UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended March 31, 2002.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ______ to ______
Commission file number 0-25090
STILLWATER MINING COMPANY
(Exact name of registrant as specified in its charter)
Delaware 81-0480654
------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
536 East Pike Avenue
Columbus, Montana 59019
-------------------------------- ------------------------------
(Address of principal executive offices) (Zip Code)
(406) 322-8700
-------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: YES X NO __
At April 11, 2002, 43,107,802 shares of common stock, $0.01 par value per
share, were issued and outstanding.
STILLWATER MINING COMPANY
FORM 10-Q
QUARTER ENDED March 31, 2002
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements................................................... 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 24
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 25
Item 2. Changes in Securities and Use of Proceeds.............................. 25
Item 3. Defaults Upon Senior Securities........................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.................... 25
Item 5. Other Information...................................................... 25
Item 6. Exhibits and Reports on Form 8-K....................................... 25
SIGNATURES ....................................................................... 26
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Stillwater Mining Company
Consolidated Balance Sheet
(Unaudited)
(in thousands, except share and per share amounts)
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Current assets
Cash and cash equivalents $ 55,311 $ 14,911
Inventories 45,374 42,944
Accounts receivable 21,540 21,773
Deferred income taxes 4,406 1,417
Other current assets 4,280 4,745
------------- -------------
Total current assets 130,911 85,790
Property, plant and equipment, net 776,178 774,036
Other noncurrent assets 7,037 8,395
------------- -------------
Total assets $ 914,126 $ 868,221
============= =============
LIABILITIES and SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 12,559 $ 21,539
Accrued payroll and benefits 10,073 10,630
Property, production and franchise taxes payable 8,824 7,768
Current portion of long-term debt and capital lease
obligations 14,130 9,008
Accrued restructuring costs 3,615 10,974
Income taxes payable 1,615 -
Other current liabilities 9,133 3,588
------------- -------------
Total current liabilities 59,949 63,507
Long-term debt and capital lease obligations 217,625 246,803
Deferred income taxes 77,440 71,887
Other noncurrent liabilities 12,565 10,901
------------- -------------
Total liabilities 367,579 393,098
------------- -------------
Shareholders' equity
Preferred stock, $0.01 par value, 1,000,000 shares
authorized; none issued - -
Common stock, $0.01 par value, 100,000,000 shares
authorized; 43,107,802 and 38,771,377 shares
issued and outstanding 431 388
Paid-in capital 349,291 291,182
Retained earnings 194,385 177,820
Accumulated other comprehensive income 4,288 5,733
Unearned compensation - restricted stock awards (1,848) -
------------- -------------
Total shareholders' equity 546,547 475,123
------------- -------------
Total liabilities and shareholders' equity $ 914,126 $ 868,221
============= =============
See notes to consolidated financial statements.
Stillwater Mining Company
Consolidated Statement of Operations
(Unaudited)
(in thousands, except per share amounts)
Three months ended
March 31,
-----------------------------------------
2002 2001
------------------ -----------------
Revenues $ 75,977 $ 89,864
Costs and expenses
Cost of metals sold 43,539 38,245
Depreciation and amortization 9,261 5,613
------------------ -----------------
Total cost of sales 52,800 43,858
General and administrative expenses 3,566 5,452
Adjustment to restructuring accrual (6,277) -
------------------ -----------------
Total costs and expenses 50,089 49,310
------------------ -----------------
Operating income 25,888 40,554
Other income (expense)
Interest income 218 568
Interest expense, net of capitalized interest of
$4,215 in 2001 (4,425) -
------------------ -----------------
Income before income taxes 21,681 41,122
Income tax provision (5,116) (11,720)
------------------ -----------------
Net income 16,565 29,402
------------------ -----------------
Other comprehensive income (expense), net of tax (1,804) 6,514
------------------ -----------------
Comprehensive income $ 14,761 $ 35,916
================== =================
Earnings per share
Basic $ 0.40 $ 0.76
================== =================
Diluted $ 0.40 $ 0.75
================== =================
Weighted average common shares outstanding
Basic 41,599 38,671
Diluted 41,787 39,406
See notes to consolidated financial statements.
Stillwater Mining Company
Consolidated Statement of Cash Flows
(Unaudited)
(in thousands)
Three Months ended
March 31,
---------------------------------
2002 2001
-------------- -------------
Cash flows from operating activities
Net income $ 16,565 $ 29,402
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,261 5,613
Deferred income taxes 2,564 8,220
Adjustment to restructuring accrual (6,277) -
Cash paid on restructuring accrual (1,082) -
Amortization of debt issuance costs 251 80
Amortization of restricted stock 254 -
Changes in operating assets and liabilities:
Inventories (2,430) 4,259
Accounts receivable 233 (27,360)
Accounts payable (8,980) (4,383)
Other 9,112 3,072
----------- ------------
Net cash provided by operating activities 19,471 18,903
----------- ------------
Cash flows from investing activities
Capital expenditures (11,403) (49,184)
Proceeds from sale/leaseback transactions 1,282 -
----------- ------------
Net cash used in investing activities (10,121) (49,184)
----------- ------------
Cash flows from financing activities
Issuance of long-term debt - 157,149
Payments on long-term debt and capital lease
Obligations (25,338) (125,676)
Payments for debt issuance costs - (3,946)
Net metals repurchase agreement transactions - (2,866)
Issuance of common stock, net of issue costs 56,388 885
----------- ------------
Net cash provided by financing activities 31,050 25,546
----------- ------------
Cash and cash equivalents
Net increase (decrease) 40,400 (4,735)
Balance at beginning of period 14,911 18,219
----------- ------------
Balance at end of period $ 55,311 $ 13,484
=========== ============
See notes to consolidated financial statements.
Stillwater Mining Company
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - General
In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the company's
financial position as of March 31, 2002 and the results of its operations
for the three-month periods ended March 31, 2002 and 2001 and cash flows
for the three-month periods ended March 31, 2002 and 2001. Certain prior
period amounts have been reclassified to conform with the current period
presentation. The results of operations for the three-month periods are not
necessarily indicative of the results to be expected for the full year. The
accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the company's 2001 Annual Report on Form 10-K.
Note 2 - New Accounting Standards
Effective January 1, 2002, the company adopted the FASB SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which
addresses financial accounting and reporting for the impairment or disposal
of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, it retains many of the fundamental provisions of
that Statement. The adoption of SFAS No. 144 did not have an impact on the
company's financial position or results of operations as of and for the
three-month period ended March 31, 2002.
Note 3 - Comprehensive Income
Comprehensive income consists of net income and other gains and
losses affecting shareholders' equity that, under generally accepted
accounting principles, are excluded from net income. For the company, such
items consist of unrealized gains and losses on derivative financial
instruments.
