Add
SWC to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SWC > SEC Filings for SWC > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
effect of low PGM prices, the upcoming elimination of floor prices for palladium
when the Company's automobile supply contracts expire and reduced demand for its
metals during the current economic downturn may significantly impact the
Company's financial performance. The restructuring was intended to better
position the Company's operations for such an environment, while preserving much
of the Company's workforce for an eventual turnaround in pricing and the
markets, although there can be no assurance as to when or if such a turnaround
may emerge.
For the first quarter of 2009, the Company has reported a net loss of
$11.6 million, or $0.12 per share, compared to a profit of $2.8 million, or
$0.03 per share, in the first quarter 2008. Most of the difference is
attributable to lower metal prices - the combined average realization per mined
ounce sold for platinum and palladium was $510 in the first quarter of 2009
compared to $625 (net of hedging losses) in last year's first quarter. Mine
production of platinum and palladium totaled 124,800 ounces in the 2009 first
quarter, as compared to 129,000 ounces in the same period of 2008, reflecting
performance improvement at Stillwater Mine offset by the scaling back of
operations at the East Boulder Mine. In the current low-price environment for
PGMs, the Company is managing toward maintaining neutral or slightly positive
cash flow, rather than focusing on earnings. The Company's total available cash
and short-term investments at March 31, 2009, was $181.8 million, up very
slightly from the balance of $180.8 million at the end of 2008. Net working
capital (including cash and investments) also increased slightly over the
quarter to $227.4 million from $230.4 million at year end 2008.
With the sharp decrease in PGM prices and restructuring of operations in the
fourth quarter 2008, the Company's operating objectives set for 2009 included
mine production of 495,000 ounces at a total cash cost of $399 per ounce and
capital expenditures of $39 million while maintaining a neutral to positive cash
flow. The Company performed well against these objectives in the first quarter
producing, as previously mentioned, 124,800 ounces at a gross mining cost of
$405 per ounce with capital spending of $8.1 million. The cost per ounce at the
mining operations was a little higher than the annual target but actually a
little better than plan for the quarter. Recycling credits were $2.3 million
lower due to the volume of business in the first quarter.
At the East Boulder Mine, the fourth-quarter 2008 restructuring included a
brief suspension of mining, a smaller and more focused workforce, and a
team-centered approach to mining that operates only in those areas that can be
justified economically at current PGM prices. Performance at East Boulder
through the first quarter of 2009 has equaled or exceeded most expectations,
with platinum and palladium production of 31,900 ounces, slightly above plan,
and total cash costs per ounce of $455 per ounce, also slightly better than
plan. Capital expenditures at the mine were $0.5 million in the first quarter,
compared to the planned $1.3 million, suggesting there may be an opportunity to
commit more resources there toward maintaining the developed state. Actual
development mining rates were better than plan suggesting that unit development
productivities have improved.
As part of the 2008 fourth quarter restructuring, a significant number of
East Boulder miners were transferred to the Stillwater Mine, replacing some
higher-cost contractors and more fully staffing the operation. First quarter
2009 platinum and palladium production at the Stillwater Mine totaled 92,900
ounces, compared to the planned first quarter production of 85,800 ounces. Total
cash costs were $387 per ounce, better than planned, and actual capital
expenditures of $7.6 million were well below the $10.2 million budgeted. Some of
this delay in spending is related to timing of key projects and should normalize
by year end.
Despite the Company's planned and relatively stable first quarter performance
from a cash perspective, if the market price of PGMs should fall further or
remain below production costs for a sustained period, the Company could sustain
significant cash losses and, under certain circumstances, there could be
additional curtailments or suspension of some or all mining, processing and
development activities. The Company continues to assess the economic impact of
PGM prices on operations and, overall stoping and development options. In a
continuing low-price environment for PGMs, these factors could have an adverse
impact on the Company's future cash flows, earnings, results of operations,
stated reserves, financial condition, ability to repay debt, and ability to
continue as a going concern.
Most of the production from the Company's mines is sold under long-term sales
agreements with Ford Motor Company and General Motors Corporation for use in
automotive catalytic converters. The automotive contracts include floor and, in
some cases, ceiling prices on palladium and platinum. The larger of these
contracts will expire at the end of 2010, and the other at the end of 2012.
Under its automotive sales agreements, the Company now has committed 100% of its
mined palladium production and 70% of its mined platinum production through
2010, and at least 20% of its palladium production in 2011 and 2012. The floor
prices in the contracts assure the Company an average minimum realization on its
palladium production of $364 per ounce in 2009 and $360 per ounce in 2010.
Unless these contracts are renewed or replaced under similarly favorable terms,
once these contracts expire, the Company will lose the benefit of these minimum
selling prices for palladium.
