Sibanye Stillwater Limited (SBSW) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Stillwater Mining Second Quarter 2013 Results Call. [Operator Instructions] As a reminder, this conference is being recorded. I'll now turn the conference over to your host, interim Chief Executive Officer, Terry Ackerman. Please go ahead, sir.

Thank you, operator. Welcome, everyone, and thank you for joining us today for Stillwater Mining Company's Second Quarter 2013 Earnings Conference Call. As the operator indicated, my name is Terry Ackerman, the interim Chief Executive Officer of Stillwater Mining Company. With me today are several members of our management team, including Greg Wing, Vice President and Chief Financial Officer; Kevin Shiell, Vice President of Mining operations; Kris Koss, Vice President of Human Resources and Safety; Brent Wadman, Vice President of Legal and Corporate Secretary; Ralph Green, Vice President of Exploration; and Rhonda Ihde, our Corporate Controller. As always, I would like to remind everyone that some statements in this conference call will be forward-looking and therefore, involve uncertainties or risks that could cause actual results to differ from our projected results. We discuss these risks and uncertainties in more detail in the company's filings with the Securities and Exchange Commission, including those discussed in our second quarter Form 10-Q which will be filed later this afternoon. This year's second quarter was an eventful one for Stillwater Mining Company. Following our annual meeting in May, we welcomed 4 new directors to the board. These new directors have taken on their responsibilities energetically and the entire board is very active in providing valuable guidance and fresh perspectives on our business. I'm enjoying working with them and I'm looking forward to their continued leadership. Following Frank's retirement in June, I was asked by the Board of Directors to assume the role of interim CEO. I appreciate the board's confidence, and as importantly, the support I'm getting from an excellent team of experienced professionals at all levels in the company. I'm honored to be part of the Stillwater, in this capacity, at such an exciting time. For the past several years, our operating teams have maintained a consistent track record of strong execution and delivering results, and the second quarter of 2013 was no different. Mine production was ahead of plan for the quarter and our recycled facilities set another quarterly record, by a significant margin, for PGM ounces recycled. In addition, our Montana development projects are moving forward on plan. In terms of financial results, the company has a strong underlying second quarter performance. However, this solid performance was masked by some unusual expenses during the quarter. I will talk more about these in a few minutes. The supply demand fundamentals for our primary product, palladium, continue to be very strong. We did experience a dip in PGM prices during the second quarter, as market prices for palladium and platinum broadly tracked a downward turn in the price of gold. However, the negative impact on palladium and platinum prices was not as severe as for gold, reflecting the dual character of our PGMs as precious metals with significant industrial application. Our average combined realized price per mined palladium and platinum sales during the quarter was $865 per ounce, up slightly from the second quarter last year but down from the $926 per ounce we realized in the first quarter. Despite the dip in market prices, PGMs, and particularly palladium, have continued to benefit from strong automotive demand in North America and China, offset in part by the lack of recovery in the European auto markets. On the supply side, instability among the South African PGM supplies, and the potential for additional labor unrest, as union contracts are renegotiated this summer, has tended to provide added support to the palladium and platinum prices. Now, I'd like to comment on a few items in our financial results. For the second quarter of 2013, we reported a consolidated net loss attributable to common shareholders of $5.3 million or $0.04 per diluted share. As I mentioned, there was some noise in our results for the second quarter. We had significant unplanned expenses, including a one-time non-cash charge of $9.1 million for accelerated vesting of essentially all outstanding incentive shares and stock options. This accelerated vesting was a result of a change in control, provisions and our equity incentive plans that were triggered during the quarter. We also recognized additional expenses of $1.5 million during the quarter for legal and advisory services related to the recent proxy contest. These 2 specific categories of expenses are broken out separately in our second quarter income statement. Also unique to the quarter were onetime compensation expenses associated with the retirement of our former CEO. These costs are included in the general and administrative line items in our financials. If these unusual expenses were excluded, our core financial results for the second quarter of 2013 were respectable. For comparison, consolidated net income attributable to common stockholders for the second quarter of last year was $19.2 million or $0.17 per diluted share. Total revenues from the mining and recycling for this year's second quarter were $265.5 million, an increase of 25% compared to second quarter of 2012. The increase in total revenues was driven by the growth in our recycle business. PGM recycling revenues for the second quarter of 2013 were $153.7 million, an increase of almost 60% from the same quarter last year. Mined PGM production in this year's second quarter totaled 131,500 ounces, down slightly from 2012 second quarter. These changes in production from period to period are primarily the result of normal variations in mining conditions and in stopes available to mine at any point in time. After reviewing our year-to-date mine production, and recognizing some of the production risks remaining, we have concluded to maintain our mined palladium and platinum guidance at 500,000 ounces mined for this year. At the Stillwater Mine, we experienced some challenges during the second quarter, with the ore grades delivered to the mill. Normal grade challenges we experienced during the quarter were compounded by several infrastructure issues, including the loss of a key muck pass. With the loss of this pass, an adjacent pass was used for both ore and waste for part of the quarter, which is not optimal for operations and created logistical challenges and dilution. Our teams are working diligently to resolve this issue. I do need to point out that the current developed state of both the Stillwater and East Boulder mines, which