ITEM 3
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the ordinary course of business, including employee injury claims. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity, and the likelihood that a loss contingency will occur in connection with these claims is remote.
ITEM 4
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5
ITEM 5
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
PERFORMANCE GRAPH
The following chart compares the yearly percentage change in the Company’s cumulative total stockholder return on Common Stock, with the cumulative total return on the following indices, assuming an initial investment of $100 on December 31, 2003 and the reinvestment of all dividends: (i) the Russell 2000 and (ii) the Peer Group. The performance shown is not necessarily indicative of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Stillwater Mining Company, The Russell 2000 Index
And A Peer Group
*$100 invested on 12/31/03 in stock & index-including reinvestment of dividends.
Fiscal year ending December 31.
Cumulative Total Return
Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings made under the Securities Act of 1933, as amended, or the Exchange Act that might incorporate this report or future filings made by the Company under those statutes, the preceding stock performance graph is not to be incorporated by reference into any such prior filings, nor shall such graph or report be incorporated by reference into any future filings made by the Company under those statutes. The Peer Group referenced above includes Stillwater Mining Company, Anglo Platinum Limited, Impala Platinum Holdings Limited, Lonmin PLC, and North American Palladium Limited.
ITEM 6
ITEM 6
SELECTED FINANCIAL DATA
ITEM 6
SELECTED FINANCIAL DATA
(Continued)
OPERATING AND COST DATA
(1)
Sub-grade tons milled includes reef waste material only. Total tons milled includes ore tons and sub-grade tons only.
(2)
Total operating costs include costs of mining, processing and administrative expenses at the mine site (including mine site overhead and credits for metals produced other than palladium and platinum from mine production). Total cash costs include total operating costs plus royalties, insurance and taxes other than income taxes. Total production costs include total cash costs plus asset retirement costs and depreciation and amortization. Income taxes, corporate general and administrative expenses, asset impairment write-downs, gain or loss on disposal of property, plant and equipment, restructuring costs, interest income and expense are not included in total operating costs, total cash costs or total production costs. Operating costs per ton, operating costs per ounce, cash costs per ton, cash costs per ounce, production costs per ton and production costs per ounce are non-GAAP measurements that management uses to monitor and evaluate the efficiency of its mining operations. These measures of cost are not defined under U.S. Generally Accepted Accounting Principles (GAAP). Please see “Reconciliation of Non-GAAP Measures to Costs of Revenues” and the accompanying discussion for additional detail.
(3)
The Company’s average realized price represents revenues, which include the effect of contract floor and ceiling prices, hedging gains and losses realized on commodity instruments and contract discounts, divided by ounces sold. The average market price represents the average London PM Fix for the actual months of the period.
(4)
The Company reports a combined average realized and market price of palladium and platinum at the same ratio as ounces that are produced from the base metal refinery.
(5)
Ounces sold and average realized price per ounce from other PGM activities relate to ounces produced from processing of catalyst materials, ounces purchased in the open market for resale and palladium received in the Norilsk Nickel transaction.
(6)
By-product metals sold reflect contained metal. Realized prices reflect net values (discounted due to product form and transportation and marketing charges) per unit received.
(7)
Costs per ounce/ton have been revised due to a correction of an immaterial error in the costs of sales for recycled rhodium ounces in 2007, 2006 and 2005.
Reconciliation of Non-GAAP measures to costs of revenues
The Company utilizes certain non-GAAP measures as indicators in assessing the performance of its mining and processing operations during any period. Because of the processing time required to complete the extraction of finished PGM products, there are typically lags from one to three months between ore production and sale of the finished product. Sales in any period include some portion of material mined and processed from prior periods as the revenue recognition process is completed. Consequently, while costs of revenues (a GAAP measure included in the Company’s Statement of Operations and Comprehensive Income/(Loss)) appropriately reflects the expense associated with the materials sold in any period, the Company has developed certain non-GAAP measures to assess the costs associated with its producing and processing activities in a particular period and to compare those costs between periods.
While the Company believes that these non-GAAP measures may also be of value to outside readers, both as general indicators of the Company’s mining efficiency from period to period and as insight into how the Company internally measures its operating performance, these non-GAAP measures are not standardized across the mining industry and in most cases will not be directly comparable to similar measures that may be provided by other companies. These non-GAAP measures are only useful as indicators of relative operational performance in any period, and because they do not take into account the inventory timing differences that are included in costs of revenues, they cannot meaningfully be used to develop measures of profitability. A reconciliation of these measures to costs of revenues for each period shown is provided as part of the following tables, and a description of each non-GAAP measure is provided below.
Total Costs of Revenues: For the Company on a consolidated basis, this measure is equal to consolidated costs of revenues, as reported in the Statement of Operations and Comprehensive Income/(Loss). For the Stillwater Mine, East Boulder Mine, and other PGM activities, the Company segregates the expenses within costs of revenues that are directly associated with each of these activities and then allocates the remaining facility costs included in consolidated costs of revenues in proportion to the monthly volumes from each activity. The resulting total costs of revenues measures for Stillwater Mine, East Boulder Mine and other PGM activities are equal in total to consolidated costs of revenues as reported in the Company’s Statement of Operations and Comprehensive Income/(Loss).
Total Production Costs (Non-GAAP): Calculated as total costs of revenues (for each mine or consolidated) adjusted to exclude gains or losses on asset dispositions, costs and profit from secondary recycling, and changes in product inventories. This non-GAAP measure provides an indication of the total costs incurred in association with production and processing in a period, before taking into account the timing differences resulting from inventory changes and before any effect of asset dispositions or secondary recycling activities. The Company uses it as a comparative measure of the level of total production and processing activities in a period, and may be compared to prior periods or between the Company’s mines. As noted above, because this measure does not take into account the inventory timing differences that are included in costs of revenues, it cannot be used to develop meaningful measures of earnings or profitability.
When divided by the total tons milled in the respective period, Total Production Cost per Ton Milled (Non-GAAP) - measured for each mine or consolidated - provides an indication of the cost per ton milled in that period. Because of variability of ore grade in the Company’s mining operations, production efficiency underground is frequently measured against ore tons produced rather than contained PGM ounces. And because ore tons are first actually weighed as they are fed into the mill, mill feed is the first point at which production tons are measured precisely. Consequently, Total Production Cost per Ton Milled (Non-GAAP) is a general measure of production efficiency, and is affected both by the level of Total Production Costs (Non-GAAP) and by the volume of tons produced and fed to the mill.
When divided by the total recoverable PGM ounces from production in the respective period, Total Production Cost per Ounce (Non-GAAP) - measured for each mine or consolidated - provides an indication of the cost per ounce produced in that period. Recoverable PGM ounces from production are an indication of the amount of PGM product extracted through mining in any period. Because extracting PGM material is ultimately the objective of mining, the cost per ounce of extracting and processing PGM ounces in a period is a useful measure for comparing extraction efficiency
between periods and between the Company’s mines. Consequently, Total Production Cost per Ounce (Non-GAAP) in any period is a general measure of extraction efficiency, and is affected by the level of Total Production Costs (Non-GAAP), by the grade of the ore produced and by the volume of ore produced in the period.
Total Cash Costs (Non-GAAP): This non-GAAP measure is calculated (for each mine or consolidated) as total costs of revenues adjusted to exclude gains or losses on asset dispositions, costs and profit from recycling activities, depreciation and amortization and asset retirement costs and changes in product inventories. The Company uses this measure as a comparative indication of the cash costs related to production and processing in any period. As noted above, because this measure does not take into account the inventory timing differences that are included in costs of revenues, it cannot be used to develop meaningful measures of earnings or profitability.
When divided by the total tons milled in the respective period, Total Cash Cost per Ton Milled (Non-GAAP) - measured for each mine or consolidated- provides an indication of the level of cash costs incurred per ton milled in that period. Because of variability of ore grade in the Company’s mining operations, production efficiency underground is frequently measured against ore tons produced rather than contained PGM ounces. And because ore tons are first weighed as they are fed into the mill, mill feed is the first point at which production tons are measured precisely. Consequently, Total Cash Cost per Ton Milled (Non-GAAP) is a general measure of production efficiency, and is affected both by the level of Total Cash Costs (Non-GAAP) and by the volume of tons produced and fed to the mill.
When divided by the total recoverable PGM ounces from production in the respective period, Total Cash Cost per Ounce (Non-GAAP) - measured for each mine or consolidated- provides an indication of the level of cash costs incurred per PGM ounce produced in that period. Recoverable PGM ounces from production are an indication of the amount of PGM product extracted through mining in any period. Because ultimately extracting PGM material is the objective of mining, the cost per ounce of extracting and processing PGM ounces in a period is a useful measure for comparing extraction efficiency between periods and between the Company’s mines. Consequently, Total Cash Cost per Ounce (Non-GAAP) in any period is a general measure of extraction efficiency, and is affected by the level of Total Cash Costs (Non-GAAP), by the grade of the ore produced and by the volume of ore produced in the period.
Total Operating Costs (Non-GAAP): This non-GAAP measure is derived from Total Cash Costs (Non-GAAP) for each mine or consolidated by excluding royalty, tax and insurance expenses from Total Cash Costs (Non-GAAP). Royalties, taxes and insurance costs are contractual or governmental obligations outside of the control of the Company’s mining operations, and in the case of royalties and most taxes, are driven more by the level of sales realizations rather than by operating efficiency. Consequently, Total Operating Costs (Non-GAAP) is a useful indicator of the level of production and processing costs incurred in a period that are under the control of mining operations. As noted above, because this measure does not take into account the inventory timing differences that are included in costs of revenues, it cannot be used to develop meaningful measures of earnings or profitability.
When divided by the total tons milled in the respective period, Total Operating Cost per Ton Milled (Non-GAAP) - measured for each mine or consolidated- provides an indication of the level of controllable cash costs incurred per ton milled in that period. Because of variability of ore grade in the Company’s mining operations, production efficiency underground is frequently measured against ore tons produced rather than contained PGM ounces. And because ore tons are first actually weighed as they are fed into the mill, mill feed is the first point at which production tons are measured precisely. Consequently, Total Operating Cost per Ton Milled (Non-GAAP) is a general measure of production efficiency, and is affected both by the level of Total Operating Costs (Non-GAAP) and by the volume of tons produced and fed to the mill.
When divided by the total recoverable PGM ounces from production in the respective period, Total Operating Cost per Ounce (Non-GAAP) - measured for each mine or consolidated- provides an indication of the level of controllable cash costs incurred per PGM ounce produced in that period. Recoverable PGM ounces from production are an indication of the amount of PGM product extracted through mining in any period. Because ultimately extracting PGM material is the objective of mining, the cost per ounce of extracting and processing PGM ounces in a period is a useful measure for comparing extraction efficiency between periods and between the Company’s mines. Consequently, Total Operating Cost per Ounce (Non-GAAP) in any period is a general measure of extraction efficiency, and is affected by the level of Total Operating Costs (Non-GAAP), by the grade of the ore produced and by the volume of ore produced in the period.
ITEM 7
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company’s Financial Statements and Notes, included elsewhere in this report, and the information contained in Part II, Item 6 “Selected Financial and Operating Data.”
OVERVIEW
PRINCIPAL FACTORS AFFECTING STILLWATER MINING COMPANY
Stillwater Mining Company is a Delaware corporation, listed on the New York Stock Exchange and based in Montana. The Company mines, processes, refines and markets platinum and palladium ores from two underground mines situated within the J-M Reef, an extensive trend of PGM mineralization located in Stillwater and Sweet Grass Counties in south central Montana. The mined ore is crushed and concentrated in a mill at each of the mine sites and then trucked to Columbus, Montana, where the concentrates are further processed into a PGM-rich filter cake. The filter cake then is shipped to third parties for final refining into finished metal.
PGM ore grades in the J-M Reef are some of the best in the world, but because of the uplifted configuration of the reef, they also are costly and complex to mine. The mines compete primarily with PGM ore reserves in the Republic of South Africa, which generally are much higher in platinum content and less steeply dipping, and with nickel mines in the Russian Federation which produce PGMs as a major by-product and so at a very low marginal cost. Consequently, in periods of low PGM prices, Stillwater Mining Company’s palladium rich production ratio and cost structure may put it at a disadvantage to these competitors. See “Business and Properties - Risk Factors - The Company is a Relatively High Cost Primary Producer” for further discussion of this issue.
In the fourth quarter 2008, as a result of a sharp decrease in PGM prices and in light of the impact of the worldwide financial crisis, the Company restructured its operations in an effort to conserve cash and reduce anticipated losses. The restructuring of the Company’s operations resulted in a dramatic change and essentially reduced the scope of its mining operations. The Company recognized that the combined effect of low PGM prices, the upcoming expiration of its automobile contracts containing floors on pricing and reduced demand for its metals would significantly impact the Company. The Company believes that it is in the interests of shareholders for management to seek to maintain some stability in its operations while looking forward to a turnaround in pricing and the markets, as to which there can be no assurance. In the current pricing environment, the Company’s mining operations are not profitable. The Company reported a loss of $131.9 million in the fourth quarter 2008, which includes an impairment charge against the carrying value of one of its mining properties and other non-cash charges. The deterioration in the PGM markets during the fourth quarter required the Company to test its facilities for impairment. The result of their assessment was that the fair value of the East Boulder Mine was $67.3 million lower than its carrying value on the Company’s books, thus resulting in the impairment charge. The Stillwater Mine was not impaired. See “Business and Properties - Risk Factors.”
In response to the decrease in PGM prices the Company briefly suspended work at its East Boulder Mine in the fourth quarter in order to consider operating alternatives. Weighing the options there, management determined that if the lower PGM market prices proved to be a temporary deviation from the longer-term pricing trend, closing the mine would create a loss of skilled miners and technical staff. When the mine reopened in early December, it was on a restructured basis consistent with the lower prices. At the same time, a significant number of East Boulder miners were transferred to the Stillwater Mine, where there were opportunities to utilize them productively to replace higher-cost contractors. The changes also resulted in substantial employee layoffs across the Company. During the 2008 fourth quarter, the Company recorded a $5.4 million provision for the restructuring.
If the market price of PGMs falls further or remains below production costs for a sustained period, losses may continue to be sustained and, under certain circumstances, there may be additional curtailments or suspension of some or all of Stillwater’s mining and exploration activities. The Company must continue to assess the economic impact of any sustained lower PGM prices on recoverability and, therefore, the cut-off grade and level of its reserves and resources. These factors could have an adverse impact on its future cash flows, earnings, results of operations, stated reserves, financial condition, ability to repay debt, and ability to continue as a going concern.
Most of the production from the Company’s mines is sold under long-term sales agreements to Ford Motor Company and General Motors Corporation for use in automotive catalytic converters. The automotive contracts include floor and, in some cases, ceiling prices on palladium and platinum. The larger of these contracts expires at the end of 2010, and the other will expire at the end of 2012. Under its automotive sales agreements, the Company now has committed 100% of its mined palladium production and 70% of its mined platinum production through 2010, and at least 20% of its palladium production in 2011 and 2012. Unless these contracts are renewed under similarly favorable terms, once these contracts expire the Company will be fully exposed to the volatility of PGM market prices.
Since 2005, the major U.S. bond rating agencies have steadily downgraded the corporate ratings of Ford Motor Company and General Motors Corporation, reflecting the substantial deterioration in their credit status. Federal financial assistance to automotive manufacturers cannot be assured and pressures for the restructuring or combination among manufacturers may increase, with potentially negative impacts on the Company. Under applicable law, if one or both of these companies should become insolvent or file for protection under the bankruptcy statutes, their respective obligations under the PGM supply agreements with the Company could be voided. The deterioration of the credit of these two customers, and the upcoming expiration of these supply contracts, particularly in light of recent low PGM market prices, has highlighted the Company’s dependence on the above-market pricing provisions in the automotive contracts.
The Company also recycles spent catalyst materials through its processing facilities in Columbus, Montana, recovering palladium, platinum and rhodium from these materials. The recycling segment has proven to be a very attractive and profitable ancillary business that utilizes surplus capacity in the Company’s smelting and refining facilities. However, it also entails certain risks. Three of the primary risks are collectibility of advances to suppliers, inability to hedge these advances effectively and fluctuation in the volume of material received. The recycling segment requires the Company to advance against third-party inventory purchases and to carry large working inventories for extended periods until processing is completed and the final metals are released. As such, it creates collection exposures and requires significant investments in working capital that draw against the Company’s liquidity balances. In light of the sharp decline in PGM prices during the second half of 2008 and the worldwide financial and credit crises, volumes of recycling materials available in the marketplace have diminished substantially in response to lower PGM prices. These lower recycling volumes result in less earnings and cash flow from the recycling segment, and therefore less economic support for the mining operations. Should it become necessary to reduce or suspend operations at the mines for economic reasons, whether because of limited recycling support or otherwise, the proportion of operating costs allocated to the recycling segment could increase, making the recycling segment less competitive. Further, the ability to operate the smelter and refinery without significant volumes of mine concentrates would likely require modification to the processing facilities. While management believes it can operate these facilities in a profitable manner, there is no assurance that the recycling facilities can operate profitably in the absence of significant concentrates from the mines, or that capital would be available to complete necessary modifications to the processing facilities. The Company has taken a non-cash charge of $26.0 million on its advances on inventory purchases related to its recycling segment. See “Business and Properties - Risk Factors.” The Company is in the process of determining what changes can be made to minimize risk in the advance process, while at the same time continuing to support and further the recycling segment as it is complementary to its mining operations and can be very profitable if the risks can be controlled.