Since 2005, the major U.S. bond rating agencies have steadily downgraded the
corporate ratings of Ford Motor Company and General Motors Corporation,
reflecting the substantial deterioration in their credit status and, more
recently, the sharp decline in automotive sales. The U.S. government has
provided significant financial support to General Motors Corporation in recent
months. Continuing federal financial assistance to automotive manufacturers
cannot be assured, however, and pressures for restructuring or combining these
companies may increase, with potentially negative impacts on the Company. Under
applicable law, if one or both these companies should become insolvent or file
for protection under the bankruptcy statutes, their respective obligations under
the PGM supply agreements with the Company could be voided. The weak credit
position of these two customers, along with the upcoming expiration of these
supply contracts, particularly in light of recent low PGM market prices, has
highlighted the Company's dependence on the above-market pricing provisions in
the automotive contracts.
At market prices for palladium below about $364 per ounce, floor prices take
affect that support the palladium price at or near that level on most of the
mined palladium sales. Considering the palladium price prevailing at March 31,
2009, if the Company did not have the benefit of the floors and ceilings in the
automobile contracts, the Company would have expected to realize about $214 per
ounce on sales of palladium at market price, which would represent a reduction
in annual sales revenue of about $57 million.
During the 2009 first quarter, there has been open discussion in the press
and politically of a possible bankruptcy filing by General Motors Corporation. A
bankruptcy filing by General Motors Corporation may have widespread implications
and it is premature to determine with any precision the consequences to the
Company and whether the Company's supply agreement would be voided. In light of
the upcoming expiration of the automotive contracts, the Company has been
reviewing its alternatives and will continue to do so, taking into account the
financial health of General Motors Corporation and the reduced demand in the
automobile sector generally.
PGM Recycling
Along with its mining operations, the Company also recycles spent catalyst
material through its processing facilities in Columbus, Montana, recovering
palladium, platinum and rhodium from these materials. Over the past several
years, the recycling segment has been a very attractive and profitable ancillary
business that utilizes surplus capacity in the Company's smelting and refining
facilities. However, the Company's business model has also entailed certain
risks. Three of the primary risks have been the collectability of advances to
suppliers, the inability to hedge these advances effectively, and fluctuations
in the volume of material available for recycling.
The Company at times has advanced funds against third-party inventory
purchases and has carried large working inventories for extended periods until
processing is completed and the final metals are released. As such, the
Company's recycling segment has faced collection exposures and has required
large amounts of working capital that draw against the Company's cash balances.
Recently, in response to the sharp decline in PGM prices and the worldwide
financial and credit crises, volumes of recycling materials available in the
marketplace have diminished substantially. These lower recycling volumes have
resulted in lower earnings and cash flow from the recycling segment. However,
the lower activity level also has reduced the amount of working capital required
by the recycling segment, freeing up cash for the Company's benefit. During the
2008 fourth quarter, the Company wrote down the carrying value of its recycling
advances by $26.0 million to reflect the doubtful collectability of a portion of
these advances. In view of questions as to collectability under various
commitments with vendors, the Company's business is substantially reduced. The
Company is in the process of determining what changes can be made to minimize
risk in the advance process, while at the same time
continuing to support and further the recycling segment as it is complementary
to its mining operations and can be very profitable if the risks can be
controlled.
For the first quarter of 2009, the Company recognized net income from its
recycling operations of $1.3 million on revenues of $21.5 million, reflecting a
combined average realization of $1,148 per sold ounce. Total tons of recycling
material fed to the furnace during the 2009 first quarter, including tolled
material, averaged 5.6 tons per day. The lower volume was in response to a
managed reduction in advances to suppliers and the significant decline in PGM
prices which resulted in reduced incentives in the market place for recycled
material collectors and ultimately steep losses incurred by them. By way of
comparison, for the first quarter of 2008, the Company recorded recycling
segment net income of $5.5 million on revenues of $86.4 million, an average
realization of $1,412 per sold ounce. Total recycling tons fed to the furnace in
last year's first quarter averaged 13.3 tons per day. Volumes of material
available for recycling appeared to be gradually recovering as the first quarter
progressed, but remain far below their year-earlier levels.
If economic conditions in the future compel the Company to reduce or suspend
its mining operations, the Company will need to determine whether it would still
be feasible to continue its recycling activities without the concentrate streams
from the mines. While the Company has not performed a full-scale test of this
scenario, a technical review suggests that recycling could continue without the
benefit of the mined concentrates. The proportion of operating costs allocated
to the recycling segment under that scenario would necessarily increase,
probably reducing the margins realized on the business. Further, the ability to
operate the smelter and refinery without significant volumes of mine
concentrates would likely require some modifications to the processing
facilities. The Company has no experience to assure that the recycling
facilities could continue to operate profitably, that economic conditions would
justify such an effort, or that capital would be available to complete necessary
modifications to the processing facilities.
