ITEM 3
LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the ordinary course of business, primarily employee lawsuits and employee injury claims. In the opinion of management, the ultimate disposition of these types of matters is not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
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, 2005 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
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
(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 depletion, 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 any applicable agreement floor and ceiling prices, hedging gains and losses realized on commodity instruments and agreement discounts, divided by ounces sold. The average market price represents the average London Bullion Market Association afternoon postings 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 PGM recycling relate to ounces produced from processing of catalyst materials.
(6)
Ounces sold and average realized price per ounce from other relate to ounces purchased in the open market for resale. Ounces in the year 2006 also included palladium ounces received in the Norilsk Nickel transaction.
(7)
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.
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 Consolidated 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 Consolidated Statement of Operations and Comprehensive Income/ (Loss). For the Stillwater Mine, East Boulder Mine, and PGM recycling and other, 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 the Stillwater Mine, East Boulder Mine and PGM recycling and other are equal in total to consolidated costs of revenues as reported in the Company’s Consolidated 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 PGM 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 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 PGM recycling, depletion, 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 Consolidated Financial Statements and Notes, included elsewhere in this report, and the information contained in Part II, Item 6 “Selected Financial Data.”
Overview of Transformational Year
Stillwater Mining Company (the “Company”) is a Delaware corporation, headquartered in Billings, Montana and listed on the New York Stock Exchange under the symbol SWC. The Company mines, processes, refines and markets palladium and platinum 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. Ore produced from each of the mines is crushed and concentrated in mills located at each mine site. The resulting concentrates are then trucked to the Company’s smelting and refining complex in Columbus, Montana which processes the mine concentrates along with recycled spent catalyst materials received from third parties. A portion of the recycling material is purchased for the Company’s own account and the balance is toll processed for a fee on behalf of others. The finished product of the Company’s base metal refinery is a PGM-rich filter cake which is shipped to third parties for final refining into finished metal.
The Company regards 2010 as a transformational year for several reasons:
1. Increased Metal Prices. Commodity markets in general received worldwide attention throughout 2010. In the case of palladium, the price increased from $407 per ounce at the beginning of 2010 to $797 per ounce at year end, a 96% increase. Among the factors contributing to this increase were the robust economy in China, the gradual return of the automotive sector after its steep decline in 2008 and 2009, growing acceptance worldwide of palladium as a jewelry metal, the introduction of palladium and platinum exchange-traded funds into the U.S. market in early 2010, and speculation that the Russian government has nearly depleted its Soviet-era stockpile of palladium, all of which accounted for strong demand and a limited worldwide supply of the metal.
2. Diversification. In November 2010, the Company acquired the PGM assets of Marathon PGM Corporation, a Canadian exploration company. The transaction was valued at US$173.4 million (which included $36.0 million of deferred income tax liability assumed) utilizing a combination of cash and newly issued shares of the Company’s common stock. The principal property acquired is a large PGM and copper deposit located near the town of Marathon, Ontario, Canada. While the Marathon deposit is currently in the permitting stage and will not be in production for several years, the acquisition represents a significant decision to diversify beyond the Company’s operations in the J-M Reef. The Marathon acquisition follows several years of evaluating possible acquisitions in an effort to reduce the Company’s exposure to a single mining property. The Company expects to devote significant cost and attention to the development of the Marathon property and will continue to review other diversification opportunities in the future.
3. Sale by Majority Owner. In December 2010, MMC Norilsk Nickel, the Company’s majority shareholder, announced that it had completed an underwritten secondary offering of all its holdings of Stillwater common stock, thereby eliminating its entire voting interest in the Company. Norilsk Nickel’s two non-independent nominees on the Board of Directors subsequently resigned and the 2003 Shareholders Agreement between the Company and Norilsk Nickel terminated. Norilsk Nickel’s investment in the Company provided valuable liquidity and signaled a commitment to the palladium market when they entered into it in June of 2003. With Norilsk Nickel’s exit at the end of 2010, the Company believes that it is now well-positioned to move forward as an independent entity. The sale by Norilsk Nickel had the effect of virtually doubling the public float of the Company’s common stock, without diluting any existing shareholders.
4. Strong Recycling Business. Revenues from the Company’s PGM recycling business more than doubled in 2010 and the Company expects to continue to grow and expand this business. The recycling business is highly complementary to the Company’s basic mining business and has shown that it can be nicely profitable. The Company in recent years has updated its recycling business model, strengthening its controls over this business and reducing its exposure to credit and pricing risk.
Principal Factors Affecting Stillwater Mining Company:
The surface expression of the J-M Reef which the Company controls is about 28 miles long and was originally part of a much larger reef structure located several miles deep in the earth. When the Beartooth Mountains were formed as part of the Rocky Mountain uplift about 65 million years ago, this portion of the reef was broken off from the larger structure as it was uplifted in the mountain. The resource the Company is now mining is about a mile in vertical extent, generally about five feet thick, and is typically found tilted up at an angle of about 55% - although this angle varies considerably depending on location.
PGM ore grades in the J-M Reef are some of the highest in the world with comparatively low mining cost per ounce, but they are palladium rich and, because of the uplifted configuration of the reef, complex to mine. The mines compete primarily with the platinum rich PGM ore reserves within South Africa’s Bushveld Complex, which are less steeply dipping but today tend to be deep underground which generally results in comparatively higher mining costs per ounce, and with the nickel mines in the Russian Federation which produce palladium rich PGMs as a major by-product and so at a very low marginal cost. Consequently, the Company’s financial performance relative to its peers depends not only on the level of PGM prices, but also on the differential between the price of platinum and the price of palladium. In periods of low PGM prices, and in particular when palladium prices also are low relative to platinum prices, the Company’s palladium-rich production may put it at a disadvantage to comparable mines in South Africa. See “Business, Risk Factors and Properties - Risk Factors - The Company May Be Competitively Disadvantaged As A Primary PGM Producer With A Preponderance Of Palladium” for further discussion.
The first of the Company’s two Montana mining operations, the Stillwater Mine, is situated near the town of Nye toward the eastern end of the J-M Reef. The mine’s primary portals are located at 5,000 feet above sea level, with access through horizontal adits on both sides of the Stillwater Valley and via a shaft and hoist from the 5,000 foot level down to about the 3,200 foot elevation. Stillwater Mine first opened in 1986 and currently has developed portions of the reef along about six horizontal miles underground on various levels ranging from about 2,000 feet at the deepest up to 7,500 feet above sea level. Typically, the lower portion of the Stillwater Mine accessed from the shaft - appropriately known as the “off-shaft” area - has contained relatively high ore grades, but the ore in this area is found in pods and tends to be inconsistent with respect to continuity, grade and thickness along the reef. By contrast, the western portion of the mine above the 5,000 level - the “upper west” area - generally has somewhat lower ore grades but the ore in this area is relatively consistent as to continuity, grade and thickness along the reef. Overall ounce production at the Stillwater Mine, then, is sensitive not only to the ore tons produced from each of these areas, but also, in view of the grade difference, to the relative proportion of total ore produced from each area. In 2010, the mine produced 351,700 ounces of palladium and platinum - off from 393,800 ounces in 2009 - and generated sales revenues of $261.3 million. At December 31, 2010, the mine had 850 employees, including 306 miners.
The Company’s other Montana mine, the East Boulder Mine, is located southeast of Big Timber and McLeod in the Gallatin National Forest, on the western portion of the J-M Reef. It is accessed by two parallel 18,000-foot horizontal rail adits that intersect the reef perpendicularly at the 6,500 foot elevation deep within the mountain. The mine first opened in 2002, and has developed along about 2.5 horizontal miles of the J-M Reef underground, with operations on different levels ranging from about 6,500 to 7,900 feet above sea level. During 2010, East Boulder Mine produced 133,400 ounces of palladium and platinum - compared to 136,100 ounces in 2009 - with sales revenue of $91.8 million. At the end of 2010, the mine had 280 employees, including 101 miners.
The Company 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 profitable ancillary business. However, the recycling business has also proven to be very sensitive to PGM prices, and volumes of recycling material available in the market have dropped very sharply when PGM prices have declined, as has the profitability of the business.
The Company believes it enjoys certain competitive advantages in the recycling business. The smelting and refining complex in Columbus Montana already processes mined PGM concentrates, which contain not only PGMs, but also significant quantities of nickel and copper as by-products. Copper and nickel bind with the PGMs from recycling in the smelter and so aid in collecting the PGMs. Consequently, the Company is able to recycle catalyst material within its system at an incremental cost lower than other processors. Moreover, the Company also believes the physical location of its processing facilities provides a logistical advantage over smelters in Europe and South Africa. And as described below, the Company is incorporating certain technological innovations that may contribute further benefit.
Since the Company’s recycling activities are substantially dependent on the availability in the smelter of the copper and nickel contained in the mine concentrates, should it become necessary at some point to reduce or suspend operations at the mines, the proportion of operating costs allocated to the recycling segment could increase, making the recycling segment less competitive. Further, in order to operate the smelter and refinery without significant volumes of mine concentrates, modifications to the processing facilities would probably be required. 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 under those circumstances to complete any necessary modifications to the processing facilities.
The Company has taken steps over the past year or so to reposition itself in the recycling business. In May 2009, the Company commissioned a new electric furnace in the Columbus smelter, increasing throughput capacity and creating backup furnace capacity in the event of planned or unforeseen outages. During the third quarter 2010, the Company commissioned a dedicated catalyst processing and sampling plant that allows for the segregation and handling of multiple batches of recycling material simultaneously. In early 2011, the Company will commission a state-of-the-art assay laboratory constructed and equipped in 2010 which utilizes an automated x-ray facility that will provide accurate results with faster turnaround times than conventional fire assay methods. New laboratory software will support this automated x-ray system, as well as, other laboratory processes.
In acquiring recycled automotive catalysts, the Company advances funds to its suppliers ahead of actually receiving material in order to facilitate procurement efforts. In past years these working capital advances often were very substantial and represented significant financial exposure for the Company. However, following the steep drop in PGM prices during the second half of 2008, which resulted in large inventory losses for many of the Company’s suppliers and led to the Company writing off $26 million of such advances as uncollectible, the Company revisited its recycling business model. In general, the Company now only advances funds to suppliers when the associated material for recycling is awaiting transit or is already in transit to the Columbus processing facilities. The new recycling sampling and assay facilities will allow the Company to accelerate final settlements with suppliers, thereby reducing the amount of working capital they require and partially offsetting the competitive disadvantage of curtailing advances. Outstanding procurement advances that were not backed up by inventory physically in the Company’s possession at December 31, 2010 and 2009, totaled $6.1 million and $3.6 million, respectively.
Following the collapse in most metal prices during the second half of 2008, platinum and palladium market prices generally trended up during most of 2009 and 2010, with both metals closing on or near their highs in London of $1,786 and $797 per ounce, respectively, at the end of 2010. In New York, the palladium price closed at $800 per ounce. PGM prices have been closely correlated with the ratio of the U.S. dollar to the euro in recent years, and they declined somewhat during May and June of 2010 in response to European economic uncertainty and associated strengthening of the U.S. dollar. Prices then recovered as the European monetary crisis subsided and the dollar weakened in anticipation of further “quantitative easing.”
An additional factor supporting PGM prices in 2010 was the introduction of PGM exchange-traded funds (ETFs) into the U.S. in January of 2010. The ETFs have proven to be a popular investment vehicle, and it was estimated that by the end of 2010, ETFs worldwide held about two million ounces of palladium and a million ounces of platinum. The Company expects that if the world economic recovery continues on track, there will likely be continued strong demand from Asia for raw materials, including PGMs, and specifically accelerated growth in automotive demand around the world. On the supply side, it appears there has been a significant reduction in palladium exports from the Russian government’s stockpiles over the past year and a half, and various commentators inside and outside of Russia have suggested recently that those stockpiles are approaching exhaustion. The diminution of those exports, coupled with very limited ability to ramp up production at existing PGM operations, suggests that markets for these metals may continue to be fairly tight for the foreseeable future.