In acquiring recycled automotive catalysts, the Company regularly advances funds to its suppliers in order to facilitate its procurement efforts. At this time the Company’s recycling segment is substantially dependent upon one such supplier. The Company works closely with its suppliers in an effort to monitor this business and the related advances. A portion of these advances is secured by material in supplier inventory, but a substantial portion is not secured and remains at risk. See “Business and Properties - Risk Factors - Reliance on Third Parties for Sourcing of Recycling Materials and the Concentration of Recycling Sources Creates the Potential for Losses” for additional detail.
On March 12, 2008, the Company issued and sold $181.5 million aggregate principal amount of senior convertible debentures due 2028 (“debentures”). The debentures pay interest at 1.875% per annum, payable semi-annually on March 15 and September 15 of each year, commencing September 15, 2008. The debentures will mature on March 15, 2028, subject to earlier repurchase or conversion. Each $1,000 principal amount of debentures is initially convertible, at the option of the holders, into approximately 42.5351 shares of the Company’s common stock, at any time prior to the maturity date. The conversion rate is subject to certain adjustments, but will not be adjusted for accrued interest or any unpaid interest. The conversion rate initially represents a conversion price of $23.51 per share. Holders of the debentures may require the Company to repurchase all or a portion of their debentures on March 15, 2013, March 15, 2018 and March 15, 2023, or upon the occurrence of certain events including a change in control. The Company may redeem the debentures for cash beginning on or after March 22, 2013.
MMC Norilsk Nickel, a Russian mining company, is majority owner of the Company, with about a 53% shareholding interest. Norilsk Nickel acquired this interest in June 2003, purchasing a 51% interest with $100 million in cash and 867,169 ounces of palladium metal, and then tendered in the market for additional shares. The Company subsequently sold off the Norilsk Nickel palladium ratably over a 24-month period that concluded in the first quarter of 2006. Norilsk Nickel purchased debentures from the Company as part of the offering in order to maintain its proportionate equity ownership. Under a Shareholders’ Agreement entered into at the time of the acquisition, Norilsk Nickel is currently entitled to nominate five of the Company’s nine directors.
2008 RESULTS AND COMMENTARY
In total, the Company reported a net loss of $112.7 million for the full year 2008, compared to a loss of $15.5 million in 2007. The 2008 results included a loss of $131.9 million in the fourth quarter, compared to net income of $0.1 million in the fourth quarter of 2007. The 2008 results include charges of $122.1 million including a $67.3 million impairment adjustment at the East Boulder Mine, $16.6 million lower-of-cost-or-market inventory adjustment, a $26.0 million write-down on advances on inventory purchases, a $3.4 million write-down of trade receivables, a $3.4 million charge to mark long-term investments to current market, and a $5.4 million provision for corporate restructuring. The results and charges reflect the steep deterioration in prices during the final quarter of 2008, for platinum-group metals (PGMs), the Company’s principal products and the steep downturn of the economy. At the same time during the fourth quarter the Company’s available cash, cash equivalents and short-term investments (excluding restricted cash) increased by $51.8 million, driven mostly by reductions in working capital required for the recycling segment. A detailed comparison of these outcomes is presented below in “Results of Operations - Year Ended December 31, 2008, Compared to Year Ended December 31, 2007.”
During 2008, the Company’s mining operations produced a total of 498,900 ounces of palladium and platinum, including 384,100 ounces of palladium and 114,800 ounces of platinum, falling short of its updated mine production guidance for 2008 of between 515,000 and 525,000 ounces. The restructuring at the East Boulder Mine during the fourth quarter, and lower realized grades than planned at the Stillwater Mine late in the year contributed to this production shortfall.
In 2008, the Company processed 398,100 ounces of recycled PGMs in its smelting and refining facilities, a 6.7% increase over the 373,000 total ounces processed in 2007. The processing of recycled materials benefits from the nickel and copper sulfides in mine concentrates, which act as collecting agents. In 2003 the Company entered into an agreement with a major U.S. collector of catalytic converters to purchase substantial volumes for processing. This agreement has since been modified and extended to facilitate expansion of these activities. In 2007, the Company entered into a second supply agreement with another supplier, although the volumes committed under the second agreement are significantly less than the first. The specific commercial terms of these agreements are confidential.
Capital spending declined somewhat in 2008, although the Company continued its program to extend the developed state of both mines. This effort includes increasing proven ore reserves and expanding infrastructure to facilitate a move toward more efficient production. Actual 2008 capital expenditures of $82.3 million were about $17.7 million below the Company’s updated guidance for the year of $100 million. The 2008 expenditures include about $12.9 million for a second electric furnace at the smelter in Columbus. The furnace is expected to begin commissioning during the first quarter of 2009. The shortfall in actual expenditures compared to guidance primarily reflected significant cuts in spending mandated during the fourth quarter in order to conserve cash.
Results from the fourth quarter of 2008 stand out in stark contrast to the first three quarters of the year. Early in 2008, shortages of electrical power and other operational problems curtailed mine production of PGMs in South Africa, driving the market price for platinum to record levels - it peaked in March on the LME at $2,273 per ounce - with palladium following directionally and peaking at $582 per ounce. The shortage of physical metal was compounded by very strong investor interest, as commodity returns suddenly looked very attractive in an otherwise lackluster market. Stillwater’s average realized PGM prices on mine output for the first nine months of 2008, which include the effect of floor and ceiling prices in the auto contracts and some hedging losses on platinum in the first half, were $1,553 per ounce for platinum and $424 per ounce for palladium. At these strong price levels, the Company reported net earnings for the first nine months of 2008 of $19.2 million and EBITDA of almost $82 million.
This bullish market environment ended abruptly in the fourth quarter of 2008. As credit markets imploded, automotive sales withered and large investors cycled out of their commodity investments into cash, the market price of platinum and palladium tumbled to levels not seen since 2003. Platinum bottomed on the LME at $756 per ounce and
palladium at $164 per ounce in the quarter, before recovering somewhat by the end of the year. With these much lower prices, the Company’s profitability evaporated, despite realizing significant benefit from the palladium floor price provisions in the automotive contracts. Average realizations on mine production in the fourth quarter were $368 per ounce for palladium and $929 per ounce for platinum.
Typically, the Company’s mines produce about 3.5 times as much palladium as platinum, a relationship driven by the relative percentages of the two metals in the ore and by metal recoveries achieved during processing. The Company’s average realization per sold ounce on combined platinum and palladium sales from mining of $675 per ounce during the first nine months of 2008 declined to $498 per ounce in the fourth quarter of 2008. Putting this in perspective, the Company’s mining cost of sales for the first nine months of 2008 (including depreciation and amortization expense) was equivalent to $618 per ounce - comfortably profitable. However, in the fourth quarter, which included some large inventory adjustments, mining cost of sales increased to the equivalent of $709 per sold ounce - a loss rate on mining operations in excess of $200 per sold ounce.
Early in the fourth quarter, management recognized the urgent need to make substantial changes in the face of potential heavy losses and concluded that its first objective would be to balance cash inflows and outflows. The focus on cash led to a number of natural decisions.
The East Boulder Mine, which typically has lower ore grades than the Stillwater Mine, historically has reported higher total cash costs per ounce (a non-GAAP measure of extraction efficiency discussed above under Reconciliation of Non-GAAP measures to costs of revenues) and clearly was not competitive at the reduced PGM market prices. Weighing the options there, management determined that if the lower PGM market prices in the fourth quarter proved to be a temporary deviation from the longer-term pricing trend, closing the mine would create a loss of skilled miners and technical staff foreclosing the opportunity to respond quickly to price recovery in the future. Staff at the mine assessed several different approaches and concluded that the mine could potentially be made competitive by using a leaner, team-based mining approach, with each team more or less self sufficient and focused on its specific mining area, and by cutting back development to only what was absolutely necessary to support current operations - particularly if prices improved at least modestly going forward. This alternative was considered preferable to suspending mining operations altogether, and included the added benefit of allowing the Stillwater Mine to fully staff its mining operations and replace 32 higher-cost mining contractors by transferring 47 skilled miners from the East Boulder Mine. Regrettably, it also entailed terminating over 200 employees at East Boulder Mine. These changes were implemented in December.
Various other broad-based changes were implemented at about the same time to conserve corporate cash. Capital expenditures and all discretionary expenditures were cut back sharply. Staffing at all locations was revisited in an effort to bring support costs into line with recent lower production levels. Contractors were replaced by Company employees wherever feasible. The corporate office in Billings was closed, with corporate staff reassigned to offices in Columbus or at the mines. The project to install a second electric furnace at the smelter was reviewed, but was deemed far enough along and of sufficient strategic importance that it should be completed with elements of the project restructured to save costs. And purchasing arrangements with suppliers were addressed to ensure competitive pricing terms.
Efforts to improve mining efficiency and productivity, which were initiated earlier in the year, are also viewed as critical and have continued. These include cross-functional study teams to address maintenance, underground logistics and supply, mining processes, purchasing and warehousing, and information systems. These teams meet regularly to review opportunities for improvement and to strengthen coordination and communication among various functions.
Along with the mining changes, the volume of material received for recycling also dropped off sharply during the fourth quarter in response to much lower prices. It appears that some recycling collectors are simply not collecting at the current prices, others determined to withhold material from the market hoping for better pricing in the future, while others suffered significant inventory losses in the falling market and have exited the industry. From a cash perspective, the lower PGM market prices and reduced volumes of recycling material from recycling suppliers and vendors have resulted in large amounts of the Company’s working capital in inventory and advances freeing up and being converted to cash. This cash from recycling inventories is likely to be needed for working capital when the recycling segment recovers, and so is segregated out when assessing whether the Company’s operations are remaining cash neutral.
The Company also has reported a lower-of-cost-or-market inventory adjustment of $6.5 million on its recycling segment for the 2008 fourth quarter. The Company’s business model for recycling includes locking in a positive margin on each lot of material at the time it is purchased by selling the contained PGMs forward in the futures market. This
underlying model has not changed. Consequently, the inventory loss shown is a timing matter, as a lower-of-cost-or-market inventory adjustment accelerates cost recognition in a falling market.
The Company’s reported fourth quarter and full year 2008 losses also include several other accounting adjustments that resulted from lower PGM market prices. The Company has not historically recorded an allowance for doubtful accounts because it has only a few large customers and its collection history is strong. However, with the sharp downturn in metal prices, several of the Company’s smaller customers have not been able to make timely payments. Accordingly, the Company has written off $3.4 million of the receivable balance at December 31, 2008, due to the uncertainty of ultimate repayment.
The Company similarly has had to roll forward certain commitments from its suppliers associated with a portion of its advances on inventory purchases, as the volumes in that market have contracted sharply. A portion of these advances to the suppliers is collateralized. However, the Company believes that performance under the contracts is unlikely unless and until market conditions improve, and consequently the Company has taken a write-down of $26.0 million on its Advances on inventory purchases related to its recycling segment.
In conjunction with the restructuring at the East Boulder Mine and associated employee terminations during the fourth quarter, the Company has recorded a corporate restructuring charge of $5.4 million in its fourth quarter results. This charge includes severance and WARN Act payments, other accrued obligations to terminated employees, final payments to contractors, and costs associated with moving the Billings corporate office.
Lower prices also can affect the economic justification of ore reserves, and the Company has reviewed its ore reserves at December 31, 2008. As in past years, the Company also engaged Behre Dolbear as third party independent geological experts to review and express their opinion on the Company’s reserve calculations. The Company performs its ore reserve economic assessment using a twelve-quarter trailing price in order to level out short-term volatility in metals prices, regarding the twelve-quarter trailing average as a reasonable surrogate for long-term future PGM prices over the period when the reserves will be mined. The combined twelve-quarter trailing weighted average price for platinum and palladium at December 31, 2008, was about $567 per ounce. At this price, the Company’s geologic ore reserves at each mine can be shown to generate (undiscounted) positive cash flow over the life of the reserve. Consequently, the Company’s ore reserves were not constrained economically at December 31, 2008.
It is important to note that, if current low PGM prices should continue for an extended period, the trailing twelve-quarter price will gradually decline. Following the Company’s methodology, there can be no assurance that the Company’s reported proven and probable ore reserves will not be constrained economically in the future. The Company is endeavoring to ensure that its operations at current prices, excluding unusual items, are generating positive cash flow.
The Company also has assessed the carrying value of its assets for impairment at December 31, 2008. The Company determined, following the process described in SFAS No. 144, that events and changes in circumstances during the fourth quarter indicated the possibility of impairment. Based on current mine plans and an assessment of long-term pricing, the Company determined that undiscounted future cash flows at the Stillwater Mine are sufficient to return the carrying value, but the undiscounted future cash flows projected at East Boulder Mine are not sufficient to cover the carrying value there. Consequently, with the assistance of Behre Dolbear, the Company assessed the fair value of the East Boulder Mine assets and concluded that a valuation adjustment was needed at East Boulder. Accordingly, the Company’s reported earnings at December 31, 2008, include a $67.3 million impairment charge reducing the carrying value of the East Boulder Mine assets to $161.4 million.
Both Moody’s Investors Service and Standard and Poor’s downgraded the Company’s corporate credit rating by two notches during 2008. This was in addition to a downgrade in December 2007. At issue is the Company’s strong dependence on contracts with Ford and General Motors, lack of geographic or product diversity, metal market volatility, and cost structure. Concerning Ford and General Motors, federal financial assistance to automotive manufacturers cannot be assured and pressures for the restructuring or combination among manufacturers may increase, with potentially negative impacts on the Company. The Company’s current financial resources are believed to be adequate at the time, with available cash and short-term investments totaling about $180.8 million at the end of 2008 and no substantial debt repayments due until 2013. The Company has not been able to secure a credit agreement upon terms deemed reasonable.
The looming expiration of the major automotive contracts creates significant exposure. If PGM prices in 2011 remained at their year-end 2008 levels, the loss of contractual floor price support at that point would make the Company’s mining operations, at least as currently configured, unsustainable without other support. Obviously, to the degree the
Company can improve the efficiency and productivity of its mining operations, its competitiveness at low PGM prices is correspondingly improved. Likewise, efforts to develop new applications for PGMs and to open new markets for them should strengthen demand and hopefully result in higher metals prices longer term. Continued efforts to diversify the Company, both internally and externally, will decrease the Company’s dependence on the price of just one or two commodities for financial viability. Management continues to focus on all of these objectives in preparing for a post-auto contract environment, although the level of resources applied to these efforts has of necessity been cut back in 2009.
In the regulatory arena, the Company made progress on several fronts during 2008. Safety performance at all locations has continued to strengthen. Overall, the Company’s rate of medically reportable incidents improved 8.3% between 2007 and 2008. Areas of specific focus from a safety perspective include enhanced work place examinations, safety standards implementation and compliance, accident/incident investigations, near miss reporting and use of loss control representatives who are part of the mining workforce. Employee-led focus teams have been successful in addressing many safety related challenges.
New rules with respect to diesel particulate matter (DPM) concentrations underground took effect in May 2008. The new rules are at the cutting edge of what is achievable with available technology, but the Company has had good success in reducing DPMs through a balanced program including catalytic converters bio-diesel blending, equipment reductions, engine and exhaust system modifications and employee awareness training. MSHA continues to support the Company’s implementation efforts and granted the Company a special one-year extension for certain areas of its Stillwater Mine. This special extension expired on November 28, 2008. The Company has applied for an additional extension and while the additional extension has not been granted to date, the Company has no indications that an additional extension will be denied for its Stillwater Mine. The East Boulder Mine has obtained a one-year extension applicable to certain areas of the mine for a period of one year commencing on May 21, 2008, subject to specified conditions being met during the period of the special extension. The Company continues to comply with the conditions outlined in the special extension granted May 21, 2008. MSHA has the statutory authority to issue citations for non-compliance and, in situations where it determines the health and safety of miners is at significant risk, to order cessation of mining operations until the risk is alleviated. No assurance can be given that any lack of compliance will not impact the Company.
The Company’s environmental performance continued its excellent track record during 2008. Environmental compliance is a very high priority in view of the pristine area in which the Company operates. The Company has a record of open communication and cooperative, proactive involvement with local and regional environmental groups. The Company’s ground-breaking 2000 Good Neighbor Agreement with these groups provides a vehicle for facilitating such communication and addressing issues cooperatively.
The Company agreed to increase surety bond coverage of its long-term obligations for final reclamation during 2008. Regulatory authorities have not yet completed their updated Environmental Impact Study (EIS), which ultimately will determine the appropriate level of such bonding, but in the interim the parties all recognized that the appropriate level will be higher than in the past. As the economy weakened late in 2008, the Company agreed to increase bonding by an additional $10 million to alleviate concerns aired by the agencies involved and to allow time for the EIS to be completed.
