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 SEPTEMBER 30, 2001.
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)
<Table>
DELAWARE 81-0480654
------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
737 PALLADIUM PLACE
COLUMBUS, MONTANA 59019
---------------------------------------- ------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</Table>
(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 OCTOBER 23, 2001, 38,750,416 SHARES OF COMMON STOCK, $0.01 PAR VALUE PER
SHARE, WERE ISSUED AND OUTSTANDING.
1
STILLWATER MINING COMPANY
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001
INDEX
<Table>
<Caption>
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS................................................... 3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...................................................... 26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................. 26
ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................ 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 26
ITEM 5. OTHER INFORMATION...................................................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 26
SIGNATURES ....................................................................... 27
</Table>
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STILLWATER MINING COMPANY
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except share and per share amounts)
<Table>
<Caption>
SEPTEMBER 30, December 31,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,903 $ 18,219
Funds held in escrow -- 2,636
Inventories 39,080 42,625
Accounts receivable 20,003 --
Deferred income taxes 3,755 7,732
Fair value of derivative financial instruments 12,903 --
Other current assets 7,864 2,943
------------ ------------
Total current assets 101,508 74,155
PROPERTY, PLANT AND EQUIPMENT, NET 741,246 602,110
OTHER NONCURRENT ASSETS 6,402 2,761
------------ ------------
Total assets $ 849,156 $ 679,026
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,540 $ 21,710
Accrued payroll and benefits 11,544 6,431
Property, production and franchise taxes payable 7,786 8,068
Current portion of long-term debt and capital lease
obligations 6,179 1,970
Metals repurchase agreements payable -- 9,386
Current income taxes payable 5,689 97
Other current liabilities 8,661 11,533
------------ ------------
Total current liabilities 66,399 59,195
Long-term debt and capital lease obligations 225,782 157,256
Deferred income taxes 73,398 55,457
Other noncurrent liabilities 10,685 6,504
------------ ------------
Total liabilities 376,264 278,412
------------ ------------
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; 38,750,416 and 38,645,886 shares
issued and outstanding 388 386
Paid-in capital 290,868 288,212
Retained earnings 172,970 112,016
Accumulated other comprehensive income 8,666 --
------------ ------------
Total shareholders' equity 472,892 400,614
------------ ------------
Total liabilities and shareholders' equity $ 849,156 $ 679,026
============ ============
</Table>
See notes to consolidated financial statements.
3
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
REVENUES $ 52,893 $ 49,056 $ 218,061 $ 146,581
COSTS AND EXPENSES
Cost of metals sold 26,978 24,083 100,816 66,919
Depreciation and amortization 5,950 4,196 17,171 12,708
----------- ----------- ----------- -----------
Total cost of sales 32,928 28,279 117,987 79,627
General and administrative expenses 5,450 1,831 15,905 6,129
Legal settlement 1,684 -- 1,684 --
----------- ----------- ----------- -----------
Total costs and expenses 40,062 30,110 135,576 85,756
----------- ----------- ----------- -----------
OPERATING INCOME 12,831 18,946 82,485 60,825
OTHER INCOME (EXPENSE)
Interest income 473 418 1,719 883
Interest expense, net of capitalized interest of
$4,485, $4,958, $13,433 and $10,037 -- -- -- --
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 13,304 19,364 84,204 61,708
INCOME TAX PROVISION (3,044)) (5,415) (23,250) (17,273)
----------- ----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 10,260 13,949 60,954 44,435
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR REVENUE
RECOGNITION, NET OF INCOME TAX BENEFIT OF $2,503 -- -- -- (6,435)
----------- ----------- ----------- -----------
NET INCOME $ 10,260 $ 13,949 $ 60,954 $ 38,000
=========== =========== =========== ===========
BASIC EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 0.26 $ 0.36 $ 1.57 $ 1.16
Cumulative effect of accounting change -- -- -- (0.17)
----------- ----------- ----------- -----------
NET INCOME $ 0.26 $ 0.36 $ 1.57 $ 0.99
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE
Income before cumulative effect of accounting change $ 0.26 $ 0.36 $ 1.55 $ 1.13
Cumulative effect of accounting change -- -- -- (0.16)
----------- ----------- ----------- -----------
NET INCOME $ 0.26 $ 0.36 $ 1.55 $ 0.97
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 38,744 38,561 38,708 38,450
Diluted 39,173 39,159 39,294 39,230
</Table>
See notes to consolidated financial statements.
4
STILLWATER MINING COMPANY
STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
NET INCOME $ 10,260 $ 13,949 $ 60,954 $ 38,000
OTHER COMPREHENSIVE INCOME:
Change in net unrealized gains on derivative financial
Instruments, net of tax of $3,786, $0,
$8,479 and $0 4,031 -- 15,805 --
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 14,291 $ 13,949 $ 76,759 $ 38,000
============ ============ ============ ============
</Table>
See notes to consolidated financial statements.
5
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in thousands)
<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 60,954 $ 38,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 17,171 12,708
Deferred income taxes 21,918 14,345
Cumulative effect of change in accounting
for revenue recognition -- 6,435
Changes in operating assets and liabilities:
Inventories 3,545 (12,917)
Accounts receivable (20,003) --
Accounts payable 4,830 10,894
Other 3,919 7,143
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 92,334 76,608
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (156,306) (151,358)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (156,306) (151,358)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt 202,611 61,435
Payments on long-term debt and capital lease
obligations (127,240) (2,045)
Payments for debt issuance costs (3,946) --
Net metals repurchase agreement transactions (9,386) 13,552
Issuance of common stock 1,617 11,357
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 63,656 84,299
------------ ------------
CASH AND CASH EQUIVALENTS
Net increase (decrease) (316) 9,549
Balance at beginning of period 18,219 2,846
------------ ------------
BALANCE AT END OF PERIOD $ 17,903 $ 12,395
============ ============
</Table>
See notes to consolidated financial statements.
6
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 September 30, 2001 and the results of its operations for the
three- and nine-month periods ended September 30, 2001 and 2000 and cash flows
for the nine-month periods ended September 30, 2001 and 2000. Certain prior year
amounts have been reclassified to conform with the current year presentation.
The results of operations for the three- and nine-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 2000 Annual Report on Form 10-K.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
PROPERTY, PLANT AND EQUIPMENT
Plant and equipment are recorded at cost and depreciated using the
straight-line method over estimated useful lives ranging from five to twenty
years or, for capital leases, the term of the related leases. Maintenance and
repairs are charged to operations as incurred. Mine development expenditures
incurred to increase existing production, develop new ore bodies or develop
mineral property substantially in advance of production are capitalized and
amortized using a units-of-production method over the proven and probable
reserves. Incremental revenues from incidental operations during the development
of new ore bodies and mineral properties, are recorded as a reduction of
capitalized development expenditures. Interest is capitalized on expenditures
related to construction or development projects and amortized using the same
method as the related asset. Interest capitalization is discontinued when the
asset is placed into operation or development ceases. Exploration costs are
expensed as incurred.