In acquiring recycled automotive catalysts, the Company has regularly
advanced funds to its suppliers in order to facilitate procurement efforts. The
Company is analyzing its recycling business model to determine how best to
minimize its risk in advancing funds to suppliers while at the same time
continuing to support and grow the recycling segment. Total outstanding
procurement advances to recycling suppliers had declined to $2.2 million at
March 31, 2009. In the current business environment, the Company largely has
curtailed new working capital advances to suppliers except on material in
process or in transit.
Strategic Considerations
During the third and fourth quarters of 2008, financial and commodities
markets worldwide experienced a sharp deterioration in available liquidity and
steep declines in market prices that have contributed to a major international
economic contraction. The Company has always been subject to swings in metals
prices, but the 2008 price declines were particularly pronounced. At these low
PGM prices, the Company's projected revenues were not sufficient to cover its
cash operating requirements. In response, the Company moved aggressively to
restructure its mining operations in order to accommodate the lower prices for
its products. During the first quarter of 2009, PGM prices recovered modestly:
afternoon postings on the London Metals Exchange for platinum and palladium were
$1,124 and $215 per ounce, respectively, at March 31, 2009, up from $898 and
$183 per ounce, respectively, at December 31, 2008. The Company's earnings
remain negative even at these higher price levels, but the Company's cash
balances are fairly stable at this point.
The price decline in PGMs during 2008 was driven by several factors. Tighter
consumer and commercial credit availability led to reduced automotive demand,
particularly in the U.S. and Western Europe, and demand for PGMs in catalytic
converters has declined accordingly. In the case of palladium, inventory
statistics have indicated significant Russian government exports into
Switzerland, Hong Kong and the U.S. in recent months, although most of these
inventory exports apparently are being held as inventories and have not been
released into the market for sale.
Both automotive and jewelry consumption of palladium reportedly continued
fairly strong in Asia, and a regulatory filing in the U.S. seeking authorization
to initiate a PGM exchange-traded fund has generated additional interest in
these metals. Mine production of PGMs, particularly at higher-cost operations,
has been
reduced or shut in, limiting supply to some degree. The volume of PGMs supplied
from recycling likewise has declined in the present market. At the same time,
however, inventories of PGMs remain fairly robust and automotive sales are still
lackluster in the U.S. and Europe, constraining further price increases.
The Company has assessed the PGM price levels that it requires in order to
maintain its operations in a cash neutral position and provide adequate
reinvestment in the business. The assessment is dependent on several factors,
including the level of recycling activity, the prices received for by-products,
and whether the floor and ceiling prices in the automotive contracts are taken
into account. For the first quarter of 2009, all-in cash costs from operations,
capital spending and corporate overhead, offset by by-product sales proceeds and
recycling profits, averaged $556 per ounce. Assuming the contractual average
floor price of $364 per ounce is received for palladium, to remain cash neutral
requires a platinum price approaching $1,200 per ounce. If the floor prices are
ignored, indicative cash breakeven prices would need to be on the order of $275
per ounce for palladium and $1,500 per ounce for platinum. Clearly, with the
upcoming expiration of the auto contracts beginning at the end of 2010, an
urgent strategic focus for the Company is to bring down its all-in cash costs as
far as possible and to seek other ways to improve the Company's competitiveness.
The Company's liquidity position remains stable at this time, with
$181.8 million of available cash, cash equivalents and short-term investments at
the end of the first quarter. The Company does not currently have a revolving
credit facility or other backup liquidity arrangement in place. While management
has considered trying to secure such a facility, it is unlikely that the Company
could secure any significant financing line with acceptable terms in the present
economic climate.
The Company is continuously reviewing its capital and operating requirements
in an effort to bring ongoing cash costs into line with current market
conditions. The recent restructuring efforts appear to have made some progress
in this direction, and cutbacks in capital spending also have helped. Several
internal multifunctional teams are involved in reviewing various facets of our
operations in an effort to increase the efficiency of our mining and support
functions. Materials costs in some cases have declined and the Company has
negotiated more favorable rates for outside services. Continuing efforts will
include focus on improving mining productivity and broader involvement in
identifying potential operating efficiencies and opportunities.
Despite these efforts, the current economic environment presents a number of
risks for the Company. There can be no assurance that the Company will succeed
in keeping costs in line with current PGM prices. Even if costs are well
controlled, however, metals prices may decline, putting further pressure on
earnings and cash flows. In the present climate, credit issues also create
risks. Two of the Company's key customers, Ford and General Motors, are
struggling with credit issues. Should their financial condition deteriorate
further, the contractual floor prices under the automotive contracts and the
collectability of accounts receivable could be placed in jeopardy. The Company
is monitoring these risks closely.