The shortage of skilled manpower that has challenged the Company over the past several years has been mitigated somewhat by the economic shift during the second half of 2008. As already noted, the restructuring at East Boulder Mine provided an opportunity to transfer miners over to the Stillwater Mine, largely alleviating the shortages there and allowing the Company to replace higher-cost contractors with its own employees. In addition, as commodity prices have declined, various mining operations in North America have cut back or closed down, freeing up manpower. However, this shift in the labor market appears to be driven mostly by low metal prices and a weak economy, and there is no assurance that the same shortages would not quickly reappear when commodity prices recover. Consequently, the Company is continuing its new miner training program at the Stillwater Mine on a limited scale.
Looking forward, management believes that the Company’s mine production for 2009 will be 495,000 PGM ounces, generally in the same range as 2008. Total cash costs per ounce (a non-GAAP measure of extraction efficiency) for the year are projected at $399, again in the same range as the $396 per ounce in 2008. Capital expenditures will decline sharply to about $39 million in 2009, down from about $82.3 million in 2008. At the Stillwater Mine, lower development activity in 2009 should still be sufficient to maintain the current developed state, but will eliminate additional spending to expand the developed state that has been included for the past several years. At East Boulder Mine, development has been pared back further, providing only the additional development needed to support 2009 production.
Although these 2009 targets assume a continuation of low PGM prices, management has focused its planning on the assumption that PGM market prices will strengthen longer term. Investment interest in PGMs may cause pricing to strengthen somewhat even in 2009, but there can be no substantive recovery in PGM pricing until the economy strengthens sufficiently to free up the flow of credit so that automotive markets recover. Automotive and related demand for platinum and palladium comprises about 60% of the market demand for these metals, so recovery of automotive demand is critical to supply/demand balance for PGMs. Third-party analysts have estimated that about 40% of PGM production is uneconomic at year-end 2008 market prices, driving some production curtailments; however, to date the decline in production has not been sufficient to offset the loss of demand.
Once the automotive industry begins showing signs of recovery, however, PGM pricing should react favorably. Substantial research effort over the past several years has gone into opportunities to substitute palladium in applications that currently use platinum and rhodium. This substitution should benefit palladium, the Company’s principal product. Taken together with increasingly stringent emission control regulations worldwide and continuing growth in vehicle demand in the developing world, along with growing emphasis on recycling, management is reasonably optimistic toward the longer-term future of these businesses. This future is not without risks, however, and should the present economic downturn worsen substantially or extend for several years, the Company’s viability could be severely challenged - particularly after the automotive contracts expire.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007
Revenues - In view of the higher prices realized for the Company’s by-product sales in the past several years, the Company has modified its reporting for by-products to include sales proceeds from by-products within its sales revenues from mining. Previously, these proceeds were netted against costs of revenues. The discussion that follows adjusts 2007 and 2006 results to reflect this reporting change.
The Company’s total revenues, including proceeds from the sale of by-products, totaled $855.7 million in 2008, compared to $673.0 million in 2007, a 27.1% increase. This increase was net of hedging losses on forward sales of platinum of $12.8 million on 15,000 ounces hedged in 2008, and $31.7 million on 98,500 ounces hedged in 2007. The increase in total revenues reflects substantially higher average realized prices, particularly in the first six months of 2008, which more than offset lower mine production sales volumes in 2008.
Revenues from mine production were $360.4 million in 2008 (including $36.8 million from by-products), compared to $331.3 million in 2007 (of which $53.8 million was from by-products), an 8.8% increase. The increase was attributable to the higher realized market prices in early 2008 which more than made up for the lower volume of mined ounces sold in 2008. Platinum and palladium ounces sold from mine production were 514,100 in 2008, compared to 544,800 ounces in 2007. The average realization on these platinum and palladium sales (including the effects of hedging and of floor and ceiling prices in the underlying contracts) was $630 per ounce in 2008 and $509 per ounce in 2007. Reduced by-product revenues were generally due to lower sales in 2008, particularly for rhodium and nickel.
Revenues from PGM recycling grew 45.6% during 2008, increasing to $475.4 million in 2008, from $326.4 million in 2007. Recycled ounces sold, excluding tolled material, increased in 2008 to 275,000 ounces compared to 245,000 ounces in 2007 and the Company’s combined average realization on recycling sales (which include palladium, platinum and rhodium) increased to $1,716 per ounce in 2008 from $1,312 per ounce in 2007. The Company processed increased volumes of recycled materials on a tolling basis in 2008. The Company toll processed 126,000 ounces of PGMs during 2008, up from 112,000 tolled ounces in 2007. Total recycling volume increased to 398,100 ounces of PGMs in 2008 up 6.7% from 373,000 ounces in 2007.
The Company recognized other revenue of $20.0 million and $15.4 million for metal purchased in the open market and resold in 2008 and 2007, respectively.
Costs of Metals Sold - Costs of metals sold, which excludes depreciation expense and no longer includes credits for by-products, was $749.0 million in 2008, compared to $578.4 million in 2007, a 29.5% increase. Even though the volume of purchased recycling material increased from year to year, significantly higher PGM prices drove up the acquisition cost of the material, which largely accounted for an increase in recycling costs of metals sold to $445.3 million in 2008 from $307.1 million in 2007. The average acquisition cost of metal in the Company’s recycling segment (including platinum, palladium and rhodium) increased to $1,534 per ounce in 2008 from $1,171 per ounce in 2007, reflecting much higher 2008 average prices for PGMs, particularly for platinum and rhodium.
During 2008, the Company’s mining operations produced 498,900 ounces of PGMs, including 384,100 and 114,800 ounces of palladium and platinum, respectively. This represents about a 7.2% decrease from 2007, during which the Company’s mining operations produced 537,500 ounces of PGMs, including 413,400 and 124,100 ounces of palladium and platinum, respectively. The Stillwater Mine produced 349,400 ounces of PGMs in 2008, compared with 359,300 ounces of PGMs in 2007, a 2.8% decrease. The East Boulder Mine produced 149,500 ounces of PGMs in 2008, compared with 178,200 ounces of PGMs in 2007, a 16.1% year-on-year decrease. The lower production in 2008
reflected the restructuring at East Boulder Mine and somewhat lower ore grades associated with the specific mining areas in 2008 at Stillwater Mine.
The costs of metals sold from mine production, despite lower 2008 production, increased to $283.8 million in 2008, compared to $256.9 million in the prior year, a 10.5% increase. The Company’s mining costs increased during 2008 mostly as a result of higher commodity prices for materials consumed in mining.
The cost of metals sold on palladium purchases for resale was $19.9 million in 2008, compared to $14.3 million in 2007.
Depreciation and amortization - Depreciation and amortization expense was $83.0 million in 2008, compared to $82.5 million in 2007. Although amortization rates per ton mined were generally higher in 2008 than in 2007, the lower tonnage produced in 2008 more than offset the effect of the higher tonnage rates.
Exploration - The Company participated in several early stage exploration programs during 2008 and 2007, spending $2.5 million and $1.1 million to meet commitments under these programs during 2008 and 2007, respectively. In addition, the Company expended $0.9 million in 2008 and $1.7 million in 2007 toward equity investments in exploration companies. During 2008, the Company also wrote down a portion of its equity investments in these ventures to fair value, taking charges totaling nearly $3.4 million.
Marketing - The Company continued its market development efforts for palladium during 2008, largely in support of the Palladium Alliance International, spending $5.7 million on marketing, up slightly from $5.6 million in 2007.
General and administrative - General and administrative costs were $24.2 million in 2008, compared to $21.8 million in 2007, an 11.0% increase, reflecting higher payroll and contractor costs. In addition to these costs, the Company separately incurred about $5.4 million in restructuring costs during 2008, mostly associated with employee and contract terminations and re-location of the Billings corporate office.
Interest income and expense - Interest income decreased to $11.1 million in 2008 from $11.7 million in 2007, on the result of lower recycling balances in the last quarter of 2008. The Company’s balance of cash and related liquid assets earning interest increased to $180.8 million at December 31, 2008, from $89.0 million reported at December 31, 2007. This increase was partially attributable to decreases in working capital in the Company’s recycling segment that resulted from lower PGM prices and lower inventories later in the year. Inventories and advances associated with recycling decreased to $23.3 million at year-end 2008 from $83.7 million at the end of 2007. The Company outstanding long-term debt balance was $211.0 million at December 31, 2008, up from $128.0 million at December 31, 2007. The Company replaced its debt facilities during 2008, increasing the level of borrowings by about $83 million. The added borrowings helped the Company accommodate significant growth in its recycling segment during the first nine months of 2008.
Interest expense declined to $9.7 million in 2008, from $11.3 million in 2007 as the increased debt balances partially offset the benefit of much lower interest rates. The 2008 expense included $2.2 million of unamortized financing costs that were written off in conjunction with the Company’s refinancing.
Total income tax provision - The Company recorded a small tax benefit of $32,000 in 2008 related to a refundable minimum tax credit and only a de minimis income tax expense in 2007, reflecting certain state minimum taxes paid. Changes in the Company’s net deferred tax assets have been offset by the change in the related valuation allowance, as the Company does not project any opportunity to benefit from its tax loss carry-forwards.
Other comprehensive income (loss), net of tax - The Company recorded a gain in other comprehensive income of $5.9 million in 2008 compared to a gain of $9.6 million in 2007. The 2008 gain included $12.8 million of realized hedging losses reclassified to income, partially offset by $6.3 million representing the change in fair value of derivatives
held, and $0.7 million of unrealized losses on investments. The 2007 gain included $31.7 million of realized hedging losses reclassified to income, partially offset by $22.4 million representing the change in fair value of derivatives held, and $0.3 of unrealized gains on investments.
YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006
Revenues - Revenues were $673.0 million, including proceeds from the sale of by-products, in 2007, compared to $655.8 million in 2006, a 2.6% increase. This increase was attributable to substantially higher market prices for platinum group metals, more than offsetting lower mine production and slightly lower recycling sales volumes. Reported revenues in both periods include the effect of floor and ceiling prices in the automotive sales agreements and of realized losses on platinum hedges.
Revenues from mine production, including by-product sales, were $331.3 million in 2007, compared to $334.8 million in 2006, a 1.0% decrease. The slight decrease was attributable to the lower volume of mined ounces produced in 2007, largely offset by higher realized PGM prices. Ounces of platinum and palladium sold from mine production were 544,800 in 2007, compared to 603,800 ounces in 2006. The average realization on these sales (including the effects of hedging and of floor and ceiling prices in the underlying contracts) was $509 per ounce in 2007 and $484 per ounce in 2006.
Revenues from PGM recycling grew 21% during 2007, increasing to $326.4 million in 2007, from $269.9 million in 2006. Recycled ounces sold, excluding tolled material, declined slightly in 2007 to 245,000 ounces compared to 250,000 ounces in 2006, however, the Company’s combined average realization on recycling sales (which include palladium, platinum and rhodium) increased to $1,312 per ounce in 2007 from $1,078 per ounce in 2006. The Company processed increased volumes of recycled materials on a tolling basis in 2007. The Company toll processed 112,000 ounces of PGMs during 2007, up from 90,000 tolled ounces in 2006. Total recycling volume increased to 373,000 ounces of PGMs in 2007 up 7.8% from 346,000 ounces in 2006.
Revenues from sales of purchased PGMs, including sales of palladium received in the Norilsk Nickel transaction, declined to $15.4 million in 2007 from $51.0 million in 2006. Within these totals, sales of palladium received in the Norilsk Nickel transaction generated $17.6 million in revenues during 2006 on sales of 63,250 ounces of palladium from inventory at an average realization of $278 per ounce. These sales ended in the first quarter of 2006 when this palladium inventory was exhausted.
Excluding the sales from the Norilsk Nickel transaction, the Company purchased and resold nearly 44,000 ounces of palladium during 2007 and 42,000 ounces of platinum, palladium and rhodium during 2006. One of the sales contracts associated with the Norilsk Nickel metal also required the Company to provide 3,250 ounces of platinum and 1,900 ounces of rhodium per month either purchased on the open market or produced from mining operations or sourced in the recycling segment. In 2006, the Company recognized other miscellaneous revenue of $22.8 million for metal purchased in the open market and resold under these sales contracts, which terminated in the first quarter of 2006.
Costs of Metals Sold - Cost of metals sold, which excludes depreciation expense and no longer includes by-product credits, was $578.4 million in 2007, compared to $536.9 million in 2006, a 7.7% increase. Although the volume of purchased recycling material was relatively flat from year to year, higher PGM prices drove up the acquisition cost of the material, which largely accounted for an increase in recycling costs of metals sold to $307.1 million in 2007 from $251.2 million in 2006. The average acquisition cost of metal in the Company’s recycling segment (including platinum, palladium and rhodium) increased to $1,171 per ounce in 2007 from $988 per ounce in 2006, reflecting much higher 2007 average prices for PGMs, and particularly for platinum and rhodium.
During 2007, the Company’s mining operations produced 537,500 ounces of PGMs, including 413,400 and 124,100 ounces of palladium and platinum, respectively. This represents about a 10.5% decrease from 2006, during which the Company’s mining operations produced 600,600 ounces of PGMs, including 463,300 and 137,300 ounces of palladium and platinum, respectively. High employee attrition rates associated with a change in shift schedule and a brief labor strike at Stillwater Mine, coupled with lower average productivity from less experienced miners, largely drove the lower production in 2007. In response, the Company also modestly reduced its emphasis on primary mine development during 2007, allowing some resources previously dedicated to primary development to be redeployed into production.
The Stillwater Mine produced 359,300 ounces of PGMs in 2007, compared with 409,400 ounces of PGMs in 2006, a 12.2% decrease. The East Boulder Mine produced 178,200 ounces of PGMs in 2007, compared with 191,200 ounces of
PGMs in 2006, a 6.8% year-on-year decrease. These production decreases, again, were attributable to workforce issues, partially offset by the redeployment of development resources into production.
The costs of metals sold from mine production, despite lower 2007 production, increased to $256.9 million in 2007, compared to $242.7 million in the prior year, a 5.9% increase. The increased mining costs primarily reflect year-on-year inflation in wages and prices.
The costs of metals sold from other activities (which in 2006 included sales of palladium received in the Norilsk Nickel transaction and some associated sales) was $14.3 million in 2007, compared to $43.1 million in 2006. The two-year program to sell the palladium received in the Norilsk Nickel transaction ended during the first quarter of 2006. The total cost in 2006 attributable to palladium sold from the ounces received in the Norilsk Nickel transaction was $10.8 million on the sale of 63,250 ounces at an average cost per ounce of just over $169. The remaining cost of metal sold in 2006 represents mostly the cost of sourcing platinum and rhodium to meet related contractual commitments. As discussed in “Revenues” above, the Company entered into sales contracts in 2004, which required it to source metal from third parties in order to fulfill delivery commitments to customers. The cost of metals sold from activities under these contracts, excluding sales of palladium received in the Norilsk Nickel transaction, was $32.3 million in 2006.
Depreciation and amortization - Depreciation and amortization expense was $82.5 million in 2007, compared to $83.7 million in 2006, a 1.4% decrease. Although amortization rates per ton mined were higher in 2007 than in 2006, the lower tonnage produced in 2007 more than offset the effect of the higher tonnage rates.
Exploration - The Company participated in several early stage exploration programs during 2007 and 2006, spending about $1.1 million and $0.3 million on these programs during 2007 and 2006, respectively. In addition, the Company expended $1.7 million and $1.9 million in 2007 and 2006, respectively, toward equity investments in exploration companies.
Marketing - The Company expanded its market development efforts for palladium during 2007, largely in support of the Palladium Alliance International, spending $5.6 million on marketing, up from $4.2 million in 2006.
General and administrative - General and administrative costs were $21.8 million in 2007, compared to $23.2 million in 2006, a 6.0% decrease. Normal year-on-year increases in these costs were largely offset by benefit forfeitures and share-based compensation adjustments.
Interest income and expense - Interest income increased to $11.7 million in 2007 from $11.3 million in 2006, reflecting increased interest on recycling volumes. The Company’s balance of cash and related liquid assets earning interest decreased to $89.0 million at December 31, 2007, from $123.9 million reported at December 31, 2006. This decrease was partially attributable to growth in working capital in the Company’s recycling segment. Inventories and advances associated with recycling increased to $83.7 million at year-end 2007 from $70.9 million at the end of 2006. The Company has reduced its debt to $128.0 million at December 31, 2007 from $130.7 million at December 31, 2006. Interest expense declined very slightly to $11.3 million in 2007 from $11.4 million in 2006 on the reduced debt balances.
Total income tax provision - The Company recorded only de minimis income tax expense in 2007 and 2006, reflecting certain state minimum taxes paid. Changes in the Company’s net deferred tax assets have been offset by the change in the related valuation allowance.