NOTE 3 - NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the company adopted the Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standard (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.
In accordance with the transition provisions of SFAS No. 133, the
company recorded a net-of-tax cumulative-effect-type loss adjustment of $7.1
million in accumulated other comprehensive loss to recognize at fair value all
derivatives that are designated as cash-flow hedging instruments at January 1,
2001. During the three- and nine- months ended September 30, 2001, $3.9 million
and $0.4 million, respectively, of accumulated other comprehensive income was
reclassified to earnings. The company expects to reclassify to earnings during
the next twelve months $5.4 million of net unrealized gains existing at
September 30, 2001, that are recorded in accumulated other comprehensive income.
Effective January 1, 2000, the company changed its method of accounting
for revenue recognition. Pursuant to the guidance in Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition for Financial Statements, the company now
recognizes revenue as title passes to the customer. In accordance with accepted
industry practice, the company previously recognized revenue when product was
shipped from the
7
company's metal refinery to an external refiner. The company implemented SAB No.
101 during the fourth quarter of 2000. The implementation was treated as a
change in accounting principle with the cumulative effect of the change on
retained earnings at the beginning of 2000 included in restated net income of
the first quarter of 2000. The third quarter and first nine months of 2000
financial statements were restated to reflect the change in accounting for
revenue recognition. The effect of the accounting change on the third quarter of
2000 was to decrease net income by approximately $644,000 ($0.02 per basic and
diluted share). The effect of the accounting change on the first nine months of
2000 was to decrease net income by approximately $9.2 million ($0.24 per basic
and $0.23 per diluted share), which includes the cumulative effect of $6.4
million ($0.17 per basic and $0.16 per diluted share). The $6.4 million
cumulative effect adjustment includes $26 million of revenue previously
recognized in 1999, which is reflected as revenue in 2000 under the company's
new method of accounting.
Effective January 1, 2000, the company also implemented Issue No. 00-14
of the FASB Emerging Issues Task Force (EITF), Accounting for Certain Sales
Incentives. The consensus reached by the FASB EITF requires a company to
classify any cash sales discounts as a reduction in revenue. Prior to the
implementation of EITF 00-14, the company classified sales discounts associated
with long-term sales contracts as a component of cost of metals sold. The
company implemented EITF No. 00-14 during the fourth quarter of 2000. Pursuant
to the consensus, financial statements for the three- and nine-month periods
ended September 30, 2000 have been reclassified. During the three- and nine-
months ended September 30, 2000, $1.0 million and $3.2 million, respectively, of
cost of metals sold was reclassified to reduce revenues.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.
The Company is required and plans to adopt the provisions of SFAS No.
143 for the quarter ending March 31, 2003. To accomplish this, the Company must
identify all legal obligations for asset retirement obligations, if any, and
determine the fair value of these obligations on the date of adoption. The
determination of fair value is complex and will require the Company to gather
market information and develop cash flow models. Additionally, the Company will
be required to develop processes to track and monitor these obligations. Because
of the effort necessary to comply with the adoption of Statement No. 143, it is
not practicable for management to estimate the impact of adopting this Statement
at the date of this report.
On October 3, 2001, the FASB issued 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. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. The company has not yet completed its evaluation of the impact of
the adoption of this Statement.
On June 29, 2001, the Accounting Standards Executive Committee (AcSEC)
issued an exposure draft of a proposed Statement of Position (SOP ED),
Accounting for Certain Costs and Activities Related to Property, Plant, and
Equipment. Concurrent with the issuance of the proposed SOP ED, the FASB issued
an exposure draft (FASB ED) of a proposed SFAS, Accounting in Interim and Annual
Financial
8
Statements for Certain Costs and Activities Related to Property, Plant, and
Equipment. The provisions of the proposed SOP ED would result in significant
changes in record keeping and accounting requirements for property, plant, and
equipment (PP&E). If adopted in its present form, the provisions of the SOP ED
would provide guidance on the types of costs that should be capitalized as PP&E,
limit indirect costs that would be capitalized as PP&E, require the use of
component accounting for PP&E and require major overhaul costs to be charged to
expense as incurred. The FASB ED would amend SFAS No. 67, Accounting for Costs
and Initial Rental Operations of Real Estate Projects, to exclude from its scope
the accounting for acquisition, development, and construction costs of real
estate developed and used by an entity for subsequent rental activities that
would be covered by the SOP ED. Until the SOP ED and the FASB ED is issued,
management is unable to determine the impact they will have on the Company's
financial statements.
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under accounting principles generally accepted in the
United States of America, 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):
<Table>
<Caption>
DERIVATIVE
FINANCIAL INSTRUMENTS
---------------------
Balance at December 31, 2000 $ --
Cumulative effect on adoption (9,985)
Reclassification to earnings (382)
Change in value due to change in metals prices 24,666
--------
14,299
Tax provision (5,633)
--------
Balance at September 30, 2001 $ 8,666
========
</Table>
NOTE 5 - INVENTORIES
Inventories consisted of the following (in thousands):
<Table>
<Caption>
SEPTEMBER 30, December 31,
2001 2000
------------ ------------
Metals inventory
Raw ore $ 15 $ 1,086
Concentrate and in-process 12,571 13,971
Finished goods 17,653 21,864
------- -------
30,239 36,921
Materials and supplies 8,841 5,704
------- -------
$39,080 $42,625
======= =======
</Table>
NOTE 6 - 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 will commence on March
31, 2002. The final maturity of
9
the Term A and the revolving credit facility is December 30, 2005 while the Term
B facility final maturity date is December 31, 2007. Of the term loan facility
proceeds, $125 million was used to repay borrowings under the prior credit
facility with the remaining proceeds to be used to fund the company's expansion
plans as required. Proceeds of the revolving credit facility will be used for
general corporate and working capital needs. As of September 30, 2001, the
company had $65.0 million and $134.7 million outstanding under the Term A and
Term B loan facilities, respectively, bearing interest at 6.00% and 6.75% for
the Term A and Term B facilities, respectively.
The loans are required to be prepaid from excess cash flow as defined
in the Credit Facility, proceeds from asset sales and the issuance of debt or
equity securities, subject to specified exceptions. At the company's option, the
Credit Facility bears interest at the London Interbank Offered Rate (LIBOR) or
an alternate base rate, in each case plus a margin of 2.0% to 3.25% which is
adjusted depending upon the company's ratio of debt to operating cash flow.
Substantially all the property and assets of the company and its subsidiaries
and the stock of the company's subsidiaries are pledged as security for the
Credit Facility.
