Stillwater Mining Company

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Stillwater Mining Company

536 East Pike Avenue
P.O. Box 1330
Columbus, Montana 59019
U.S.A.
Telephone: (406) 322-8700
Fax: (406) 322-9985
Web site: http://www.stillwatermining.com

Public Company
Incorporated: 1992 as Stillwater Mining Co. Ltd.
Employees: 700
Sales: $277.38 million (2001)
Stock Exchanges: New York
Ticker Symbol: SWC
NAIC: 212299 All Other Metal Ore Mining

Stillwater Mining Company operates the world’s only viable platinum and palladium mines outside Russia and South Africa. Mining Magazine describes SMC as the highest grade, lowest cost producer of platinum group metals (PGMs) in the world. PGMs include platinum, palladium, and rhodium, and are used in jewelry, dental alloys, electronic equipment, and their largest use—catalytic converters for controlling auto emissions.

Origins

The Stillwater Complex, located near the town of Nye in the Beartooth Mountains of southern Montana, has been mined for various minerals by various companies since the late 1800s. Prospectors first searched the area for gold in 1883 but nickel and copper were the first to be extracted. Chromite was first mined there in 1905; Anaconda Copper developed its Mouat chromite mine in World War II, and also mined for the strategically important mineral during the Korean War.

In 1967, Manville Products, a unit of Manville Corporation, a Denver-based provider of building products, began intensive exploration of the site and located deposits of platinum group metals (PGMs). In the next 20 years, Manville and its partners would spend $40 million exploring and developing the complex. Johns Manville Corporation geologists discovered a 28-by-4-mile strip of viable PGM deposits in the early 1970s and named it the J-M Reef after their employer.

Chevron USA Inc. joined the Stillwater Mining Co. Ltd. (SMC) joint venture in 1979. Its Chevron Resources Co. unit would be the operator of the mine. Anaconda Minerals Co., a unit of Atlantic Richfield Co., joined in 1983. By 1984, the partners had agreed to spend another $45 million to open a mine on property still owned by Anaconda.

The tale was complicated by the bankruptcy of Manville Products and the decision of Atlantic Richfield Co., parent of Anaconda, to abandon metals mining altogether. Toronto-based LAC Minerals Ltd. bought Anaconda’s one-third share and acquired a 5 percent net profit interest for $15 million in the autumn of 1985.

Located near Nye, Montana, Stillwater was launched as the only platinum and palladium mine in the United States. In fact, it was the only one in the world outside South Africa and the Soviet Union. As Business Week noted, the timing seemed perfect. Platinum and palladium were in very high demand. Western countries consumed six million ounces of the two metals every year, which were used in products as varied as jewelry, dental alloys, computer chips, and automotive catalytic converters. They were also used as a catalyst in petroleum refining and in manufacturing organic chemicals.

Prices began a steep rise in June 1985 on news of racial unrest in South Africa. Platinum was selling for about $360 an ounce in January 1986. One Manville executive quoted by Business Week speculated the price could hit $600 an ounce by 2000. Catalytic converters, required on new U.S. automobiles since 1975, also began to be mandated in West Germany and Australia in the late 1980s.

Opening of Stillwater Mine: 1986

Mining began in late 1986, and the mine was officially dedicated on August 14, 1987. Stillwater had 210 employees by the end of the year. Some of these came from neighboring states, whose mines were closing due to low silver prices.

Stillwater was expected to become fully operational in 1992 and produce 150,000 ounces of palladium and 50,000 ounces of platinum a year, together worth $30 million in 1986 prices. The Stillwater Mine was not the world’s largest, but the PGM deposits found there were relatively accessible. There was a high ratio of palladium to platinum. Stillwater was only geared to produce 1 percent of the Western world’s platinum supply, but accounted for more than 3 percent of the palladium market.

Stillwater had higher labor costs per miner than its counterparts in Russia and South Africa. Other costs included civic contributions to fund infrastructure and schools in local communities and the cost of environmental compliance in an area that was considered a pristine wilderness. SMC filed a $1.2 million reclamation bond with the state, later increased to $4.2 million; the mine was projected to be in operation for 20 to 30 years. SMC produced 6.3 tons (203,000 ounces) of platinum and palladium in 1989, 3.4 ounces of palladium for every one ounce of platinum. SMC had about 450 employees, three of them based at its Denver headquarters.

A number of important changes had occurred by this time. A new $6.8 million smelter was under construction 40 miles away in Columbus, Montana. Manville Corp. had become half owner in Stillwater, and the company was considering selling its interest in the mine.