Other comprehensive income (loss), net of tax - The Company recorded a gain in other comprehensive income of $9.6 million in 2007 compared to a gain of $1.8 million in 2006. The 2007 gain included $31.7 million of realized hedging losses reclassified to income, partially offset by $22.4 million representing the change in fair value of derivatives held, and $0.3 million of unrealized gains on investments. The 2006 gain included $31.1 million of realized hedging losses reclassified to income, partially offset by $29.3 million representing the change in fair value of derivatives held, and $25,000 of unrealized loss on investments.
LIQUIDITY AND CAPITAL RESOURCES
For 2008, net cash provided by operating activities was $114.2 million compared to $56.4 and $97.0 million for 2007 and 2006, respectively. The Company’s net cash flow from operating activities is affected by several key factors, including net realized prices for its products, cash costs of production, and the level of PGM production from the mines.
Liquidation of about $25 million cash tied up in recycling working capital accounted for a portion of the 2008 cash flow from operations, offset in part by about a $10 million increase in restricted cash associated with added surety bonding. The $112.7 million reported loss for 2008 included about $200 million of non-cash charges, including $67.3 million carrying value adjustment at the East Boulder Mine, a $16.6 million lower-of-cost-or-market inventory adjustment, a $3.4 million write-down of trade receivables, a $26.0 million write-down of advances on inventory purchases, a $3.4 million charge to mark long-term investments to current market, and $83 million of depreciation and amortization.
At the PGM price levels prevailing at December 31, 2008, absent separate hedging arrangements, a change in the price of platinum generally would flow through almost dollar-for-dollar to cash flow from operations, subject only to (1) price ceilings on 14% of the mines’ platinum production to be sold under the Company’s long-term sales contracts, and (2) certain costs - severance taxes and royalties on mine production - which adjust upward or downward with market prices.
Under the Company’s long-term sales contracts for mined production, a change in the market price of palladium, at prices above about $364 per ounce, would flow through directly to cash flow from operations, subject only to an offset for severance taxes and royalties that are based on the realized price. At market prices for palladium below about $364 per ounce, floor prices take affect that support the palladium price at or near that level on most of the mined palladium sales. Considering the palladium price prevailing at December 31, 2008, if the Company did not have the benefit of the floors and ceilings in the automobile contracts, the Company would have expected to realize about $184 per ounce on sales of palladium at market price, which would represent a reduction in annual sales revenue of about $70 million.
The Company enters into fixed forward contracts that set the selling price of a significant portion of PGMs in its recycling activities, so for outstanding recycling lots, a change in the market price of platinum and palladium on sales of recycling materials would have little or no effect on margins earned from this activity and on cash flow from operations. However, a percentage change in market prices would affect margins on future lots by about the same percentage as the change in price. It normally takes existing lots of recycling material two to three months from the date of receipt to flow through to sales.
Changes in the cash costs of production generally flow through dollar-for-dollar into cash flow from operations. A reduction due to grade in total mine production of 10%, or about 50,000 ounces per year, would reduce cash flow from operations by an estimated $23 million per year at the price and cost levels prevailing at December 31, 2008. Because the Company at these PGM price levels is working to remain cash neutral, such a 10% reduction could require additional operating changes and perhaps a suspension of operations at the East Boulder Mine.
Net cash used in investing activities was $74.6 million, $81.0 million and $78.9 million in 2008, 2007 and 2006, respectively. The Company’s investing activities primarily represent capital expenditures of $82.3 million, $87.9 million and $97.8 million in 2008, 2007 and 2006, respectively, and changes in highly liquid investments. See Note 15 “Property, Plant and Equipment” to the Company’s 2008 audited financial statements for further information. The Company also expended $0.9 million and $1.7 million and $1.9 million to acquire equity interests in two small exploration companies during 2008, 2007 and 2006, respectively.
Net cash provided by financing activities was $60.7 million in 2008 compared to net cash used by financing activities of $2.4 million and $10.0 million in 2007 and 2006, respectively. Net cash provided by financing activities included proceeds of $181.5 million in convertible debentures, offset by the repayment of the Company’s outstanding balance under its previous bank credit facility of $98.3 million. Debt issuance costs and changes in restricted cash accounted for the remainder of the net cash provided financing activities.
At December 31, 2008, the Company’s available cash was $161.8 million and it had $211.0 million of debt outstanding. If highly liquid short-term investments are included, the Company’s balance sheet liquidity increases to $180.8 million. During 2009, the Company will be required to make a payment of approximately $0.1 million for scheduled principal reductions on its outstanding borrowings, reflecting the final maturity of the Company’s educational impact bonds. The Company, at interest rate levels prevailing at December 31, 2008, also will be required to pay approximately $5.8 million in total interest payments during 2009 related to its outstanding debt obligations. The Company’s current liquidity is reasonable under the circumstances and largely results from the completion of the sale of convertible debentures in March 2008. In view of the worldwide credit crisis, the Company has not been successful in putting in place a new credit agreement. While the lack of a credit agreement may create vulnerability for the Company, the Company believes that its liquidity is sufficient for its needs at this time.
Convertible Debentures
On March 12, 2008, the Company issued and sold $181.5 million aggregate principal amount of senior convertible debentures due 2028 (“debentures”). The debentures pay interest at 1.875% per annum, payable semi-annually on March 15 and September 15 of each year, commencing September 15, 2008. The debentures will mature on March 15, 2028, subject to earlier repurchase or conversion. Each $1,000 principal amount of debentures is initially convertible, at the option of the holders, into approximately 42.5351 shares of the Company’s common stock, at any time prior to the maturity date. The conversion rate is subject to certain adjustments, but will not be adjusted for accrued interest or any unpaid interest. The conversion rate initially represents a conversion price of $23.51 per share. Holders of the debentures may require the Company to repurchase all or a portion of their debentures on March 15, 2013, March 15, 2018 and March 15, 2023, or upon the occurrence of certain events including a change in control. The Company may redeem the debentures for cash beginning on or after March 22, 2013.
The debentures were sold to an “accredited investor” within the meaning of Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act. The initial investor offered and resold the debentures to “qualified institutional buyers” under Rule 144A of the Securities Act. An affiliate of MMC Norilsk Nickel, with the approval of the Company’s public directors, purchased $80 million of the debentures, thereby maintaining its majority ownership position in the Company.
In connection with the issuance of the debentures, the Company agreed to file a shelf registration statement with the Securities and Exchange Commission (SEC) for the resale of the debentures and the common stock issuable upon conversion of the debentures and to use reasonable best efforts to cause it to become effective, within an agreed-upon period. The Company also agreed to periodically update the shelf registration and to keep it effective until the earlier of (1) the date the debentures or the common stock issuable upon conversion of the debentures is eligible to be sold to the public pursuant to Rule 144 of the Securities Act or (2) the date on which there are no outstanding registrable securities. Except for the debentures held by Company affiliates, the six-month holding period prescribed in Rule 144 has now elapsed, and management believes the debentures are now eligible to be sold to the public in the secondary market.
Management has evaluated the terms of the debentures, which include the call feature, redemption feature, and the conversion feature, under applicable accounting literature, including SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and concluded that none of these features should be separately accounted for as derivatives.
In connection with the issuance of the debentures, the Company incurred $5.1 million of issuance costs, which primarily consisted of investment banking fees, legal and other professional fees. These costs are classified within Other noncurrent assets and are being amortized as interest expense using the effective interest method over the term from issuance through the first date that the holders can require repurchase of the debentures, which is March 15, 2013. Amortization expense related to the issuance costs of the debentures was $0.8 million for the year 2008, and the interest expense on the debentures was $2.7 million for the year 2008. The Company made cash payments of $1.7 million for interest on the debentures during 2008.
The Company used a portion of the proceeds of the debenture offering to retire $98.3 million of term debt and terminate a $40 million revolving credit line under its previous credit facility. Interest expense for 2008 includes approximately $0.2 million of amortization expense and $2.2 million for the non-cash write-off of unamortized issuance costs on the prior facility. In conjunction with terminating the revolving credit line, the Company posted $20.7 million of restricted cash during 2008 to collateralize stand-by letters of credit previously supported by that facility.
CONTRACTUAL OBLIGATIONS
The Company is obligated to make future payments under various contracts such as its debt agreements. The following table represents significant contractual cash obligations and other commercial commitments and the related interest payments as of December 31, 2008:
(1)
Interest payments on the convertible debentures noted in the above table are calculated up to March 15, 2013, the date the holders of the debentures can exercise their put option.
Interest payments noted in the table above assume no changes in interest rates. Amounts included in other noncurrent liabilities that are anticipated to be paid in 2010 include workers’ compensation costs, property taxes and severance taxes.
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. These statements may contain words such as “desires,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “estimates” or similar expressions. These statements are not guarantees of the Company’s future performance and are subject to risks, uncertainties and other important factors that could cause its actual performance or achievements to differ materially from those expressed or implied by these forward-looking statements. Such statements include, but are not limited to, comments regarding the duration and overall effects of the current worldwide financial and credit crises, the effects of restructuring the Company’s operations and maintaining a skilled work force, the automotive market and the health of the automobile manufacturers, expansion plans and realignment of operations, costs, grade, production and recovery rates, permitting, labor matters, financing needs and the terms of future credit facilities, 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. Additional information regarding factors that could cause results to differ materially from management’s expectations is found in the section entitled “Business and Properties - Risk Factors” above.
The Company intends that the forward-looking statements contained herein be subject to the above-mentioned statutory safe harbors. Investors are cautioned not to rely on forward-looking statements. The Company disclaims any obligation to update forward-looking statements.
CRITICAL ACCOUNTING POLICIES
Mine Development Expenditures - Capitalization and Amortization
Mining operations are inherently capital intensive, generally requiring substantial capital investment for the initial and concurrent development and infrastructure of the mine. Many of these expenditures are necessarily incurred well in advance of actual extraction of ore. Underground mining operations such as those conducted by the Company require driving tunnels and sinking shafts that provide access to the underground ore body and construction and development of infrastructure, including electrical and ventilation systems, rail and other forms of transportation, shop facilities, material handling areas and hoisting systems. Ore mining and removal operations require significant underground facilities used to conduct mining operations and to transport the ore out of the mine to processing facilities located above ground.
Contemporaneously with mining, additional development is undertaken to provide access to ongoing extensions of the ore body, allowing more ore to be produced. In addition to the development costs that have been previously incurred, these ongoing development expenditures are necessary to access and support all future mining activities.
Mine development expenditures incurred to date to increase existing production, develop new ore bodies or develop mineral property substantially in advance of production are capitalized. Mine development expenditures consist of vertical shafts, multiple surface adits and underground infrastructure development including footwall laterals, ramps, rail
and transportation, electrical and ventilation systems, shop facilities, material handling areas, ore handling facilities, dewatering and pumping facilities. Many such facilities are required not only for current operations, but also for all future planned operations.
Expenditures incurred to sustain existing production and access specific ore reserve blocks or stopes provide benefit to ore reserve production over limited periods of time (secondary development) and are charged to operations as incurred. These costs include ramp and stope access excavations from primary haulage levels (footwall laterals), stope material rehandling/laydown excavations, stope ore and waste pass excavations and chute installations, stope ventilation raise excavations and stope utility and pipe raise excavations.
The Company calculates amortization of capitalized mine development costs by the application of an amortization rate to current production. The amortization rate is based upon un-amortized capitalized mine development costs, and the related ore reserves. Capital development expenditures are added to the un-amortized capitalized mine development costs as the related assets are placed into service. In the calculation of the amortization rate, changes in ore reserves are accounted for as a prospective change in estimate. Ore reserves and the further benefit of capitalized mine development costs are based on significant management assumptions. Any changes in these assumptions, such as a change in the mine plan or a change in estimated proven and probable ore reserves could have a material effect on the expected period of benefit resulting in a potentially significant change in the amortization rate and/or the valuations of related assets. The Company’s proven ore reserves are generally expected to be extracted utilizing its existing mine development infrastructure. Additional capital expenditures will be required to access the Company’s estimated probable ore reserves. These anticipated capital expenditures are not included in the current calculation of depreciation and amortization.
The Company’s method of accounting for development costs is as follows:
•
Unamortized costs of the shaft at the Stillwater Mine and the initial development at the East Boulder Mine are treated as life-of-mine infrastructure costs, amortized over total proven and probable reserves at each location, and
•
All ongoing development costs of footwall laterals, ramps and associated facilities are amortized over the ore reserves in the immediate and geologically relevant vicinity of the development.
The calculation of the amortization rate, and therefore the annual amortization charge to operations, could be materially affected to the extent that actual production in the future is different from current forecasts of production based on proven and probable ore reserves. This would generally occur to the extent that there were significant changes in any of the factors or assumptions used in determining ore reserves. These factors could include: (1) an expansion of proven and probable ore reserves through development activities, (2) differences between estimated and actual costs of mining due to differences in grade or metal recovery rates, and (3) differences between actual commodity prices and commodity price assumptions used in the estimation of ore reserves.
Asset Impairment
The Company follows Statement of Financial Accounting Standard (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company reviews and evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Impairment is considered to exist if total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. Future cash flows include estimates of recoverable ounces, PGM prices (long-term sales contract prices and historical pricing trends or third party projections of future prices rather than prices at a point in time as an indicator of longer-term future prices), production levels, and capital and reclamation expenditures, all based on life-of-mine plans and projections. If the assets are impaired, a calculation of fair market value is performed, and if fair market value is lower than the carrying value of the assets, the assets are reduced to their fair market value.
In accordance with the methodology prescribed by SFAS No. 144, the Company concluded that the economic circumstances in which the Company operates have changed significantly during the latter part of 2008. This required the Company to assess whether total estimated future cash flows at the East Boulder and the Stillwater mines would be sufficient to recoup the carrying amount of each asset. Based on current mine plans and an assessment of long-term pricing, the Company determined that undiscounted future cash flows at the Stillwater Mine are sufficient to return the carrying value, but the undiscounted future cash flows projected at East Boulder Mine are not sufficient to cover the carrying value there. Consequently, with the assistance of Behre Dolbear, the Company assessed the fair value of the East
Boulder Mine assets and concluded that a valuation adjustment was needed at East Boulder. Accordingly, the Company’s reported earnings at December 31, 2008, include a $67.3 million reduction in carrying value of the East Boulder Mine assets to $161.4 million.
Income Taxes
Income taxes are determined using the asset and liability approach in accordance with the provisions of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes. This method gives consideration to the future tax consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on currently enacted tax rates. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Each quarter, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. A valuation allowance has been provided at December 31, 2008, and December 31, 2007, for the portion of the Company’s net deferred tax assets for which it is more likely than not that they will not be realized. Based on the Company’s current financial projections, and in view of the level of tax depreciation and depletion deductions available, it appears unlikely that the Company will owe any income taxes for the foreseeable future. However, if average realized PGM prices were to increase substantially in the future, the Company could owe income taxes prospectively on the resulting higher taxable income.
Post-closure Reclamation Costs
In accordance with Statement of Financial Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement Obligations, the Company recognizes the fair value of a liability for an asset retirement obligation 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 ultimately is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss at the time of settlement.
Accounting for reclamation obligations requires management to make estimates for each mining operation of the future costs the Company will incur to complete final reclamation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work that the Company is required to perform. Any such increases in future costs could materially impact the amounts charged to operations for reclamation and remediation.
The Company reviewed its asset retirement assumptions at December 31, 2008, and recorded a reduction of $2.3 million and $2.1 million for the Stillwater Mine and the East Boulder Mine, respectively, due to an increase in the estimated mine lives of both mines. See Note 17 “Asset Retirement Obligation” to the Company’s 2008 audited financial statements for further information.
Derivative Instruments
From time to time, the Company enters into derivative financial instruments, including fixed forwards, cashless put and call option collars and financially settled forwards to manage the effect of changes in the prices of palladium and platinum on the Company’s revenue. The Company accounts for its derivatives in accordance with Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires 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 highly 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 the determination of net income in the period the offsetting hedged transaction occurs. The Company primarily uses derivatives to hedge metal prices and to manage interest rate risk. The Company also enters into financially settled forwards related to its recycling segment which are not
accounted for as cash flow hedges. The realized and unrealized gains or losses are recognized in net income in each period. See Note 6 “Derivative Instruments” to the Company’s 2008 audited financial statements for further information.
ITEM 7A
ITEM 7A
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 performance can be 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 from time to time 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 the fair value of the derivatives are expected to be highly effective in offsetting changes in the value of the hedged transaction.
The Company has entered into long-term sales contracts with Ford Motor Company and General Motors Corporation. The contracts together cover significant portions of the Company’s mined PGM production through December 2012 and stipulate floor and ceiling prices for some of the covered production. The Company from time to time also purchases platinum and rhodium in the open market for resale under various supply arrangements. See “Business and Properties - Current Operations - PGM Sales and Hedging Activities” and Note 6 “Derivative Instruments” to the Company’s 2008 audited financial statements for a more detailed discussion of the Company’s open positions.