Covenants in the Credit Facility restrict: (1) additional indebtedness;
(2) payment of dividends or redemption of capital stock; (3) liens; (4)
investment, acquisitions, dispositions or mergers; (5) transactions with
affiliates; (6) capital expenditures (other than those associated with the
expansion plan); (7) changes in the nature of business conducted or ceasing
operations at the principal operating properties; and (8) commodities hedging to
no more than 90% of annual palladium production and 75% of annual platinum
production (excluding the sales covered by the company's marketing contracts and
similar agreements). The company is also subject to financial covenants
including a debt to operating cash flow ratio, a debt service coverage ratio and
a debt to equity ratio.
Events of default include: (1) a cross-default to other indebtedness of
the company or its subsidiaries; (2) any material modification to the
life-of-mine plan for the Stillwater Mine; (3) a change of control of the
company; (4) the failure to maintain agreed-upon annual PGM production levels;
or (5) any breach or modification of any of the sales agreements.
The company is in compliance with all aspects of the credit agreement,
including all financial covenants as of September 30, 2001.
EXEMPT FACILITY REVENUE BONDS
On July 6, 2000, the company completed a $30 million offering of Exempt
Facility Revenue Bonds, Series 2000, through the State of Montana Board of
Investments. The bonds were issued by the State of Montana Board of Investments
to finance a portion of the costs of constructing and equipping certain sewage
and solid waste disposal facilities at both the Stillwater Mine and the East
Boulder Project. The bonds mature on July 1, 2020 and have an interest rate of
8.00% with interest paid semi-annually. The bonds have an effective interest
rate of 8.57%. Net proceeds from the offering were $28.7 million.
NOTE 7 - EARNINGS PER SHARE
The effect of outstanding stock options on diluted weighted average
shares outstanding was 428,644 and 598,636 shares for the three-month periods
ending September 30, 2001 and 2000, respectively. Outstanding options to
purchase 1,192,220 and 326,625 shares of common stock were excluded from the
computation of diluted earnings per share for the three-month periods ended
September 30, 2001 and 2000, respectively, because the effect of inclusion would
have been antidilutive using the treasury stock method.
The effect of outstanding stock options on diluted weighted average
shares outstanding was 585,937 and 780,564 shares for the nine-month periods
ending September 30, 2001 and 2000, respectively. Outstanding options to
purchase 640,041 and 39,725 shares of common stock were excluded from the
computation of diluted earnings per share for the nine-month periods ended
September 30, 2001 and 2000, respectively, because the effect of inclusion would
have been antidilutive using the treasury stock method.
10
NOTE 8 - INCOME TAXES
Income taxes for the nine-month periods ended September 30, 2001 and
2000 have been provided at the expected annualized rate of 27.6% and 28.0%,
respectively.
NOTE 9 - COMMODITY INSTRUMENTS
The company maintains long-term sales contracts with General Motors,
Ford Motor Company and Mitsubishi Corporation. The contracts are not subject to
the requirements of SFAS No. 133 as the contracts qualify for the normal sales
exception provided in SFAS No. 138. The floors and ceilings embedded within the
long-term sales contracts are treated as part of the host contract, not a
separate derivative instrument and are therefore also not subject to the
requirements of SFAS No. 133.
In addition to the long-term sales contracts, the company may also
enter into transactions for the sale and repurchase of metals held in the
company's account at third party refineries. Under these transactions, the
company will enter into an agreement to sell a certain number of ounces at the
then current market price. The company will simultaneously enter into a separate
agreement with the same counter party, to repurchase the same number of ounces
at the same price at the repurchase date.
The company utilizes the following types of derivative financial
instruments: fixed forwards, cashless put and call option collars and
financially settled forwards. For derivative instruments outstanding as of
September 30, 2001, the company has designated the derivative as a hedge of a
forecasted transaction ("cash flow" hedge). Currently, all derivatives have been
assessed as highly effective cash-flow hedges of forecasted transactions.
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 forecasted transactions occur.
From time to time, the company may enter into cashless put and call
option collars under which the company receives the difference between the put
price and the market price only if the market price is below the put price and
the company pays the difference between the call price and the market price only
if the market price is above the call price. The company's put and call options
are financially settled at maturity. Since the put/call instruments hedge
forecasted transactions, they qualify for cash flow hedge accounting. They are
considered to be highly effective since the intrinsic value of the put/call will
offset the change in value associated with future production not subject to the
long-term sales contract. For the nine-month period ended September 30, 2001,
the company reclassified a realized loss of $2.4 million to reduce revenues and
earnings for cashless put and call option collars that were recorded in
accumulated other comprehensive loss at January 1, 2001. The company has no
cashless put and call option collars outstanding at September 30, 2001.
The company may enter into fixed forward contracts to sell metals at a
future date and at a fixed price in order to reduce the risk associated with
future metals prices for ounces produced in excess of the company's long-term
sales contracts. These instruments are considered to be highly effective
derivatives that will qualify for cash flow hedge accounting since they are an
"all-in-one-hedge" instrument, meaning that all of the components (ounces,
delivery date, and price) are fixed as part of the original commitment. The
company has no fixed forward contracts outstanding at September 30, 2001.
The company also enters into financially settled forwards. They differ
from fixed forwards in that the net gain or loss is settled at maturity. The
company uses the financially settled forwards as a mechanism to hedge the
fluctuations in metal prices associated with future production not subject to
the long-term sales contracts. The financially settled forwards qualify as a
cash flow hedge and are considered to be highly effective, since the change in
the value of the financially settled forward will offset changes in the expected
future cash flows related to future production not subject to the long-term
sales contracts. For the three- and nine-month periods ended September 30, 2001,
the company reclassified a realized gain of $3.9 million and $2.8 million,
respectively, to revenues and earnings from accumulated other comprehensive
income for financially settled forwards.
11
A summary of the company's derivative financial instruments as of
September 30, 2001 is as follows.