we have worked very hard on to strengthen over the past several years, has provided operational flexibility that has allowed us to effectively manage through issues like this when they arise. As evidence of this, our mine production remained ahead of plan for the year and we are maintaining our production development goals. In fact, if we are able to resolve these grade issues fairly soon at the Stillwater Mine, we may be able to improve our 2013 production and cost outlook. As I mentioned, our recycling facilities set another quarterly record for total palladium, platinum and rhodium processed, with 175,000 ounces fed to the smelter during the second quarter of 2013. This is 13% more than the record set just last quarter. This growth has come, mostly attributable to the addition of several new suppliers. The company's combined average realization for recycling sales, including palladium, platinum and rhodium was $1,070 per ounce in the second quarter of 2013, up slightly compared to second quarter of 2012. Late in the second quarter, we began re-bricking our Number 2 smelting furnace and as a result, have been milling and processing the old furnace brick. The total recycled PGM ounces processed during the second quarter included approximately 8,000 ounces recovered from the reprocessed furnace brick. Recycling activities will benefit further from an additional 12,000 brick ounces to be reprocessed during the third quarter. The majority of the revenues from the sales of these additional ounces will be recognized in the third quarter. Total cash cost per ounce -- mined ounce averaged $532 for this year's second quarter, up from $454 per ounce reported for the second quarter of last year. This increase is mainly due to the lower ore grades at the Stillwater Mine that I discussed, along with higher labor cost. Contractual wage and benefit rates have increased and the number of Montana employees has grown over 7% to 1,717 at the end of second quarter this year, from 1,599 at the end of second quarter last year. This is a good thing. The increase in employees is primarily driven by hiring for the new miner training program in support of our new projects and to accommodate increasing underground travel distances and operational support required as the mining operations recede further from the entrances to our mines. The company's guidance for average 2013 total cash cost remains at $560 per ounce, which represents an expected increase of nearly 16% from the $484 reported in 2012. As I noted, we could do a little better than this if we are able to resolve or at least offset some of the grade challenges we are currently seeing. I also would like to emphasize that while we believe our operations are efficient and cost-competitive, we are focused on controlling cost. Our operations cannot remain competitive if costs are not controlled and we will have a key focus on that objective as we plan for 2014 and beyond. Marketing expense for this year's second quarter was $2.3 million compared to $3.7 million for the second quarter last year. Marketing spend has become an important focus for some of our investors, and I'd like to provide an update on our plans in this area. During the full year of 2012, we spent $11.2 million in our marketing, and our original marketing plan for 2013 was $12.1 million, mostly for palladium jewelry promotion. We have since reevaluated our marketing strategy, and in light of the already strong supply and demand fundamentals for palladium, have initiated a phaseout of our jewelry marketing efforts. This will result in a sharp reduction in marketing spend going forward. But beyond jewelry promotion, the company will continue as an active proponent of palladium and platinum applications, particularly on the industrial side, and we will maintain our dialogue with the investor community and other participants in the palladium market. We believe that Stillwater can continue to play in an influential role in promoting palladium among these groups. Exploration expenses in the second quarter totaled $2.2 million, primarily for exploration at the Altar project in Argentina. The company has budgeted $14.8 million for exploration programs in Argentina and Canada during 2013. As indicated in the past, future levels of exploration spending are discretionary and will be evaluated year-by-year. The total capital expenditures for the first 6 months of this year were $58.8 million. Total capital expenditure, to date, in 2013, are considerably lower than planned, and consequently, we are reducing our 2013 capital expenditure guidance to a range of $145 million to $155 million. This is down from the original budget -- 2013 budget for capital expenditures of $172.8 million. Moving on to development projects. All 3 of the Montana growth projects Blitz, Graham Creek and the Lower Far West are on schedule. Beyond Montana, we continue to make progress at both our Marathon project in Canada and our Altar project in Argentina. At Marathon, a detailed engineering and feasibility study is in the process and is expected to be completed during the fourth quarter of this year. At Altar, we concluded the limited drilling program for 2013 drilling season in April and the drill core is now being analyzed. We expect to complete an updated resource report on Altar project before the year end. Before I end my prepared remarks, I would like to comment on the review process noted in our press release this morning. The company management has been working closely with the Board of Directors in conducting a comprehensive internal review. This process is intended to be a very thorough review of the company's current and planned activities and includes all areas of the business. The objective is to provide information necessary to assist the Board of Directors and the company management in charting a forward that will build on the company strengths, provide long-term strategic focus and ensure our efforts are contributing to shareholder value. I view this process as a very positive step for Stillwater and anticipate the results will be very beneficial to the organization. The review will be completed as quickly as possible and the results will be disclosed as appropriate. In summary, Stillwater is performing well, and despite reporting a loss, had a very good second quarter, both operationally and financially. The company is on track to meet its mine production and development targets for 2013. In addition, we believe the market fundamentals for palladium as are robust as ever. The company's in good hands with an experienced management team and a Board of Directors who are working diligently to take the steps necessary to make Stillwater an even stronger company. I'd like, now, to turn over the call to the operator for any questions.