The following summary sets forth the changes of other
comprehensive income (loss) accumulated in shareholders' equity (in
thousands):
Commodity Interest Total Derivative
Instruments Rate Swaps Financial Instruments
----------------- ----------------- --------------------------
Balance at December 31, 2001 $ 9,458 $ - $ 9,458
Reclassification to earnings (2,837) 133 (2,704)
Change in value due to change in
forward interest rates - 321 321
----------------- ----------------- --------------------------
6,621 454 7,075
Tax effect (2,608) (179) (2,787)
----------------- ----------------- --------------------------
Balance at March 31, 2002 $ 4,013 $ 275 $ 4,288
================= ================= ==========================
All commodity instruments outstanding at March 31, 2002, have been
settled and cash has been received. The gains are being deferred in
accumulated other comprehensive income until the original contract
settlement dates. The company expects to realize and reclassify to earnings
the entire $6.6 million ($4.0 million net of tax) of unrealized gains
existing at March 31, 2002 during the next nine months.
The unrealized gains of $454,000 ($275,000 net of tax) existing at
March 31, 2002 on the interest rate swaps are being deferred and will be
recognized as an adjustment to interest expense over the next twenty-four
months.
Note 4 - Inventories
Inventories consisted of the following (in thousands):
March 31, December 31,
2002 2001
----------------------- ------------------------
Metals inventory
Raw ore $ 1,454 $ 1,571
Concentrate and in-process 13,092 14,944
Finished goods 20,488 17,171
----------------------- ------------------------
35,034 33,686
Materials and supplies 10,340 9,258
----------------------- ------------------------
$ 45,374 $ 42,944
======================= ========================
Note 5 - Long-Term Debt
Credit Facility
In February 2001, the company obtained a $250 million credit
facility (the "Credit Facility") from a syndicate of financial
institutions. The Credit Facility provides for a $65 million five-year term
loan facility (Term A), a $135 million seven-year term loan facility (Term
B) and a $50 million revolving credit facility. Amortization of the term
loan facilities commenced on March 31, 2002. The final maturity of the Term
A and the revolving credit facility is December 30, 2005 while the Term B
facility final maturity date is December 31, 2007. As of March 31, 2002,
the company had $65.0 million and $134.0 million outstanding under the Term
A and Term B loan facilities, respectively, bearing interest at 4.50% and
5.625% for the Term A and Term B facilities, respectively. No balance is
outstanding under the revolving credit facility as of March 31, 2002, which
requires an annual commitment fee of 0.5% on the unadvanced amount.
Note 6 - Capital Stock Transactions
Restricted Stock
On January 2, 2002, the company granted 132,299 shares of
restricted stock to certain of its officers and employees. Substantially
all shares vest on dates ranging from June 30, 2002 to January 2, 2005
provided that the recipient is still employed by the company on such
vesting dates. Vesting may accelerate upon the attainment of certain
performance criteria measured on specified dates. The market value of
restricted stock awarded totaled approximately $2.5 million on the grant
date and was recorded as a separate component of stockholders' equity. No
shares of restricted stock were forfeited during the first quarter of 2002.
The company is amortizing unearned compensation over the vesting periods.
During the first quarter of 2002, approximately $254,000 related to the
restricted stock was recognized as compensation expense and an accrued
compensation liability was reduced by $438,000.
Stock Offering
On January 31, 2002, the company completed a $60 million private
placement of its common stock involving approximately 4.3 million shares or
approximately 10% of the outstanding shares after such issuance. The price
per share represents an approximate 10% discount from the closing price of
$15.61 on January 29, 2002. As of March 31, 2002, proceeds from the
offering were approximately $54.9 million, net of actual offering costs of
$5.1 million incurred to date.
Note 7 - Earnings per Share
The effect of outstanding stock options on diluted weighted
average shares outstanding was 190,822 and 735,064 shares for the
three-month periods ending March 31, 2002 and 2001, respectively.
Outstanding options to purchase 1,905,958 and 329,625 shares of common
stock were excluded from the computation of diluted earnings per share for
the three-month periods ended March 31, 2002 and 2001, respectively,
because the effect of inclusion would have been antidilutive using the
treasury stock method.
The effect of outstanding restricted stock on diluted weighted
average shares outstanding was 47,926 shares for the three-month period
ending March 31, 2002.
Note 8 - Long-Term Sales Contracts
The company maintains long-term sales contracts with General
Motors Corporation, Ford Motor Company and Mitsubishi Corporation. The
contracts provide for floor and ceiling price structures as summarized
below:
------------------------------------------------- -------------------------------------------------------
PALLADIUM PLATINUM
------------------------------------------------- -------------------------------------------------------
Avg. Avg. Avg.
% of Floor % of Ceiling % of Avg. Floor % of Ceiling
Year Production Price Production Price Production Price Production Price
--------------------------------------------------- -------------------------------------------------------
2002 95% $370 28% $400 98% $403 42% $567
2003 95% $357 28% $400 97% $404 27% $571
2004 100% $371 39% $644 80% $425 16% $856
2005 100% $355 31% $702 80% $425 16% $856
2006 100% $339 16% $981 80% $425 16% $856
2007 80% $400 20% $975 70% $425 14% $850
2008 80% $385 20% $975 70% $425 14% $850
2009 80% $380 20% $975 70% $425 14% $850
2010 80% $375 20% $975 70% $425 14% $850
Note 9 - Financial Instruments
The company utilizes the following types of derivative financial
instruments: fixed forwards, cashless put and call option collars,
financially settled forwards and interest rate swaps. For derivative
instruments, the company designates derivatives as a hedge of a forecasted
transaction or the variability of cash flows to be received or paid related
to a recognized asset or liability ("cash flow" hedge). Changes in fair
value of derivatives that are highly effective as hedges and that are
designated and qualified as a cash-flow hedge are reported in other
comprehensive income until the related specific firm commitments or
forecasted transactions occur. Hedging gains or (losses) on commodity
instruments were recognized as an adjustment to revenue and consisted of
the following (in thousands):
Three months ended March 31,
2002 2001
------------------- -----------------
Cashless put and call option collars $ - $ (2,457)
Financially settled forwards 2,837 (1,765)
------------------ ----------------
$ 2,837 $ (4,222)
=================== ================
The company had no fixed forward contracts outstanding during the
periods ending March 31, 2002 and 2001 and had no cashless put and call
option collars outstanding during the period ending March 31, 2002.
During the first quarter of 2002, the company has entered into two
identical interest rate swap agreements with a combined notional amount
totaling $100 million. The outstanding interest rate swap agreements were
effective March 4, 2002 and mature on March 4, 2004. The agreements require
the company to pay interest at a fixed rate of 3.67% and receive interest
at a rate based on LIBOR, which is adjusted on a quarterly basis. The
adjusted quarterly rate at March 31, 2002 was 1.9%. The interest rate swap
agreements qualify as a cash flow hedge and are considered to be highly
effective since the change in the value of the interest rate swap will
offset changes in the future cash flows related to interest payments on the
company's debt.
Note 10 - Restructuring Costs
In the fourth quarter of 2001, the company began implementing a
revised operating plan, which included a reduction of the company's
previously planned capital expenditures and production levels. In
accordance with the plan, the company terminated certain contracts related
to ongoing mine development and accrued a pre-tax charge of approximately
$11 million for early contract termination costs. The accrual was based on
the termination provisions of the related contracts. During the first
quarter of 2002, the company reduced its accrued restructuring costs
resulting in a gain of $6.3 million primarily as a result of successful
negotiations of certain termination clauses of the construction contracts.