<Table>
<Caption>
Palladium Sales Platinum Sales
Ounces Price Ounces Price
--------- ----- -------- -----
2001 Financially settled forwards 5,000 $706 3,000 $575
2002 Financially settled forwards 15,000 $700 3,000 $575
</Table>
In November 2000 and March 2001, the company renegotiated certain of
its long-term sales contracts. The new arrangements establish higher floor and
ceiling prices on a portion of the current contracts, extend the term of the
contracts through 2010 with new floors and ceilings and increase the amount of
platinum committed. The contracts provide for floor and ceiling price structures
as summarized below:
<Table>
<Caption>
PALLADIUM PLATINUM
-------------------------------------------------- -------------------------------------------------------
% of Avg. Floor % of Avg. Ceiling % of Avg. Floor % of Avg. Ceiling
Year Production Price Production Price Production Price Production Price
----------- ---------- ----------- ------------- ------------- ------------- ------------- -------------
2001 90% $347 30% $400 89% $400 41% $550
2002 100% $363 30% $400 96% $404 40% $573
2003 100% $350 30% $400 90% $408 20% $601
2004 100% $371 39% $644 80% $425 16% $856
2005 100% $355 16% $981 80% $425 16% $856
2006 80% $400 20% $980 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
</Table>
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS STILLWATER MINING COMPANY
KEY FACTORS
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
2001 2000 2001 2000
---- ---- ---- ----
STILLWATER MINE:
OUNCES PRODUCED (000)(1)
Palladium 96 75 285 236
Platinum 27 23 85 72
---- ---- ---- ----
Total 123 98 370 308
TONS MINED (000) 201 171 581 488
TONS MILLED (000) 201 152 588 470
MILL HEAD GRADE (OUNCE PER TON) 0.65 0.69 0.68 0.70
TOTAL MILL RECOVERY (%) 91 90 90 91
SUB-GRADE TONS MILLED (000) 30 29 73 73
SUB-GRADE MILL HEAD GRADE (OUNCE PER TON) 0.21 0.21 0.21 0.23
TOTAL TONS MILLED (000) 231 181 661 543
COMBINED MILL HEAD GRADE (OUNCE PER TON) 0.59 0.61 0.62 0.63
OUNCES SOLD (000)(1)
Palladium 80 74 292 226
Platinum 26 19 84 71
---- ---- ---- ----
Total 106 93 376 297
AVERAGE REALIZED PRICE PER OUNCE(1)
Palladium $513 $559 $610 $518
Platinum 474 473 516 460
Combined(2) 504 542 589 505
AVERAGE MARKET PRICE PER OUNCE
Palladium $475 $732 $687 $641
Platinum 481 577 559 528
Combined(2) 477 696 657 614
</Table>
(1) Effective January 1, 2000, the company changed its method of accounting for
revenue recognition. The company now recognizes revenue as title passes to
the customer. Ounces sold and average realized prices for the three- and
nine-month periods ended September 30, 2000 have been restated accordingly.
The differences in ounces produced and ounces sold are caused by the length
of time required by the smelting and refining processes and the specified
delivery dates under the long-term sales contracts. The differences between
the realized prices and market prices occur due to contract pricing
provisions and hedge positions.
(2) Stillwater Mining reports a combined average realized and market price of
palladium and platinum at the same ratio as ounces are produced from the
base metals 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.
13
STILLWATER MINING COMPANY
KEY FACTORS (CONTINUED)
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
STILLWATER MINE:
PER TON MILLED(3)
CASH OPERATING COSTS $128 $143 $126 $129
Royalties and taxes 13 23 21 20
---- ---- ---- ----
TOTAL CASH COSTS $141 $166 $147 $149
Depreciation and amortization 26 23 26 24
---- ---- ---- ----
TOTAL PRODUCTION COSTS $167 $189 $173 $173
==== ==== ==== ====
PER OUNCE PRODUCED(3)
CASH OPERATING COSTS $239 $263 $225 $227
Royalties and taxes 25 43 38 36
---- ---- ---- ----
TOTAL CASH COSTS $264 $306 $263 $263
Depreciation and amortization 49 43 47 42
---- ---- ---- ----
TOTAL PRODUCTION COSTS $313 $349 $310 $305
==== ==== ==== ====
</Table>
(3) Income taxes, corporate general and administrative expense and interest
income and expense are not included in either total cash costs or total
production costs. Certain prior year amounts have been reclassified to
conform with the current year presentation.
RECENT DEVELOPMENTS
The market prices for PGMs have fallen significantly over the last few
months and may continue to fall. The price for palladium, which had reached
record high price levels of $1,115 per ounce in January has fallen sharply and
is currently approximately $320 per ounce on October 23, 2001. The price for
platinum has also fallen from $648 per ounce early in 2001 to approximately $426
per ounce on October 23, 2001.
Because of the sharp drop in the price of PGMs, the company is
reviewing whether its previously planned sources of financing will be sufficient
to meet its capital requirements, including the completion of the East Boulder
project on the previously announced schedule. The capital programs that have
been recently pursued by the company depended on operating cash flow and bank
financing premised on a more favorable palladium pricing environment than
currently exists. In light of the drop in PGM prices, the company accelerated
and expanded its ongoing optimization planning and review of operating options
and funding requirements. This optimization review will consider the PGM market
outlook, production, ore grade and tonnage, ounces to be produced and timing of
the company's expansion program. The review will examine variations in
production levels at both the Stillwater mine and the East Boulder mine. In the
current price environment and considering the company's funding requirements,
the company's previously announced production target of 1 million ounces per
annum for 2003 may be deferred or a revised target established.
The company has recently completed the initial East Boulder Mine plan.
The plan is the result of several years of extensive work by the company and
engineering consulting firms and is based on an average PGM price of $450 per
ounce. The company expects to process an average of 1,300 tons of ore per day at
an average grade 0.42 ounce per ton at the East Boulder Mine in 2002. The
initial lower ore grade forecast is the result of development muck scheduled to
be produced in the first half of the year as the mine ramps up to its daily
design rate and grade. The monthly mining rate will be ramped up, as more
production areas become available to mine. In 2003, the mine is forecast to ramp
up to the design rate of 2,000 tons per day producing at an ore grade of 0.56
ounce per ton.
Key data underlying the mine plan was derived from 132 drill holes in
the vicinity of where the access tunnels pierced the reef ore zone and along 675
feet of the orebody strike length. This initial ore reserve work indicates that
the orebody at East Boulder is more continuous yielding about 134 tons of ore
per footwall lateral at an undiluted ore grade of 0.63 ounces per ton, compared
to an average of 70 tons at the Stillwater Mine, at its average undiluted grade
of 1.05 ounces per ton. The higher yield is due to less waste associated with
the reef ore zone at East Boulder and should result in 70 ounces per foot of
footwall lateral on average over the drilled area compared to 52 ounces per foot
of footwall lateral on average at the Stillwater Mine.
Since the initial 132 drill hole program, drilling has tested over
5,000 feet of the orebody with 603 drill holes. The average drillhole grade is
0.65 ounces per ton over a horizontal wall thickness of 7.1 feet. The recent
work includes 170 drill holes along 2,000 feet of the west end of the footwall
lateral that indicates the occurrence of a higher grade zone. Preliminary
results based on the recently completed drill holes indicate the undiluted
weighted averages of the grade in this area range from 0.71 to 0.78 ounce per
ton.
Palladium and platinum production from East Boulder is forecast between
150,000 to 176,000 ounces for 2002, 362,000 ounces for 2003 and 370,000 ounces
for 2004. Cash operating costs before royalties and taxes over the three-year
period, 2002 to 2004, are estimated to be approximately $297, $215,
14
and $206 per ounce produced, respectively. On a cash operating cost per ton
milled basis, costs are estimated to be $110, $102 and $99, respectively.
Capital expenditures at the end of the third quarter of 2001 for the
East Boulder Project were $238 million. Approximately $38 million is projected
to be spent during the remainder of 2001, $81 million for 2002 and $11 million
for 2003. Sustaining capital is projected to be $5 million for 2002, $11 million
for 2003 and $13 million per year going forward.