However, this market view also encompasses certain risks. PGM trading volumes are relatively thin and their markets have limited liquidity, particularly in comparison to markets for other precious metals and the major industrial metals. Consequently, PGM prices historically have been volatile and difficult to forecast. PGM prices may be affected - favorably or unfavorably - by numerous factors, including the level of industrial demand, particularly from the automotive sector; supply factors that include changes in mine production and inventory activity; and by shifts in investor sentiment. In particular, although exports from the Russian government inventories appear to have slowed, the Russian Federation does not officially disclose its inventory holdings and there is no assurance that those inventories are actually approaching depletion. Recent PGM prices are comparatively high by historical standards, and to some extent these price levels are likely driven by investor sentiment that could shift away from precious metals if other markets become more attractive. The Company attempts to manage this market volatility in several ways, including by entering into long-term supply agreements, in some cases through metal hedging, by investing in the developed state of the mines, giving attention to cost controls and by monitoring the Company’s liquidity closely to provide capacity to bridge periods when PGM prices are low.
Automotive demand generally continued to strengthen worldwide during 2010 after its steep decline during late 2008 and 2009. Light vehicle sales in North America are estimated at 13.9 million units during 2010, up 10.3% from 12.6 million units in 2009. Chinese light vehicle sales in 2010 are estimated at 17.2 million units, up from about 12.9 million units in 2009.
Worldwide mine production of palladium and platinum, which had declined in every year since peaking in 2006, appears to have strengthened slightly during 2010. North American Palladium’s Lac des Iles Mine in Canada, which was shut down due to the economic recession and weak metal prices for about 18 months, reopened during the 2010 second quarter and is currently reported to be producing palladium and platinum at an annual rate of between 150,000 and 200,000 ounces. Norilsk Nickel, which produces about 50% of the world’s annual palladium output as a by-product of its nickel operations, had indicated that its 2010 production was likely to be equal to or slightly ahead of its 2009 production. And the South African producers collectively, while projecting slight production increases each year, consistently have encountered operational or other issues that have limited their output growth. Overall, the Company’s assessment is that PGM supplies remain constrained, with little opportunity for significant growth in worldwide output over the next few years. This is true despite the current strong market prices for PGMs that normally would incentivize production growth.
Of some concern in the PGM industry is the lack of an adequate level of reinvestment in the business in recent years. While a few smaller companies, principally in South Africa, have invested in developing new mines, the amount of new production they are generating is not sufficient over the longer term to sustain current production levels. Putting in a large new underground mine on the Bushveld in South Africa requires an investment of a billion dollars or so in a new shaft and takes four or five years to develop. Although current PGM prices seem comparatively robust in U.S. dollars, an adverse exchange rate for the South African rand has limited the benefit of higher metal prices to South African producers. As a result, they do not see price levels that can justify the kinds of new mining investments that need to be made. When coupled with other challenges in South Africa, including power shortages, rapidly escalating wage structures, political uncertainty on several fronts, and declining availability of experienced professionals, the outlook for adequate future reinvestment there seems fairly bleak.
In response to the steep deterioration in PGM prices during the second half of 2008, the Company restructured its operations, focusing its business plans for 2009 and 2010 on conserving cash and maintaining the Company’s financial viability. As a result, the Company transferred miners and laid off about 23% of its total employee workforce, terminated most contractors, adjusted the Company’s mining processes, relocated the Company’s corporate offices, and severely restricted operating and capital expenditures. In total, the Company reduced its employee workforce by 320 between September 2008 and March 2009 and by another 63 positions during the remainder of 2009. By March of 2009, the miner
workforce at the East Boulder Mine had been reduced to 111 from 170, while transfers to the Stillwater Mine had increased the number of miners there to 312 from 241. At the same time, the Company eliminated 45 contractor positions, mostly at the Stillwater Mine. The Company also sharply reduced support staffing at all locations. Several corporate programs, including market development, recruiting, exploration and investor relations, were eliminated or sharply curtailed in 2009 and remained restricted during 2010. Capital spending, which had totaled about $82.3 million in 2008, was reduced to $39.5 million in 2009 and $50.3 million in 2010 in an effort to conserve cash.
As the fundamentals of the PGM markets strengthened during 2010, the Company assembled a special planning team to review and prioritize additional PGM development opportunities within the Company’s holdings along the J-M Reef. These opportunities were grouped into nine different potential projects, each of which was evaluated based on several criteria, including grade potential, likely capital and operating costs, time and complexity to implement, and ease of access. Two of these opportunities emerged as clear favorites - the Blitz and Graham Creek projects. Both projects are expected to begin in 2011.
The Blitz project envisions developing two 20,000-foot parallel drifts in the footwall on the 5,000 and 5,200 levels eastward from the existing infrastructure in the Stillwater Mine and ultimately driving a ventilation shaft to surface from the end of these drifts. Definition drilling from these drifts could provide a wealth of information about the J-M Reef and perhaps identify attractive future areas for mining. Depending on the project outcome, Blitz production could either serve to extend the ultimate life of the Stillwater Mine or to increase the production rate from the mine. The Blitz development is projected to take about five years to complete at a total cost of about $68.0 million.
The Graham Creek project is similar, but would develop westward in the footwall from the existing infrastructure at the East Boulder Mine, utilizing an existing tunnel boring machine to extend out about 8,200 feet from the current western extremity of the mine. Again, the plan would include adding a new ventilation raise to surface at the end of the drift. This project also is projected to take about five years to complete, but its total cost is estimated at only about $8 million. The lower cost relative to the Blitz project is attributable to the shorter length of the drift, initially developing only a single drift compared to two in the Blitz development, and the lower cost of developing with an in-place tunnel boring machine. The benefits of the Graham Creek project are analogous to those at the Blitz, including potential to extend mine life or possibly to increase production rates, and the opportunity to expand the Company’s knowledge of an undeveloped section of the J-M Reef.
The recovery of the PGM markets during 2009 and 2010 also allowed the Company to proceed with an attractive Canadian acquisition, the PGM assets of Marathon PGM Corporation in late 2010. The principal asset acquired is a PGM development project near the town of Marathon, Ontario on the north shore of Lake Superior. The project will require several years to complete permitting and mine construction, but the Company believes it could be in production by 2014 or 2015. The project feasibility study indicates potential annual production from the completed mine of about 200,000 ounces of PGMs and 37 million pounds of copper. At recent metal prices, the Marathon development could contribute substantially to the Company’s future financial performance.
In light of the Environmental Protection Agency’s recent determination to regulate carbon dioxide (CO2) emissions as hazardous to health, the Company has assessed its exposure to likely restrictions on such emissions. The Company’s principal sources of CO2 emissions are limited to a comparatively few internal combustion engines in vehicles and mining equipment, and to stationary sources such as process heaters, dryers and converters that consume natural gas. The Company already utilizes buses to transport its workforce to and from the mines and utilizes a 70% blend of biodiesel fuels in its operations which reduces workplace diesel particulate matter emissions and its carbon footprint. Consequently, any taxes or added restrictions on emissions are unlikely to have any direct material effect on the Company’s operations. The Company’s physical exposure to climate change is minimal. The Company’s operations are not materially dependent upon weather patterns or seasonal availability of water. The relatively remote location of the mines presents some exposure to severe weather, particularly winter snowfall that can restrict access to the mine sites, but the Company already regularly addresses this issue during the winter months in Montana. Similarly, summer wildfires can temporarily restrict access to the mines, but their duration tends to be relatively short. Probably the Company’s most significant exposure to greenhouse gas regulation is the potential consequence of a substantial longer-term movement away from internal combustion engines on the demand for PGMs in catalytic converters. Such a major shift in automotive demand could depress PGM prices and impair the Company’s financial performance. Regulatory constraints on other industries also could affect the price or availability of electricity and other materials, driving up the Company’s operating costs.
2010 Results and Commentary
For the full year 2010, the Company reported net income of $50.4 million, or $0.51 per fully diluted share, a substantial improvement over the loss of $8.7 million, or $0.09 per diluted share, reported for 2009 and the loss of $115.8 million, or $1.24 per diluted share in 2008. The 2008 results included a property, plant and equipment impairment charge of $67.3 million and a loss on advances on inventory purchases of $26.0 million. Steadily strengthening realized prices over the course of 2010 for the Company’s primary products, palladium and platinum, more than offset the effect of lower ounce production relative to 2009. The Company’s average realized price on sales of mined palladium and platinum was $721 per ounce in 2010, substantially higher than the $549 per ounce average realized in 2009. Had these same sales taken place at market prices, the Company’s 2010 average would have been $773 per ounce and the 2009 average $487 per ounce. The Company’s combined average realized price for each metal differed from equivalent average market prices as the result of various contractual provisions, which included ceiling prices that applied to a portion of the Company’s mined platinum, floor prices that during most of 2009 benefited the Company’s mined palladium, small contractual discounts on those volumes not subject to floors or ceilings, and selling prices based on monthly averages which generally have lagged the market price by one month.
The Company’s mine production of palladium and platinum totaled 485,100 ounces in 2010, down 8.5% compared to 529,900 ounces in 2009. The lower mine production in 2010 was primarily attributable to operational and grade issues in the off-shaft area of the Stillwater Mine. Revenues from mining in 2010 totaled $353.1 million, up from $283.2 million in 2009, on stronger realized prices in 2010 for the Company’s primary products, palladium and platinum.
Stillwater Mine’s total cash costs averaged $380 per ounce for the full year 2010, higher than originally planned and above the $344 per ounce actually realized in 2009. Interestingly, looking at tons mined instead of ounces produced, the average cash cost per ore ton mined in 2010 at Stillwater Mine was $171, less than the $174 per ton reported in 2009. This result suggests that the higher cost per ounce in 2010 was mostly driven by the lower ore grade at Stillwater, rather than by rising costs or lower mining productivity. A higher than usual proportion of mining stopes in the off-shaft area of the mine are currently either early or late in their production life and are somewhat smaller than has been typical in the past - both factors that might tend to result in more volatility in realized ore grades. Also, a higher proportion of Stillwater Mine production came out of the upper west area of the mine in 2010 than was originally planned, and ore grades in the upper west tend to be lower than in the off-shaft area.
Capital expenditures at the Stillwater Mine totaled $34.1 million in 2010, exceeding plan and well ahead of the $26.7 million spent during 2009. Primary development at the Stillwater Mine advanced about 19,700 feet during 2010, about 13% ahead of plan, but to some extent this was at the expense of secondary development, which at about 14,500 feet was 18% behind plan. Diamond drilling footages in 2010 at the Stillwater Mine totaled about 291,000 feet, about 8% better than planned.
Total cash costs per ounce at the East Boulder Mine in 2010 averaged $442 per ounce, a little higher than plan and substantially higher than the $407 per ounce averaged in 2009. In East Boulder’s case, total cash costs per ore ton mined averaged $147, exactly on plan but higher than the $136 reported in 2009. The year-on-year difference is mostly attributable to the quality of areas available to mine, an issue recognized and reflected in the original 2010 mine plan at East Boulder. Capital expenditures at the mine totaled $6.5 million in 2010 compared to $4.4 million in 2009. Actual primary development at the East Boulder Mine advanced about 3,500 feet during 2010, lagging the plan, while secondary development advanced 12,500 feet in 2010, slightly above plan. In total, development footage at the East Boulder Mine was about 3.5% behind plan, reflecting delays in getting a new development crew in place and operating. Diamond drilling footage totaled about 81,500 feet at East Boulder in 2010, about 17% behind plan, in part driven by the lower primary development.
The Company’s sales agreement with Ford Motor Company, which committed 80% of the Company’s palladium production and 70% of its platinum production from mining, expired at the end of 2010. This agreement contained certain guaranteed floor and ceiling prices for metal delivered, as well as a small discount to market. The Company believes it could readily sell all of its mine production on a spot basis into terminal markets with virtually no detrimental effect on market prices. Nevertheless, the Company has recently signed a new three-year palladium supply agreement with General Motors Corporation, a one-year palladium agreement with BASF, a one-year platinum supply agreement with Tiffany and is engaged in discussions with other potential customers for the remainder of its mined palladium and platinum. The Company expects ultimately to enter into new supply agreements for most of its metal production, but likely without the pricing floors and caps as in past contracts. The absence of floor prices in any successor contracts will increase the Company’s financial exposure to low PGM prices,
while the absence of the ceiling prices in any successor contracts will increase the Company’s opportunity to realize fully on higher prices.