Any adjustments to the original estimate of the accrual have been included
in the company's results of operations. The following summary sets forth
the changes of the restructuring accrual during the first quarter of 2002
(in thousands):
Contract
Terminations
-----------------
Balance at December 31, 2001 $ 10,974
Cash paid (1,082)
Accrual adjustments (6,277)
----------------
Balance at March 31, 2002 $ 3,615
================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Stillwater Mining Company
Key Factors
(Unaudited)
Three months ended
March 31,
---------------------------------------
2002 2001
---------------- -----------------
OPERATING DATA
Consolidated:
Ounces produced (000)
Palladium 128 96
Platinum 38 28
---------------- -----------------
Total 166 124
Tons mined (000) 325 199
Tons milled (000) 324 200
Mill head grade (ounce per ton) 0.57 0.68
Sub-grade tons milled (000) 12 18
Sub-grade mill head grade (ounce per ton) 0.28 0.21
Total tons milled (000) 336 218
Combined mill head grade (ounce per ton) 0.56 0.64
Total mill recovery (%) 89 90
Stillwater Mine:
Ounces produced (000)
Palladium 110 96
Platinum 33 28
---------------- -----------------
Total 143 124
Tons mined (000) 255 199
Tons milled (000) 253 200
Mill head grade (ounce per ton) 0.63 0.68
Sub-grade tons milled (000) 12 18
Sub-grade mill head grade (ounce per ton) 0.28 0.21
Total tons milled (000) 265 218
Combined mill head grade (ounce per ton) 0.61 0.64
Total mill recovery (%) 90 90
East Boulder Mine:
Ounces produced (000)
Palladium 18 -
Platinum 5 -
---------------- -----------------
Total 23 -
Tons mined (000) 70 -
Tons milled (000) 71 -
Mill head grade (ounce per ton) 0.37 -
Mill recovery (%) 88 -
SALES AND PRICE DATA
Ounces sold (000)
Palladium 124 109
Platinum 41 28
---------------- -----------------
Total 165 137
Average realized price per ounce
Palladium $ 455 $ 704
Platinum 493 529
Combined (1) 465 668
Average market price per ounce
Palladium $ 387 $ 930
Platinum 485 602
Combined (1) 410 853
(1) Stillwater Mining reports a combined average realized and market price
of palladium and platinum at the same ratio as ounces are produced from
the refinery. The combined average realized price represents revenues
of the company excluding contract discounts divided by ounces sold. The
combined average market price represents the average London PM Fix for
the actual months of the period.
COST DATA
Consolidated:
PER TON MILLED(2)
Cash operating costs $ 118 $ 123
Royalties and taxes 14 28
--------------------- ----------------
Total cash costs $ 132 $ 151
Depreciation and amortization 28 26
--------------------- -----------------
Total production costs $ 160 $ 177
===================== =================
PER OUNCE PRODUCED(2)
Cash operating costs $ 240 $ 217
Royalties and taxes 28 48
--------------------- -----------------
Total cash costs $ 268 $ 265
Depreciation and amortization 56 45
--------------------- -----------------
Total production costs $ 324 $ 310
===================== =================
Stillwater Mine:
PER TON MILLED(2)
Cash operating costs $ 117 $ 123
Royalties and taxes 14 28
--------------------- -----------------
Total cash costs $ 131 $ 151
Depreciation and amortization 26 26
--------------------- -----------------
Total production costs $ 157 $ 177
===================== =================
PER OUNCE PRODUCED(2)
Cash operating costs $ 217 $ 217
Royalties and taxes 26 48
--------------------- -----------------
Total cash costs $ 243 $ 265
Depreciation and amortization 48 45
--------------------- -----------------
Total production costs $ 291 $ 310
===================== =================
(2) Income taxes, corporate general and administrative expense and
interest income and expense are not included in total cash costs or
total production costs.
East Boulder Mine:
PER TON MILLED(2)
Cash operating costs $ 123 $ -
Royalties and taxes 13 -
---------------------- -----------------
Total cash costs $ 136 $ -
Depreciation and amortization 35 -
---------------------- ------------------
Total production costs $ 171 $ -
====================== ===================
PER OUNCE PRODUCED(2)
Cash operating costs $ 382 $ -
Royalties and taxes 40 -
---------------------- -------------------
Total cash costs $ 422 $ -
Depreciation and amortization 107 -
====================== ===================
Total production costs $ 529 $ -
====================== ===================
(2) Income taxes, corporate general and administrative expense and
interest income and expense are not included in total cash costs or
total production costs.
Recent Developments
During the first quarter of 2002, the company placed the East
Boulder Mine into commercial production. As a result, all assets have been
placed into service and are being depreciated, depleted and / or amortized
in accordance with the company's policy. Additionally, interest
capitalization has been discontinued since the assets have been placed into
operation.
The company is engaged in discussions with the Securities and
Exchange Commission concerning its methodology for calculating its probable
ore reserves. Proven reserves are not affected by this issue. The issue
arose in connection with the SEC's review of the company's "shelf"
registration statement, which was filed in December 2001. The SEC has
informed the company that it believes the company's reserve methodology
should be revised to better conform to the SEC's interpretation of industry
standards. Since the company went public in 1994, it has consistently used
the same reserve estimation methodology and believes that it has
demonstrated the ability to convert probable reserves into proven reserves
and proven reserves into revenue ounces, which supports its methodology.
Since 1994, the company's ore reserves have been reviewed by Behre Dolbear
& Company, independent consultants, who are experts in mining, geology and
ore reserve determination. In addition, Behre Dolbear & Company has
retained an additional independent consultant who has confirmed its opinion
and ore reserve estimation methodology. The company and its independent
consultants continue to believe that its methodology is appropriate. The
company intends to defend its position on reserve methodology and will
pursue all avenues of appeal. There can be no assurance as to the outcome
of this issue and it is not possible to quantify the amount of any
potential adjustment, if any, in the Company's reported probable reserves
until the matter is resolved. Although we believe that our method is
appropriate, there can be no assurance as to the outcome of our discussions
with the SEC and it is not possible to quantify the amount of any potential
adjustment in probable reserves until the matter is resolved, but any such
adjustment could be material.
The company's depreciation and amortization expense and the
carrying amounts of its property, plant and equipment included in its
audited financial statements for the year ended December 31, 2001 are
dependent upon the company's ore reserve estimates. If the company is
required to revise these estimates, it may result in a reduction to net
income reported for the year 2001 and possibly for prior years. While the
company is in compliance with its credit facility, an adverse decision with
respect to the company's reserve methodology could cause events of default
under its credit facility.
On January 30, 2002, we sold 4,285,715 shares of common stock, at
an aggregate offering amount of $60,000,000, to accredited investors in a
private placement. These shares of common stock were not registered under
the Securities Act. The Company's discussions with the SEC have caused a
delay in the effectiveness of the registration statement. Under the terms
of the stock purchase agreement, if a registration statement covering the
resale of the shares is not declared effective by the SEC within 90 days
after the closing of the private placement, we will be required to pay each
investor liquidated damages in a cash amount equal to one-thirtieth of one
percent of the purchase price paid by such investor.