Beginning in the third quarter of 2005, the major U.S. bond rating agencies have successively downgraded the corporate ratings of Ford Motor Company and General Motors Corporation, the Company’s two primary customers under long-term sales contracts. As a result, the debt of these companies no longer qualifies as investment grade. The Company’s business is substantially dependent on its contracts with Ford and General Motors, particularly because the floor prices in these contracts provide significant price protection to the Company in periods of low palladium prices. Under applicable law, these contracts may be void or voidable if Ford or General Motors becomes insolvent or files for bankruptcy. The loss of either of these contracts could require the Company to sell at prevailing market prices, which at price levels prevailing at December 31, 2008, would expose it to lower metal prices as compared to the floor prices under the contracts. In such an event, the Company’s operating plans could be threatened. Thus, termination of these contracts could have a material adverse impact on the Company’s operations and viability. Federal financial assistance to automotive manufacturers cannot be assured and pressures for the restructuring or combination among manufacturers may increase, with potentially negative impacts on the Company.
The Company from time to time enters into fixed forward sales and financially settled forward sales transactions that may or may not be accounted for as cash-flow hedges to mitigate the price risk in its PGM recycling and mine production activities. In the fixed forward transactions, normally metals contained in the spent catalytic materials are sold forward at the time the materials are purchased and are delivered against the fixed forward contracts when the finished ounces are recovered. The Company accounted for such fixed forwards as cash flow hedges for transactions entered into prior to April 1, 2006; thereafter, the Company has elected to account for these transactions using the normal purchase and normal sales provisions contained in SFAS No. 138. Financially settled forwards also may be used as a mechanism to offset fluctuations in metal prices associated with future production in circumstances where the Company elects to retain control of the final disposition of the metal. In the past, the Company generally accounted for financial settled forward transactions as cash flow hedges. Following the amendment of one of the automotive PGM supply contracts in August of 2007, the Company has from time to time entered into various financially settled forward contracts covering a portion of its recycling production and has elected not to apply hedge accounting treatment to these transactions. Consequently, these transactions are marked to market in each accounting period.
Under financially settled forwards, at each settlement date, the Company receives the difference between the forward price and the market price if the market price is below the forward price, and the Company pays the difference between the forward price and the market price if the market price is above the forward price. The Company’s financially settled forwards are settled at maturity. As of December 31, 2008, the Company was not party to any financially settled forward agreements.
The Company also enters into financially settled forwards related to its recycling segment which are not accounted for as cash flow hedges. The realized and unrealized gains or losses are recognized in net income in each period. All commodity instruments outstanding at December 31, 2008, are expected to be settled within the next six months. See Note 6 “Derivative Instruments” to the Company’s 2008 audited financial statements for further information.
The following is a summary of the Company’s commodity derivatives as of December 31, 2008:
PGM Recycling:
Fixed Forwards
INTEREST RATE RISK
At December 31, 2008, all of the Company’s outstanding long-term debt was subject to fixed rates of interest. Interest income on payments to the Company’s recycling suppliers is generally linked to short-term inter-bank rates.
The Company retired its bank credit facility in March 2008. The convertible debentures that replaced it do not contain financial covenants, other than change in control protection and investor make-whole provisions. Consequently, the Company is not subject to conventional financial covenants at this time.
ITEM 8
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Stillwater Mining Company:
We have audited the accompanying balance sheets of Stillwater Mining Company as of December 31, 2008 and 2007, and the related statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stillwater Mining Company as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), Stillwater Mining Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2009 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Billings, Montana
March 16, 2009
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Stillwater Mining Company:
We have audited Stillwater Mining Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Stillwater Mining Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the Company’s reconciliation and related review controls over a component of cost of goods sold has been identified and included in management’s assessment. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Stillwater Mining Company as of December 31, 2008 and 2007, and the related statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2008 financial statements, and this report does not affect our report dated March 16, 2009, which expressed an unqualified opinion on those financial statements.
In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Stillwater Mining Company has not maintained effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ KPMG LLP
Billings, Montana
March 16, 2009
STILLWATER MINING COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
See accompanying notes to financial statements.
STILLWATER MINING COMPANY
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(Continued)
See accompanying notes to financial statements.
STILLWATER MINING COMPANY
BALANCE SHEETS
(in thousands, except share and per share amounts)
See accompanying notes to financial statements.
STILLWATER MINING COMPANY
STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes to financial statements.
STILLWATER MINING COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
See accompanying notes to financial statements.
STILLWATER MINING COMPANY
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1
NATURE OF OPERATIONS
Stillwater Mining Company, a Delaware corporation, is engaged in the development, extraction, processing, refining and marketing of palladium, platinum and associated metals (platinum group metals or PGMs) from a geological formation in south central Montana known as the J-M Reef and from the recycling of spent catalytic converters. The J-M Reef is a twenty-eight (28) mile long geologic formation containing the largest known deposit of platinum group metals (PGMs) in the United States.
The Company’s mining operations consist of the Stillwater Mine located on the J-M Reef in Nye, Montana, the East Boulder Mine, located at the western end of the J-M Reef in Sweet Grass County, Montana and a smelter and base metal refinery located in Columbus, Montana. The Company processes its mining concentrates and recycles spent catalyst material received from third parties to recover PGMs at the smelter and base metal refinery.
The Company’s operations can be significantly affected by risks and uncertainties associated with the mining and recycling industry as well as those specifically related to its operations. Of these risks, management believes the three most significant risks that could have an immediate material impact on current operations are (i) continuing declines in PGM prices below current planning assumptions, (ii) the potential loss of two customers with which the Company has long-term sales contracts that contain floor prices, and (iii) reduction in the recycling market.
Risk of continuing depressed PGM prices
Because the Company’s most significant source of revenue is the sale of PGMs, changes in the market price of these metals significantly affects 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, currency exchange rates, and production levels and costs in other PGM-producing countries, principally Russia and South Africa. Additionally, a prolonged economic contraction in the United States or worldwide could put further downward pressure on market prices of PGMs, particularly if demand for PGMs continued to decline in connection with reduced automobile demand and more restricted availability of investment credit.
Risk associated with loss of long-term sales contracts
Most of the production from the Company’s mines is sold under long-term sales agreements to Ford Motor Company and General Motors Corporation (see Note 5). Unless these contracts are renewed under similar terms, once these contracts expire the Company will be fully exposed to the volatility of PGM market prices. Additionally, since 2005, the major U.S. bond rating agencies have steadily downgraded the corporate ratings of Ford Motor Company and General Motors Corporation, reflecting the substantial deterioration in their credit status. Under applicable law, if one or both of these companies should become insolvent or file for protection under the bankruptcy statutes, their respective obligations under the PGM supply agreements with the Company could be voided. Federal financial assistance to automotive manufacturers cannot be assured and pressures for the restructuring or combination among manufacturers may increase, with potentially negative impacts on the Company. The deterioration of the credit of these two customers, particularly in light of recent low PGM market prices, has highlighted the Company’s dependence on the pricing provisions in the automotive contracts. At recent price levels, the loss of the pricing floors in these sales agreements could have a material adverse effect on the Company. The Company is undertaking steps to restructure its operations in order to mitigate this exposure, but cost levels have not yet been reduced sufficiently to compensate for loss of these contracts with PGM prices at their recent levels.
Risk associated with recycling segment
The Company relies upon the recycling segment to provide supplemental earnings and cash flow to help support the economics of its mining business when PGM prices are low. The recycling segment in turn depends upon the copper and nickel produced in mine concentrates to extract the PGMs in recycled material within the Company’s processing facilities. The economics of the recycling segment to a large extent have been regarded as incremental within the processing operations, with the result that recycling volumes have attracted only an incremental share of their operating costs.
Volumes of recycling materials available in the marketplace have diminished substantially in response to lower PGM prices. These lower recycling volumes result in less earnings and cash flow from the recycling segment, and therefore less economic support for the mining operations. Should it become necessary to reduce or suspend operations at the mines for economic reasons, whether because of limited recycling support or otherwise, the proportion of operating costs allocated to the recycling segment could increase, making the recycling segment less competitive. Further, the ability to operate the smelter and refinery without significant volumes of mine concentrates would likely require modification to the processing facilities. There is no assurance that the recycling facilities can operate profitably in the absence of significant concentrates from the mines, or that capital would be available to complete necessary modifications to the processing facilities.
Other risks and uncertainties that the Company faces include but are not limited to: mineral reserve estimation, environmental obligations, governmental regulations, and ownership of and access to mineral reserves.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all cash balances and all highly liquid investments purchased with an original maturity of three months or less.
RESTRICTED CASH
Restricted cash consists of cash equivalents that have been posted as collateral on outstanding letters of credit. The restrictions on the balances lapse upon expiration of the letters of credit which currently have terms of one year or less. The Company anticipates renewing these letters of credit upon expiration.
INVESTMENTS
The Company accounts for investments in accordance with Statement of Financial Accounting Standard (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Investment securities at December 31, 2008, accounted for under SFAS No. 115, consist of a mutual fund and federal agency notes and commercial paper with stated maturities in excess of three months but less than one year. All securities are deemed by management to be available-for-sale and are reported at fair value. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of other comprehensive income (loss) until realized. A decline in the market value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction of the carrying amount of the security to fair value. The impairment is charged to earnings and a new cost basis for the security is established.
The Company’s long-term investments are accounted for in accordance with Accounting Principles Board (APB) Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. The investments were originally recorded at cost due to less than 20% equity interest and no significant Company control over the investees. A decline in the market value of these long-term investments that is deemed to be other-than-temporary will result in a reduction of the carrying amount of the investment to fair value. The impairment is charged to earnings and a new cost basis for the investment is established.
INVENTORIES
Metals inventories are carried at the lower of current realizable value or average cost taking into consideration the Company’s long-term sales contracts and average unit costs. Production costs include the cost of direct labor and materials, depreciation and amortization, and overhead costs relating to mining and processing activities. Materials and supplies inventories are valued at the lower of average cost or fair market value.
RECEIVABLES
Trade receivables and other receivable balances recorded in other current assets are reported at outstanding principal amounts, net of an allowance for doubtful accounts. Management evaluates the collectability of receivable account balances to determine the allowance, if any. Management considers the other party’s credit risk and financial condition,
as well as current and projected economic and market conditions, in determining the amount of the allowance. Receivable balances are written off when Management determines that the balance is uncollectable. With the sharp downturn in metal prices, some of the Company’s smaller customers have not been able to make timely payments. Accordingly, the Company has written off $3.4 million of the receivable balance at December 31, 2008, due to the uncertainty of ultimate repayment. The Company determined that no allowance against its receivables was necessary as of December 31, 2007.
PROPERTY, PLANT AND EQUIPMENT
Plant facilities and equipment are recorded at cost and depreciated using the straight-line method over estimated useful lives ranging from three to seven years or, for capital leases, the term of the related leases, if shorter. Maintenance and repairs are charged to cost of revenues as incurred.
Capitalized mine development costs are expenditures incurred to increase existing production, develop new ore bodies or develop mineral property substantially in advance of production. Capitalized mine development costs include a vertical shaft, multiple surface adits and underground infrastructure development including footwall laterals, ramps, rail and transportation, electrical and ventilation systems, shop facilities, material handling areas, ore handling facilities, dewatering and pumping facilities. These expenditures are capitalized and amortized over the life of the mine or over a shorter mining period, depending on the period benefited by those expenditures, using the units-of-production method. The Company utilizes total proven and probable ore reserves, measured in tons, as the basis for determining the life of mine and uses the ore reserves in the immediate and relevant vicinity as the basis for determining the shorter mining period.
The Company calculates amortization of capitalized mine development costs in any vicinity by applying an amortization rate to the relevant current production. The amortization rates are each based upon a ratio of un-amortized capitalized mine development costs to the related ore reserves. Capital development expenditures are added to the un-amortized capitalized mine development costs and amortization rates updated as the related assets are placed into service. In the calculation of the amortization rate, changes in ore reserves are accounted for as a prospective change in estimate. Ore reserves and the further benefit of capitalized mine development costs are determined based on management assumptions. Any significant changes in these assumptions, such as a change in the mine plan or a change in estimated proven and probable ore reserves, could have a material effect on the expected period of benefit resulting in a potentially significant change in the amortization rate and/or the valuations of related assets. The Company’s proven ore reserves are generally expected to be extracted utilizing its existing mine development infrastructure. Additional capital expenditures will be required to access the Company’s estimated probable ore reserves. These anticipated capital expenditures are not included in the current calculation of depreciation and amortization.
Expenditures incurred to sustain existing production and directly access specific ore reserve blocks or stopes provide benefit to ore reserve production over limited periods of time (secondary development) and are charged to operations as incurred. These costs include ramp and stope access excavations from the primary haulage levels (footwall laterals), stope material rehandling/laydown excavations, stope ore and waste pass excavations and chute installations, stope ventilation raise excavations and stope utility and pipe raise excavations.
Interest is capitalized on expenditures related to major construction or development projects and is amortized using the same method as the related asset. Interest capitalization is discontinued when the asset is placed into operation or when development and construction cease.
LEASES
The Company follows SFAS No. 13, Accounting for Leases. The Company evaluates the criteria as outlined in SFAS No. 13 when classifying a lease as either capital or operating. All capital leases are depreciated either over the useful life of the asset or over the lease term.
ASSET IMPAIRMENT
The Company follows SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company reviews and evaluates its long-lived assets for impairment when events and changes in circumstances indicate that the related carrying amounts of its assets may not be recoverable. Impairment is considered to exist if the total estimated future cash flows on an undiscounted basis are less than the carrying amount of the asset. Future cash flows include estimates of recoverable ounces, PGM prices (historical prices or third-party projections of future prices, long-
term sales contracts prices, price trends and related factors), production levels and capital and reclamation expenditures, all based on life-of-mine plans and projections. If the assets are impaired, a calculation of fair market value is performed, and if the fair market value is lower than the carrying value of the assets, the assets are reduced to their fair market value.
Assumptions underlying future cash flows are subject to risks and uncertainties. Any differences between significant assumptions and market conditions such as PGM prices, lower than expected recoverable ounces, and/or the Company’s operating performance could have a material effect on the Company’s determination of ore reserves, or its ability to recover the carrying amounts of its long-lived assets resulting in potential additional impairment charges.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s non-derivative financial instruments consist primarily of cash equivalents, trade receivables, investments, revenue bond debt, and capital lease obligations. The carrying amounts of cash equivalents and trade receivables approximate fair value due to their short maturities. The carrying amounts of investments approximate fair value based on market quotes.
At December 31, 2008, the Company was not party to any capital lease obligations. The fair value of the Company’s $181.5 million 1.875% convertible debentures was $81.7 million at December 31, 2008. The fair value of the Company’s $30 million 8% Series 2000 exempt facility revenue bonds was $13.8 million and $31.9 million at December 31, 2008 and 2007, respectively. The $0.1 million aggregate fair value of the Company’s special industrial education impact revenue bonds was not materially different from their carrying values at December 31, 2008 and 2007. The Company used implicit interest rates on unsecured obligations of issuers that are not investment grade to calculate the fair value of the revenue bonds at December 31, 2008. The Company used its respective current borrowing rate to calculate the fair value of the revenue bonds at December 31, 2008 and 2007.
The Company adopted SFAS No. 157, Fair Value Measurements, effective January 1, 2008, for all financial assets and liabilities and any other assets and liabilities that are recognized or disclosed at fair value on a recurring basis. The adoption of SFAS No. 157 had no material effect on the Company’s financial condition, results of operations or cash flows.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy within SFAS No. 157 distinguishes among three levels of inputs that may be utilized when measuring fair value: Level 1 inputs (using quoted prices in active markets for identical assets or liabilities), Level 2 inputs (using external inputs other than level 1 prices such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability) and Level 3 inputs (unobservable inputs supported by little or no market activity and based on internal assumptions used to measure assets and liabilities). The classification of each financial asset or liability within the above hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
REVENUE RECOGNITION
Revenue is comprised of mine production revenue, PGM recycling revenue, other sales revenue and sales of palladium received in the Norilsk Nickel transaction (in 2006). Mine production revenue consists of the sales of palladium and platinum extracted by the Company’s mining operations, including any realized hedging gains or losses, and is reduced by sales discounts associated with long-term automotive contracts. PGM recycling revenue consists of the sales of recycled palladium, platinum and rhodium derived from spent catalytic materials, including any unrealized and realized hedging gains or losses. Other sales revenue consists of sales of PGMs that were acquired on the open market for resale.
Pursuant to the guidance in Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred either physically or through an irrevocable transfer of metals to customers’ accounts, the price is fixed or determinable, no related obligations remain and collectability is probable. Under the terms of sales contracts and purchase orders received from customers, the Company recognizes revenue when the product is in a refined and saleable form and title passes, which is typically when the product is transferred from the account of the Company to the account of the customer. Under certain of its sales agreements, the Company instructs a third party refiner to transfer metal from the Company’s account to the customer’s
account; at this point, the Company’s account at the third party refinery is reduced and the purchaser’s account is increased by the number of ounces of metal sold. These transfers are irrevocable and the Company has no further responsibility for the delivery of the metals. Under other sales agreements, physical conveyance occurs by the Company arranging for shipment of metal from the third party refinery to the purchaser. In these cases, revenue is recognized at the point when title passes contractually to the purchaser. Sales discounts are recognized when the related revenue is recorded. The Company classifies any sales discounts as a reduction in revenue.