The Company’s smelter and base metal refinery in Columbus, Montana process the PGM ore concentrates from the two mines and also recycles spent PGM catalysts from automotive catalytic converters and from other industrial applications, ultimately recovering palladium, platinum and rhodium from these materials. During 2010, the Company fed about 399,400 combined ounces of recycled platinum, palladium and rhodium into the smelter, of which roughly half was from material purchased by the Company and the remainder was toll processed on behalf of others for a fee. Total ounces fed were up 59% compared to the 251,000 recycling ounces fed in 2009, a year when the auto market was severely depressed and so fewer vehicles were scrapped. Recycling revenues in 2010 were $168.6 million on 156,100 combined ounces sold, benefitting from both higher volumes and stronger PGM prices; 2009 recycling revenues totaled $81.8 million on sales of 102,000 combined ounces.
In 2010, the Company earned $11.5 million from recycling operations on revenues of $168.6 million, reflecting a combined average realization (including rhodium) of $1,046 per sold ounce. By comparison, in 2009 the Company earned $5.9 million from recycling operations on revenues of $81.8 million, with a combined average realization of $779 per sold ounce. Total tons of recycling material processed during 2010, including tolled material, averaged 16.2 tons per day, up from 10.0 tons per day in 2009. Strengthening PGM prices in 2010 have created a greater incentive for suppliers to collect recycling material, and during 2010, the Company was able to enter into new sourcing arrangements for catalyst material with several suppliers.
The Company’s total available liquidity, expressed as cash plus short-term investments, ended 2010 at $208.4 million, comprised of $19.4 million of cash and cash equivalents and $189.0 million of available-for-sale investments. In total this represented a small increase over the corresponding year-end 2009 balance of $201.2 million, including $166.7 million of cash and $34.5 million of liquid investments. However, 2010 also included the expenditure of $63.6 million of cash as part of the acquisition of Marathon PGM Corporation, so cash generation in 2010 was stronger than the change in the year-end balance might indicate. In fact, cash generated from operations during 2010 totaled $123.9 million, up from $59.7 million in 2009, driven by the higher PGM prices in 2010.
At the end of 2009, the Company’s workforce totaled 1,273 employees, down from 1,656 in September 2008. As the year 2010 progressed and PGM prices continued to strengthen, the Company concluded to increase its mine development efforts by reactivating the tunnel boring machine at the East Boulder Mine and by resuming mining on the higher-cost east side of the Stillwater Mine. This decision entailed hiring additional development crews to accommodate these efforts. Consequently, by the end of 2010, the Company’s total workforce had been increased to 1,354.
On December 13, 2010, Norimet Ltd., a wholly-owned subsidiary of MMC Norilsk Nickel (Norilsk) and the Company’s majority shareholder, completed a $971 million secondary offering of Stillwater shares in the public market and so disposed of its entire equity interest in the Company. Prior to completion of the offering it was determined that Norimet was unable to locate its original share certificates and the Company, the Company’s transfer agent and affiliates of Norilsk, entered into certain indemnification and ancillary arrangements to protect the Company and its transfer agent from possible claims relating to the issuance of replacement certificates. For additional information about these arrangements, see Note 19 to the Company’s consolidated financial statements for a discussion of potential exposure to losses that the Company could suffer.
The Company’s environmental performance continued its excellent track record during 2010. 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 its neighbors and 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 and its neighbors celebrated the tenth anniversary of the agreement during 2010.
Outlook
The Company’s operating guidance for 2011 currently includes targeted mine production of about 500,000 combined ounces of palladium and platinum at a total consolidated cash cost per ounce of $430, and capital expenditures of about $120 million. (Total cash cost per ounce is a non-GAAP measure of extraction efficiency - please see “Reconciliation of non-GAAP measures to Costs of Revenues” for a discussion of how this measure is derived).
The plan to produce 500,000 ounces in 2011 takes into account the lower grades realized in the off-shaft area of the Stillwater Mine in 2010 and compensates for the shortfall by assuming that some production resumes from the east side of the mine in 2011. Management’s assessment of mining conditions for 2011 suggest that ore grades at Stillwater are likely to remain a little lower on average than in the past, reflecting the same higher variability in the lower off-shaft area as was experienced during 2010. These lower realized ore grades centered in the lower off-shaft area seem to be mostly the result of having smaller, more variable stopes to mine there than in prior years. In planning for 2011, the Company has taken these lower grades into account and to offset this has planned to resume a limited amount of production on the east side of the mine, which in the past has had higher ore grades but also more difficult mining conditions. The Company’s 2011 mine plan, taking all this into account, calls for mine production from the combined mining operations of 500,000 ounces of palladium and platinum during 2011.
Prominent risks to accomplishing the 2011 mine plans include continuing variability of mined ore grades, the pending expiration of the labor agreement with the United Steel workers at the end of June, the ability to retain or attract skilled miners as the year progresses, and from a cost perspective, greater than planned cost inflation for key materials.
The targeted 2011 combined average total cash cost per ounce of $430 per ounce for the mines compares to the combined average total cash cost per ounce for the year 2010 of $397. The increase in 2011 reflects a rising cost trend during 2010 - fourth quarter 2010 total cash costs were $432 per ounce - plus general inflation for wages and materials, and the effect of higher average sales realizations on royalties and taxes, all partially offset by slightly higher mine production in 2011. Projected capital expenditures for 2011 of $120 million represent an increase of 139% over the $50.3 million spent during 2010. Capital spending in 2009 and 2010 was restricted in order to conserve cash, so the 2011 budget includes operational spending of $90 million to compensate for the shortfall in those prior years, spending at a higher rate to replace 2011 anticipated production, spending to advance the developed state and significant equipment replacement. The 2011 capital budget also includes developmental spending of $21 million for initial modest capital needs on the newly acquired Marathon properties (about $10 million) and the two long-term resource delineation projects along the J-M Reef, Blitz and Graham Creek, announced during 2010.
The Company’s mining permits require that, in conjunction with its mining and processing activities, it must provide adequate financial surety in support of its permit obligations to complete final reclamation and remediation once mining operations cease. As of December 31, 2010, the Company had outstanding approximately $33.3 million of surety bonds and letters of credit in favor of state and federal agencies to guarantee its final reclamation commitments. Regulatory authorities are currently in the midst of updating an EIS, which when finalized will determine whether or not the existing surety amounts are sufficient. In the interim, however, as the economy weakened late in 2008, the Company agreed to increase its surety bonding by an additional $10 million as an interim measure to alleviate concerns aired by the agencies involved and to allow time for the EIS to be completed. Upon completion of the EIS process, probably during 2011, it is likely that the Company will be required to provide additional surety bond coverage.
Marathon PGM Corporation Acquisition
On November 30, 2010, the Company completed its acquisition of Marathon PGM Corporation (Marathon), a Canadian exploration company with a number of attractive PGM-copper assets. Marathon is a Canadian exploration company with promising PGM assets located near the town of Marathon at the north end of Lake Superior in Ontario and another PGM exploration position known as Bird River in Manitoba. Aside from its PGM assets, Marathon also held certain prospective gold properties that were spun out into a separate public company just prior to the acquisition. Stillwater has since exercised its option to acquire a 15% equity interest in the new gold company, thereby maintaining a relationship with this talented exploration team.
The Marathon PGM assets acquired include two potential resource blocks situated on the larger Coldwell Complex, a geologic formation that appears to be rich in copper-PGM opportunity. Of particular interest to the Company is a well-defined resource known as the Marathon project located near the town of Marathon, Ontario, Canada at the northern extremity of Lake Superior. The Marathon deposit boasts a completed definitive feasibility study (Canadian NI 43-101 compliant) that indicates the potential for PGM production of about 200,000 ounces per year (at a ratio of about 4 to 1 palladium to platinum) and annual copper production on the order of 37 million pounds, from an open-pit operation. Cost of constructing the mine is currently estimated to be about $450 million to full completion, subject to a final detailed engineering study. The Company intends to fund the project out of internally generated cash flow, possibly with supplemental external financing. The Company is in the process of establishing a project team to focus on development of the Marathon PGM reserves.
The feasibility study anticipates an active mine life of approximately 11.5 years for this property, although there is resource potential that is expected to extend the mine life. In conjunction with the acquisition of these properties, certain non-PGM exploration properties held by Marathon were spun out to the previous Marathon shareholders; Stillwater has subsequently exercised an option to acquire a 15% equity interest in Marathon Gold Corporation, a non-PGM entity.
The Marathon project is currently in the permitting stage and if it remains on schedule could reasonably be in production during 2014 or 2015. Capital spending for Marathon during 2011 is estimated at about $10 million.
Along with the Marathon project comes another attractive exploration property on the same Coldwell Complex, known as Geordie Lake. The Geordie Lake property is situated about 8 kilometers to the west of the Marathon property and appears to be on a parallel structure within the larger complex. Subsequent to the Marathon acquisition, the Company announced its intent to acquire properties and exploration rights to additional properties connecting Marathon and Geordie Lake from Benton Resources Corp. which, in essence, will consolidate ownership of the Coldwell Complex. And along with these property acquisitions, the Company also retained a competent exploration team with a full understanding of the geology of the Coldwell Complex to develop the additional resource potential of these properties.
The Marathon transaction fits well into the Company’s long-term strategy of expanding and diversifying its mining activities. The size of this transaction is manageable financially, and the location is politically stable and logistically accessible. The Marathon area is well developed with extensive public infrastructure already established, and there is other active mining in the general vicinity of the project. The new mine is projected to create a significant number of jobs in an area with relatively high unemployment. The Company’s strong focus on environmental stewardship should serve it well in this region.
Strategic Areas of Emphasis
For several years now the Company’s management has focused on three broad areas of strategic emphasis. While specific initiatives in each area have varied as markets have shifted and the Company has progressed, these fundamental strategic directions continue to provide a basic framework for management’s efforts to strengthen performance and build value for shareholders.
1. Be a Safe, Low-Cost Operator
The Company maintains that companies with safe operations also tend to be well managed and efficient in other important areas. The Company measures safety performance using several criteria, including the frequency and severity of medical reportable incidents and lost-time accidents in comparison to the Company’s own historical performance and relative to other mining operations in the industry. Safety is also assessed in terms of the number and severity of citations issued by MSHA inspectors during their regular visits to the mine sites. Both measures - accident frequency and regulatory compliance - are critical elements of the Company’s safety efforts. Various internal programs support these safety efforts, including annual refresher training and other training programs, pre-shift employee inspections of each work area, regular workgroup discussions of current safety issues and incidents, detailed accident investigations to identify core causes, reporting of near misses that had the potential of resulting in injuries, and more rarely so-called “safety stand-downs” to re-emphasize safety principles as necessary. The Company also responds promptly to correct any safety issues, whether identified internally or by MSHA inspectors, and to eliminate unsafe work practices.
Safety performance at the Company’s mining operations falls under the regulatory jurisdiction of MSHA. MSHA performs detailed quarterly inspections at each of the Company’s mine sites and separately investigates any occurrences deemed to pose a significant hazard to employee health and safety. The Company cooperates fully with MSHA in its compliance responsibilities and maintains its own program of safety training and incident tracking in an effort to ensure that no employee is ever put at risk in carrying out his or her job responsibilities and that all unsafe situations are identified and remediated immediately. The Company’s overall safety performance (including contractors on site), measured in terms of reportable incidents per 200,000 hours worked, averaged a rate of 3.65 during 2010, a modest improvement over the 4.14 rate reported for 2009.
Legislation signed into law on July 21, 2010, requires publicly traded mining companies to disclose certain statistics pertaining to their compliance with the Mine Act. Please see “Business, Risk Factors and Properties-Introduction and Current Operations - 2010 Safety Performance” for a table containing this required safety reporting.