Results of Operations
Three months ended March 31, 2002 compared to three months ended March 31,
2001
PGM Production. During the first quarter of 2002, the company
produced approximately 128,000 ounces of palladium and 38,000 ounces of
platinum compared with production of approximately 96,000 ounces of
palladium and 28,000 ounces of platinum in the first quarter of 2001. The
increase was primarily due to a 15% increase in production at the
Stillwater Mine, which produced 110,000 ounces of palladium and 33,000
ounces of platinum in the first quarter of 2002, and the East Boulder Mine,
which produced 18,000 ounces of palladium and 5,000 ounces of platinum in
the first quarter of 2002. The increased production is primarily the result
of a 54% increase in total tons milled of 336,000 tons compared to 218,000
tons in the first quarter of 2001, partially offset by a 13% decrease in
the combined mill head grade.
Revenues. Revenues were $76.0 million for the first quarter of
2002 compared with $89.9 million for the first quarter of 2001. The 16%
decrease is primarily due to a 30% decrease in realized PGM prices,
partially offset by a 20% increase in ounces sold.
Combined PGM sales increased by 28,000 ounces to 165,000 ounces
compared with 137,000 ounces for the same period of 2001. Palladium and
platinum ounces sold increased to approximately 124,000 ounces and 41,000
ounces, respectively, compared to 109,000 ounces and 28,000 ounces,
respectively, for the first quarter of 2001.
The company's combined average realized price per ounce of
palladium and platinum sold in the first quarter of 2002 decreased 30% to
$465 per ounce, compared to $668 per ounce in the first quarter of 2001.
The combined average market price decreased 52% to $410 per ounce in the
first quarter of 2002, compared to $853 per ounce in the first quarter of
2001. The company's average realized price per ounce of palladium was $455
in the first quarter of 2002, compared to $704 per ounce in the first
quarter of 2001, while the average market price of palladium was $387 per
ounce in the first quarter of 2002 compared to $930 per ounce in the first
quarter of 2001. The company's average realized price per ounce of platinum
was $493 in the first quarter of 2002, compared to $529 per ounce in the
first quarter of 2001, while the average market price of platinum was $485
per ounce in the first quarter of 2002 compared to $602 per ounce in the
first quarter of 2001.
Production Costs. The company's total cash costs per ounce
produced for the quarter ended March 31, 2002 increased $3 or 1% to $268
per ounce from $265 per ounce in the quarter ended March 31, 2001. The
increase in total cash costs is primarily attributed to a $20 per ounce
increase related to the East Boulder Mine, which has not reached its full
production capacity as of March 31, 2002, and lower byproduct and secondary
credits of $8 per ounce. This is offset by lower royalties and taxes of $20
per ounce and lower support services costs of $6 per ounce. The company's
total production costs per ounce increased $14, or 5%, to $324 per ounce in
the quarter ended March 31, 2002 due to an increase in non-cash costs of
$11 per ounce, primarily related to an increase in depreciable fixed assets
placed into service during the first quarter of 2002.
Expenses. General and administrative expenses decreased from $5.5
million in the first quarter of 2001 to $3.6 million in the first quarter
of 2002 and are primarily a result of $1.4 million of costs attributable to
management realignment during the first quarter of 2001.
During the first quarter of 2002, the company reduced its accrued
restructuring costs resulting in a $6.3 million gain as a result of
successful negotiations of certain termination clauses of construction
contracts cancelled during the fourth quarter of 2001. During the fourth
quarter of 2001, the company accrued a pre-tax charge of approximately $11
million for restructuring costs related to implementing a revised operating
plan.
Interest expense increased $4.4 million as a result of the
start-up of the East Boulder Mine, which resulted in discontinuing interest
capitalization since assets have been placed into operation.
Income Taxes. The company has provided for income taxes of $5.1
million, or 23.6%, of pre-tax income for the quarter ended March 31, 2002
compared to $11.7 million, or 28.5% of pre-tax income, for the quarter
ended March 31, 2001. The reduction in the effective tax rate is the result
of a change in the treatment of mine development costs that will allow the
company to increase depletion expense for tax purposes.
Net Income. The company reported net income of $16.6 million or
$0.40 per diluted share for the first quarter of 2002 compared with net
income of $29.4 million, or $0.75 per diluted share for the first quarter
of 2001.
Liquidity and Capital Resources
The company's working capital at March 31, 2002 was $71.0 million
compared to $22.3 million at December 31, 2001. The ratio of current assets
to current liabilities was 2.2 at March 31, 2002, compared to 1.4 at
December 31, 2001.
Net cash provided by operations for the three months ended March
31, 2002, was $19.5 million compared with $18.9 million for the comparable
period of 2001, an increase of $0.6 million. The increase was primarily a
result of decreased net income of $12.8 million, a decrease in the
restructuring accrual of $7.4 million due to adjustments of $6.3 million
and cash payments of $1.1 million, and a decrease in other non-cash
expenses of $1.6 million, offset by an increase in net operating assets and
liabilities of $22.3 million.
A total of $10.1 million of cash was used in investing activities
in the first three months of 2002 compared to $49.2 million in the same
period of 2001, a decrease of $39.1 million. The decrease is due to a
reduction of capital expenditures in accordance with the company's
optimization plan. The capital expenditures in the first three months of
2002 primarily relate to mine development activities.
For the three months ended March 31, 2002, cash provided by
financing activities was $31.1 million compared to $25.5 million for the
comparable period of 2001. Cash provided by financing activities were
primarily attributed to net proceeds from a $60 million common stock
offering, offset by a $25 million repayment on the company's credit
facility.
Cash and cash equivalents increased by $40.4 million for the first
three months of 2002 compared to a decrease of $4.7 million for the
comparable period of 2001.
The company intends to utilize cash on hand and expected cash
flows from operations, along with available borrowings under the existing
$250 million Credit Facility to fund its operating and capital needs. At
March 31, 2002, outstanding borrowings under the Credit Facility were $199
million. See Note 5 to the financial statements for a description of the
company's Credit Facility. In addition, the company may, from time to time,
also seek to raise additional capital from the public or private securities
markets or from other sources for general corporate purposes and for
investments beyond the scope of the current phase of the current operating
plans.
FORWARD LOOKING STATEMENT; FACTORS THAT MAY AFFECT FUTURE RESULTS AND
FINANCIAL CONDITION
Some statements contained in this report are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, and, therefore, involve uncertainties or risks that could cause
actual results to differ materially. Such statements include comments
regarding expansion plans, costs, grade, production and recovery rates,
permitting, financing needs, and capital expenditures, increases in
processing capacity, cost reduction measures, safety, timing for
engineering studies, and environmental permitting and compliance,
litigation and the palladium and platinum market.
Investors are cautioned not to put undue reliance on
forward-looking statements. The company disclaims any obligation to update
forward-looking statements.
Critical Accounting Policies
Asset Impairment
The company follows Statement of Financial Accounting Standard
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived
Asset. The company reviews and evaluates its long-lived assets for
impairment when events or changes in circumstances indicate that the
related carrying amounts may not be recoverable. Impairment is considered
to exist if total estimated future cash flows on an undiscounted basis are
less than the carrying amount of the asset. An impairment loss is measured
as the amount by which the asset-carrying value exceeds fair value. Fair
value is determined using estimated discounted future cash flow analysis.