HEDGING PROGRAM
From time to time, the Company enters into derivative financial instruments, including fixed forwards, cashless put and call option collars and financially settled forwards to manage the effect of changes in the prices of palladium and platinum on the Company’s revenue and to manage interest rate risk. The Company accounts for its derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS No. 138, Accounting for Derivative Instruments and Certain Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which 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 highly 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 (loss) in the period of change, and subsequently recognized in the determination of net income (loss) in the period the offsetting hedged transaction occurs. If an instrument is settled early, any gains or losses are immediately recognized as adjustments to the revenue recorded for the related hedged production.
Unrealized derivative gains and losses recorded in current and non-current assets and liabilities and amounts recorded in other comprehensive income (loss) and in current period earnings are non-cash items and therefore are taken into account in the preparation of the statement of cash flows based on their respective balance sheet classifications.
RECLAMATION AND ENVIRONMENTAL COSTS
The Company accounts for its obligations associated with the retirement of tangible long-term assets and the associated asset retirement costs in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations. 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.
Under SFAS No. 143, accounting for reclamation obligations requires management to make estimates for each mining operation of the future costs the Company will incur to complete final reclamation work required to comply with existing laws and regulations. Actual costs incurred in future periods could differ from amounts estimated. Additionally, future changes to environmental laws and regulations could increase the extent of reclamation and remediation work that the Company is required to perform. Any such increases in future costs could materially impact the amounts charged in future periods to operations for reclamation and remediation.
INCOME TAXES
Income taxes are determined using the asset and liability approach in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. This method gives consideration to the future tax consequences of temporary differences between the financial reporting basis and the tax basis of assets and liabilities based on currently enacted tax rates. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Each quarter, management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. A valuation allowance has been provided at December 31, 2008 and 2007, for the portion of the Company’s net deferred tax assets for which it is more likely than not that they will not be realized. Based on the Company’s current financial projections, and in view of the level of tax depreciation and depletion deductions available, it appears unlikely that the Company will owe any income taxes for the foreseeable future. However, if average realized PGM prices were to increase substantially in the future, the Company could owe income taxes prospectively on the resulting higher taxable income.
The Company adopted FASB Interpretation No 48, Accounting for Uncertainty in Income Taxes in 2007 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with SFAS No. 109.
STOCK-BASED COMPENSATION
The Company accounts for its share-based payments in accordance with SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123 (R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements over the respective vesting periods and determined using a fair-value-based measurement method. The fair values for stock options and other stock-based compensation awards issued to employees are estimated at the date of grant using a Black-Scholes option pricing model.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if the Company’s dilutive outstanding stock options or nonvested shares were exercised and the Company’s convertible debt was converted. No adjustments were made to reported net income (loss) in the computation of basic or diluted earnings (loss) per share as of December 31, 2008, 2007 or 2006. The Company currently has only one class of equity shares outstanding.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss), as well as other changes in stockholders’ equity that result from transactions and events other than those with stockholders. The Company’s only significant elements of other comprehensive income are unrealized gains and losses on derivative financial instruments related to commodity price hedging activities and available-for-sale marketable securities.
DEBT ISSUANCE COSTS
Costs associated with the issuance of debt are included in other noncurrent assets and are amortized over the term of the related debt using the effective interest method.
USE OF ESTIMATES
The preparation of the Company’s financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant areas requiring the use of management’s estimates relate to mineral reserves, reclamation and environmental obligations, valuation allowance for deferred tax assets, useful lives utilized for depreciation, amortization and accretion calculations, future cash flows from long-lived assets, fair value of long-lived assets, fair value of derivatives and accruals for restructuring costs. Actual results could differ from these estimates.
RECLASSIFICATIONS
Prior year amount previously disclosed as long-term investments has been consolidated into other noncurrent assets to conform to the current year presentation on the Company’s balance sheet. In prior years, the Company has credited the proceeds from by-product sales against costs. However, with the substantial growth in by-product sales proceeds in recent years, the Company has determined to include by-product sales within Mine production revenues in its financial statements. The Company has reclassified these by-product sales proceeds in with mine production revenues for all prior periods referenced to conform to current year presentation. Prior year restricted cash balance was reclassed from current to noncurrent to conform to current year presentation.
NOTE 3
CORRECTION OF IMMATERIAL ERROR
Subsequent to the quarter ended December 31, 2008, the Company identified an error in the recovery percentage used to calculate the number of ounces of recycled rhodium in its finished goods inventory. Due to this error, the costs of goods sold for the third and fourth quarters of 2005 and the full years of 2006 and 2007 were understated.
The recovery percentage error resulted in a $2.9 million total understatement of costs of goods sold. The cumulative impact for the years 2005 through 2007 was a $2.0 million understatement of costs of goods sold and was immaterial overall to previously reported quarterly and annual periods.
The Company assessed the materiality of this error in accordance with Staff Accounting Bulletin (SAB) No. 108 and determined that the error was immaterial to previously reported amounts contained in its periodic reports and the Company intends to correct this error through subsequent periodic filings. The effect of recording this immaterial correction in the statements of operations for the two fiscal years impacted, balance sheet as of December 31, 2007, and for the fiscal 2008 quarterly periods to be reported in subsequent periodic filings are as follows:
NOTE 4
ASSET IMPAIRMENT
In accordance with the methodology prescribed by SFAS No. 144, the Company has concluded that the economic circumstances in which it operates have changed significantly during the latter part of 2008. This requires the Company to assess whether total estimated undiscounted future cash flows at the East Boulder and the Stillwater mines would be sufficient to recoup the carrying amount of each asset. Based on current mine plans and an assessment of long-term pricing, the Company determined that undiscounted future cash flows at the Stillwater Mine are sufficient to return the
carrying value, but the undiscounted future cash flows projected at East Boulder Mine are not sufficient to cover the carrying value there. The Company engaged Behre Dolbear & Company, Inc. (“Behre Dolbear”), third party independent consultants, to assist in determining the fair value of the East Boulder Mine assets. Behre Dolbear performed their appraisal based on projected future cash flows under various long-term pricing scenarios. Accordingly, the Company’s reported earnings at December 31, 2008, include a $67.3 million reduction in carrying value of the East Boulder Mine assets to $161.4 million.
Assumptions underlying estimates of future cash flows are subject to risks and uncertainties. Any differences between significant assumptions and market conditions such as PGM prices, lower than expected recoverable ounces, and/or the company’s operating performance could have a material effect on the company’s determination of ore reserves, or its ability to recover the carrying amounts of its long lived assets, resulting in potential additional impairment charges.
NOTE 5
SALES
Mine Production
Palladium, platinum, rhodium, gold and silver are sold to a number of consumers and dealers with whom the Company has established trading relationships. Refined platinum group metals (PGMs) of 99.95% purity (rhodium of 99.9%) 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 normally sold at market prices to customers, brokers or outside refiners. Copper and nickel by-products, however, are produced at less than commercial grade, so prices for these metals typically reflect a quality discount. By-product sales previously reflected as a reduction to costs of metals sold, are now included in revenues from mine production. During 2008, 2007 and 2006, total by-product (copper, nickel, gold, silver and mined rhodium) sales were $36.8 million, $53.8 million and $42.6 million, respectively.
The Company has entered into long-term sales contracts with Ford Motor Company and General Motors Corporation, covering production from the mines, that contain guaranteed floor and, in some cases, ceiling prices for metal delivered. Metal sales under these contracts, when not affected by the guaranteed floor or ceiling prices, are priced at a slight discount to market. Under these sales contracts, the Company currently has committed 100% of its palladium production and 70% of its platinum production from mining through 2010. After 2010, 20% of the Company’s total mine production of palladium, along with additional palladium ounces to be procured from other sources at the Company’s discretion, are committed for sale in 2011 and 2012 under these contracts. None of the Company’s platinum production after 2010 is committed for sale under these contracts.
The following table summarizes the floor and ceiling price structures for the long-term sales contracts with Ford Motor Company and General Motors Corporation related to mine production. The first two columns for each commodity represent the percent of total mine production that is subject to floor prices and the weighted average floor price per ounce. The second two columns for each commodity represent the percent of total mine production that is subject to ceiling prices and the weighted average ceiling price per ounce.
The long-term contracts contain termination provisions that allow the purchasers to terminate in the event the Company breaches certain provisions of the contract and the Company does not cure the breach within specified periods ranging from 10 to 30 days of notice. The contracts are not subject to the requirements of SFAS No. 133, SFAS No. 138 or SFAS No. 149, because the contracts qualify for the normal sales exception since they will not settle net and will result in physical delivery. 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, SFAS No. 138, or SFAS No. 149.
PGM Recycling
The Company purchases spent catalyst materials from third parties and processes these materials in its facilities in Columbus, Montana to recover palladium, platinum and rhodium to sell to various third parties. The Company’s recycling segment is currently highly dependent on the performance of one supplier. The Company also has various spot purchase and tolling agreements with other suppliers of spent catalytic materials, but the volumes from these agreements are less significant.
The Company advances cash for purchase and collection of these spent catalyst materials to its suppliers. These advances are reflected as Advances on inventory purchases on the Company’s balance sheet until the Company physically receives the material and title has transferred to the Company. Once the material is received and title has transferred, the associated advance is reclassified into Inventories. Finance charges on these advances collected in advance of being earned are recorded as Unearned income and are included in Other current liabilities on the Company’s balance sheet.
The Company holds a security interest in materials procured by suppliers but not yet received by the Company. However, until the suppliers have actually procured the promised material, a portion of the Advances on inventory purchases on the Company’s balance sheet remains unsecured. This unsecured portion is fully at risk should the suppliers fail to deliver the promised material or experience other financial difficulties. Any determination that a supplier is unable to deliver the promised material or otherwise repay these advances would likely result in a significant charge against earnings. The Company has had to roll forward certain commitments from its suppliers associated with a portion of these advances on inventory purchases, as the volumes in that market have contracted sharply. A portion of these advances to the suppliers is collateralized. However, the Company has taken a write-down of $26.0 million on its Advances on inventory purchases related to its recycling segment.
At the same time the Company purchases material for recycling, it enters into a contract for future delivery of the PGMs contained in the material at a price consistent with the purchase cost. The contract commits the Company to deliver finished metal on a specified date that normally corresponds to the expected out-turn date for the metal from the final refiner. This arrangement largely eliminates the Company’s exposure to fluctuations in market prices during processing, but it also creates an obligation to deliver metal in the future that could be subject to operational risks. If the Company were unable to complete the processing of the recycled material by the contractual delivery date, it could be required to purchase substitute finished metal in the open market to cover its commitments, and then would bear the cost (or benefit) of any change in market price relative to the price stipulated in the delivery contract.
Other activities
The Company makes other open market purchases of PGMs from time to time for resale to third parties. The Company recognized revenue of $20.0 million and $15.4 million on 48,800 and 43,800 ounces of palladium that were purchased in the open market and re-sold for the years ended December 31, 2008 and 2007, respectively.
NOTE 6
DERIVATIVE INSTRUMENTS
The Company uses various derivative financial instruments to manage the Company’s exposure to changes in interest rates and PGM market commodity prices. Some of these derivative transactions are designated as hedges. Because the Company hedges only with instruments that have a high correlation with the value of the underlying exposures, changes in the derivatives’ fair value are expected to be offset by changes in the value of the hedged transaction.
Commodity Derivatives
The Company regularly enters into fixed forward contracts and financially settled forward contracts to offset the price risk in its PGM recycling activity. From time to time, it also enters into these types of contracts on portions of its mine production. In fixed forward transactions, the Company agrees to deliver a stated quantity of metal on a specific future date at a price stipulated in advance. The Company uses fixed forward transactions primarily to price in advance the metals acquired for processing in its recycling segment. Under financially settled forward transactions, 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. These financially settled forward contracts are settled in cash at maturity and do not require physical delivery of metal at settlement. The Company normally uses financially settled forward contracts with third parties to reduce its exposure to price risk on metal it is obligated to deliver under the long-term sales agreements.
Mine Production
On June 30, 2008, the Company settled the remaining financially settled forward agreements covering future anticipated platinum sales out of mine production. Consequently, the Company, at present, is no longer party to any further hedges on its mined platinum production. Realized losses on hedges of mined platinum in 2008 totaled $12.8 million. Realized losses on hedges of mined platinum were $31.7 million and $31.1 million in 2007 and 2006, respectively.
Before these financially settled forward contracts related to mine production matured, any net change in the value of the hedging instrument was reflected in stockholders’ equity in accumulated other comprehensive income (loss) (AOCI). The net unrealized losses related to financially settled forwards for mine production were $6.5 million and $15.8 million at December 31, 2007 and 2006, respectively. When these instruments settled, any remaining gain or loss on the cash flow hedges offset gains or losses on the future metal sales and were recognized at that time in operating income.
PGM Recycling
The Company enters into fixed forward sales relating to PGM recycling of catalysts materials. The Company accounts for these fixed forward sales under the normal sales provisions of SFAS No. 133, as amended by SFAS No. 138 and SFAS No. 149. The metals from PGM recycled materials are sold forward at the time of purchase and delivered against the fixed forward contracts when the ounces are recovered. All of these fixed forward sales contracts open at December 31, 2008, will settle at various periods through June 2009. The Company has credit agreements with its major trading partners that provide for margin deposits in the event that forward prices for metals exceed the Company’s hedged prices by a predetermined margin limit. As of December 31, 2008 and 2007, no such margin deposits were outstanding or due.
From time to time, the Company also enters into financially settled forward contracts on recycled materials for which it hasn’t entered into a fixed forward sale. Such contracts are utilized when the Company wishes to establish a firm forward price for recycled metal as of a specific future date. No financially settled forward contracts were outstanding at December 31, 2008. The Company generally has not designated these contracts as cash flow hedges, so they are marked to market at the end of each accounting period with the change in the fair value of the derivatives being reflected in the income statement. The corresponding net realized loss on these derivatives was $162,000 in 2008 compared to a net realized loss of $174,000 in 2007 and was recorded as a component of recycling revenue.
The following is a summary of the Company’s commodity derivatives as of December 31, 2008:
PGM Recycling:
Fixed Forwards
Interest Rate Derivatives
On July 28, 2006, the Company entered into an interest rate swap agreement that had the effect of fixing the interest rate on $50 million of the Company’s outstanding term loan debt through December 31, 2007. The effective fixed rate of the interest rate swap was 7.628%. The company elected not to account for this as a cash flow hedge and accordingly recorded a credit to interest expense of $7,600 in 2007. This interest rate swap terminated on December 31, 2007. The Company did not enter into any interest rate swap agreements in 2008.
NOTE 7
SHARE-BASED PAYMENTS
STOCK PLANS
The Company sponsors stock option plans (the “Plans”) that enable the Company to grant stock options or nonvested shares to employees and non-employee directors. The Company has options outstanding under three separate plans: the 1994 Incentive Plan, the General Plan and the 2004 Equity Incentive Plan. During 2004, the 1994 Incentive Plan was terminated and in early 2008, the General Plan was terminated. Shares of common stock that have been authorized for issuance under the 1994 Incentive Plan and the General Plan were 1,400,000 and 1,151,000, respectively. While no additional options may be issued under these two plans, options issued prior to the termination dates remain outstanding. A total of 5,250,000 shares of common stock have been authorized for issuance under the 2004 Equity Incentive Plan, of which approximately 3,656,000 shares remain reserved and available for grant as of December 31, 2008.
Awards granted under the Plans may consist of incentive stock options (ISOs) or non-qualified stock options (NQSOs), stock appreciation rights (SARs), nonvested shares or other stock-based awards, with the exception that non-employee directors may not be granted SARs and only employees of the Company may be granted ISOs.
The Compensation Committee of the Company’s Board of Directors administers the Plans and determines the exercise price, exercise period, vesting period and all other terms of instruments issued under the Plans. Directors’ options vest over a six month period after date of grant. Officers’ and employees’ options vest ratably over a three year period after date of grant. Officers’ and directors’ options expire ten years after the date of grant. All other options expire five to ten years after the date of grant, depending upon the original grant date. The Company received approximately $3.0 million, $0.3 million and $0.8 million, in cash from the exercise of stock options in 2008, 2007 and 2006, respectively.