The significance of aiming to be a low-cost operator deserves some elaboration. Ore grades at the Company’s operations are some of the best in the world, and consequently total cash costs per ounce for the Company’s mining operations also rank among the lowest of any primary PGM producer in the industry. However, because the Company’s ore contains about 3.4 times as much palladium as platinum and South African ores typically have about twice as much platinum as palladium, the Company’s average revenues per ounce are lower and therefore operating margins have tended to be historically tighter than for South African producers. Other significant PGM producers, including Norilsk Nickel and the Canadian nickel operations, produce PGMs as by-products, and PGMs at such operations attract almost no allocated cost. Consequently, the Company measures its performance as a low-cost operator in competitive terms, both relative to its own historical cost performance and relative to historical market prices for its products.
The importance of low-cost operations is amplified now that the palladium floor prices in the Company’s long-term supply agreements have all expired. In today’s market, any new supply agreements that the Company may enter into will mostly likely be market-based and are unlikely to include pricing floors and ceilings. Without the floor prices, of course, the Company will not enjoy the downside price protection such floors have provided in the past when palladium prices have cycled downward. Instead, the Company intends to manage through any downward price cycles using several critical operating tactics:
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maintaining sufficient developed state ahead of operations that capital spending could be curtailed during a downturn without any major long-term impact;
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ensuring that the Company’s operating costs remain competitive and that discretionary commitments can be scaled back when necessary;
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sustaining the Company’s balance sheet liquidity and limiting financial leverage to reduce exposure to downturns.
Although in theory the Company also could hedge its mine production in the financial markets through derivative transactions, the cost of such a strategy would be prohibitively expensive or would require trading away the opportunity for shareholders to benefit fully from an increase in PGM prices. Consequently, the Company has no intention of hedging its mine production at this time. (The Company does hedge its recycling purchases, locking in a margin on each lot, and also hedges certain critical consumables used in its operations - but this has been standard practice for many years.)
And, on the other hand without the ceiling prices of the contracts or financial market hedges, our revenues will not be limited as they might otherwise be in the current rising price environment, a position that is expected to benefit the Company.
As discussed above, the Company estimates that its mine production for 2011 will be about 500,000 ounces, with a corresponding total cash cost per ounce of $430, and capital spending on all projects totaling about $120 million for the year. Projected 2011 total cash cost per ounce is up about 8% over the 2010 average of $397, but because costs trended up during 2010 it is actually lower than the $432 averaged in the 2010 fourth quarter. Production in 2011 is expected to benefit from the resumption of mining on the east side of the Stillwater Mine and could also benefit further if ore grades improve in the lower off-shaft area of the mine. The $120 million capital budget for 2011, which as already noted includes some “catch-up” spending on infrastructure to offset lower spending during 2009 and 2010, also includes $8 million to refurbish the original electric furnace at the smelter and convert it for slag cleaning, about $10 million for the Blitz and Graham Creek projects, and about $10 million for work at Marathon. Expenses for corporate programs are also planned to increase in 2011, as the Company moves forward with funding an exploration effort and increases its palladium marketing expenditures. Much of this spending is discretionary and could be scaled back in the event that PGM markets weakened substantially.
Management is cautiously optimistic that during 2011 a number of the challenges that have limited the Company’s mining flexibility will largely be resolved. The first-phase installation of the Kiruna electric trucks at Stillwater Mine that will provide more efficient ramp haulage from the deeper portions of the off shaft area - a long-term project - is now nearly complete and should open up more mining alternatives in that part of the mine. Development through a largely barren zone on the west end of the lower off-shaft area in the Stillwater Mine also is nearing completion, allowing access for the first time to the Lower West portion of the mine. The Company expects to experience good ore continuity in the Lower West, analogous to the Upper West area above it, and initial findings in the drifts that have driven through have tended to confirm this expectation. The Lower West is likely to be a primary mining area at Stillwater Mine over the next decade.
The intent of the higher spending in 2011 is to strengthen the developed state of the mines and also, particularly in view of stronger PGM prices, to position the mines in time for a modest expansion of production rates going forward.
The effect of “using up” a portion of the developed state at both mines in 2009 and 2010 means that there are fewer alternatives available for mining if problems develop in a particular area. This ultimately may be reflected in lower ounce production or in reduced mining efficiency, depending on the circumstances. The ability to throttle back development in times of economic difficulty, thereby conserving cash, is a significant benefit of advancing the developed state well ahead of mining when PGM prices are strong. Operationally, it is like having money in the bank. As the economy recovers and strengthens, though, it is important to replace that developed state by increasing investment in mine development.
Although manpower on site remains adequate to staff current operations, the Company will need to add manpower to support the additional development in 2011 and for all of these future operating initiatives. Some staffing increases also will be needed to support the expanded exploration, marketing and development programs. While it may be a challenge to add all of the new miners needed, the Company has resumed recruiting efforts in an effort to meet these increased requirements.
Ore production at the Stillwater Mine averaged 2,138 tons of ore per day during 2010; this compares to an average of 2,129 ore tons per day produced during 2009. The rate of ore production at the East Boulder Mine averaged 1,097 tons per day during 2010; compared to an average of 1,116 ore tons per day during 2009.
During 2010, the Company’s mining operations produced a total of 374,100 ounces of palladium, and 111,000 ounces of platinum. As by-products, the mines also produced and sold 9,200 ounces of gold, 4,900 ounces of silver, 1,600 ounces of rhodium, 824,000 pounds of copper and 1,157,000 pounds of nickel (as nickel sulfate). By comparison, in 2009 the mines produced to 407,000 ounces of palladium and 122,900 ounces of platinum. They also produced and sold as by-products 9,200 ounces of gold, 5,700 ounces of silver, 4,200 ounces of rhodium, 776,000 pounds of copper and 856,000 pounds of nickel. Revenues from by-product sales totaled $28.0 million in 2010 and $23.6 million in 2009.
2. Palladium Market Development
A consortium of South African producers has spent significant sums each year for many decades now marketing platinum. Their efforts have been well rewarded, with platinum positioned as the premier jewelry metal, projecting an image of elegance and high quality. Platinum also is a metal of choice in certain industrial applications where its remarkable catalytic properties are required. Palladium, on the other hand, historically has never enjoyed a comparable level of marketing support and has remained largely an unknown metal to a large swath of consumers. However, in 2004 palladium began to appear as an alternative jewelry metal in China after the price of platinum moved above $800 per ounce in December 2003. Recognizing this as an opportunity, and identifying the marketing gap, the Company stepped forward beginning in 2004, initially putting forward a comparatively modest marketing program that focused on providing technical support to manufacturers and bench jewelers and image advertising at the industry level through the Palladium Alliance International, a entity organized by the Company to facilitate marketing collaborations. This effort continued on a modest scale until the economic downturn of late 2008 and 2009, at which time it was cut back sharply due to economic constraints. However, in late 2010 the Company began to resurrect its marketing program, and in 2011 will broaden its efforts, with particular emphasis on China. It also appears that Norilsk Nickel will launch a major marketing campaign for palladium jewelry in 2011.
Even through the economic downturn, the Company maintained marketing representatives in China who continue to provide first-hand insight into palladium activity there and maintain contact with key palladium consumers. The Company also sponsors palladium image advertising in Chinese media. China first led the recent trend toward using palladium in jewelry and remains the largest market for it. According to Johnson Matthey, consumption of palladium in jewelry declined to just over 600,000 ounces in 2010, down from about a million ounces per year prior to the economic downturn, with most of the consumption drop centered in Asia. Some of this may be attributable to lower prices for platinum jewelry during the downturn, as the demand for platinum jewelry increased sharply when prices fell in 2009. The Company’s marketing efforts in 2011 will refocus on Asian consumers. Palladium jewelry is now available in all major markets worldwide, and in January of 2010 the U.K. mandated the hallmarking of all palladium jewelry, formally recognizing it, along with gold, silver and platinum, as a precious jewelry metal.
Automotive applications for palladium in catalytic converters are well established for gasoline engines, but diesel engine catalytic technologies generally have been based on platinum. In recent years, driven mostly by economics, research efforts in the auto industry have focused on how to substitute less expensive palladium for platinum in these applications. The Company has encouraged this research and closely monitored its progress. Reportedly, it is now possible in the laboratory to replace about 50% of the platinum in a diesel system with palladium on nearly a one-for-one
basis, although the average proportion of palladium actually used in production vehicles now is estimated to be closer to 25%. Palladium and platinum also are important players in emerging fuel cell technologies.
Other industrial applications for palladium include refinery catalysts, electronics, hydrogen generation and dentistry. Electronic uses that take advantage of palladium’s unique characteristics include multi-layered ceramic capacitors, high-end television screens, and compact discs. Palladium in thin films has a unique ability to pass hydrogen molecules while blocking other impurities, allowing relatively inexpensive production of high-purity hydrogen for chemical processes and fuel cells. Palladium alloys used in dental fillings wear well and have an expansion coefficient that closely matches that of the teeth themselves, although other materials tend to be substituted for palladium when its price rises.
3. Growth and Diversification
The Company monitors diversification opportunities in various mineral exploration and development projects, as well as potential merger or acquisition candidates and other business ventures. It also seeks appropriate opportunities to diversify its existing mining and processing operations, and evaluates potential avenues for vertical integration. The focus of these diversification efforts is both to establish a broader operating base, reducing the Company’s sole reliance on the Montana properties, and ultimately to build value for the Company’s shareholders.
Recognizing the need to broaden its base, the Company over the past several years has successfully expanded its recycling operations into a distinct business segment that has become a meaningful source of income, reducing the Company’s captive reliance financially on the performance of the mines. The recycling business has utilized surplus capacity within the Company’s smelting and refining facilities to generate an additional income stream, requiring relatively little incremental investment in facilities. As already noted, over the past year or so the Company has invested in some new dedicated recycling facilities that are intended to increase the Company’s capacity to handle recycled material and sharply reduce turnaround times for settlement with suppliers.
The Company holds minority investments in two small exploration companies that target PGMs and other precious metals. In the fourth quarter of 2010, the Company acquired the PGM assets of Marathon PGM Corporation, including both a large development property and various exploration holdings. Since then the Company also has acquired additional properties adjacent to the Marathon project in Ontario. The Company also has formed an exploration group aimed at evaluating opportunities related to the Marathon holdings and perhaps extending further afield, as well.
The Company monitors various later-stage mineral development projects, as well as potential merger and acquisition candidates in an effort to diversify the Company’s financial and operating risk and perhaps add scale. While the Company’s primary focus is on properties with potential for PGM production - particularly in North America, the pool of opportunities meeting those criteria is limited, and ancillary opportunities outside of PGMs that have strategic benefits for the Company and are compatible with its existing mining expertise are not ruled out. Thus gold, silver, copper and nickel opportunities or combinations thereof continue to be studied. Management believes that the acquisition of Marathon PGM Corporation, which has both PGMs and copper as described previously, will provide an excellent entry into a development-stage project that will utilize the Company’s resources effectively and establish a strong presence in an attractive North American PGM district.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009
Revenues - The Company’s total revenues, including proceeds from the sale of by-products, totaled $555.9 million in 2010, an increase of 40.9% compared to revenues of $394.4 million in 2009. This substantial year-on-year increase in total revenues reflects much higher recycling sales volumes in 2010 as compared to 2009, as well as higher PGM prices realized in 2010.
Revenues from mine production totaled $381.0 million in 2010 (including $28.0 million from by-products), up 24.2% compared to $306.9 million in 2009 (of which $23.6 million was from by-products). Palladium and platinum ounces sold from mine production were 489,400 in 2010, compared to 515,700 ounces in 2009 - slightly lower. The combined average realization on these palladium and platinum sales (including the effects of hedging and of floor and ceiling prices in the underlying agreements) was $721 per ounce in 2010 and $549 per ounce in 2009.
Revenues from PGM recycling increased 106% during 2010, to $168.6 million from $81.8 million in 2009.