Future cash flows include estimates of recoverable ounces, platinum and
palladium prices (considering current and historical prices, price trends
and related factors), production levels, capital and reclamation
expenditures, all based on detailed life-of-mine plans derived from
engineering reports. In estimating future cash flows, assets are grouped
together at each individual mine property which is the lowest level for
which there are identifiable cash flows that are largely independent of
cash flows from other asset groups. Assumptions underlying future cash
flows are subject to risks and uncertainties. Any differences between
significant assumptions and market conditions such as declining PGM prices,
lower than expected recoverable ounces, and/or the company's performance
could have a material effect on the company's ability to recover the
carrying amounts of its long lived assets resulting in potential impairment
charges. As of March 31, 2002, the company does not believe that any
impairments of its long-lived assets have occurred.
Income Taxes
Income taxes are determined using the asset and liability approach
in accordance with the provisions of SFAS No. 109, Accounting for Income
Taxes. This method gives consideration to the future tax consequences of
temporary differences between the financial reporting basis and the tax
basis of assets and liabilities based on currently enacted tax rates.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment. The company
expects the deferred tax assets at March 31, 2002 to be realized as a
result of projected income from future operations and reversal of existing
taxable temporary differences. Any differences between the assumptions used
in management's analysis and market conditions, such as declining PGM
prices and lower recoverable ounces, that would effect the company's future
taxable income could have a material effect on the ability of the company
to fully realize the benefit of its deferred tax assets. There was no
valuation allowance recorded at March 31, 2002 because it is more likely
than not that all deferred tax assets will be realized.
Reclamation Liabilities
Post-closure reclamation and site restoration costs are estimated
based on environmental regulatory requirements and are accrued ratably over
the life of the mine using a units-of-production method. At March 31, 2002,
the company was required to post surety bonds with the State of Montana in
the amount of $13.2 million, which will be required to be increased by $7.5
million to a total of $20.7 million, which also represents the company's
current estimate of mine closure and reclamation costs for current
operations. Any differences between the required bonded amounts and actual
post-closure reclamation and site restoration costs could have a material
effect on the company's estimated liability resulting in an increase in the
recorded amount. The accrued reclamation liability was approximately $1.5
million at March 31, 2002.
Hedging Program
Effective January 1, 2001, the company adopted the FASB SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities and SFAS
No. 138, Accounting for Derivative Instruments and Certain Hedging
Activities, an amendment to SFAS No. 133. SFAS Nos. 133 and 138 require
that derivatives be reported on the balance sheet at fair value and, if the
derivative is not designated as a hedging instrument, changes in fair value
must be recognized in earnings in the period of change. If the derivative
is designated as a hedge and to the extent such hedge is determined to be
effective, changes in fair value are either (a) offset by the change in
fair value of the hedged asset or liability (if applicable) or (b) reported
as a component of other comprehensive income in the period of change, and
subsequently recognized in earnings when the offsetting hedged transaction
occurs. The company primarily uses derivatives to hedge metal prices and
manage interest rate risk. As of March 31, 2002, all outstanding commodity
derivative instruments have been settled and cash has been received. The
associated gains are being deferred in accumulated other comprehensive
income until the original settlement dates. As of March 31, 2002, the
outstanding interest rate swaps have a value of $275,000, net of tax, and
are reported as a component of accumulated other comprehensive income.
RISK FACTORS
Set forth below are certain risks faced by the company.
Vulnerability to Metals Price Volatility--Changes in supply and demand
could reduce market prices.
Since our sole source of revenue is the sale of platinum group
metals, changes in the market price of platinum group metals significantly
impacts profitability. Many factors beyond our control influence the market
prices of these metals. These factors include global supply and demand,
speculative activities, international political and economic conditions and
production levels and costs in other platinum group metal producing
countries, particularly Russia and South Africa.
The market prices of PGMs have fallen significantly over the past
year and may continue to fall. The price for palladium, which had reached
record high price levels of $1,090 per ounce in January 2001 fell sharply
to approximately $320 per ounce during the third quarter of 2001 and at
April 11, 2002 was approximately $372 per ounce. The price for platinum
also fell from $640 per ounce early in 2001 to approximately $533 per ounce
at April 11, 2002. The economic contraction experienced in the United
States and worldwide may lead to further reductions in market prices of
PGMs, particularly if demand for PGMs falls in connection with reduced
automobile and electronics production. Any such economic downturn or
continued drop in prices could adversely impact our results of operations
and could impair our ability to achieve our production plans. Because of
the recent declines in the price of PGMs, we have adjusted our production
goals to consider the PGM market outlook, production, ore grade and
tonnage, ounces to be produced and timing of our expansion program. In the
current price environment and considering our funding requirements, our
previously announced production target of 1 million ounces per annum for
2003 has been revised to approximately 730,000 ounces.
Economic and political events in Russia could also result in
declining market prices. If Russia disposes of substantial amounts of
platinum group metals from stockpiles or otherwise, the increased supply
could reduce the market prices of palladium and platinum. Financial,
economic, or political instability in Russia and economic problems could
make Russian shipments difficult to predict and the risk of sales from
stockpiles more significant. Volatility was evident during 1997 through
2001 when apparent tightness in the market for platinum group metals led to
high prices for current delivery contracts and "backwardation", a condition
in which delivery prices for metals in the near-term are higher than
delivery prices for metals to be delivered in the future.
Any drop in PGM prices adversely impacts our revenues, profits and
cash flows. In addition, sustained low prices could reduce revenues further
by production cutbacks due to cessation of the mining of deposits or
portions of deposits that have become uneconomic at the then prevailing PGM
price and reduce funds available for development. See "Business and
Properties - Competition: Palladium and Platinum Market" in the company's
annual report on Form 10-K for the year ended December 31, 2001 for further
explanation of these factors.
Method of Calculating Probable Reserves - We are engaged in discussions
with the SEC concerning our method for calculating probable reserves.
We are currently engaged in discussions with the SEC concerning
our methodology for calculating probable ore reserves. The discussions
arose in connection with the SEC's review of our registration statement
filed in December 2001. On January 30, 2002, we sold 4,285,715 shares of
common stock, at an aggregate offering amount of $60,000,000, to accredited
investors in a private placement. These shares of common stock were not
registered under the Securities Act. Under the terms of the stock purchase
agreement, if a registration statement covering the resale of the shares is
not declared effective by the SEC within 90 days after the closing of the
private placement, we will be required to pay each investor liquidated
damages in a cash amount equal to one-thirtieth of one percent of the
purchase price paid by such investor. On February 7, 2002, we amended the
registration statement to include the resale of the shares of common stock
purchased by the investors. The registration statement has not been
declared effective by the SEC.
The SEC has informed us that it believes our method for
calculating probable reserves should be revised and directed that we
re-designate our probable reserves as mineralized material. Although we
believe that our method is appropriate, there can be no assurance as to the
outcome of our discussions with the SEC and it is not possible to quantify
the amount of any potential adjustment in probable reserves until the
matter is resolved, but any such type adjustment could be material.