[Operator Instructions] And our first question will come from David Gagliano with Barclays.

I just have a few questions. First of all, on the outlook for the remainder of 2013. Obviously, it sounds like grade variability at the Stillwater mine is factored into it, but the full year guidance for cash cost implies about a 13% increase in the second half versus the first half. Is there a way to frame how much of that -- if things kind of continue the way they are at the Stillwater mine, how much lower could the cash cost be versus that $560 target?

Well, David, I think, as you indicated, the guidance is anticipating us working through the grade issues at Stillwater Mine. There is a little additional cost anticipated because of contractual increases that kick in the July period. But we're optimistic that we can work through that and experience a better cash cost.

Okay, okay. Just on another note, regarding the change of control provision, I just have a question. What do you actually change in terms of the control? I always thought change of control was based on shareholders not Board Members or am I missing something there? Like, what exactly did change in terms of the control?

I'm going to have Brent Wadman maybe speak to that.

David, it's a kind of dependent on the agreement that we're talking about. But each equity plan, each of our contracts have kind of a different definition of change of control, and most of them do have a provision for changes in the composition of the board.

Okay, okay. Okay, and then, I'm sorry, I'll just add a couple more. In terms of the lower run rate on the CapEx, was there anything that you've actually removed from spending this year or pushed out or is it just the cost associated with what you're trying to get down are actually lower?

I think all 3 things you mentioned. We're experiencing some better-than-planned costs on some projects going well. We've deferred a few activities, that will probably kick in more in 2014, and we've deferred a few items related to our permitting speed up in Canada.

What were sort of the major deferrals if there are any big buckets?

Some equipment purchases, we got a little bit later start on some development activity in Montana operations, and again, some of the planned project activities at Marathon are linked to the environmental assessment process which has stretched out a bit.

And then I just have one more, on Marathon, the feasibility engineering study. Is that taking a little bit longer than expected? And if so, why? Or am I missing something there?

No. We've been anxious, maybe we're a little optimistic, as we try to give the best guidance we can, and we've had the opportunity to look at some options that previously we may be passed over. So, I'd say it's all healthy and we're more focused on putting out a good product and a good understanding down the road here.

[Operator Instructions] We'll go next to Daniel McConvey with Rossport Investments.

In terms of people changes, I see, just like in the management, there's been very few in terms of other changes in management. If you go down the line, has there been many people left in the last 3 months?

I'm just looking at my HR help here. I don't think so.

Very stable.

Very stable, and I think that's one of the things that's I'm very pleased about. It sure helps my job be easier.

Okay, very good. In the employee numbers you just gave out, I think you had roughly 1,600 last year and 1,750 this year, broadbrush numbers. I know the mine is getting further away from kind of the entry points, et cetera. Is that a good representation, roughly, of the number people you're going to need going forward versus what you did need to sustain the current production rate?

I think it's so, you have a plan going in there. Adding people for receiving pay usually comes in tranches, it's not like a linear function. But I think, more importantly, a lot of the activity that's bringing people in the doors in preparation for, and gearing up on these development activities at both the East Boulder and Stillwater mines takes a 3- to 5-year period to develop a good miner. And so that, if we're going to sustain our accelerated development activities towards growing some production, we just have to get started.