Recycling ounces sold during 2010 totaled 156,100 ounces, an increase of 53.0% compared to the 102,000 ounces sold in 2009. The Company’s combined average realization on recycling sales (which include palladium, platinum and rhodium) increased to $1,046 per ounce in 2010 from $779 per ounce in 2009, paralleling the increases in PGM prices generally. In addition to purchased recycling material, the Company toll processed 235,900 ounces of PGMs during 2010, up from 128,000 tolled ounces in 2009. Overall, recycling volumes processed during 2010 totaled 399,400 ounces of PGMs, up 59.1% from the 251,000 ounces processed in 2009, as stronger PGM prices in 2010 increased the volume of recycled catalytic converters available in the market.
In addition to mine and recycled metal sales, the Company recognized other revenue of $6.2 million and $5.8 million for metal purchased in the open market and resold in 2010 and 2009, respectively.
Costs of Metals Sold - Cost of metals sold, which excludes depletion, depreciation and amortization expense, was $393.7 million in 2010, compared to $290.8 million in 2009, a 35.4% increase. The largest share of this increase was attributable to recycling. Volumes of purchased recycling material were sharply higher in 2010, which along with higher PGM prices increased the total cost to purchase recycling material. Overall, recycling cost of metals sold increased to $157.3 million in 2010 from $75.9 million in 2009. The average acquisition cost of metal purchased in the Company’s recycling segment (including platinum, palladium and rhodium) increased to $1,015 per ounce in 2010 from $674 per ounce in 2009, reflecting higher PGM prices in 2010 in response to strengthened demand from the automotive and investment sectors.
During 2010, the Company’s mining operations produced 485,100 ounces of PGMs, including 374,100 ounces of palladium and 111,000 ounces of platinum. This represented an 8.5% decrease from 2009, when the Company’s mining operations produced 529,900 ounces of PGMs, including 407,000 of palladium and 122,900 ounces of platinum. The Stillwater Mine produced 351,700 ounces of PGMs in 2010, compared with 393,800 ounces of PGMs in 2009, a 10.7% decrease. The East Boulder Mine produced 133,400 ounces of PGMs in 2010, down 2.0% compared with the 136,100 ounces of PGMs produced there in 2009.
The cost of metals sold from mine production, totaled $230.0 million in 2010, compared to $209.1 million in the prior year, a 10.0% increase. The Company’s mining costs increased during 2010 partly as a result of the lower ore grade realized at the Stillwater Mine.
The cost of metals sold for metal purchased in the open market for resale was $6.4 million in 2010, compared to $5.7 million in 2009.
Depletion, depreciation and amortization - Depletion, depreciation and amortization expense was $71.6 million in 2010, compared to $70.4 million in 2009. The higher expense in 2010 was mostly the result of added capital placed into service in 2010.
Marketing - The Company limited its market development efforts for palladium to some extent during 2010. The Company spent $2.4 million in support of marketing programs during 2010, up slightly from $2.0 million in 2009.
General and administrative - Excluding marketing expenses discussed above, general and administrative costs were $33.0 million in 2010, compared to $25.1 million in 2009, a 31.5% increase, due to approximately $1.5 million in acquisition expenses, and approximately $5.0 million in contractual support of the Norilsk Nickel secondary offering and increased share-based compensation expense.
Other corporate costs - In 2010, other corporate costs included a $0.6 million provision for uncollectable receivables and advances. In 2009, other corporate costs included a $1.1 million provision for uncollectable receivables and advances and $0.1 million for marking investments to market.
Interest income and expense - Interest income increased to $2.1 million in 2010 from $1.8 million in 2009, reflecting higher interest rates and increased financing income on recycling balances in 2010. The Company’s balance of cash and related liquid assets earning interest increased to $208.4 million at December 31, 2010, from $201.2 million reported at December 31, 2009. Inventories and advances associated with recycling increased to $41.5 million at year-end 2010 from $28.6 million at the end of 2009. The Company’s outstanding long-term debt balance was $196.0 million at December 31, 2010, unchanged from $196.0 million at December 31, 2009. The Company paid off the final $0.1 million of principal on its education impact bonds in May 2009. Interest expense declined to $6.5 million in 2010, from $6.8 million in 2009.
Other comprehensive income (loss), net of tax - The Company recorded a loss in other comprehensive income of $0.8 million in 2010 compared to a gain of $70,000 in 2009. The 2010 and 2009 activity in each case represented net unrealized gains or losses on investments.
YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
Revenues - The Company’s total revenues, including proceeds from the sale of by-products, totaled $394.4 million in 2009, a decrease of 53.9% compared to revenues of $855.7 million in 2008. This substantial year-on-year decline in total revenues reflects much lower recycling sales volumes in 2009 as compared to 2008, as well as lower PGM realizations in 2009.
Revenues from mine production totaled $306.9 million in 2009 (including $23.6 million from by-products), compared to $360.4 million in 2008 (of which $36.8 million was from by-products). Palladium and platinum ounces sold from mine production were 515,700 in 2009, compared to 514,100 ounces in 2008 - essentially flat. The combined average realization on these palladium and platinum sales (including the effects of hedging and of floor and ceiling prices in the underlying agreements) was $549 per ounce in 2009 and $630 per ounce in 2008.
Revenues from PGM recycling declined 82.8% during 2009, to $81.8 million from $475.4 million in 2008. Recycling ounces sold during 2009 totaled 102,000 ounces, a decrease of 62.9% compared to the 275,000 ounces sold in 2008. The Company’s combined average realization on recycling sales (which include palladium, platinum and rhodium) decreased substantially to $779 per ounce in 2009 from $1,715 per ounce in 2008, paralleling the drop in PGM prices generally. In addition to purchased recycling material, the Company toll processed 128,000 ounces of PGMs during 2009, up from 126,000 tolled ounces in 2008. Overall, recycling volumes processed during 2009 totaled 251,000 ounces of PGMs, down 36.9% from the 398,100 ounces processed in 2008, as weak PGM prices in 2009 reduced the volume of recycled catalytic converters available in the market.
In addition to mine and recycled metal sales, the Company recognized other revenue of $5.8 million and $20.0 million for metal purchased in the open market and resold in 2009 and 2008, respectively.
Costs of Metals Sold - Cost of metals sold, which excludes depletion, depreciation and amortization expense, was $290.8 million in 2009, compared to $752.0 million in 2008, a 61.3% decrease. The largest share of this decrease was attributable to recycling. Volumes of purchased recycling material were sharply lower in 2009, which along with lower PGM prices reduced the total cost to purchase recycling material. Overall, recycling cost of metals sold declined to $75.9 million in 2009 from $448.4 million in 2008. The average acquisition cost of metal purchased in the Company’s recycling segment (including platinum, palladium and rhodium) decreased to $674 per ounce in 2009 from $1,534 per ounce in 2008, reflecting lower PGM prices in 2009 in response to weakened demand from the automotive sector.
During 2009, the Company’s mining operations produced 529,900 ounces of PGMs, including 407,000 ounces of palladium and 122,900 ounces of platinum. This represented a 6.2% increase from 2008, when the Company’s mining operations produced 498,900 ounces of PGMs, including 384,100 of palladium and 114,800 ounces of platinum. The Stillwater Mine produced 393,800 ounces of PGMs in 2009, compared with 349,400 ounces of PGMs in 2008, a 12.7% increase. The East Boulder Mine produced 136,100 ounces of PGMs in 2009, down 9.0% compared with the 149,500 ounces of PGMs produced there in 2008, but the 2009 production was accomplished with less than 50% of the 2008 workforce.
The cost of metals sold from mine production, despite higher 2009 production, decreased to $209.1 million in 2009, compared to $283.8 million in the prior year, a 26.3% improvement. The Company’s mining costs decreased during 2009 mainly as a result of a lower level of employment, lower prices for key consumables such as fuel, power, steel and explosives, improved efficiencies in mining processes, much reduced reliance on contractors and redirection of mining out of some higher-cost areas.
The cost of metals sold for metal purchased in the open market for resale was $5.7 million in 2009, compared to $19.9 million in 2008.
Depletion, depreciation and amortization - Depletion, depreciation and amortization expense was $70.4 million in 2009, compared to $83.0 million in 2008. To a large extent, the lower expense in 2009 was the result of a $67.3 million impairment adjustment to the carrying value of the East Boulder Mine taken at the end of 2008, resulting in lower
amortization rates in 2009.
Marketing - The Company reduced its market development efforts for palladium to some extent during 2009. The Company spent $2.0 million in support of marketing programs during 2009, down from $5.7 million in 2008.
General and administrative - Excluding marketing expenses discussed above, general and administrative costs were $25.1 million in 2009, compared to $26.7 million in 2008, a 6.0% decrease, as increased share-based compensation expense partially offset other corporate cost reductions.
Other corporate costs - In 2009, corporate adjustments included a $1.1 million provision for uncollectable receivables and advances and $0.1 million for marking investments to market. In 2008, such adjustments included a $67.3 million asset impairment write-down at the East Boulder Mine, a $29.4 million provision for uncollectable receivables and advances (mostly associated with recycling activities), a $3.4 million charge to mark investments to market, and $5.4 million for restructuring costs.
Interest income and expense - Interest income decreased to $1.8 million in 2009 from $11.1 million in 2008, reflecting lower interest rates and much lower financing income on recycling balances in 2009. The Company’s balance of cash and related liquid assets earning interest increased to $201.2 million at December 31, 2009, from $180.8 million reported at December 31, 2008. Inventories and advances associated with recycling increased to $29.0 million at year-end 2009 from $22.1 million at the end of 2008. The Company’s outstanding long-term debt balance was $196.0 million at December 31, 2009, down from $211.0 million at December 31, 2008. The decrease in long-term debt was mostly attributable to a transaction which converted $15.0 million principal balance of the Company’s convertible debentures into approximately 1.84 million shares of common stock. The Company also paid off the final $0.1 million of principal on its education impact bonds in May 2009. Interest expense declined to $6.8 million in 2009, from $9.7 million in 2008; the Company replaced its outstanding credit facilities with a 1.875% convertible debenture offering in March 2008.
Other comprehensive income (loss), net of tax - The Company recorded a gain in other comprehensive income of $70,000 in 2009 compared to a gain of $5.9 million in 2008. The 2009 gain represented unrealized gains on investments. 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 of unrealized losses on investments.
LIQUIDITY AND CAPITAL RESOURCES
For 2010, net cash provided by operating activities was $123.9 million compared to $59.7 million and $114.2 million for 2009 and 2008, 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. Mining productivity rates and ore grades in turn can affect both PGM production and cash costs of production. Net cash flow from operations also includes changes in non-cash working capital, including changes to inventories and advances.
At December 31, 2010, the Company’s available balance of cash and cash equivalents and highly liquid short-term investments (excluding restricted cash) was $208.4 million and it reported $196.0 million of debt outstanding. Available cash and cash equivalents at December 31, 2010, was $19.4 million. Corresponding balances at December 31, 2009, included $166.7 million of available cash and cash equivalents, $196.0 million of outstanding debt, and available cash plus liquid investments of $201.2 million. The Company exchanged $15 million face amount of its outstanding convertible debentures for about 1.84 million common shares during the fourth quarter of 2009. The remaining $166.5 million of convertible debentures outstanding will reach their date of first call in March 2013, and the Company believes most holders are likely to convert their debentures, should the share price be at or above the $23.51 conversion price, or redeem them at par at that time.
The Company, at interest rate levels prevailing at December 31, 2010, will be required to fund approximately $5.5 million in total interest payments during 2011 related to its outstanding debt obligations. No principal payments against outstanding debt are scheduled to come due in 2011. With its current liquidity position, the Company has elected not to put in place a revolving credit agreement at this time. While the lack of a credit agreement may create some vulnerability, the Company believes that its liquidity on hand is adequate to cover its needs for the foreseeable future.