Our depreciation and amortization expense and the carrying amounts
of our property, plant and equipment included in our audited financial
statements for the year ended December 31, 2001 and in our financial
statements for the period ended March 31, 2002 are dependent upon our ore
reserve estimates. If we are not successful in defending our position, it
would likely result in a material downward revision of our reserves which,
in turn, would result in a reduction to net income reported in the year
2001 and possibly to a restatement of earlier years' results. A reduction
in reserve estimates could also result in asset impairment charges.
Our agreement with the syndicate of financial institutions
provides a credit facility that contains an event of default if we fail to
own or control, at any time, proven and probable reserves of at least 12.5
million tons. We are currently in compliance with the credit facility, but
if we are required to reclassify our probable reserve estimates to a level
where proven and probable reserves are less than 12.5 million tons, there
will be an immediate event of default under the credit facility, which
could cause the financial institutions to accelerate the maturity date of
the outstanding borrowings. Changes to our financial statements could also
result in violations of, or an event of default under, our credit facility.
An event of default under our credit facility, an adjustment of our net
income or the recognition of any impairment charges could negatively impact
our financial condition, which in turn could negatively effect our stock
price.
Effect of Hedging--Hedging could limit the realization of higher metal
prices.
We enter into hedging contracts from time to time in an effort to
reduce the negative effect of price changes on our cash flow. These hedging
activities typically consist of contracts that require us to deliver
specific quantities of metal, or to financially settle the obligation in
the future at specific prices, the sale of call options and the purchase of
put options. At April 11, 2002, the market prices for palladium and
platinum were $372 and $533 per ounce, respectively. See Note 9 to the
financial statements attached hereto for a discussion of our outstanding
hedge positions. While hedging transactions are intended to reduce the
negative effects of price decreases, they can also prevent us from
benefiting from price increases. When PGM prices are above the price for
which future production has been sold, we would have an opportunity loss.
We have entered into long-term sales contracts that provide a floor price
for sales of a portion of our production. See Note 8 to the financial
statements attached hereto for a description of these contracts.
Operating Plan Risks - Achievement of our production goals is subject to
significant uncertainties.
Our achievement of our production goals depends upon our ability
to sustain production at the Stillwater Mine and our related facilities and
its ability to achieve initial production targets at the East Boulder Mine.
Each of these tasks will require us to develop mine facilities to commence
and maintain production within budgeted levels. We have previously and may
need to further revise our plans and cost estimates for the Stillwater Mine
and East Boulder Mine as the mining progresses. See "Business and
Properties - Current Operations" in the company's annual report on Form
10-K for the year ended December 31, 2001 for further discussion of our
operating plans. Among the major risks to a successful operating plan are
potential cost overruns during development of new mine operations and
construction of new facilities and the inability to retain sufficient
numbers of skilled underground miners.
Based on the complexity and uncertainty involved in operating
underground mines, it is extremely difficult to provide accurate production
and cost estimates. We cannot be certain that either the Stillwater or East
Boulder Mines expanded operations will achieve the anticipated production
capacity or that the expected operating cost levels will be achieved or
that funding will be available from internal and external sources in
necessary amounts or on acceptable terms. Failure to achieve our
anticipated production capacity would reduce production levels, which would
impact our revenues, profits and cash flows. The reduction of production
levels would also impact certain covenants under our credit facility
relating to the accomplishment of specified production levels.
In the course of seeking to increase production, we have
historically experienced difficulties resulting from development shortfalls
and production constraints including underground materials handling
constraints, equipment unavailability, operational inconsistencies and
service interruptions. New mining operations often experience unexpected
problems during the development and start-up phases, which can result in
substantial delays in reaching commercial production. During 2001, we
revised our operating plans at the Stillwater Mine and East Boulder Mine.
See "Business and Properties - Current Operations - Optimization Plan" in
the company's annual report on Form 10-K for the year ended December 31,
2001. The operating plan further contemplates a significant effort to
reduce expenses. We may experience difficulties in achieving these
production goals. We may also continue to experience difficulties and
delays as we increase production.
The East Boulder Mine commenced operations in the first quarter of
2002 and has no operating history. As a result, estimates of future cash
operating costs at East Boulder are based largely on our operating
experience at the Stillwater Mine portion of the J-M Reef. Actual
production, cash operating costs and economic returns may differ
significantly from those currently estimated or those established in future
studies and estimates. New mining operations often experience unexpected
problems during the development and start-up phases, which can result in
substantial delays in reaching commercial production.
Compliance with Bank Credit Agreement - The restrictions imposed by our
debt agreements could negatively affect our ability to engage in certain
activities.
Our agreement with the syndicate of financial institutions
provides a credit facility that is being used to finance a portion of the
expansion plan and contains covenants relating to the accomplishment of
specific production objectives, capital cost and financial targets. If we
are unable to comply with the debt covenants, we would seek to amend the
existing contract or to seek alternative financing. If we violate any of
the covenants contained in our agreement, such default could cause
immediate acceleration of the loan and could increase the interest rate on
any borrowings thereunder. During 2001, we were required to amend certain
credit agreement covenants to align the credit agreement with our revised
operating plan. These covenants were amended effective December 2001. See
Note 5 to the financial statements attached hereto for a discussion of the
company's credit facility.
Dependence on Agreements with Significant Customers - We depend upon a few
customers and our sales and operations could suffer if we lose any of them.
We are party to long-term sales contracts with General Motors
Corporation, Ford Motor Company and Mitsubishi Corporation, each of who
represent more than 10% of the company's revenues. For more information
about these sales contracts, see Note 8 to the financial statements
attached hereto.
As a result of these contracts, we are subject to the customers'
compliance with the terms of the contracts, their ability to terminate or
suspend the contracts and the customers' willingness and ability to pay.
The loss of any of these customers would require us to sell at prevailing
market prices, which may expose us to lower metal prices as compared to the
floor and ceiling price structures under the sales contracts. In the event
we become involved in a disagreement with one or more of its customers,
their compliance with these contracts may be at risk. For example, we have
negotiated floor prices that are well above historical low prices for
palladium and platinum. In the event of a substantial decline in the market
price of palladium or platinum, one or more of these customers could seek
to renegotiate the prices or fail to honor the contracts. In such an event,
our operating plans could be threatened. In addition, under our syndicated
credit facility, a default or modification of the sales contracts could
prohibit additional loans or require the repayment of outstanding loans. A
termination or breach by a customer could negatively impact our results of
operations. The contracts are designed to limit the downside risk of metal
prices at the risk of foregoing a portion of upside price potential should
market prices exceed the price ceilings. See Note 8 to the financial
statements attached hereto for additional information about the sales
contracts.
Substitution of Materials - Users of PGMs may substitute other materials
for palladium and platinum.
High PGM prices may lead users of PGMs to substitute other
materials for palladium and platinum. The automobile, electronics and
dental industries are the three largest sources of palladium demand. In
response to supply questions and high market prices for palladium, some
automobile manufacturers may seek alternatives to palladium and may reduce
their PGM purchases. There has been some substitution of other metals for
palladium in the automobile, electronics and dental applications.