Nonvested Shares:
Nonvested shares granted to non-management directors and certain members of management and other employees as of December 31, 2008, 2007 and 2006, along with the related compensation expense recorded in general and administrative expense are detailed in the following table:
Deferral Plans:
The Stillwater Mining Company Non-Employee Directors’ Deferral Plan, allows non-employee directors to defer all or any portion of the compensation received as directors, in accordance with the provisions of Section 409A of the Internal Revenue Code and associated Treasury regulations. All amounts deferred under this plan are fully vested, and each participant elects the deferral period and form of the compensation (cash or Company common stock). The plan provides for a Company matching contribution equal to 20% of the participant’s deferred amount. Each participant elects the form of the Company match (cash or Company common stock). In accounting for this plan, the Company follows the provisions of APB Opinion No. 12, Omnibus Opinion - 1967 on accounting for deferred compensation plans other than post-retirement plans in conjunction with EITF 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested. Compensation expense that was deferred in common stock related to the Non-Employee Directors’ Deferral Plan was $47,700 and $57,900 in 2008 and 2007, respectively. The Company match was made in Company common stock and resulted in compensation expense of $7,950 and $9,650 in 2008 and 2007, respectively. Additional compensation expense of $10,900 and $27,300, made in Company common stock and attributable to the vesting of deferred restricted stock, was recognized in 2008 and 2007, respectively.
The Stillwater Mining Company Nonqualified Deferred Compensation Plan, allows officers of the Company to defer up to 60% of their salaries and up to 100% of cash compensation other than salary in accordance with the provisions of Section 409A of the Internal Revenue Code and associated Treasury regulations. All amounts deferred under this plan are fully vested, and each participant elects the deferral period and form of the compensation (cash or Company common stock). For each Plan year, the Company matches the amount of compensation deferred during that year up to a maximum of 6% of the participant’s total compensation for the calendar year. In accounting for this plan, the Company follows the provisions of APB Opinion No. 12, Omnibus Opinion - 1967 on accounting for deferred compensation plans
other than post-retirement plans in conjunction with EITF 97-14, Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested. Compensation expense deferred in cash was $174,200 and $121,000 in 2008 and 2007, respectively.
Stock Options:
The Company recognizes compensation expense associated with its stock option grants based on fair market value on the date of grant using a Black-Scholes option pricing model. Stock option grants to employees generally vest in annual installments over a three year period. The Company recognizes stock option expense ratably over the vesting period of the options. If options are canceled or forfeited prior to vesting, the Company stops recognizing the related expense effective with the date of forfeiture, but does not recapture expense taken previously. The compensation expense related to the fair value of stock options during 2008, 2007 and 2006 was $380,000, $392,000 and $276,000, respectively. Compensation expense related to the fair value of stock options was recorded in general and administrative expense.
The fair value for options in 2008, 2007 and 2006 was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Stock option activity for the years ended December 31, 2008, 2007 and 2006, is summarized as follows (excluding the effect of nonvested shares):
The total intrinsic value of stock options exercised during the years ended December 31, 2008, 2007 and 2006 was $1,835,000, $147,000, and $833,000, respectively. At December 31, 2008, the total intrinsic value was $20,000 and $16,000 for stock options outstanding and exercisable, respectively.
The following table summarizes information for outstanding and exercisable options as of December 31, 2008:
A summary of the status of the Company’s nonvested stock options as of December 31, 2008, and changes during the year then ended, is presented below:
Total compensation cost related to nonvested stock options not yet recognized is $231,000, $80,400, and $15,700 for 2009, 2010 and 2011, respectively.
Employee Benefit Plans:
The Company has adopted two savings plans, which qualify under section 401(k) of the U.S. Internal Revenue Code, covering essentially all non-bargaining and bargaining employees. Employees may elect to contribute up to 60% of eligible compensation, subject to the Employee Retirement Income Security Act of 1974 (ERISA) limitations. The Company is required to make matching contributions equal to 100% of the employee’s contribution up to 6% of the employee’s compensation. Matching contributions are made with common stock of the Company. During 2008, 2007 and 2006, the Company issued 815,449, 488,285 and 409,187 shares of common stock, respectively, with a market value on the respective grant dates of $6.0 million, $5.5 million and $4.9 million, respectively, to match employees’ contributions. The Company made no cash contributions to the plans in 2008, 2007 or 2006.
NOTE 8
INCOME TAXES
The components of the Company’s deferred tax liabilities (assets) are comprised of the following temporary differences and carry forwards at December 31, 2008 and 2007:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company provided a valuation allowance in 2008 and 2007 to reflect the estimated amount of deferred tax assets which may not be realized principally due to the expiration of the net operating loss carry forwards (NOL’s) as management considers it more likely than not that the NOL’s will not be realized based upon projected future taxable income.
Reconcilement of the federal income tax provision at the applicable statutory income tax rate to the effective rate is as follows:
(1)
Prior amounts have been revised due to immaterial correction of an error as described in Note 3
At December 31, 2008, the Company had approximately $357 million of regular tax net operating loss carry forwards expiring during 2009 through 2028. Usage of $189 million of these net operating losses is limited to approximately $9.5 million annually as a result of the change in control of the Company that occurred in connection with the Norilsk Nickel transaction in 2003. Usage of net operating losses incurred after the change in control is not subject to this limitation.
No cash payments for income taxes related to state tax payments were made for the years ended December 31, 2008 or 2007 and a cash payment of $10,000, was made for the year ended December 31, 2006 related to state tax payments and was included in income tax expense. The Company recorded a tax benefit of $32,000 in 2008 related to a refundable minimum tax credit.
The Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48) on January 1, 2007. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company had no unrecognized tax benefits at December 31, 2008 or 2007. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in Income tax provision in the Statements of Operations and Comprehensive Income (Loss). There was no interest or penalties for the year ended December 31, 2008. The tax years subject to examination by the taxing authorities are the years ending December 31, 2007, 2006 and 2005.
NOTE 9
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of earnings items and other gains and losses affecting stockholders’ equity that are excluded from current net income (loss). As of December 31, 2008, such items consist of unrealized gains and losses on derivative financial instruments related to commodity price hedging activities and available-for-sale marketable securities.
The Company settled its remaining commodity instruments relating to financially settled forwards on June 30, 2008. The net realized loss on these instruments was $12.8 million for the first six months of 2008 and is reflected in other comprehensive income (loss).
The following summary sets forth the changes in AOCI during 2008, 2007 and 2006:
NOTE 10
SEGMENT INFORMATION
The Company operates two reportable business segments: Mine Production and PGM Recycling. These segments are managed separately based on fundamental differences in their operations.
The Mine Production segment consists of two business components: the Stillwater Mine and the East Boulder Mine. The Mine Production segment is engaged in the development, extraction, processing and refining of PGMs. The Company sells PGMs from mine production under long-term sales contracts, through derivative financial instruments and in open PGM markets. The financial results of the Stillwater Mine and the East Boulder Mine have been aggregated, as both have similar products, processes, customers, distribution methods and economic characteristics.
The PGM Recycling segment is engaged in the recycling of spent automobile and petroleum catalysts to recover the PGMs contained in those materials. The Company allocates costs of the smelter and base metal refinery to both the Mine Production segment and to the PGM Recycling segment for internal and segment reporting purposes because the Company’s smelting and refining facilities support the PGM extraction of both business segments.
The All Other group primarily consists of assets, revenues, and expenses of various corporate and support functions, and for the year 2006, included the assets, revenues and expenses associated with the palladium received in the Norilsk Nickel transaction. The program to sell the palladium received in the Norilsk Nickel transaction was completed during the first quarter of 2006.
The Company evaluates performance and allocates resources based on income or loss before income taxes. The following financial information relates to the Company’s business segments:
NOTE 11
INVESTMENTS
The cost, gross unrealized gains, gross unrealized losses, and fair market value of available-for-sale investment securities by major security type and class of security at December 31, are as follows:
The mutual funds included in the investment table above are included in Other noncurrent assets on the balance sheet.
NOTE 12
INVENTORIES
For purposes of inventory accounting, the market value of inventory is generally deemed equal to the Company’s current cost of replacing the inventory, provided that: (1) the market value of the inventory may not exceed the estimated selling price of such inventory in the ordinary course of business less reasonably predictable costs of completion and disposal, and (2) the market value may not be less than net realizable value reduced by an allowance for a normal profit margin. In order to reflect inventory costs in excess of market values, the Company, during 2008, 2007 and 2006, reduced the aggregate inventory carrying value of certain components of its in-process and finished goods inventories by $16.6 million, $6.0 million and $2.5 million, respectively.
The costs of PGM inventories as of any date are determined based on combined production costs per ounce and include all inventoriable production costs, including direct labor, direct materials, depreciation and amortization and other overhead costs relating to mining and processing activities incurred as of such date.
Inventories reflected in the accompanying balance sheets at December 31 consisted of the following:
NOTE 13
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share reflect the potential dilution that could occur if the Company’s dilutive outstanding stock options or nonvested shares were exercised and the Company’s convertible debt was converted. No adjustments were made to reported net income (loss) in the computation of basic earnings (loss) per share or diluted earnings (loss) per share in 2008, 2007 or 2006. The Company currently has only one class of equity shares outstanding.
Outstanding options to purchase 888,879 and 1,058,982 weighted average shares were excluded from the computation of diluted earnings (loss) per share in 2008 and 2007, respectively, because the Company reported losses in both years and so the effect would have been antidilutive and inclusion of these options would have reduced the net loss per share. The effect of outstanding stock options on diluted weighted average shares outstanding was 85,341 shares in 2006.
There was no effect of outstanding nonvested shares on diluted weighted average shares outstanding in 2008 or 2007 because the Company reported net losses in both years and inclusion of any of these shares would have reduced the net loss per share amounts. The effect of outstanding nonvested shares was to increase diluted weighted average shares outstanding by 234,439 shares in 2006.
All 7.72 million shares of common stock applicable to the outstanding convertible debentures were excluded from the computation of diluted weighted average shares in 2008 because the net effect of assuming all the debentures were converted would have been antidilutive.
NOTE 14
DEBT OBLIGATIONS
Convertible Debentures
On March 12, 2008, the Company issued and sold $181.5 million aggregate principal amount of senior convertible debentures due 2028 (“debentures”). The debentures pay interest at 1.875% per annum, payable semi-annually on March 15 and September 15 of each year, commencing September 15, 2008. The debentures will mature on March 15, 2028, subject to earlier repurchase or conversion. Each $1,000 principal amount of debentures is initially convertible, at the option of the holders, into approximately 42.5351 shares of the Company’s common stock, at any time prior to the maturity date. The conversion rate is subject to certain adjustments, but will not be adjusted for accrued interest or any unpaid interest. The conversion rate initially represents a conversion price of $23.51 per share. Holders of the debentures may require the Company to repurchase all or a portion of their debentures on March 15, 2013, March 15, 2018 and March 15, 2023, or upon the occurrence of certain events including a change in control. The Company may redeem the debentures for cash beginning on or after March 22, 2013.
The debentures were sold to an “accredited investor” within the meaning of Rule 501 under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the private placement exemption afforded by Section 4(2) of the Securities Act. The initial investor offered and resold the debentures to “qualified institutional buyers” under Rule 144A of the Securities Act. An affiliate of MMC Norilsk Nickel, with the approval of the Company’s public directors, purchased $80 million of the debentures, thereby maintaining its majority ownership position in the Company.
In connection with the issuance of the debentures, the Company agreed to file a shelf registration statement with the Securities and Exchange Commission (SEC) for the resale of the debentures and the common stock issuable upon conversion of the debentures and to use reasonable best efforts to cause it to become effective, within an agreed-upon period. The Company also agreed to periodically update the shelf registration and to keep it effective until the earlier of (1) the date the debentures or the common stock issuable upon conversion of the debentures is eligible to be sold to the public pursuant to Rule 144 of the Securities Act or (2) the date on which there are no outstanding registrable securities. Except for the debentures held by Company affiliates, the six-month holding period prescribed in Rule 144 has now elapsed, and management believes the debentures are now eligible to be sold to the public in the secondary market.
Management has evaluated the terms of the debentures, which include the call feature, redemption feature, and the conversion feature, under applicable accounting literature, including SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, and concluded that none of these features should be separately accounted for as derivatives.
In connection with the issuance of the debentures, the Company incurred $5.1 million of issuance costs, which primarily consisted of investment banking fees, legal and other professional fees. These costs are classified within Other noncurrent assets and are being amortized as interest expense using the effective interest method over the term from issuance through the first date that the holders can require repurchase of the debentures, which is March 15, 2013. Amortization expense related to the issuance costs of the debentures was $0.8 million in 2008, and the interest expense on the debentures was $2.7 million in 2008. The Company made cash payments of $1.7 million for interest on the debentures in 2008.
The Company used a portion of the proceeds of the debenture offering to retire $98.3 million of term debt and terminate a $40 million revolving credit line under its previous credit facility. Interest expense for 2008 includes approximately $0.2 million of amortization expense and $2.2 million for the non-cash write-off of unamortized issuance costs on the prior facility. In conjunction with terminating the revolving credit line, the Company posted $20.7 million of restricted cash during 2008 to collateralize stand-by letters of credit previously supported by that facility.
EQUIPMENT LEASE AGREEMENTS
The Company periodically leases certain underground mining equipment under leasing agreements containing purchase options that can be exercised at the end of the original lease terms. As of December 31, 2008, the Company was not party to any capital lease agreements.
EXEMPT FACILITY REVENUE BONDS
During 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 Mine. The bonds mature on July 1, 2020, and have a stated 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. The balance outstanding for the years ended December 31, 2008 and 2007 was $29.4 million, which is net of unamortized discount of $0.6 million.
SPECIAL INDUSTRIAL EDUCATION IMPACT REVENUE BONDS
The Company issued these bonds in 1989 in three series to finance impact payments to local school districts. The bonds bear interest at varying rates between 6.5% and 7.8% and mature in increasing annual principal amounts through 2009. The aggregate balance outstanding at December 31, 2008 and 2007 was $0.1 million and $0.3 million, respectively. The bonds, which are collateralized by the Company’s real estate, are secured by guarantees from Chevron Corporation and Manville Corporation. Final principal payment is due in 2009.
CASH PAID FOR INTEREST
The Company made cash payments for interest of $5.4 million, $10.1 million and $10.3 million for the years ended December 31, 2008, 2007 and 2006, respectively.
NOTE 15
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consisted of the following:
The Company’s capital expenditures for the years ended December 31, were as follows:
NOTE 16
RESTRUCTURING COSTS
In the fourth quarter of 2008, the Company implemented a revised operating plan, which included a reduction of the Company’s previously planned capital expenditures and production levels. In accordance with the plan, the Company terminated certain contracts related to ongoing mine development which included 32 contractor miners and reduced its company-wide workforce by 218 employees. As a result of these terminations, the Company incurred a pre-tax charge of approximately $5.4 million. The restructuring charge was based on the termination provisions of the related contracts. Cash paid for restructuring costs in 2008 was $2.4 million which included termination costs for service contracts and employee terminations.
The following summary identifies components of the restructuring plan accrual at December 31, 2008:
NOTE 17
ASSET RETIREMENT OBLIGATION
The following summary sets forth the annual changes to the Company’s asset retirement obligation in 2008, 2007 and 2006:
Revisions during 2008 resulted from changes in estimated timing of actual abandonment. In 2008, the Company increased the estimated mine life of the Stillwater Mine from the year 2025 to 2030; and it increased the estimated mine life of the East Boulder Mine from the year 2040 to 2055. In 2007, the Company recorded a $1.2 million adjustment to the future reclamation obligation at the Stillwater Mine related to an increase in the estimated reclamation costs. No adjustment to the asset retirement obligation for the East Boulder Mine was made in 2007.
At December 31, 2008, the Company had posted surety bonds with the State of Montana in the amount of $25.8 million, and had obtained a letter of credit of $7.5 million to satisfy the current $33.3 million of financial guarantee requirements determined by the regulatory agencies. The Company believes these financial guarantee requirements may increase once the state finalizes an updated environmental impact statement which was completed in 2008. However the Company had not received a final environmental impact statement from the state at December 31, 2008.
NOTE 18
FAIR VALUE MEASUREMENTS
The Company adopted SFAS No. 157, Fair Value Measurements, effective January 1, 2008, for all financial assets and liabilities and any other assets and liabilities that are recognized or disclosed at fair value on a recurring basis. The adoption of SFAS No. 157 had no material effect on the Company’s financial condition, results of operations or cash flows.
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy within SFAS No. 157 distinguishes among three levels of inputs that may be utilized when measuring fair value: Level 1 inputs (using quoted prices in active markets for identical assets or liabilities), Level 2 inputs (using external inputs other than Level 1 prices such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability) and Level 3 inputs (unobservable inputs supported by little or no market activity and based on internal assumptions used to measure assets and liabilities). The classification of each financial asset or liability within the above hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Financial assets and liabilities measured at fair value on a recurring basis at December 31, 2008, consisted of the following:
The fair value of mutual funds and investments, consisting of federal agency notes and commercial paper, is based on market prices which are readily available. Unrealized gains or losses on mutual funds and investments are recorded in accumulated other comprehensive income (loss).
Financial assets and liabilities measured at fair value on a nonrecurring basis at December 31, 2008, consisted of the following:
The carrying value of the Company’s long-lived assets at its East Boulder mine at December 31, 2008 was $228.7 million. An impairment charge of $67.3 million was taken on the assets related to the East Boulder Mine operations at December 31, 2008 resulting in a fair value of $161.4 million. The impairment charge was included in earnings for the period.