The results of the company's review and optimization plan of operations
and funding needs due to the recent sharp decline in PGM prices may have an
adverse effect on these projected results for the East Boulder Mine.
RESULTS OF OPERATIONS
Three months ended September 30, 2001 compared to three months ended September
30, 2000
PGM Production. During the third quarter of 2001, the company produced
approximately 96,000 ounces of palladium and approximately 27,000 ounces of
platinum compared with production of approximately 75,000 ounces of palladium
and 23,000 ounces of platinum in the third quarter of 2000. The increase was
primarily due to a 28% increase in total tons milled at the Stillwater Mine in
the third quarter of 2001 compared to the third quarter of 2000. The increase in
tons milled is the result of additional mine production.
Revenues. Revenues were $52.9 million for the third quarter of 2001
compared with $49.1 million for the third quarter of 2000, an increase of 8% and
is primarily due to a 14% increase in ounces sold offset by a 7% decrease in
realized PGM prices, compared to the same period in 2000.
Palladium ounces sold from the Stillwater Mine increased to
approximately 80,000 ounces in the third quarter of 2001 from approximately
74,000 ounces in the third quarter of 2000. Platinum ounces sold from the
Stillwater Mine increased to approximately 26,000 ounces in the third quarter of
2001 from approximately 19,000 ounces in the third quarter of 2000.
The company's combined average realized price per ounce of palladium
and platinum sold in the third quarter of 2001 decreased 7% to $504 per ounce,
compared to $542 per ounce in the third quarter of 2000. The combined average
market price decreased 31% to $477 per ounce in the third quarter of 2001,
compared to $696 per ounce in the third quarter of 2000. The company's average
realized price per ounce of palladium was $513 in the third quarter of 2001,
compared to $559 per ounce in the third quarter of 2000, while the average
market price of palladium was $475 per ounce in the third quarter of 2001
compared to $732 per ounce in the third quarter of 2000. The company's average
realized price per ounce of platinum was $474 in the third quarter of 2001,
compared to $473 per ounce in the third quarter of 2000, while the average
market price of platinum was $481 per ounce in the third quarter of 2001
compared to $577 per ounce in the third quarter of 2000.
Costs and Expenses. Total cash costs per ounce produced at the
Stillwater Mine for the quarter ended September 30, 2001 decreased $42 or 14% to
$264 per ounce from $306 per ounce in the quarter ended September 30, 2000.
Total production costs per ounce produced at the Stillwater Mine in the quarter
ended September 30, 2001 decreased $36 or 10% to $313 per ounce from $349 per
ounce in the quarter ended September 30, 2000. This decrease is primarily a
result of lower royalties and taxes of $18 per ounce associated with lower metal
prices, lower support services of $4 per ounce and lower mine operating costs of
$20 per ounce, offset by higher non-cash costs of $6 per ounce relating to
increased production and increased capital fixed assets. General and
administrative expenses increased $3.6 million primarily as a result of $2.2
million of increased administrative support required to transition the company
from a single site producer to a multi-location producer and $1.2 million
related to consulting services. The company also incurred $1.7 million related
to a settlement of a legal dispute with a terminated refining contract.
Operating Income. The company reported operating income of $12.8
million for the quarter ended September 30, 2001, compared with operating income
of $18.9 million for the quarter ended September 30, 2000. The lower operating
income was mainly the result of lower realized prices, offset by increased
15
quantities delivered to customers and increased general and administrative
expenses.
Net Income. The company reported net income of $10.3 million or $0.26
per diluted share for the third quarter of 2001 compared with net income of
$13.9 million, or $0.36 per diluted share for the third quarter of 2000.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
PGM Production. During the first nine months of 2001, the company
produced approximately 285,000 ounces of palladium and approximately 85,000
ounces of platinum compared with production of approximately 236,000 ounces of
palladium and 72,000 ounces of platinum in the first nine months of 2000. The
increase was due to a 22% increase in total tons milled at the Stillwater Mine
in the first nine months of 2001 compared to the first nine months of 2000. The
increase in tons milled is the result of additional mine production.
Revenues. Revenues were $218.1 million for the first nine months of
2001 compared with $146.6 million for the first nine months of 2000, an increase
of 49% and were the result of a 17% increase in realized PGM prices and a 27%
increase in ounces sold, compared to the same period in 2000.
Palladium ounces sold from Stillwater Mine increased to approximately
292,000 ounces in the first nine months of 2001 from approximately 226,000
ounces in the first nine months of 2000. Platinum ounces sold from Stillwater
Mine increased to approximately 84,000 ounces in the first nine months of 2001
from approximately 71,000 ounces in the first nine months of 2000.
The company's combined average realized price per ounce of palladium
and platinum sold in the first nine months of 2001 increased 17% to $589 per
ounce, compared to $505 per ounce in the first nine months of 2000. The combined
average market price rose 7% to $657 per ounce in the first nine months of 2001,
compared with $614 per ounce in the first nine months of 2000. The company's
average realized price per ounce of palladium was $610 in the first nine months
of 2001, compared to $518 per ounce in the first nine months of 2000, while the
average market price of palladium was $687 per ounce in the first nine months of
2001 compared to $641 per ounce in the first nine months of 2000. The company's
average realized price per ounce of platinum was $516 in the first nine months
of 2001, compared to $460 per ounce in the first nine months of 2000, while the
average market price of platinum was $559 per ounce in the first nine months of
2001 compared to $528 per ounce in the first nine months of 2000.
Costs and Expenses. Total cash costs per ounce produced at Stillwater
Mine for the nine months ended September 30, 2001 were $263 per ounce and were
comparable to the cash costs per ounce for the nine months ended September 30,
2000. The cash costs per ounce are comparable as a result of increased
production that was offset by increased stope mining and mine overhead costs,
compared to the same period in 2000. Total production costs per ounce produced
at Stillwater Mine in the nine months ended September 30, 2001 increased $5, or
2% to $310 per ounce from $305 per ounce in the nine months ended September 30,
2000. This increase is due to an increase in non-cash costs of $5 per ounce
relating to increased production and increased capital fixed assets. General and
administrative expenses increased $9.8 million primarily as a result of $6.6
million of increased administrative support required to transition the company
from a single site producer to a multi-location producer, $1.2 million related
to consulting services and $1.7 million attributable to management realignment.
The company also incurred $1.7 million related to a settlement of a legal
dispute with a terminated refining contract.
Operating Income. The company reported operating income of $82.5
million for the nine months ended September 30, 2001, compared with operating
income of $60.8 million for the comparable period of 2000. The higher operating
income was mainly the result of higher realized prices and increased quantities
of metals delivered to customers offset by increased general and administrative
expenses.