Public in 1994

In September 1994, Manville Corporation had funded the placement of Chevron’s 50 percent stake in SMC with private investors after Chevron decided to exit the mining business. Stillwater Mining Co. Ltd. then made an initial public offering on the NASDAQ exchange in December 1994. SMC aimed to take proceeds from the IPO to incorporate radical changes in mining methods and double production by mid-1997. The smelter product was then being sent to Metallurgie Hoboken Overpelt for removal of copper and nickel. The IPO raised about $54 million and reduced Manville’s holding in SMC to 31 percent.

A new management team was installed as SMC underwent a restructuring. The investors were rewarded handsomely and quickly as platinum and palladium prices rose. SMC, which had by then spent $100 million to develop the mine, had not turned a profit since 1990 and lost $5.63 million on revenues of $53.8 million in 1993. In 1994, though, the company posted net income of $2 million on sales of $58.6 million. The share price, initially $13, doubled in eight months.

Manville Mining Co. sold its interest in SMC in August 1995, making SMC an independent company. Johns Manville Corporation still held a 5 percent royalty in the mine, which it sold to the Franco-Nevada Mining Corporation for $36 million in March 1998.

Platinum prices reached $400 an ounce in 1997. The palladium market was also tightening. The mine produced 271,000 ounces of palladium and 84,000 ounces of platinum in 1997, from 520,000 tons of ore. SWC moved its stock listing to the AMEX exchange during the year.

William E. Nettles was brought in to help turn the company around and appointed chairman and CEO in August 1997. The company’s hedging policy (agreeing to sell future production at fixed prices) had prevented it from capitalizing on the upturn in PGM prices. After the changeover in management, the company made it a policy to hedge no more than 50 percent of production for no more than two years ahead, a strategy designed to placate investors seeking to take advantage of the “upside” of higher prices. Only 15 percent of the company’s metals production would be sold forward in 2000.

By 1998, SWC was developing its East Boulder platinum mine in Montana’s Absaroka Mountains. This was expected to cost $270 million. Two other expansion projects were in the works: expanding the Stillwater mine at a cost of $75 million and expanding the smelter and base metals refinery in Columbus, Montana. SMC lowered its palladium and platinum production costs to a record $147 per ounce in the second quarter of 1998, while producing a record 120,000 ounces. A fall in the price of gold made PGM mining that much more attractive to investors.

“Good Neighbor” in 1998

SMC and local citizens groups signed an unprecedented contract in August 1998. The “Good Neighbor Agreement” set out environmental and community protections beyond those required by law and aimed to head off the years of legislative and legal wrangling commonly associated with the impact of mining on communities.

Company Perspectives:

Not only are we a tremendous contributor to clean air throughout the world, but we have been good citizens during 14 years of operation in Montana. We have taken very good care of the environment where we operate. We have an impeccable record, with no environmental citations during this time. We have accomplished this because we believe preserving the quality of life in Montana is an inherent part of our responsibility to the communities in which we live and work.

Key Dates:

1967:: Denver-based Manville Corp. begins looking for platinum in Montana’s Beartooth Mountains.
1979:: Chevron joins Manville in Stillwater Mining (SMC) joint venture.
1983:: Anaconda Minerals joins SMC.
1985:: LAC Minerals buys Anaconda’s share.
1985:: Platinum mining begins at Stillwater.
1994:: SMC launches IPO on NASDAQ.
1995:: Manville sells its remaining interest in SMC.
1998:: Unprecedented “Good Neighbor Agreement” signed.
2001:: SMC migrates from the American to the New York Stock Exchange.

Frank McAllister, formerly chairman and CEO of copper producer ASARCO Incorporated, took those roles at SMC in February 2001 upon the retirement of William Nettles. Driven by demand from automakers, the price of palladium had reached $1,100 an ounce. Platinum had peaked at $625 an ounce the previous December. However, prices fell sharply during the year. In November, palladium was only selling for $320 an ounce. New sources of PGMs were being developed in Canada, the United States, and Zimbabwe.

As a result of the plunge in PGM prices, SMC scaled back plans for its East Boulder underground mine, halving its planned ore production rate to 900 tons a day. The company also terminated 500 contract employees and 30 of its own employees at the East Boulder mine. Rumors of a takeover (perhaps by other mining companies, including Lonmin plc or Impala Platinum Holdings Ltd.) abounded throughout 2000 and 2001.

SMC posted net income of $65.8 million on revenue of $277.4 million in 2001, both figures up from the previous year. The company produced a record 504,000 ounces of palladium and platinum. SMC had left the American Stock Exchange to trade on the New York Stock Exchange in June 2001 and had relocated its headquarters from Denver to Columbus, Montana.