The Company’s long-term investments are carried on the balance sheet at cost. The Company determined that its long-term investments, representing equity holdings in two exploration companies, were other than temporarily impaired and recorded a write-down of $3.4 million in 2008.
NOTE 19
RELATED PARTIES
The Palladium Alliance International (PAI) promotes palladium in the worldwide jewelry market. Currently, the PAI receives a significant portion of its funding from the Company. In 2008, 2007 and 2006, the Company made contributions of $5.2 million, $4.8 million and $3.8 million, respectively, to PAI. These contributions are accounted for in marketing expense.
NOTE 20
COMMITMENTS AND CONTINGENCIES
The Company manages risk through insurance coverage, credit monitoring and diversification of suppliers and customers.
REFINING AGREEMENTS
The Company has contracted with two entities to refine its filter cake production. Even though there are a limited number of PGM refiners, the Company believes that it is not economically dependent upon any one refiner.
PURCHASE COMMITMENT
The Company has entered into metal sourcing agreements under which it purchases spent catalysts delivered to the Company based on market prices. Under the agreements, the Company advances cash for purchase and collection of these spent catalyst materials. These advances are reflected as Advances on inventory purchases on the balance sheet until such time as the material has been received and title has transferred to the Company. The Company has a security interest in the materials that have been procured but not yet received by the Company; however, until such time as the material has been procured, a portion of the advances are unsecured and the unsecured portion is fully at risk should the supplier fail to deliver material as promised or experience other financial difficulties. Any determination that a supplier is unable to deliver the promised material or otherwise repay these advances would result in a significant charge against earnings. Finance charges on these advances collected in advance of being earned are recorded as Unearned income and included in Other current liabilities on the balance sheet. The Company has had to roll forward certain commitments from its suppliers associated with a portion of these advances on inventory purchases, as the volumes in that market have contracted sharply. A portion of these advances to the suppliers is collateralized, and during 2008 the Company has taken a write-down of $26.0 million on its Advances on inventory purchases related to its recycling segment.
OPERATING LEASES
The Company has operating leases for various office equipment and office space. Total rental expense for cancelable and non-cancelable operating leases was $1.8 million in 2008 and $2.0 million in 2007 and 2006.
Future minimum lease payments for operating leases with terms in excess of one year are as follows:
SIGNIFICANT CUSTOMERS
Total sales to significant customers as a percentage of total revenues for the years ended December 31 were as follows:
LABOR UNION CONTRACTS
As of December 31, 2008, the Company had approximately 62% and 15% of its active labor force covered by collective bargaining agreements expiring on July 1, 2011 and July 1, 2012, respectively.
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the ordinary course of business, primarily
employee lawsuits. In the opinion of management, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity.
REGULATIONS AND COMPLIANCE
On May 20, 2006, new federal regulations went into effect that as of May 20, 2008, tightened the maximum permissible diesel particulate matter (DPM) exposure limit for underground miners from the prior level of 308 m g/m3 of elemental carbon to the new limit of 160 m g/m3 of total carbon. The Company utilizes a significant number of diesel-powered vehicles in its underground mining operations. It is not yet clear if appropriate measurement methods and emission control standards exist that will ensure compliance with this new standard in the Company’s mining environment. The Company is aggressively utilizing existing and exploring alternative technologies to reduce DPM exposures to the lowest levels currently achievable and is actively working with the Mine Safety and Health Administration (MSHA), the National Institute for Occupational Safety and Health (NIOSH) and various other companies in the mining industry to share best practices and compliance strategies. The Company’s compliance efforts in this area include using catalytic converters and DPM filters, cleaner-burning biodiesel fuel blends, replacing a portion of its underground equipment fleet with battery-powered units, and experimenting with other emerging emission control technologies. While the initial results in each case are promising and the Company believes that MSHA will continue to support these efforts, in the absence of full compliance there can be no assurance that the Company will not be held in violation of the standard and be subject to an MSHA enforcement action.
MSHA has the statutory authority to issue citations for non-compliance and, in situations where it determines the health and safety of miners is at significant risk, to order cessation of mining operations until the risk is alleviated. The Company was granted a special one-year extension of time to comply with the new DPM standards in certain areas of its Stillwater Mine, subject to specified conditions; this extension was scheduled to expire on November 28, 2008. The Company has applied for an additional extension and while the additional extension has not been granted to date, the Company has no indications that an additional extension will be denied for its Stillwater Mine. The East Boulder Mine has obtained a one-year extension applicable to certain areas of the mine for a period of one year commencing on May 21, 2008, subject to specified conditions being met during the period of the special extension. The Company continues to comply with the conditions outlined in the special extension granted May 21, 2008. No assurance can be given that any lack of compliance will not impact the Company.
NOTE 21
QUARTERLY DATA (UNAUDITED)
Quarterly earnings data for the years ended December 31, 2008 and 2007 were as follows:
ITEM 9
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
ITEM 9A
ITEM 9A
CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures.
The registrant’s management, with the participation of the registrant’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the registrant’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2008. Based on such evaluation, the registrant’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the registrant’s disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act due to the material weakness in internal control over financial reporting described below in Item 9A(b).
(b)
Management’s Report on Internal Control over Financial Reporting.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s system of internal control over financial reporting is based upon the framework defined in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A material weakness is a control deficiency (as defined in Public Company Accounting Oversight Board Auditing Standard No. 5), or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weakness has been identified in conjunction with management’s assessment of the Company’s internal control over financial reporting as of December 31, 2008:
Inadequate control over recycling cost of goods sold calculation. During the 2008 year-end accounting close, the Company determined that the reconciliation control over the recycling cost of goods sold calculation, including the review of the quantities of each type of metal and the associated allocation of costs to those metals in each stage of recycling inventory, was not designed effectively. Specifically this reconciliation and review control did not include verifying calculated volumes at each inventory stage against actual volumes on hand at the end of each period. As a result, it was possible for discrepancies to accumulate in these inventories, potentially resulting in material differences between the calculated metal volumes and actual volumes at each stage. This deficiency resulted in immaterial errors in the Company’s 2008 financial statements that were corrected prior to issuance, as well as immaterial errors in amounts relating to prior periods which were also corrected.
The Company, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2008. Because of the material weakness described above, management concluded that, as of December 31, 2008, the Company’s internal control over financial reporting was not effective.
The Company’s independent registered public accounting firm has issued an audit opinion on the effectiveness of the Company’s internal control over financial reporting. This report appears in Item 8 of this Form 10-K.
(c)
Changes in Internal Control over Financial Reporting.
In its Third Quarter 2008 Quarterly Report on Form 10-Q, the Company reported that the ineffective design of controls over the valuation of the Company’s recycled metal inventory and the related determination of cost of metal sold when aggregated resulted in a material weakness in the Company’s internal control over financial reporting. The Company’s efforts to remedy this material weakness during the fourth quarter 2008 included the following changes to its internal control over financial reporting:
ü
The Company modified its inventory valuation process to include a control requiring regular determination of lower-of-cost-or-market valuation for each stage of its recycling inventory;
ü
The Company revised its process for estimating the final settlement liability and the corresponding inventory asset for transactions awaiting final assay results.
The changes to the Company’s internal control over financial reporting described above were implemented prior to filing the Quarterly Report on Form 10-Q for the third quarter 2008 and consequently did not require any revision of reported financial results.
The following remedial actions have been initiated during the first quarter of 2009 as a result of the material weakness in internal control over financial reporting described in Item 9A(b) above:
ü
Expansion of the monthly recycling production reconciliation report to include recycled rhodium
ü
Monthly review of inventory volumes by an analyst in the recycling group
ü
Monthly reconciliation of production reports with accounting sales information
ITEM 9B
ITEM 9B
OTHER INFORMATION
Not Applicable
PART III
ITEM 10
ITEM 10
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
With regard to directors and corporate governance, reference is made to the information set forth under the caption “Nominees for Election” in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
Set forth below is certain information concerning the individuals who were executive officers of the Company as of December 31, 2008.
The following are brief biographies of the Company’s executive officers and new directors:
EXECUTIVE OFFICERS
Francis R. McAllister (age 66) was appointed Chairman of the Board and Chief Executive Officer of the Company effective February 12, 2001. Mr. McAllister was appointed a Director of the Company on January 9, 2001. Prior to his appointment to the Board, Mr. McAllister served with ASARCO Incorporated from 1966 to 1999, most recently as Chairman and Chief Executive Officer in 1999, as Chief Operating Officer from 1998 to 1999, as Executive Vice President - Copper Operations from 1993 to 1998, as Chief Financial Officer from 1982 to 1993 and in various professional and management positions from 1966 to 1982. He currently serves on the Board of Directors of Cleveland Cliffs, Incorporated, an iron ore mining Company. Mr. McAllister received his MBA from New York University, his Bachelor of Science - Finance from the University of Utah, and attended the Advanced Management Program at Harvard Business School.
Greg R. Struble (age 51) joined Stillwater Mining Company as the Company’s Executive Vice President and Chief Operating Officer effective February 4, 2008. Mr. Struble had served previously as Project Manager for Barrick Gold Corporation’s Cortez Hills Project and Joint Venture. Prior to joining Barrick, he was General Manager of Meridian Gold’s El Peñón Mine in Chile from 2003 to 2007, where he also oversaw the final closure of the San Cristobel Mine. From 1997 to 2003, he was General Manager and Underground General Manager of AngloGold’s Jerritt Canyon Mine in Nevada. And from 1983 to 1993, Mr. Struble served in positions of increasing responsibility with Homestake Mining Company based in South Dakota. Mr. Struble is a graduate of Michigan Technological University with a Bachelor of Science degree in Mining Engineering.
John R. Stark (age 56) was appointed Vice President, Human Resources on September 21, 1999, and was subsequently appointed Secretary and Corporate Counsel on May 29, 2001 and July 17, 2001, respectively. In 2003, Mr. Stark assumed the duties and responsibilities of the Chief Commercial Officer (including oversight of the recycling segment). Mr. Stark has a varied background in corporate administration and human resources. He was previously with Molycorp, Inc. in 1996 as Manager of Sales and Administration; Western Mobile, Inc., an international construction material supplier, from 1992 to 1996; and with AMAX Inc. for 13 years until 1992. Mr. Stark received his Juris Doctor degree from the University of Denver School of Law and holds a Bachelor of Arts degree in economics from the University of Montana.
Gregory A. Wing (age 59) became the Company’s Vice President and Chief Financial Officer effective March 22, 2004. Previously, Mr. Wing served as the Vice President and Chief Financial Officer of Black Beauty Coal Company from 1995 through 2003. Prior to joining Black Beauty, Mr. Wing was with The Pittsburg and Midway Coal Mining Company, a subsidiary of Chevron Corporation, as Manager of Financial Planning and Analysis. From 1986 to 1989, he was employed by Chevron Corporation as Senior Analyst in Corporation Planning, and from 1980 to 1986, he was with Arabian American Oil Company in Dhahran, Saudi Arabia. Mr. Wing received a Bachelor of Arts in Physics and an M.B.A in Accounting and Finance, both from the University of California at Berkeley
Terrell I. Ackerman (age 55) is currently Vice President, General Manager - East Boulder Mine Operations. Mr. Ackerman joined the Company in March 2000 as Director of Corporate Planning after 2 years as an independent consultant. During 1998 and 1999, Mr. Ackerman conducted feasibility studies, operational and mine planning reviews for various underground operations. Prior to this time, Mr. Ackerman was VP and General Manager of BHP Copper’s San Manuel Operation in Arizona. Mr. Ackerman held increasing roles of accountability for Magma Copper Company starting as an underground engineer in training in 1976. Mr. Ackerman received a Bachelor of Science degree in Mine Engineering from the University of Idaho College of Mines.
For information concerning the Company’s executive officers, reference is made to the information set forth under the caption “Section 16(a) Beneficial Ownership Compliance” in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
Audit Committee Financial Expert
Federal regulations and New York Stock Exchange listing requirements require the board to determine if a member of its audit committee is an “audit committee financial expert.” According to these requirements, an audit committee member can be designated an audit committee financial expert only when the audit committee member satisfies five specified qualification requirements, such as experience (or “experience actively supervising” others engaged in) preparing, auditing, analyzing, or evaluating financial statements presenting a level of accounting complexity comparable to what is encountered in connection with the Company’s financial statements. The regulations further require such qualifications to have been acquired through specified means of experience or education. While the board has confidence in the ability and the effectiveness of its audit committee, the board has determined that no current audit committee member qualifies as an audit committee financial expert. However, the board believes that the current members of the audit committee are qualified and collectively have sufficient extensive financial training and experience to carry out the duties and responsibilities of the audit committee.
New Directors of the Company
Michael E. McGuire, Jr., a nominee of Norimet Limited was elected to the Company’s board of directors on December 10, 2008 to replace Mr. Jack Thompson who resigned from the board in July 2006. Mr. McGuire is the Founder & Managing Partner of Triple Trunk Capital LLC; which provides liquidity to second-tier corporate clients and second-tier banks in the Russian market through structured trade finance, structured finance and asset-backed lending strategies. He holds the same positions at Triple Trunk Investment Management LLC; which until December 31, 2008 managed the investment of Smart Hydrogen in Plug Power, Inc., a company active in the fuel cell industry. Mr. McGuire was on the Board of Directors of Plug Power, until January 19, 2009.
From 1991 to 2005 he was the Founder & Managing Director of ARIA Worldwide, Inc., which focused on commodity trading and structured trade finance in Russia and Slavic republics of the Commonwealth of Independent States (CIS). He started his career in 1988 at Manufacturers Hanover Trust Co., (k/n/a JPMorgan Chase). He is the chairman of the ITP Foundation, a non-profit organization dedicated to increasing the awareness and research into, a rare
bleeding disorder (Immune Thrombocytopenic Purpura). Mr. McGuire received a B.S. in Entrepreneurial Studies and Investments in 1988 from Babson College in Wellesley, MA.
Todd D. Schafer resigned his position as a Director of the Company on January 27, 2009. Mr. Schafer was a nominee of Norimet Limited, the Company’s majority stockholder and a subsidiary of MMC Norilsk Nickel.
Michael Schiavone, a nominee of Norimet Limited has been elected a Director of the Company to replace Mr. Schafer. Mr. Schiavone is owner of East Coast Realty, which provides real estate and property management services in southern Florida. Prior to organizing East Coast Realty, from 1972 to 1999 he served as Chief Executive Officer and Chief Financial Officer of Michael Schiavone & Sons, Inc., which focuses on recycling metals domestically and internationally, including activities in China, Japan, Korea, Turkey, Venezuela, Malaysia and Spain. Mr. Schiavone began his career at Schiavone-Chase Corporation in 1968. He holds a Bachelor of Arts degree from Boston University in Boston, MA.
Mr. McGuire and Mr. Schiavone are nominees of Norimet Limited, the Company’s majority stockholder and a subsidiary of MMC Norilsk Nickel. Under the Company’s Stockholders Agreement, upon the resignation or removal of a Director appointed by Norimet, Norimet is entitled to nominate an independent replacement candidate to fill the vacancy, subject to approval by the Company’s governance and nominating committee and election by a majority of the independent Directors of the Board. After review with counsel, the governance and nominating committee determined that Mr. McGuire and Mr. Schiavone qualify as independent directors, based on the criteria established by the New York Stock Exchange and by the Sarbanes-Oxley Act of 2002.
Code of Ethics
The Company’s code of ethics requires honest and ethical conduct; avoidance of conflicts of interest; compliance with applicable governmental laws, rules and regulations; full, fair, accurate, timely, and understandable disclosure in reports and documents filed with the SEC and in other public communications made; and accountability for adherence to the code. The code of ethics can be accessed via the Company’s internet website at http://www.stillwatermining.com. Printed copies will be provided upon request.
Corporate Governance
The Company’s corporate governance principles, corporate governance and nominating committee charter, compensation committee charter and audit committee charter can be accessed via the Company’s internet website at http://www.stillwatermining.com
NYSE CEO Certification
Pursuant to Section 303A.12(a) of the NYSE Listed Company Manual, the Company’s chief executive officer submitted a certification, dated May 12, 2008, that to his knowledge, as of such date, the Company was not in violation of any NYSE listing standards.
ITEM 11
ITEM 11
EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption “Executive Compensation” in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
ITEM 12
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
Reference is made to the information set forth under the caption “Security Ownership of Principal Stockholders and Management” in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
ITEM 13
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Reference is made to the information set forth under the caption “Certain Relationships and Related Transactions and Director Independence” in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
ITEM 14
ITEM 14
PRINCIPAL ACCOUNTING FEES AND SERVICES
Reference is made to the information set forth under the caption “Principal Accounting Fees and Services” in the Company’s Proxy Statement for the 2009 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A, which information is incorporated herein by reference.
PART IV
ITEM 15
ITEM 15
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Form 10-K
1. Financial Statements and Supplementary Data
2. Financial Statement Schedules (not applicable)
(b) See Exhibit Index below
(c) Not applicable
EXHIBITS
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.