Net Income Before Cumulative Effect of Accounting Change. In its first
nine months of 2001, the company has provided for income taxes of $23.3 million
or 27.6% of income before taxes compared to a provision of $17.3 million, or 28%
of pretax income for the first nine months of 2000. The company reported net
income before the cumulative effect of an accounting change of $61.0 million, or
$1.55 per
16
diluted share compared to $44.4 million, or $1.13 per diluted share in the first
nine months of 2000.
Cumulative Effect of Change in Accounting for Revenue Recognition.
Effective January 1, 2000, the company changed its method of accounting for
revenue recognition. Pursuant to the guidance in Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition for Financial Statements, the company now
recognizes revenue as title passes to the customer. The change was implemented
during the fourth quarter of 2000 and was treated as a change in accounting
principle with the $6.4 million ($0.17 per basic and $0.16 per diluted share)
cumulative effect of the change on retained earnings at the beginning of 2000
included in restated net income of the first nine months of 2000. See Note 3 to
the financial statements attached for a description of new accounting standards
applicable to the company.
Net Income. The company reported net income of $61.0 million or $1.55
per diluted share for its first nine months of 2001 compared with net income of
$38.0 million, or $0.97 per diluted share for the first nine months of 2000.
EAST BOULDER PROJECT
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
---- ---- ---- ----
EAST BOULDER PROJECT:
OUNCES PRODUCED (000)(1)
Palladium 7 -- 7 --
Platinum 2 -- 2 --
------ ------ ------ ------
Total 9 -- 9 --
DEVELOPMENT TONS MILLED (000) 41 -- 41 --
DEVELOPMENT MILL HEAD GRADE (OUNCE PER TON) 0.28 -- 0.28 --
TOTAL MILL RECOVERY (%) 83 -- 83 --
</Table>
(1) The ounces produced at the East Boulder Project were incidental and
generated from development activities. Revenues generated from the ounces
have been credited to capitalized mine development.
During the third quarter of 2001 the East Boulder Project produced
7,000 ounces of palladium and 2,000 ounces of platinum. These ounces produced
were incidental and generated from development activities. Revenues generated
from the ounces have been credited to capitalized mine development.
During 2001, the company expects to continue underground development,
detailed engineering and commissioning of the concentrator and ancillary
facilities at East Boulder. The East Boulder Project is expected to begin
commercial production during 2002. However, new mining operations often
experience unexpected problems during the development and start-up phases, which
can result in substantial delays in reaching commercial production. The company
currently estimates the cost of developing the project to enable it to commence
initial production at approximately $370 million of which approximately $238
million has been spent as of September 30, 2001. Additional sustaining capital
expenditures will be necessary to achieve and maintain the mine's initial design
capacity of 2,000 tons of ore per day. This estimated cost and schedule may
change based upon the results of the mine planning work to be completed during
2001 and the results of the company's recently initiated optimization review.
East Boulder is a development project and has no operating history.
Thus, estimates of future cash operating costs at East Boulder are based largely
on the company's years of operating experience at the Stillwater Mine portion of
the J-M Reef. Actual cash operating costs and economic returns may differ
significantly from those currently estimated or those established in future
studies and estimates. Although the company anticipates that the operating
characteristics at East Boulder will be similar to the Stillwater Mine.
17
LIQUIDITY AND CAPITAL RESOURCES
The company's working capital at September 30, 2001 was $35.1 million
compared to a deficit of $15.0 million at December 31, 2000. The ratio of
current assets to current liabilities was 1.5 at September 30, 2001, compared to
1.25 at December 31, 2000.
Net cash provided by operations for the nine months ended September 30,
2001, was $92.3 million compared with $76.6 million for the comparable period of
2000, an increase of $15.7 million. The increase was primarily a result of
increased net income of $23.0 million and an increase in non-cash expenses of
$5.6 million offset by an increase in net operating assets and liabilities of
$12.8 million, primarily due to an increase in accounts receivable of $20.0
million relating to the timing of cash receipts for delivery of metals sold to
customers.
A total of $156.3 million of cash was used in investing activities in
the first nine months of 2001 compared to $151.4 million in the same period of
2000. The capital expenditures primarily relate to the development of the East
Boulder Mine, the Stillwater Mine and the company's Columbus ancillary
facilities.
For the nine months ended September 30, 2001, cash provided by
financing activities was $63.7 million compared to $84.3 million for the
comparable period of 2000. The financing activities in the first nine months of
2001 were primarily attributed to new borrowings of $203 million under the
company's $250 million Credit Facility partially offset by repayment of $125
million on the prior credit facility.
As a result of the above, cash and cash equivalents decreased by $0.3
million for the first nine months of 2001 compared to an increase of $9.5
million for the comparable period of 2000.
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 September 30, 2001
outstanding borrowings under the Credit Facility were $200 million. See Note 6
to the financial statements for a description of the company's Credit Facility.
If PGM prices remain at or below current levels, the company may be required to
raise additional capital from public or private securities markets or from other
sources to complete its expansion plans on schedule or to fund general corporate
purposes. The company can make no assurance that additional financing, if
needed, will be available on terms favorable to the company or at all.
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. Factors that could cause
actual results to differ materially from those anticipated include:
o price volatility of PGMs;
o worldwide economic and political events affecting the supply and demand
of palladium and platinum;
o potential cost overruns, difficulty in making reliable estimates in
connection with expansion, uncertainties involved in developing a new
mine and other factors associated with a major expansion;
o fluctuations in ore grade, tons mined, crushed or milled;
18
o variations in concentrator, smelter or refinery operations;
o geological, technical, permitting, mining or processing problems;
o availability of experienced employees;
o financial market conditions;
o compliance of the company and significant customers with marketing
contracts; and
o the other factors discussed under "Risk factors", below and in
"Business and Properties -- Risk Factors" in the company's annual
report on Form 10-K for the year ended December 31, 2000.
Investors are cautioned not to put undue reliance on forward-looking
statements. The company disclaims any obligation to update forward-looking
statements.
19
RISK FACTORS
Set forth below are certain risks faced by the company. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Forward Looking Statements; Factors That May Affect Future Results
and Financial Conditions" above.
VULNERABILITY TO METALS PRICE VOLATILITY--CHANGES IN SUPPLY AND DEMAND COULD
REDUCE MARKET PRICES.
Since the company's sole source of revenue is the sale of platinum
group metals, changes in the market price of platinum group metals significantly
impact profitability. Many factors beyond the company's 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 in the last few
months and may continue to fall. The price for palladium, which had reached
record high price levels of $1,115 per ounce in January has fallen sharply and
is currently approximately $320 per ounce at October 23, 2001. The price for
platinum has also fallen from $648 per ounce early in 2001 to approximately $426
per ounce at October 23, 2001. 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. In addition, the worldwide economy may be
adversely affected by the September 2001 terrorist attacks and related
hostilities. Any such economic downturn or continued drop in prices could
adversely impact our results of operations and could impair our ability to
complete our expansion plans. Because of the recent declines in the price of
PGMs, the company has accelerated and expanded its ongoing optimization review
to consider the PGM market outlook, production, ore grade and tonnage, ounces to
be produced and timing of the company's expansion program. The review will
examine variations in production levels at both the Stillwater mine and the East
Boulder mine. In the current price environment and considering the company's
funding requirements, the company's previously announced production target of 1
million ounces per annum for 2003 may be deferred or a revised target
established.