The Company was granted a special one-year extension of time to comply with
the new DPM standards in certain areas of its Stillwater Mine, subject to
specified conditions, that expired on November 28, 2008. The Company applied for
an additional extension at its Stillwater Mine which was denied on May 4, 2009.
The East Boulder Mine also obtained a one-year extension applicable to certain
areas of the mine which is slated to expire on May 21, 2009 and a further
extension may also be denied. The new DPM standards continue to be a source of
discussion within the industry. The Company is attempting to meet the standards,
and believes it is in substantial compliance and is consulting with the
applicable governmental agencies. Although, the Company believes that full
compliance by most companies is not possible and may entail penalties or
closures of certain mine areas for a period of time, the Company does not
believe that failure to be in full compliance will have a material adverse
effect on the Company. The Company continues to comply with the conditions
outlined in the East Boulder Mine extension as well as continues its mitigation
efforts at the Stillwater Mine. However, no assurance can be given that any lack
of compliance will not impact the Company.
Although the external operating environment has shifted dramatically over the
past several quarters, the Company has continued to emphasize three major
strategic areas of focus. Resources allocated to these strategies have been
adjusted in conjunction with the market shifts described above, but
directionally the Company has continued this strategic emphasis.
1. Transformation of Mining Processes to Increase Mining Efficiency The Company normally measures its mining efficiency in terms of total cash costs per ounce of PGMs extracted. This non-GAAP measure is discussed in more detail in Reconciliation of Non-GAAP Measures to Costs of Revenues beginning on page 35 of this document. Mining efficiency is affected by the total cost of labor and materials incurred in mining and processing ore and by net PGM production. In general, lowering costs or increasing net production per hour worked will benefit mining efficiency. Labor and materials costs are influenced by the mix of mining methods used, by the type and volume of equipment employed in the mines, by the effectiveness of mine planning and by the state of general economic conditions. The Company's net palladium and platinum production is determined by the number of total ore tons mined, the grade of the extracted ore, and the metallurgical recovery percentages achieved in each stage of processing. The Company has shifted its operating focus in the current pricing environment toward minimizing costs rather than maximizing mine production. This approach requires tailoring the mining methods used to the ore configuration in each specific area being mined. Broadly, the Company employs three different mining methods in its extraction efforts. The most highly mechanized of these, known as sublevel extraction or panel mining, is based on developing drifts, or "sills," at different levels within the orebody, drilling boreholes between the different levels, and then blasting out the ore in sections or panels. This method extracts large volumes of material, but it requires large, expensive equipment and can dilute the ore with waste material if not carefully monitored. It is most effectively applied in areas where the orebody is relatively consistent and predictable. The second method is generally known as "mechanized ramp-and-fill" mining, in which secondary ramps are developed from the major mine primary haulage levels that parallel the reef laterally into the orebody, where mechanized equipment is used to extract the ore at the level of the ramp. Once the ore is extracted, the ramp is filled and cut to a new level and then the next level of ore is extracted. Because the ramps are cut through waste rock, this method also involves moving substantial amounts of waste material and is most effectively applied in areas where the reef may widen out or the specific stope is large. The third method, known as "captive cut-and-fill" mining, is the most manpower intensive, but also the most selective in terms of the material extracted. A small mining team is assigned to a particular stoping block and, working within successive levels of the orebody, follows the reef closely using jackleg drills to surgically extract the ore. Once the ore is blasted and the wall rock secured, a simple slusher bucket on an electric winch is used to drag the ore to an ore pass or chute, where it drops down to a gathering bay at the base of the stope. This method is often the only economic method of extraction in areas where the reef is variable in width or grade, or is otherwise inconsistent. At the East Boulder Mine, which prior to 2006 used highly mechanized sublevel extraction almost exclusively, approximately 35% of the material fed to the concentrator during the first quarter of 2009 was mined using ramp-and-fill as well as captive cut-and-fill. At the Stillwater Mine, which first introduced selective mining methods in the Upper West area of the mine at the beginning of 2007, approximately 90% of the mined tons fed to the mill in the first three months of 2009 were extracted using these same mining methods. As already noted, the Company's objective in this transition is to tailor the mining method used in each mining area to best fit the economics of that area which in some cases could still permit the use of more productive panel mining. The Company's highest operating priority is the safety of its employees. Safety reportable incident rates in the first quarter of 2009 remained very favorable compared to national averages for metals and mining; however, efforts continue to drive incident rates toward zero. The Company's safety program is founded on a task-based model that creates specific standards for performing each task safely, provides training to the standard, and follows up on safety incidents to identify opportunities to improve the standards. The program has been very successful in improving the Company's safety incident rates over the past several years. During the first quarter, the mines have identified opportunities to improve aspects of safety in their operations and have emphasized individual and collective responsibility for maintaining a safe work environment. Efforts to strengthen the program recently have particularly focused on better defining roles and responsibilities under the program and providing additional training and support.
. . .
|
|