During the fourth quarter of 2009, the Company filed a $450 million shelf registration statement. The registration became effective on December 8, 2009, and permits the Company to issue any of various public debt or equity
instruments for financing purposes so long as the registration statement remains effective. The Company is generating significant cash flow at the current time and will also consider its financing needs as its plans develop and opportunities warrant. In this connection, the development of the Marathon property will require significant capital and the debentures may require cash payments, whether upon maturity or earlier redemption. Management believes that the shelf registration statement may facilitate access to additional liquidity in the future. However, there is no assurance that debt or equity capital would be available to the Company in the public markets in the event the Company determines to issue securities under the shelf registration.
In December of 2009, Standard and Poor’s upgraded the Company’s debt rating from B- to B, citing improved market conditions and adequate liquidity. Both Moody’s Investors Service and Standard and Poor’s had downgraded the Company’s corporate credit rating by two notches during 2008 as economic conditions deteriorated. At issue had been the Company’s strong dependence on its automotive agreements, lack of geographic or product diversity, metal market price volatility, and difficult cost structure.
The Company’s financial performance is affected by changes in PGM prices. Absent separate hedging arrangements, any change in the price of platinum or palladium generally would flow through almost dollar-for-dollar to cash flow from operations, subject only to certain costs - severance taxes and royalties on mine production - which adjust upward or downward with market prices. At the forecasted 2011 mine production level of 500,000 combined PGM ounces, a one-dollar change in the price of platinum would affect annual cash generated from mining operations by about $0.1 million, and a corresponding change in the price of palladium would affect annual cash generation from mining operations by about $0.4 million. The sensitivity of the recycling business to changes in platinum and palladium prices is more muted and varies according to the provisions in the various recycling agreements. In the Company’s recycling activities, upon purchasing recycled material for processing the Company simultaneously enters into a fixed forward contract that determines the future selling price of the contained PGMs, effectively locking in a sales margin.
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 $52 million per year at the price and cost levels prevailing at December 31, 2010.
During the third quarter of 2010, the Company revised its cash management guidelines to extend the available investment maturities on a portion of its cash balances, broaden the suite of permissible investments, and adjust the percentage limits on certain classes of investments. As a result, during 2010 most of the Company’s cash holdings were transferred into short-term investments. All of these short-term investments remain highly liquid, but technically they no longer meet the strict definition of cash and cash equivalents. Net cash used in investing activities was $272.0 million, $54.7 million and $74.6 million in 2010, 2009 and 2008, respectively. The Company’s investing activities primarily represent capital expenditures and net sales and purchases of short term investments. Capital expenditures totaled $50.3 million, $39.5 million and $82.3 million in 2010, 2009 and 2008, respectively. The Company also expended $67.5 million in cash (along with newly issued common shares with a fair value of $73.4 million) in 2010 and $0.9 million in 2008 to acquire equity interests in exploration companies. No such acquisitions were made in 2009.
All significant company-wide repair and maintenance costs in connection with planned major maintenance activities are expensed as incurred. The Company does not accrue in advance for major maintenance activities, but, when practicable, tries to disclose in advance in its public filings any planned major maintenance activities that may affect operations.
Net cash provided by or used in financing activities equaled $0.8 million, $(0.1) million and $60.7 million in 2010, 2009 and 2008, respectively. Financing activities in 2008 included retiring the Company’s bank facility and replacing it with $181.5 million of convertible debentures.
Convertible Debentures
On March 12, 2008, the Company issued and sold $181.5 million aggregate principal amount of senior convertible debentures due in 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 at any time 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 independent directors, purchased $80 million of the debentures.
In October 2009, the Company undertook the exchange of $15 million face amount of the convertible debentures in exchange for 1.84 million shares of the Company’s common stock. The debentures so acquired have been retired, leaving $166.5 million face value of the debentures outstanding at December 31, 2010.
CONTRACTUAL OBLIGATIONS
The Company is obligated to make future payments under various debt agreements and regulatory obligations. The following table represents significant contractual cash obligations and other commercial commitments and regulatory commitments, including related interest payments, as of December 31, 2010:
(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 liabilities that are anticipated to be paid in 2011 and 2012 include 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. Such statements also include, but are not limited to, comments regarding the acquisition and plans for Marathon PGM Corporation; the global automotive market and the outlook for automobile production and sales; contract negotiations and the future ability to sell the Company’s products; expansion plans and realignment of operations; future costs, grade, production and recovery rates; permitting; labor matters; financing needs and the terms and availability of future credit facilities; capital expenditures; increases in processing capacity; cost reduction measures; safety performance; timing for engineering studies; environmental permitting and compliance; litigation exposures; and anticipated changes in global supply and demand and prices for PGM materials. 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. Additional information regarding factors that could cause results to differ materially from management’s expectations is found in the section entitled “Business, Risk Factors 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 adits 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 for each relevant geological area within a mine is based upon un-amortized capitalized mine development costs and the related ore reserves associated with that area. Capital development expenditures are added to the un-amortized capitalized mine development costs as the related development 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 depletion, 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 ore grades 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 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. The estimation of future cash flows takes into account 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 determination 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.
Foreign Currency Transaction
With the acquisition during 2010 of certain Canadian assets, the Company now regularly incurs certain capital and operating expenditures in Canadian dollars and within Canadian entities. The Company has determined that the functional currency for these Canadian activities will be the U.S. dollar and therefore reflects all assets, liabilities and expenditures in U.S. dollars for accounting purposes. The Company uses a monthly average exchange rate for converting minor Canadian dollar expenditures into U.S. dollars, and uses the actual exchange rate incurred in accounting for larger transactions. For balance sheet purposes, Canadian dollar monetary assets and liabilities are recorded based on the exchange rate at the end of the respective period. Any net accounting difference that results from exchange rate differences is recorded as a foreign exchange gain or loss for the respective period on the consolidated statement of operations.
Income Taxes
With the acquisition during the fourth quarter of 2010 of certain Canadian assets, the Company now is subject to Canadian federal and provincial income taxes on its Canadian activities as well as to U.S. state and federal income taxes.
Income taxes are determined using the asset and liability approach. This method gives consideration to the future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities based on currently enacted tax rates. 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. Deferred taxes associated with the Company’s Canadian activities are recorded using the assumption that future earning and profits associated with these activities will not be repatriated into the U.S. but will be fully utilized in Canada.
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, 2010 and 2009, 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.
Post-closure Reclamation Costs
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, 2010 and 2009, and recorded a reduction at December 31, 2009, of $0.6 million and $0.8 million for the Stillwater Mine and the East Boulder Mine, respectively, due to an increase in the estimated mine lives of both mines. No corresponding adjustment was required at December 31, 2010. See Note 16 “Asset Retirement Obligation” to the Company’s 2010 audited consolidated financial statements for further information.
Derivative Instruments
The Company from time to time enters into derivative financial instruments, including fixed forward sales, cashless put and call option collars and financially settled forward sales to manage the effect of changes in the prices of palladium and platinum on the Company’s revenue. Derivatives are reported on the balance sheet at fair value and, if the derivative is not designated as a hedging instrument, changes in fair value are 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 2010 audited consolidated 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 has entered into long-term agreements with suppliers and customers, from time to time has employed various derivative financial instruments and attempts to maintain adequate liquidity to sustain operations during a downturn in PGM prices. 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’s remaining long-term automotive supply agreement with Ford Motor Company expired on December 31, 2010. The floor prices in that agreement applied to 70% of the Company’s mined platinum ounces and 80% of the Company’s mined palladium ounces. Replacement supply agreements are not likely to include any comparable floor price protection, and consequently the Company’s mining revenues going forward will be more fully exposed to prevailing market prices. Without these pricing provisions, the risk increases that the Company may not be able to operate profitably during any future downturns in PGM prices.
The Company customarily enters into fixed forward sales and from time to time in the past has entered into 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. Under these fixed forward transactions, typically metals contained in the spent catalytic materials are sold forward at the time the materials are purchased and then are delivered against the fixed forward contracts when the finished ounces are recovered. The Company believes such transactions qualify for the exception to hedge accounting treatment provided for in the accounting literature and so has elected to account for these transactions as normal purchases and normal sales.
Financially settled forward sales provide another mechanism to offset fluctuations in metal prices associated with future production, particularly in circumstances where the Company elects to retain control of the final disposition of the metal. In financially settled forward sales, the parties agree in advance to a net financial settlement in the future based on the difference between the market price of the metal on the settlement date and a forward price set at inception. Consequently, at the 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. No metal changes hands between the parties in these financially settled transactions. The Company generally has accounted for financially settled forward transactions as cash flow hedges, as they are not eligible for treatment as normal purchases and normal sales. However, if the Company determines not to document them as cash flow hedges, these transactions are marked to market in each accounting period and the realized and unrealized gains or losses are recognized in net income in each period. As of December 31, 2010 and 2009, the Company was not party to any financially settled forward agreements.
Periodically, the Company also has entered 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 on such transactions therefore are recognized in net income in each period.
Interest Rate Risk
At December 31, 2010, 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’s convertible debentures and industrial revenue bonds do not contain financial covenants, other than change in control protection and, in the case of the convertible debentures, investor make-whole provisions. Consequently, the Company is not subject to conventional financial covenants at this time.
Foreign Currency Risk
With the acquisition of certain Canadian assets during the fourth quarter of 2010, the Company has gained some modest exposure to fluctuations in the exchange rate between the Canadian dollar and the U.S. dollar. While this exposure is currently limited to Canadian dollar cash deposits and expenses incurred for the services of a few Canadian employees and contractors along with some associated support costs, as the Company’s commitments there expand in the future, the exposure may become more material. The Company does not hedge this exposure at present, but may consider doing so in the future as the scale of its Canadian operations grows.
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 and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Stillwater Mining Company and subsidiaries as of December 31, 2010 and 2009, and the related consolidated 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, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stillwater Mining Company and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, 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, 2010, 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 February 22, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Billings, Montana
February 22, 2011
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Stillwater Mining Company and Subsidiaries:
We have audited Stillwater Mining Company’s internal control over financial reporting as of December 31, 2010, 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.
In our opinion, Stillwater Mining Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Stillwater Mining Company and subsidiaries as of December 31, 2010 and 2009, and the related consolidated 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, 2010, and our report dated February 22, 2011, expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Billings, Montana
February 22, 2011
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
See accompanying notes to the consolidated financial statements.
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Continued)
See accompanying notes to the consolidated financial statements.
STILLWATER MINING COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
See accompanying notes to the consolidated financial statements.
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
See accompanying notes to the consolidated financial statements.
STILLWATER MINING COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
See accompanying notes to the consolidated financial statements.
STILLWATER MINING COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
NATURE OF OPERATIONS
Stillwater Mining Company (the Company) 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 conducts mining operations at the Stillwater Mine near Nye, Montana, and at the East Boulder Mine near Big Timber, Montana. Ore extraction at both mines takes place within the J-M Reef. The Company operates concentrating plants at each mining operation to upgrade the mined production into a concentrate form. The Company operates a smelter and base metal refinery at Columbus, Montana which further upgrades the mined concentrate into a PGM-rich filter cake. The filter cake is shipped to third-party custom refiners for final refining before being sold to third parties.
Besides processing mine concentrates, the Company also recycles spent catalyst material at the smelter and base metal refinery to recover the contained PGMs - palladium, platinum and rhodium. The Company currently has catalyst sourcing arrangements with various suppliers who ship spent catalysts to the Company for processing to recover the PGMs. The Company smelts and refines the spent catalysts within the same process stream as the mined production.
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. One of the most significant risks and uncertainties the Company faces is price volatility of palladium and platinum.
Additional risks and uncertainties include but are not limited to the following: economic and political events affecting supply and demand for these metals, mineral reserve estimation, environmental restrictions and obligations, governmental regulations, ownership of and access to mineral reserves, stable workforce and increased surety requirements.
The Company evaluates subsequent events through the date the financial statements are issued. No subsequent events were identified that required additional disclosure through the date of this filing.
NOTE 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Stillwater Mining Company and its wholly owned subsidiaries (collectively referred to as the “Company”). All intercompany transactions and balances have been eliminated in consolidation.
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. Restricted cash is classified as noncurrent as the Company anticipates renewing the letters of credit (associated with reclamation obligations) upon expiration.