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 2000 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. 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, 2000 for further explanation of these factors.
The company enters into hedging contracts from time to time in an
effort to reduce the negative effect of price changes on the company's cash
flow. These hedging activities typically consist of contracts that require the
company 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 October 23, 2001, the market prices for palladium
and platinum were $320 and $426 per ounce, respectively. See Note 9 to the
financial statements attached hereto for a discussion of the company's
outstanding hedge obligations. Thus, while hedging transactions are intended to
reduce the negative effects of price decreases, they may also prevent the
company from benefiting from price increases. The company has entered into
long-term sales contracts that provide a floor price for sales of a portion of
the company's production. For additional discussion of the sales contracts, see
Note 9 to the financial statements attached hereto.
EXPANSION PLAN RISKS - ACHIEVEMENT OF THE COMPANY'S LONG-TERM GOALS IS SUBJECT
TO SIGNIFICANT UNCERTAINTIES.
The company's achievement of its long-term expansion goals depends upon
its ability to obtain funding for its planned capital projects at Stillwater and
East Boulder, increase and sustain production at the Stillwater Mine and its
related facilities and its ability to develop and bring into production the East
Boulder Project. Each of these tasks will require the company to construct mine
and processing facilities and to commence and maintain production within
budgeted levels. Although the
20
company believes its goals and estimates are based upon reasonable assumptions,
the company has previously and may need to further revise its plans and cost
estimates for the Stillwater Mine and East Boulder Project as the projects
progress. Because of the recent declines in the price of PGMs, the company is
reviewing whether its previously planned sources of financing will be sufficient
to meet its capital requirements, including the completion of its expansion plan
on the previously announced schedule. The capital programs that have been
recently pursued by the company depended on operating cash flow and bank
financing premised on a more favorable PGM pricing environment than currently
exists. In light of the drop in PGM prices, the company has accelerated and
expanded its ongoing optimization review to consider the PGM market outlook,
production, ore grade and tonnage, ounces to be produced and timing of the
company's expansion program. The company's expansion plans may be adversely
affected by the results of the optimization review. See "Business and Properties
- Current Operations - East Boulder Project" and "Business and Properties -
Expansion Plans" in the company's annual report on Form 10-K for the year ended
December 31, 2000 for further discussion of the company's expansion plans. Among
the major risks to successful completion of the Expansion Plan are:
o availability of sufficient funding;
o volatility in PGM market prices;
o potential cost overruns during development of new mine operations and
construction of new facilities;
o possible delays and unanticipated costs resulting from difficulty in
obtaining the required permits; and
o the inability to recruit sufficient numbers of skilled underground
miners.
Based on the complexity and uncertainty involved in development
projects at this early stage, it is extremely difficult to provide reliable time
and cost estimates. The company cannot be certain that either the Stillwater
mine expansion or the development of East Boulder will be completed on time or
at all, that the expanded operations will achieve the anticipated production
capacity, that the construction costs will not be higher than estimated, 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.
During 2001, the company expects to continue underground development,
detailed engineering and commissioning of the concentrator and ancillary
facilities at East Boulder. The East Boulder Project is expected to begin
commercial production during 2002. However, new mining operations often
experience unexpected problems during the development and start-up phases, which
can result in substantial delays in reaching commercial production. The company
currently estimates the cost of developing the project to enable it to commence
initial production at approximately $370 million of which approximately $238
million has been spent as of September 30, 2001. Additional sustaining capital
expenditures will be necessary to achieve and maintain the mine's initial design
capacity of 2,000 tons of ore per day. This estimated cost and schedule may
change based upon the results of the mine planning work to be completed during
2001 and the company's review and optimization plan.
East Boulder is a development project and has no operating history.
Thus, estimates of future cash operating costs at East Boulder are based largely
on the company's years of operating experience at the Stillwater Mine portion of
the J-M Reef. Actual cash operating costs and economic returns may differ
significantly from those currently estimated or those established in future
studies and estimates. Although the company anticipates that the operating
characteristics at East Boulder will be similar to the Stillwater Mine.
COMPLIANCE WITH BANK CREDIT AGREEMENT - THE RESTRICTIONS IMPOSED BY OUR DEBT
AGREEMENTS COULD NEGATIVELY AFFECT OUR ABILITY TO ENGAGE IN CERTAIN ACTIVITIES.
The company's 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 certain covenants relating to the accomplishment of
certain production objectives, capital cost and financial targets. Should market
prices of PGMs continue to decline, the company may not be able to comply with
the debt covenants in its credit facility. In the event the company was not able
to comply with the debt covenants, the company would seek to amend the existing
facility or to seek alternative financing. See Note 6 to the financial
statements
21
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.
Palladium, platinum, rhodium and gold are sold to a number of consumers
and dealers with whom the company has established trading relationships. Refined
PGMs of 99.95% purity in sponge form are transferred upon sale from the
company's account at third party refineries to the account of the purchaser.
By-product metals are purchased at market price by customers, brokers or outside
refiners.
During 1998, the company entered into long-term sales contracts with
General Motors Corporation, Ford Motor Company and Mitsubishi Corporation, each
of whom represent more than 10% of the company's revenues. The 1998 contracts
applied to the company's production over the five-year period from January 1999
through December 2003. Under the original contracts, the company committed
between 90% to 100% of its palladium production and 20% of its platinum
production. Metal sales were priced at a discount to market. The remaining
production is not committed under these contracts and remains available for sale
at prevailing market prices.
In November 2000 and March 2001, the company renegotiated certain of
its long-term sales contracts. The new arrangements establish higher floor and
ceiling prices on a portion of the current contracts, extend the term of the
contracts through 2010 with new floors and ceilings and increase the amount of
platinum committed. See Note 9 to the financial statements attached hereto for
additional information about sales contracts.
The company, therefore, is 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 could have a material adverse effect on the company. In the event the
company becomes involved in a disagreement with one or more of its customers,
their compliance with these contracts may be at risk. For example, the company
has 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, the
company's expansion plans could be threatened. In addition, under the company's
syndicated credit facility, a default or modification of the sales contracts
could prohibit additional loans or require the repayment of outstanding loans.
Although the company believes it has adequate legal remedies if a customer fails
to perform, termination or breach could have a material adverse effect on the
company's expansion plans and 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. During
the first nine months of 2001, the price ceilings reduced the average price
realized by $82 per ounce as compared to the average PGM market price for the
same period. See Note 9 to the financial statements attached hereto for
additional information about the sales contracts.