Okay. But, remind me, does that include, for those projects -- it was pretty much sustained, this 500 to 550 rate, correct?

Well, we've given some guidance, looking forward, at adding some production over the next 3 years at both mines.

Yes. I will add to that we're planning to add 30,000 ounces at East Boulder in 2015, and about 60 of those people are targeting just that. And we've got to get them on board before we actually need to produce the tons and ounces. So it's a fair lead to what's going to come.

Our next question is from Sam Crittenden with RBC Capital Markets.

Just to clarify what you said on Marathon earlier. The permitting process has been slow, is that something you guys have actively done or is that something from the regulator's side of things?

My foot's still on the pedal. It's a back-and-forth. We're in a joint panel review process with the federal and provincial groups. It's the first time in Ontario that anyone's going through this, so there's a lot of nuances that are being laid out and decisions being made. So it's been maybe a little more trying and there's been more back and forth as we understand and interpret their needs, of the government. But, no, I think we're getting great cooperation and I think it's just one of those things. When you go through these processes, you get comments, you have to respond to them and sometimes we have to come off the clock as we address the concerns or issues that are raised.

And then, so do you have a rough timeline in mind of when you could get permits for that project?

Obviously, subject to change, but our current thinking is that we're going to get a nod to move forward with the public sessions, and hopefully, that'll take place in October of this year. Then some different phases that the different ministers go through, of the review. So, if all the stars align, it could be as early as late second quarter but more likely middle of next year. And I would encourage anybody interested to get on to the CEAA website, in Canada, and there's a pretty good timeline established and a process that we're in the middle of going through. It would help you out.

And then just one last one. You mentioned you're looking at different options and I know you're still doing the engineering, but do you think the project would support a smaller, higher grade development? Could you scale the project down if you chose to do so or do you need a certain scale to make it worthwhile?

I think the latter. I think there's a certain minimum when you look at open pit mining and capital investment. So that's part of the analysis, looking at a range of options.

[Operator Instructions] We have Sam Dubinsky with Wells Fargo.

Obviously, PGM pricing has pulled back a little bit, albeit more so for platinum and palladium. Would you still describe the market as tight or have fund flows out of the commodity change supply at all in recent months? Then I have a follow-up.

Let me try to tackle that, if I may. I think our view is that, although neither of the markets are terribly tight at this point, the palladium market probably is a little bit firmer than the platinum market. What has helped the platinum market a little bit is the introduction of the, in effect, ETF in South Africa which has soaked up some production. But with the European auto situation still remaining fairly dire, in terms of production there, there's been surplus platinum in the market. I think, to a lesser extent, we've seen that in palladium.

Okay, great. And then, for a strategic review to be complete, do you need to first appoint a permanent CEO or can we have an update before then?

I think that'll from further guidance from our board, as to the timing of that, as we put together the information they've requested and we go down the road.

Okay, and just my last question. How should we think about mining cost in 2014? What leverage do you have to pare back on costs if pricing sort of stays at current levels? Basically, sort of what's in your control and what's out of your control.

Wages, obviously, are fairly predictable. The cost of benefits is less controllable in turn, although we work on that. We have wellness programs, and so forth, that target that. Materials costs are fairly steady, if you will. We, obviously, are looking at efficiencies, but we also are looking at the best way to get things done in a combination of factors there.

I think one thing to point out is that, while we clearly have seen a pretty steep increase in our cash cost per ounce, if you take a look at our cash cost per ton, it kind of drives our mining operations, you'll note that year-on-year we're pretty flat on the total cost per ton. So I would suggest that the efficiency, the people, productivity gains are helping greatly to offset the cost on our mine sites.

We have a follow-up from David Gagliano with Barclays.

Just a quick one, on the realized price, and maybe our math is a little off, it still seems like even though prices came down -- just the simple math on the averages, unless our math is wrong, suggest prices should have been a little bit higher. Is there anything else going on there or is it just timing?

I think it's just timing. Most of our contracts, as I think you might know, are delayed. They're based on last month's pricing, if you will, on average. So we do see a little bit of trailing. I don’t know if that's built into the model. I suspect it might be. But, other than that, I think you should be pretty much reflecting market.

Thank you, and we have no further questions. Please go ahead with any closing remarks.

Well, I'd like to thank everybody. I believe I'll turn it back to the operator will give you some instructions about how this call can be heard again. Thank you.