INVESTMENTS
Investment securities at December 31, 2010 and 2009, consist of a mutual fund and federal agency notes and commercial paper with stated maturities less than two years. All securities are deemed by management to be available-for-sale and are reported at fair value. Unrealized holding gains and losses 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 were originally recorded at cost due to less than 20% equity ownership 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, depletion, 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. The Company determined that no allowance against its receivable balances at December 31, 2010 were necessary. The Company wrote off $0.6 million and $3.4 million of its trade receivable balance in 2009 and 2008, respectively, when it was determined that ultimate repayment was questionable.
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 depletion, 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 classifies a lease as either capital or operating. All capital leases are depreciated either over the shorter of the useful life of the asset or over the lease term.
ASSET IMPAIRMENT
The Company reviews and evaluates its long-lived assets for impairment when events or 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.
Fair value is defined 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. A fair value hierarchy was established 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 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 and other sales revenue. 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 automotive agreements. Mine production revenue also consists of the sales of by-products (rhodium, gold, silver, copper and nickel) extracted by
mining operations. 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.
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. Derivatives are 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 deferred and recognized as adjustments to the revenue recorded for the related hedged production when the transaction related to the original hedge instrument settles.
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 consolidated statement of cash flows based on their respective balance sheet classifications.
RECLAMATION AND ENVIRONMENTAL COSTS
The fair value of a liability for an asset retirement obligation is 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.
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
The Company determines income taxes using the asset and liability approach which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of those assets and liabilities, as well as operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. 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. Deferred tax assets and liabilities are recorded on a jurisdictional basis.
In assessing the realizability of U.S. 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, 2010 and 2009, 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.
STOCK-BASED COMPENSATION
Costs resulting from all share-based payment transactions are 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 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 or diluted earnings (loss) per share as of December 31, 2010, 2009, or 2008. 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 in 2010 and 2009 consisted of unrealized gains and losses related to available-for-sale marketable securities. In 2008, comprehensive income (loss) consisted of 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 consolidated 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 consolidated 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 depletion, depreciation, amortization and accretion calculations, future cash flows from long-lived assets, fair value of long-lived assets, and fair value of derivatives. Actual results could differ from these estimates.
FOREIGN CURRENCY TRANSACTIONS
The functional currency of the Company’s Canadian subsidiary is the U.S. dollar. Gains or losses resulting from transactions denominated in Canadian currency are included in net income in the consolidated statements of operations and comprehensive income (loss).
NOTE 3
ACQUISITION
The Company acquired the PGM assets of Marathon PGM Corporation, a Canadian exploration company, on November 30, 2010 for $63.6 million in cash and 3.88 million Stillwater common shares with a fair value of $73.4 million. The principal property acquired is a PGM and copper deposit located near the town of Marathon, Ontario, Canada. The Marathon deposit is currently in the permitting stage and will not be in production for several years.
The following table summarizes the final allocation of the total consideration paid to the assets acquired at the date of the acquisition:
NOTE 4
ASSET IMPAIRMENT
The Company determined that there was no material event or change in circumstances requiring the Company to test its long-lived assets for impairment at December 31, 2010 and 2009. The Company recorded a $67.3 million charge against earnings at December 31, 2008, reducing the 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
The Company mines and processes ores containing palladium, platinum, rhodium, gold, silver, copper and nickel into intermediate and final products for sale to customers. Palladium, platinum, rhodium, gold and silver are sent to third party refineries for final processing from where they 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 precious metals are normally sold at market prices to customers, brokers or outside refiners. By-products of copper and nickel are produced by the Company at less than commercial grade, so prices for these metals typically reflect a quality discount. By-product sales are included in revenues from mine production. During 2010, 2009 and 2008, total by-product (copper, nickel, gold, silver and mined rhodium) sales were $28.0 million, $23.6 million and $36.8 million, respectively.
Through the end of 2010, the Company was party to a sales agreement with Ford Motor Company (Ford) that in recent years committed 80% of the Company’s mined palladium and 70% of its mined platinum for delivery to Ford. This agreement expired at the end of 2010. The Ford supply agreement included certain price floors and caps designed to limit the parties’ exposure to fluctuations in PGM market prices. Except for ounces priced at the floor or cap, the contract provided that metal deliveries were to be priced at a small discount to the trailing month’s average London price for PGMs.
Effective January 1, 2011, the Company has entered into a three-year supply agreement with General Motors
Corporation (GM) that provides for fixed quantities of palladium to be delivered to GM each month. The agreement does not include price floors or caps, but provides for pricing at a small discount to a trailing market price. The Company is continuing to negotiate potential supply arrangements with other large PGM consumers and in the meantime is selling its remaining mine production under month-to-month and spot sales agreements.
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 for sale. It also accepts material supplied from third parties on a tolling basis, processing it for a fee and returning the recovered metals to the supplier. The Company has entered into sourcing arrangements for catalyst material with several suppliers. Under these sourcing arrangements as currently structured, the Company in some cases may advance cash against a shipment of material shortly before actually receiving the physical shipment. These advances are included in Other current assets on the Company’s consolidated balance sheet until such time as the material has been physically received and title has transferred to the Company. The Company holds a security interest in materials procured by its largest supplier that have not been received by the Company. Once the material is physically received and title has transferred, the associated advance is reclassified from Other current assets into Inventories. Finance charges collected on advances and inventories prior to being earned are included in Other current liabilities on the Company’s consolidated balance sheet. Finance charges are reclassed from Other current liabilities to Interest income ratably from the time the advance was made until the outturn date of the inventory. The Company recorded write-downs of advances on these recycling inventory purchases of $0.6 million, $0.5 million and $26.0 million during 2010, 2009 and 2008, respectively.
At the same time the Company purchases recycling material it typically enters into a fixed forward contract for future delivery of the PGMs contained in the recycled material at a price consistent with the purchase cost of the recycled material. 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. The purpose of this arrangement is to eliminate the Company’s exposure to fluctuations in market prices during processing, while at the same time creating an obligation for the Company to deliver metal at a future point in time 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 finished metal in the open market to cover its delivery commitments, and then would bear the cost (or benefit) of any change in the market price relative to the price stipulated in the delivery contract.
Other
The Company makes other open market purchases of PGMs from time to time for resale to third parties. The Company recognized revenue of $6.2 million and $20.0 million on 13,000 ounces and 48,800 ounces of palladium that were purchased in the open market and re-sold for the year ended December 31, 2010 and 2008, respectively. The Company purchased in the open market 12,600 ounces of palladium and 2,900 ounces of platinum for the year ended December 31, 2009, recognizing revenue of $5.8 million.
NOTE 6
DERIVATIVE INSTRUMENTS
The Company uses various derivative financial instruments to manage its 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 customarily enters into fixed forward contracts and on occasion it also enters into 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. Under these customary 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 the 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 will typically use financially settled forward contracts with third parties to reduce its exposure to price risk on metal it is obligated to deliver under long-term sales agreements.
Mine Production
At present, the Company has not entered into derivative instruments to hedge its mined production. In the second quarter of 2008, the Company settled the remaining financially settled forward agreements covering future anticipated platinum sales out of mine production. Realized losses on hedges of mined platinum in 2008 were $12.8 million and were recorded as an adjustment to mine production revenue.
PGM Recycling
The Company customarily enters into fixed forward sales relating to PGM recycling of catalysts materials. The metals from PGM recycled materials are typically 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, 2010, will settle at various periods through June 2011. 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, 2010 and 2009, no such margin deposits were outstanding or due.
Occasionally 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 on a specific future date. No financially settled forward contracts were outstanding at December 31, 2010 and 2009. 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. The change in the fair value of the derivatives is reflected in the income statement. The corresponding net realized loss on these derivatives was $0.2 million in 2009 and 2008 and was recorded as a component of recycling revenue. There was no corresponding net realized gain or loss on these derivatives in 2010.
The following is a summary of the Company’s commodity derivatives as of December 31, 2010:
The Following is the Effect of Derivative Instruments on the Consolidated Statements of Operations and Comprehensive Income (Loss)
for the periods ended December 31,
Derivatives Designated as Cash Flow Hedges
Effective Portion
(In thousands)
Ineffective portion of derivatives was not significant at December 31, 2010, 2009, or 2008.
The Following is the Effect of Derivative Instruments on the Consolidated Statements of Operations and Comprehensive Income
(Loss) for the periods ended December 31,
NOTE 7
SHARE-BASED COMPENSATION
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. The 1994 Incentive Plan and the General Plan have been terminated. While no additional options may be issued under the two terminated plans, options issued prior to plan termination remain outstanding. Authorized shares of common stock have been reserved for options that were issued prior to the expiration of the 1994 Incentive Plan and the General Plan. At inception of the three plans, approximately 7.8 million shares of common stock were authorized for issuance under the Plans, including approximately 5.2 million, 1.4 million and 1.2 million shares for the 2004 Equity Incentive Plan, the General Plan and the 1994 Incentive Plan, respectively. Options for approximately 1.5 million shares were available and reserved for grant under the 2004 Equity Incentive Plan as of December 31, 2010.
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 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. 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 $0.8 million, $9,200 and $3.0 million, in cash from the exercise of stock options in 2010, 2009 and 2008, respectively.
Nonvested Shares:
Nonvested shares granted to non-management directors certain members of management and other employees as of December 31, 2010, 2009, and 2008, along with the related compensation 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 stock amount. Each participant elects the form of the Company match (cash or Company common stock). Compensation expense that was deferred in common stock related to the Non-Employee Directors’ Deferral Plan was $37,350, $34,900 and $66,550 in 2010, 2009, and 2008, respectively. The Company match was made in Company common stock. In 2010, compensation expense that was deferred in cash related to the Non-Employee Directors’ Deferral Plan was $88,700.
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. Compensation expense deferred in cash was $226,400, $171,500 and $174,200 in 2010, 2009, and 2008, respectively.
Stock Options:
The Company recognizes compensation expense associated with its stock option grants based on their 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. The compensation expense recorded in general and administrative expense related to the fair value of stock options in 2010, 2009 and 2008 was approximately $0.2 million, $0.2 million and $0.4 million, respectively.
The fair value for options in 2010, 2009 and 2008 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, 2010, 2009 and 2008, is summarized as follows (excluding the effect of nonvested shares):
The total intrinsic value of stock options exercised during the years ended December 31, 2010, 2009 and 2008 was $0.6 million, $6,000 and $1.8 million, respectively. At December 31, 2010, the total intrinsic value was $2.4 million and
$1.9 million for stock options outstanding and exercisable, respectively.
The following table summarizes information for outstanding and exercisable options as of December 31, 2010:
A summary of the status of the Company’s nonvested stock options as of December 31, 2010, and changes during the year then ended, is presented below:
Total compensation cost related to nonvested stock options not yet recognized is $181,400, $72,800 and $23,800 for 2011, 2012 and 2013, 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 2010, 2009 and 2008, the Company issued approximately 0.3 million, 0.9 million and 0.8 million shares of common stock, respectively, with a market value on the respective grant dates of $4.4 million, $4.8 million and $6.0 million, respectively, to match employees’ contributions. The Company made no cash contributions to the plans in 2010, 2009 or 2008.
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, 2010 and 2009:
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 2010 and 2009 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:
At December 31, 2010, the Company had approximately $324 million of regular tax net operating loss carry forwards expiring during 2010 through 2029. Usage of $193 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 $131 million of these net operating losses is limited to approximately $79 million annually as a result of the exit of Norilsk Nickel in 2010.
The Company recorded a tax benefit of $30,000 in 2009 related to a refundable minimum tax credit. No cash payments for income taxes related to state tax payments were made in 2010, 2009, or 2008.
The Company had no unrecognized tax benefits at December 31, 2010 or 2009. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in Income tax provision in the Consolidated Statements of Operations and Comprehensive Income (Loss). There was no interest or penalties for the year ended December 31, 2010. The tax years subject to examination by the taxing authorities are the years ending December 31, 2009, 2008 and 2007.