Substitution in all of these industries may increase significantly if the
PGM market prices rise or if supply becomes unreliable. Significant
substitution for any reason could result in a material PGM price decrease,
which would negatively impact our revenues.
Limited Availability of Additional Mining Personnel and Uncertainty of
Labor Relations - Our operations depend significantly upon the availability
of qualified miners, and if we are not able to attract and retain these
miners, our production targets may not be met.
Our operations depend significantly on the availability of
qualified miners. Historically, we have experienced high turnover with
respect to our miners. In addition, we must compete for individuals skilled
in the operation and development of mining properties. The number of such
persons is limited, and significant competition exists to obtain their
skills. We cannot be certain that we will be able to maintain an adequate
supply of miners and other personnel or that our labor expenses will not
increase as a result of a shortage in supply of such workers. We currently
employ 446 miners and under the current operating plan expect to slightly
decrease the number of miners within the next five years. Failure to
maintain an adequate supply of miners could limit our ability to meet our
contractual requirements. We currently have approximately 1,640 employees,
about 1,010 of whom are covered by a collective bargaining agreement with
Paper, Allied Industrial, Chemical and Energy Workers International Union
(PACE) Local 8-001, expiring June 30, 2004. In January 2002, we recognized
PACE as the exclusive bargaining representative for the hourly employees at
the East Boulder Mine. We anticipate that labor contract negotiations will
occur in 2002. In the event our employees were to engage in a strike or
other work stoppage, we could experience a significant disruption of our
operations and higher ongoing labor costs, which could limit our ability to
meet our contractual requirements.
Availability of Surety Bonds - If the company is unable to obtain surety
bonds to collateralize our reclamation liabilities, our operating permits
may be impacted.
We are required to post surety bonds to guarantee performance of
reclamation activities at the Stillwater and East Boulder Mines. As a
result of the terrorist activities on September 11, 2001, the total bonding
capacity of the U.S. insurance industry has been severely reduced. In
addition, the State of Montana has been requiring higher bonding levels at
mining operations throughout the state. For example, the bonded amount at
the East Boulder Mine is currently $4.0 million and the State of Montana is
requiring the bond to be increased by $7.5 million. The Stillwater Mine
currently posts a bond of $9.2 million, which may require a substantial
increase. In the event that increased bonding requirements are imposed and
we are unable to obtain the required bonds, the ability to operate under
existing operating permits could be adversely affected.
Availability of Cash - If we are unable to meet production targets under
the revised operating plan and/or control expenses, the company may not
have the necessary cash available.
The amount of cash available to us would be adversely affected if
we are unable meet the production targets under the revised operating plan
and/or control expenses. A drop in metal prices in the market would also
negatively impact the amount of cash available to us. While we raised $60
million in a private offering of our common stock in January 2002, a
portion of the proceeds from that offering must be used to address existing
expenses, such as increased surety bond requirements and letter of credit
requirements. In view of these uncertainties, we expect to continually
monitor our liquidity position and seek appropriate financial and strategic
transactions if required or as available at the time.
Mining Risks and Potential Inadequacy of Insurance Coverage - Our business
is subject to significant risks that may not be covered by insurance.
Underground mining and our milling, smelting and refining operations
involve a number of risks and hazards, including:
o unusual and unexpected rock formations,
o ground or slope failures,
o cave-ins and other mining or ground-related problems,
o environmental hazards,
o industrial accidents,
o labor disputes,
o metallurgical and other processing, smelting or refining problems,
o flooding and periodic interruptions due to inclement or hazardous
weather conditions or other acts of God,
o mechanical equipment and facility performance problems and
o the availability of materials and equipment.
Such risks could result in damage to, or destruction of, mineral properties
or production facilities, personal injury or death, environmental damage,
delays in mining, monetary losses and possible legal liability. Fatalities
have occurred at our mine since operations began in 1986. Industrial
accidents could have a material adverse effect on our business and
operations. We cannot be certain that this insurance will cover the risks
associated with mining or that we will be able to maintain insurance to
cover these risks at economically feasible premiums. We might also become
subject to liability for environmental damage or other hazards which we
cannot insure against or which we may elect not to insure against because
of premium costs or other reasons. Losses from such events could have a
negative impact on our business, financial condition and results of
operations.
Adverse Effect of Governmental Regulations--Changes to regulations and
compliance with regulations could increase costs and cause delays.
Our business is subject to extensive federal, state and local
environmental controls and regulations, including the regulation of
discharge of materials into the environment, disturbance of lands,
threatened or endangered species and other environmental matters. These
laws are continually changing and, as a general matter, are becoming more
restrictive. Generally, compliance with these regulations requires us to
obtain permits issued by Federal, state and local regulatory agencies.
Certain permits require periodic renewal or review of their conditions. We
cannot predict whether we will be able to renew such permits or whether
material changes in permit conditions will be imposed. Nonrenewal of
permits or the imposition of additional conditions could prohibit our
ability to conduct its operations. See "Business and Properties - Current
Operations - Regulatory and Environmental Matters" in the company's annual
report on Form 10-K for the year ended December 31, 2001.
Compliance with existing and future environmental laws and
regulations may require additional control measures and expenditures, which
we cannot predict. Environmental compliance requirements for new mines may
require substantial additional control measures that could materially
affect permitting and proposed construction schedules for such facilities.
Under certain circumstances, facility construction may be delayed pending
regulatory approval. Expansion may require new environmental permitting at
the Stillwater Mine and mining and processing facilities at the East
Boulder Mine. Private parties may pursue legal challenges of our permits.
See "Business and Properties - Current Operations - Regulatory and
Environmental Matters" in the company's annual report on Form 10-K for the
year ended December 31, 2001.
Our activities are also subject to extensive federal, state and
local laws and regulations governing matters relating to mine safety,
occupational health, labor standards, prospecting, exploration, production,
exports and taxes. Compliance with these and other laws and regulations
could require significant capital outlays.
Importance of a Single Mine--The Stillwater Mine is the company's largest
source of revenues.
A significant portion of our revenues are currently derived from
our mining operations at the Stillwater Mine. An interruption in operations
at the Stillwater Mine or at any of our processing facilities would have a
negative impact on our ability to generate revenues and profits in the
future. A smaller portion of our revenues is derived from our mining
operations at the East Boulder Mine. Material factors that could cause an
interruption in our operations at either mine include:
o ground or slope failures,
o cave-ins and other mining or ground-related problems,
o industrial accidents,
o mechanical equipment and facility performance problems and
o the availability of materials and equipment.
Uncertainty of Title to Properties - The validity of unpatented mining
claims is subject to title risk.
We have a number of unpatented mining claims. See "Business and
Properties - Current Operations - Title and Royalties" in the company's
annual report on Form 10-K for the year ended December 31, 2001. The
validity of unpatented mining claims on public lands, which constitute most
of our property holdings, is often uncertain and may be contested and
subject to title defects. Unpatented mining claims may be located on U.S.
federal public lands open to appropriation, and are generally considered to
be subject to greater title risk than other real property interests because
the validity of unpatented mining claims is often uncertain and is always
subject to challenges of third parties or contests by the federal
government. The validity of an unpatented mining claim or millsite, in
terms of its location and its maintenance, depends on strict compliance
with a complex body of federal and state statutory and decisional law and,
for unpatented mining claims, the existence of a discovery of valuable
minerals. In addition, few public records exist to definitively control the
issues of validity and ownership of unpatented mining claims or millsites.