22
SUBSTITUTION OF MATERIALS - USERS OF PGM'S MAY SUBSTITUTE OTHER MATERIALS FOR
PALLADIUM AND PLATINUM.
Users of PGMs may 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. Recently, a representative of
one automobile manufacturer indicated that such manufacturer would seek to
reduce PGM loading quantities per vehicle by up to 30% over the next 12 to 18
months as engineers continue to design more efficient exhaust systems. There has
been some substitution of other metals for palladium in 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
could have a material adverse effect on the company's business, financial
condition and results of operations.
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.
The operations of the company depend significantly on the availability
of qualified miners. Historically, the company has experienced high turnover
with respect to its miners. In addition, the company 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. The company cannot be certain that it will be able to maintain an
adequate supply of miners and other personnel or that the company's labor
expenses will not increase as a result of a shortage in supply of such workers.
The company currently employs 444 miners and expects to require an additional
252 miners within the next five years. Failure to maintain an adequate supply of
miners could adversely effect the company's expansion plans and results of
operations. The company currently has approximately 1,630 employees, about 1,009
of whom are covered by a collective bargaining agreement with PACE Local 8-001,
expiring June 30, 2004. The company expects to employ approximately 1,800
persons by the end of second quarter 2002. In the event the company's employees
were to engage in a strike or other work stoppage, the company could experience
a significant disruption of its operations and higher ongoing labor costs, which
could have a material adverse effect on the company's business, financial
condition and results of operations.
AVAILABILITY OF ELECTRICITY - IF WE ARE UNABLE TO NEGOTIATE SATISFACTORY
LONG-TERM CONTRACTS FOR ELECTRICAL ENERGY, WE COULD EXPERIENCE A SIGNIFICANT
INCREASE IN OPERATING COSTS OR PRODUCTION DISRUPTION.
The company uses significant amounts of electrical energy at its
operations and energy prices have recently been very volatile. The total cost of
electricity in 2000 for the Stillwater Mine, the East Boulder Project and at the
smelter/refinery complex was $6.5 million. The company purchases energy at
regulated rates from Montana Power for the Stillwater Mine and the
smelter/refinery and purchases energy from Park Electric Cooperative Inc. under
a long-term contract for the East Boulder Project. Park Electric receives the
bulk of its energy supply under long-term contracts from Bonneville Power at an
average cost to Stillwater Mining of $0.026 per kWh. Actual total energy costs
at the mine site are a function of power factors, transmission and distribution
costs and administrative costs and will average $0.047 per kWh in 2001. Energy
purchased from Montana Power is covered by regulated rates through June 30,
2002. The energy portion of the rate will average $0.028 per kWh for 2001 and
the total rate, including transmission and distribution, etc., will average
$0.037 per kWh. The requirement for the company to move to deregulated supply is
currently June 2005; however, regulated rates have not been set beyond June
2002. Should the company be required to move to market prices or be unable to
negotiate satisfactory long-term contracts for electrical energy, it could
experience a significant increase in operating costs or production disruptions.
23
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 the company's milling, smelting and refining
operations involve a number of risks and hazards, including unusual and
unexpected rock formations, ground or slope failures, cave-ins and other mining
or ground-related problems, environmental hazards, industrial accidents, labor
disputes, metallurgical and other processing, smelting or refining problems,
flooding and periodic interruptions due to inclement or hazardous weather
conditions or other acts of God, mechanical equipment and facility performance
problems and 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 the
company's mine since operations began in 1986. During the first nine months of
2001, the company experienced three fatalities at the Stillwater Mine.
Industrial accidents could have a material adverse effect on the company's
business and operations. Although the company believes that it maintains
insurance within ranges of coverage consistent with industry practice, it cannot
be certain that this insurance will cover the risks associated with mining or
that the company will be able to maintain insurance to cover these risks at
economically feasible premiums. The company might also become subject to
liability for pollution or other hazards which it cannot insure against or which
it may elect not to insure against because of premium costs or other reasons.
Losses from such events could have a material adverse effect on the company.
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.
While the company's 2000 ore reserves have been reviewed by independent
consultants, the 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. Although the company believes its
estimated ore reserves are well established, it cannot be certain that its
estimated ore reserves are accurate, and future production experience could
differ materially from such estimates. Should the company encounter
mineralization or formations at any of its 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 the company's operations. Significant additional
declines in the market prices of platinum group metals may render the mining of
some or all of the company's 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. The company 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 the profitability of the company in any particular
accounting period.
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
by-product 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.
24
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 9 to
the financial statements attached hereto for additional information about sales
contracts.
As of September 30, 2001, the company had sold forward 5,000 ounces of palladium
for delivery in 2001 at an average price of $706 per ounce and 15,000 ounces of
palladium for delivery in 2002 at an average price of $700 per ounce. In
addition, the company had sold forward 3,000 and 3,000 ounces of platinum for
delivery in 2001 and 2002, respectively, at an average price of $575 per ounce.
Under a financially settled forward, 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. The company's financially settled forwards had a deferred pre-tax gain
of approximately $14.3 million at September 30, 2001.
INTEREST RATE RISK
At the present time, the company has no financial instruments in place
to manage the impact of changes in interest rates. Therefore, the company is
exposed to changes in interest rates on the portion of its credit facility which
carries a variable interest rate based upon LIBOR. At September 30, 2001, no
amounts were outstanding under the revolving credit portion of the facility. 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. 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 September 30, 2001, the company had $65.0 million and
$134.7 million outstanding under the Term A and Term B loan facilities,
respectively, bearing interest at 6.00% and 6.75% for the Term A and Term B
facilities, respectively.
25
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.
Item 2. Changes in Securities and Use of Proceeds
None
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:
10.1 Employment agreement between Francis R. McAllister and the
Company dated July 23, 2001.
10.2 Employment agreement between Harry C. Smith and the Company
dated July 23, 2001.
10.3 Employment agreement between James A. Sabala and the Company
dated July 23, 2001.
10.4 Employment agreement between Ronald W. Clayton and the
Company dated July 23, 2001.
10.5 Employment agreement between Robert M. Taylor and the Company
dated July 23, 2001.
(b) Reports on Form 8-K:
None
26
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: October 26, 2001 By: /s/ FRANCIS R. MCALLISTER
------------------------------------
Francis R. McAllister
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: October 26, 2001 By: /s/ JAMES A. SABALA
------------------------------------
James A. Sabala
Vice President and Chief Financial
Officer
(Principal Financial Officer)
27
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Employment agreement between Francis R. McAllister and the
Company dated July 23, 2001.
10.2 Employment agreement between Harry C. Smith and the Company dated
July 23, 2001.
10.3 Employment agreement between James A. Sabala and the Company
dated July 23, 2001.
10.4 Employment agreement between Ronald W. Clayton and the Company
dated July 23, 2001.
10.5 Employment agreement between Robert M. Taylor and the Company
dated July 23, 2001.
</Table>