Investable equities in the platinum group metals (PGMs) space have always been limited. South Africa, providing approximately 40 percent of global palladium and some 70 percent of global platinum, remains largely un-investable, given significant socio-political issues that inherently drive cost escalation to the point of material industry decline.
Outside of South Africa, only a few listed companies operate in this space, Stillwater Mining Company (NYSE:SWC) is one among them. Stillwater has steered clear of the flawed copper strategy and is now re-focused on making more of the PGM asset base.
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Recently, Stillwater projected a limited amount of growth from the PGM assets – looking for a potential output level of 600 Koz. by 2017 (from 500 Koz. at present).
CIBC analyst Leon Esterhuizen said SWC is well geared to increases in the palladium price in particular, but also to platinum and is almost "perfectly" positioned in that it is outside South Africa and thus able to participate in any metal price increase that results from the problems in South Africa.
New management is aggressively pursuing cost-reduction or profit-maximization measures, which could lead to increased utilization at the smelter and refinery complex.
The recently appointed CEO, Mick McMullen, could not have asked for a better opportunity. All he needs to do is drop costs, increase output, and make sure the company does not get distracted by opportunities (or rather non-opportunities) in copper—the company's greatest failure in the past.
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Well, results delivered over the past two quarters are clearly showing significant delivery on this exact strategy, with costs having come down, production increasing, and a complete step-back from large-scale capital expenditure on Marathon and Altar (two copper projects with questionable economics). Meanwhile, the PGM asset base continues to be developed.
The new strategy seems to be about reduce the cost of production; increase the output of PGMs; and crank up the unproductive smelter and refinery business. Esterhuizen added that this does not spell anything that sounds remotely impossible and given current unusually high cost levels and significantly underutilized capital assets, combined with thin free cash flow margins, any improvements, even very small ones, could deliver sharply better profitability.
After about nine months in the seat, McMullen's strategy is bearing fruit and was clearly reflected in the fourth quarter 2013 results. Production sequentially rose 13 percent to 141.1 Koz, and full-year production was 523.9 Koz., ahead of guidance of 505-515 Koz.
Cash costs in the fourth quarter were $500/oz., down from $590/oz. in the third quarter. Full-year costs were $496/oz., well below guidance of $530 to $540/oz.
The price received in the first quarter of 2014 seems to be running in the order of $930/oz—a full $80/oz more than the impressive fourth quarter delivery, but higher palladium prices aren't the only consideration. Costs are expected to continue declining with a management's objective to try and reduce this by at least $100/oz.
In a recent investor presentation, management indicated January and February 2014 delivery to be running ahead of guidance. Stillwater actually increased guidance again when fourth quarter results were announced (guidance was first increased at the end of January 2014), to 520-535 Koz. from 505 to 515 Koz. Cash cost guidance has also been improved to between $540/ and $590/oz., from $550 to $600/oz. Current growth pushes all-in cost guidance to $805-$855/oz. per PGM ounce.
Esterhuizen noted that this consistent guidance and the equally consistent out-performance of this guidance, when combined with a $80/oz (10 percent) increase in revenue, should naturally deliver even better numbers in the first quarter.
Meanwhile, the company's downstream business in Stillwater attracts zero value in the share price of the company. This idle capacity can be filled and may even allow for expansion and sound profit generation through third-party smelting and refining.
There is a real need in the general area for an alternative as several possible PGM producing projects across the border on the Canadian side have been hit due to the lack of a nearby smelter/refiner. Stillwater is well positioned to play that role
The current smelters (two that can handle 150t/day and 100t/day in concentrate feed) are only running at 60 percent capacity and on a batch process for four days of the week. The first objective then must be simply to fill this underutilized capital capacity.
Esterhuizen notes the big focus for the team is to make sure this extra capacity that has been opened up again is filled with high-quality ore that delivers not only more ounces, but even more profit.
In fact, the Stillwater Mine had regularly been filling the mill at a rate of about 2,200 t/day, but following some small changes and adjustments, this mill is now consistently running in the order of 2,700 to 2,800 t/day with the mill having a full capacity of 3,000 t/day.
From the strategy and the options available, Esterhuizen believes there is real potential here for driving the share price higher even in the face of a flat PGM price environment. Under new management, a renewed focus on delivering maximum profitability from an already installed capital capacity seems set to change that.
Not only are recent production and cost numbers starting to paint a positive trend, but the ideas and strategies now being focused on seem to hold equal promise for the trend to continue, or even improve over the next two to three years. A strong combination of lower costs and higher volumes, as well as expanded utilization of the downstream business, could lift share price to well above $20.
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