While we have obtained various reports, opinions and certificates of title
for some of the unpatented mining claims or millsites we own or to which we
have the rights in accordance with what we believe is industry practice, we
cannot be certain that the title to any of our claims may not be defective.
See "Business and Properties - Current Operations - Title and Royalties" in
the company's annual report on Form 10-K for the year ended December 31,
2001.
Difficulty of Estimating Reserves Accurately - Reserves are very difficult
to estimate and reserve estimates may require adjustment in the future;
changes in ore grades could materially impact our production.
Ore reserve estimates are necessarily imprecise and depend to some
extent on statistical inferences drawn from limited drilling, which may
prove unreliable. Reserve estimates are expressions of judgment based on
knowledge, experience and industry practice. We cannot be certain that our
estimated ore reserves are accurate, and future production experience could
differ materially from such estimates. Should we encounter mineralization
or formations at any of our mines or projects different from those
predicted by drilling, sampling and similar examinations, reserve estimates
may have to be adjusted and mining plans may have to be altered in a way
that might adversely affect our operations. Declines in the market prices
of platinum group metals may render the mining of some or all of our ore
reserves uneconomic. The grade of ore may vary significantly from time to
time and between the Stillwater Mine and the East Boulder Mine, as well as
with any operation. We cannot give any assurances that any particular level
of metal may be recovered from the ore reserves. Moreover, short-term
factors relating to the ore reserves, such as the need for additional
development of the orebody or the processing of new or different grades,
may impair our profitability in any particular accounting period.
Complexity of Processing Platinum Group Metals - The complexity of
processing poses operational and environmental risks in addition to typical
mining risks.
Producers of platinum group metals are required to conduct
processing procedures and construct and operate additional facilities
beyond those for gold and silver producers. In addition to concentration
facilities at the mine site, we operate our own smelting and refining
facilities in Columbus, Montana to produce a filter cake that is shipped
for final refining by a third party refiner. The operations of a smelter
and refinery by us require environmental steps and operational expertise
not required of most other precious metals producers. This additional
complexity of operations poses additional operational and environmental
risks, such as solution spills, the release of sulfur dioxide from the
storage vessels and product spills in transportation.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The company is exposed to market risk, including the effects of
adverse changes in metal prices and interest rates as discussed below.
Commodity Price Risk
The company produces and sells palladium, platinum and associated
byproduct metals directly to its customers and also through third parties.
As a result, financial risks are materially affected when prices for these
commodities fluctuate. In order to manage commodity price risk and to
reduce the impact of fluctuation in prices, the company enters into
long-term contracts and uses various derivative financial instruments.
Because the company hedges only with instruments that have a high
correlation with the value of the hedged transactions, changes in
derivatives' fair value are expected to be offset by changes in the value
of the hedged transaction.
The company has entered into long-term sales contracts with
General Motors Corporation, Ford Motor Company and Mitsubishi Corporation.
The contracts apply to the portions of the company's production over the
period through December 2010 and provide for a floor and ceiling price
structure. See Note 8 to the financial statements attached hereto for
additional information about sales contracts.
As of March 31, 2002, the company had no metal committed for
future delivery under either forward delivery contracts or under put and
call option strategies. From time to time, the company utilizes financially
settled forwards and cashless put and call option collars. Under
financially settled forwards, at each settlement date, the company receives
the difference between the forward price and the market price if the market
price is below the forward price and the company pays the difference
between the forward price and the market price if the market price is above
the forward price. The company's financially settled forwards are settled
at maturity. Under cashless put and call option collars, at each
settlement, the company receives the difference between the put price and
the market price if the market price is below the put price and the company
pays the difference between the call price and the market price of the
market price is above the call price.
Interest Rate Risk
At the present time, the company has entered into interest rate
swaps to manage the impact of changes in interest rates. The interest rate
swaps have notional amounts totaling $100 million, which provide a fixed
interest rate of 3.67% on the variable portion of the calculation of the
interest rate on the company's credit facility. Therefore, the company is
exposed to changes in interest rates on the portion of its credit facility
in excess of $100 million, since the credit facility carries a variable
interest rate based upon LIBOR. The company's credit facility provides for
a $65 million five-year term loan facility (Term A), a $135 million
seven-year term loan facility (Term B) and a $50 million revolving credit
facility. The final maturity of the Term A and revolving credit facility is
December 30, 2005, while the Term B facility final maturity date is
December 31, 2007. As of March 31, 2002, the company had $65.0 million and
$134.0 million outstanding under the Term A and Term B loan facilities,
respectively, bearing interest at 4.50% and 5.625% for the Term A and Term
B loan facilities, respectively. No balance is outstanding under the
revolving credit facility as of March 31, 2002.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The company is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion
of management, the ultimate disposition of these matters will not
have a material adverse effect on the company's consolidated
financial position, results of operations or liquidity.
On April 12, 2002, Stillwater became aware through media
reports that the Company and certain senior officers were named in
a pending securities class action complaint filed April 11, 2002
in United States District Court, Southern District of New York.
This action purports to be a class action filed on behalf of all
persons who purchased or otherwise acquired common stock of the
Company between April 20, 2001 through and including April 1,
2002, and asserts claims against the Company and certain of its
officers under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. Plaintiffs challenge the accuracy of certain public
disclosures made by the Company regarding its financial
performance, and in particular, its accounting for probable
reserves. The Company has not been served by any of the plaintiffs
but intends to vigorously defend itself in these actions.
Item 2. Changes in Securities and Use of Proceeds
On January 31, 2002, the company completed a $60 million
private placement of its common stock involving approximately 4.3
million shares or approximately 10% of the outstanding shares
after such issuance. The price per share represented an
approximate 10% discount from the closing price of $15.61 on
January 29, 2002. As of March 31, 2002, proceeds from the offering
were approximately $54.9 million, net of actual offering costs of
$5.1 million incurred to date. The proceeds were used to pay down
the $25 million revolving credit facility and the remaining will
be used for general corporate purposes.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10 Waiver, Consent and Amendment No. 3 to Credit
Agreement, dated as of January 28, 2002 by and among
Stillwater Mining Company and Toronto Dominion
(Texas), Inc. (filed herewith).
(b) Reports on Form 8-K:
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
STILLWATER MINING COMPANY
(Registrant)
Date: April 18, 2002 By: /s/ Francis R. McAllister
-------------------------------------
Francis R. McAllister
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: April 18, 2002
By: /s/ James A. Sabala
-------------------------------------
James A. Sabala
Vice President and Chief Financial
Officer (Principal Financial Officer)
Exhibit Index
Exhibit
Number Description
- ------- -----------
10 Waiver, Consent and Amendment No. 3 to Credit
Agreement, dated as of January 28, 2002 by and
among Stillwater Mining Company and Toronto
Dominion (Texas) Inc. (filed herewith).