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, 2010 and 2009, such items consisted of unrealized
losses on available-for-sale marketable securities. In 2008, comprehensive income (loss) consisted of unrealized gains and losses on derivative financial instruments related to commodity price hedging activities and available-for-sale marketable securities.
The following summary sets forth the changes in Accumulated other comprehensive income (loss) during 2010, 2009 and 2008:
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 agreements, 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 catalyst material to recover the PGMs contained in the material. 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 Company purchased the PGM assets of Marathon PGM Corporation, of which the majority represents mineral properties. The principal property acquired is a large PGM and copper deposit located near the town of Marathon, Ontario, Canada. The Marathon deposit is currently in the permitting stage and will not be in production for several years. Financial information available for this segment of the Company as of December 31, 2010, consists of total asset values and limited capital expenditures as the properties are developed.
The All Other group primarily consists of assets, revenues, and expenses of various corporate and support functions.
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 consolidated 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 2009 and 2008, reduced the aggregate inventory carrying value of certain components of its in-process and finished goods inventories by $6.6 million and $8.9 million, respectively. No reduction to inventory value was necessary during 2010.
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:
The Company also holds in its possession, materials it processes on a toll basis for customers until the tolled material is transported to a third party refiner.
NOTE 13
EARNINGS (LOSS) PER COMMON SHARE
A total of 53,013 stock option weighted average shares of common stock were included in the computation of diluted earnings (loss) per share for 2010. Outstanding options to purchase 439,440 weighted shares of common stock were excluded from the computation of diluted earnings (loss) per share for 2010, because the market price at the end of the period was lower than the exercise price, and therefore the effect would have been antidilutive. Outstanding options to purchase 760,619 and 888,879 weighted average shares were excluded from the computation of diluted earnings (loss) per share in 2009 and 2008 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 nonvested shares was to increase diluted weighted average shares outstanding by 1,189,253 shares for 2010. There was no effect of outstanding nonvested shares on diluted weighted average shares outstanding in 2009 or 2008 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.
All shares of common stock applicable to the outstanding convertible debentures were excluded from the computation of diluted weighted average shares in 2010, 2009 and 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 March 15, 2028 (debentures). The debentures pay interest at 1.875% per annum, payable semi-annually on March 15 and September 15 of each year, and commenced on 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 at any time before March 15, 2028 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.
After issuance of the debentures, the Company used a portion of the proceeds to repay its term loan facility and revolving credit facility. The term loan facility and the revolving credit facility were fully repaid and terminated in March 2008. Interest expense for 2008 included approximately $2.2 million for the write-off of unamortized fees associated with the termination of the credit facility. Amortization expense related to the issuance costs of the debentures was $0.9 million, $1.0 million and $0.8 million in 2010, 2009 and 2008, respectively, and the interest expense on the debentures was $3.1 million, $3.3 million and $2.7 million in 2010, 2009 and 2008, respectively. The Company made cash payments of $3.1 million, $3.4 million and $1.7 million for interest on the debentures during 2010, 2009 and 2008, respectively.
In October 2009, the Company undertook the exchange of $15.0 million face amount of the convertible debentures for 1.84 million shares of the Company’s common stock. The debentures so acquired were retired, leaving $166.5 million face value of the debentures outstanding at December 31, 2009. Because the number of shares issued in the transaction exceeded the 42.5351 shares per $1,000 of face value specified in the bond indenture, the Company expensed the value of the additional shares as an “inducement loss.” Consequently, the Company recorded a loss on the exchange transaction of $8.1 million in 2009.
The Indenture for the convertible debentures defines a “change of control” in part as a change in which “any ‘person’ or ‘group’ other than [Norilsk Nickel and its affiliates] is or becomes the direct or indirect beneficial owner of shares of Voting Stock representing 50% or more of the total voting power of all outstanding classes of the Company’s Voting Stock or has the power, directly or indirectly, to elect a majority of the members of the Board of Directors.” The exit of Norilsk Nickel as the Company’s majority shareholder in late 2010 was accomplished through a widely distributed secondary offering to the market that did not result in any single shareholder or affiliated group of shareholders
controlling 50% or more of the Company’s shares or having the power to elect a majority of the Board. Consequently, the transaction did not constitute a change of control under the Indenture.
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 both years ended December 31, 2010 and 2009 was $29.5 million, which is net of unamortized discount of $0.5 million. The Company made cash payments of $2.4 million for interest on the revenue bonds during 2010, 2009 and 2008.
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
ASSET RETIREMENT OBLIGATION
The following summary sets forth the annual changes to the Company’s asset retirement obligation in 2010, 2009 and 2008:
No adjustments were made to the asset retirement obligations in 2010. Revisions during 2009 and 2008 resulted from changes in estimated timing of abandonment. In 2009, the Company increased the estimated mine life of the Stillwater Mine from the year 2030 to 2032; and it increased the estimated mine life of the East Boulder Mine from the year 2055 to 2074. In 2008, the Company increased the estimated mine life of the Stillwater Mine five years; and it increased the estimated mine life of the East Boulder Mine by 15 years.
At December 31, 2010, 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 anticipates these financial guarantee requirements may increase once the state finalizes its environmental impact statement which was completed in 2008. However, the Company to date has not received a final environmental impact statement from the state.
NOTE 17
FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. This hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of each financial asset or liability within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The three levels of inputs used to measure fair value are as follows:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Observable inputs other than quoted prices included in Level 1 such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or inputs that are observable or can be corroborated by observable market data.
•
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial assets and liabilities measured at fair value on a recurring basis at December 31, 2010 and 2009 consisted of the following:
The fair value of mutual funds and investments 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, 2010 and 2009 consisted of the following:
The Company used implicit interest rates of comparable unsecured obligations to calculate the fair value of the Company’s $30 million 8% Series 2000 exempt facility industrial revenue bonds at December 31, 2010 and 2009. The Company used its current trading data to determine the fair value of the Company’s $166.5 million 1.875% convertible debentures at December 31, 2010 and 2009.
NOTE 18
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 2010, 2009 and 2008, the Company made contributions of $2.1 million, $1.7 million and $5.2 million, respectively, to PAI. These contributions are accounted for in marketing expense.
NOTE 19
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.
OPERATING LEASES
The Company has operating leases for various mining equipment, office equipment and office space expiring at various dates through December 31, 2014. Total rental expense for cancelable and non-cancelable operating leases was $1.3 million, $1.5 million and $1.8 million in 2010, 2009 and 2008, respectively.
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, 2010, the Company had approximately 62% and 17% 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 consolidated financial position, results of operations or liquidity.
REGULATIONS AND COMPLIANCE
At December 31, 2010, the Company believes all underground operations are in compliance with Mine Safety and Health Administration (MSHA) limits on diesel particulate matter (DPM) exposure for underground miners through the use of blended bio-diesel fuels, post exhaust treatments, power train advances and high secondary ventilation standards. No assurance can be given that any lack of compliance will not impact the Company in the future.
Nitrogen concentrates in groundwater have been elevated above background levels at both the Stillwater Mine and the East Boulder Mine as a result of operational activities and discharges currently authorized under permit. Noncompliance with standards have occurred in some instances and are being addressed by the Company through action plans approved by the appropriate federal and state regulatory agencies. Additionally, an Administrative Order on Consent (AOC) has been approved in response to exceedances at the East Boulder Mine which modifies enforcement limits and provides for Agency approval of remedial actions under the compliance plan. In view of its efforts to comply and progress to date in implementing remedial and advanced treatment technologies, the Company does not believe that failure to be in strict compliance will have a material adverse effect on the Company’s financial position, results of operations and cash flows.
GUARANTEES AND INDEMNITIES
On December 13, 2010, MMC Norilsk Nickel, the Company’s largest shareholder, announced that it had completed a sale to the public of the entire 49.8 million shares of the Company’s common stock owned by its wholly owned subsidiary, Norimet Limited. However, prior to the closing of the sale transaction, Norimet Limited advised that it was unable to deliver the share certificates to the transfer agent. Notably, most of these share certificates include a prominent legend indicating that the shares are subject to a stockholders agreement, which contains restrictions on transfer. As is customary when securities are undeliverable, before proceeding, the transfer agent required indemnification for its exposure to any consequent legal damage claims prior to the issuance of replacement shares. In order to allow the transaction to close, the Company and certain Norilsk Nickel affiliates agreed to indemnify and hold harmless the transfer agent. Simultaneously, the Company became the beneficiary of an Indemnification Agreement executed by certain affiliates of Norilsk Nickel, whereby the entire net proceeds of the offerings received by Norilsk Nickel and its affiliates were deposited into a restricted account and cannot be released without the Company’s consent. The Company is not required to consent to the release of these funds until certain specified conditions are satisfied.
If Norilsk is not able to obtain surety commitments for the unlocated certificates and certain other alternative requirements are not satisfied, Norilsk Nickel or its affiliates will be obligated to make certain payments to the Company.
The maximum potential exposure to losses that the Company could suffer relating to the unlocated certificates cannot be estimated, but presumably such amount would correlate to the value of the shares represented by the unlocated certificates at some unknown date. The Company believes that the probability of it incurring an unrecoverable loss related to the unlocated certificates is remote, given that the entire net proceeds of the offerings remain in a restricted account and cannot be released without the Company’s consent, and the fair value of the exposure, is therefore believed to be immaterial.
NOTE 20
QUARTERLY DATA (UNAUDITED)
Quarterly earnings data for the years ended December 31, 2010 and 2009 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)
Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’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 the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.
(b)
Changes in Internal Control Over Financial Reporting.
In evaluating the registrant’s internal control over financial reporting, as required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act, for the quarter ended December 31, 2010, management determined that during the fourth quarter of 2009 there were no changes to the registrant’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
(c)
Internal Control Over Financial Reporting.
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, 2010, and has concluded that, as December 31, 2010, the Company’s internal control over financial reporting was 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 within Item 8 of this Annual Report on Form 10-K.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based upon the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, our management concluded that our internal control over financial reporting is effective, as of December 31, 2010.
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 2011 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, 2010.
Name
Age
Position
Francis R. McAllister
Chairman of the Board and Chief Executive Officer
John R. Stark
Executive Vice President, Chief Commercial Officer
Gregory A Wing
Vice President and Chief Financial Officer
Terrell I. Ackerman
Vice President, General Manager East Boulder Operations
Kevin Shiell
Vice President, General Manager Stillwater Mine Operations
The following are brief biographies of the Company’s executive officers:
EXECUTIVE OFFICERS
Francis R. McAllister (age 68) 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 Cliffs Natural Resources 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.
John R. Stark (age 58) 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 61) 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 57) 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.
Kevin G. Shiell (age 53) was elected Vice President of the Company on May 4, 2010. Mr. Shiell has over 32 years of underground mining experience. Mr. Shiell has served as General Manager of the Stillwater mine and operations since 2009. During 2006 to 2008 he was General Manager at the East Boulder Mine. Prior to joining Stillwater in 1999, Mr. Shiell was Mine Superintendent with Dynatec Corporation. Mr. Shiell was with Addwest Minerals as Mine Superintendent and Echo Bay Minerals as Manager of Operations. From 1979 to 1995, Mr. Shiell was with Hecla Mining Company where he held various positions including miner, supervisor, trainer, planner, as well as mine and safety foreman. And from 1978 to 1979, Mr. Shiell was with Day Mines and United Nuclear homestake operations. Mr. Shiell is a member of Northwest Mining Association.
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 2010 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. The Board has designated Michael S. Parrett as an Audit Committee financial expert. Mr. Parrett meets the independence standards for audit committee members under the NYSE Listed Company and SEC rules.
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 June 1, 2010, 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 2011 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 2011 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 2011 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 2011 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
Page
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Balance Sheets
Consolidated Statements of Cash Flow
Consolidated Statements of Changes in Stockholders’ Equity
Notes to the Consolidated Financial Statements
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.
STILLWATER MINING COMPANY
(“Registrant”)
Dated: February 22, 2011 By: /s/ Francis R. McAllister
Francis R. McAllister
Chairman and Chief Executive Officer
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.