Writedown spills red ink over Stillwater

A major writedown of mining assets has hampered the bottom line of Stillwater Mining (SWC-N), the largest primary producer of platinum group metals outside of South Africa.

The company posted a net loss of US$331.5 million on revenue of US$240.2 million for 2003, largely owing to the asset impairment charge of US$390.3 million in the last quarter. By comparison, the company earned US$31.7 million in the previous year on revenue of US$275.6 million. But even without the writedown, Stillwater would have incurred a net loss of US$18.7 million for 2003. The losses are partly attributed to lower combined prices for platinum group metals (PGMs) and lower production.

The writedown of mining assets comes as no surprise as the company had previously disclosed the possibility of such an event. Stillwater Chairman Francis McAllister says the board consulted outside advisers and concluded it was necessary to reduce the carrying value of the assets “in view of the reduction in ore reserves and in accordance with the accounting guidelines.”

Stillwater operates its namesake mine and the adjacent East Boulder mine in Montana. At the end of 2003, the company recorded a 7% reduction of contained ounces in overall proven and probable reserves, which includes a 16% reduction of the contained ounces at the Stillwater mine. But even after the revised calculation, the two mines have sufficient reserves to operate for more than 20 years at current rates. At the end of 2003, total proven and probable reserves stood at 40.4 million tons grading 0.58 oz. PGMs per ton, equivalent to 23.6 million oz. palladium and platinum (at a 3.6-to-1 in situ ratio).

After taking into account the reduction in contained ounces, changes to the mining plan and various other factors, the company reduced the carrying value of the Stillwater mine to about US$250 million and the East Boulder mine to about US$166 million. The figure includes their pro rata share of the company’s processing assets.

For 2003, Stillwater Mining produced a total of 584,000 oz. PGMs from both mines, which included 450,000 oz. palladium and 134,000 oz. platinum. Output in 2002 amounted to 617,000 oz. PGMs, including 476,000 oz. palladium and 141,000 oz. platinum.

The total cash cost per ounce of PGMs for the year was US$283 per oz., compared with US$287 per oz. in 2002. However, total consolidated production costs increased to US$354 per oz., compared with US$351 per oz. in 2002, owing to higher depreciation and amortization costs.

The company’s realized prices in 2003 were US$352 per oz. for palladium and US$602 per oz. for platinum. The average realized combined price per ounce of PGMs was US$408 last year (about 30% higher than the combined market price of US$315 per oz.), roughly 10% lower than in 2002.

Looking ahead to 2004, Stillwater expects to produce 610,000-625,000 oz. PGMs, with total cash costs of about US$257-290 per oz.

The newly constructed East Boulder mine, which was ramped up to 1,250 tons per day in 2003, is expected to average 1,650 tons per day by the end of 2004. Stillwater is considering a further ramp-up of production at East Boulder over an undisclosed period of time, the eventual design rate there being 2,000 tons per day.

At the end of 2003, Stillwater had cash and cash equivalents of US$47.5 million, as well as US$17.5 million under a revolving credit facility. Working capital stood at US$154.7 million, up from US$46.7 million a year earlier.

In mid-2003, the company received US$248.2 million (US$100 million in cash and 877,169 oz. palladium valued at US$148.2 million) as consideration for the sale of 45.4 million shares (or about 50.8% of its outstanding shares) to a unit of Norilsk Nickel, a Russian mining company.