Sibanye Stillwater Limited (SBSW) Q2 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the Stillwater Mining Company's Second Quarter Results. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mick McMullen, President and CEO. Thank you, Mr. McMillan. You may begin.

Thank you, very much. And this is our Second Quarter Earnings Call. You've got myself Mick McMullen, the CFO; Greg Wing -- I'm sorry, the CEO; Greg Wing, our CFO; and Mike Beckstead, our IR Manager here. For everybody who's got the presentation, I'd like to refer you to the Page 2, which is our forward-looking statements. If you could all read that at your leisure. And moving into Slide 3, I'd just like to go through the summary of our second quarter highlights. Our net income attributable to common stockholders was $17.9 million or $0.14 per diluted share. This does include a reorganization charge of $5.6 million. So if you add that back in, we actually had a very solid quarter. I've stated at length in the past to say that, we're focused very much on cash generation and the cash plus investments increased up quarter-on-quarter by $28 million to just over $500 million. And that was a very good effort because we also increased our working capital in the recycling business by $9.8 million. Our all-in sustaining costs were at $792 per PGM ounce, which is below our previous guidance and at the low end of our newly revised guidance, which I'll discuss shortly. Our corporate overheads were reduced to $9.3 million for the quarter, which was a 50% decrease from the same period in the previous year. We entered into a sales and refining agreement with Johnson Matthey, which I will also discuss shortly. Our mine production was 126,400 ounces of PGM. We're very focused on safety and maintaining our social license and profitability. The management team here is not driven by any specific ounce target. The company is very focused on generating the maximum free cash flow that we can by keeping our workforce safe and maintaining our social license. We're going to change our practices going forward, so in future, we will announce our quarterly production and our earnings at the same time. This will allow us to put the production results in the context of the earnings and the cost savings that we're making. And lastly, in terms of the summary, and certainly not least, our safety performance has been very good for this first half of this year. Compared to the previous year, we saw a 21% reduction in our overall incidence rate. This is very important to us. We're very focused on safety. And we see it as a leading indicator of the health of the business and the company. And we're very happy to report that we've had such a significant improvement. Turning to Slide 4. Tracking down the second quarter results, as we've discussed, production was down approximately 3.9% year-on-year. And our cash cost per mined ounce was up by about 3.4%. However, we're much more focused on our all-in sustaining cost, which was down 6.5% from the same period last year, really driven by significant reduction in corporate overheads -- a halving, and also capital expenditure came down by just under 2% as well. As we previously announced, recycling PGM ounces was down 23% year-on-year. However, we did see a reasonably significant increase in those ounces quarter-on-quarter. This builds on the trend that we discussed on the last call where we saw a slow start to the year, mainly weather related. We've seen that pick up quite a bit. Slide 5 is a -- some new information that we've started giving in our last quarter, which breaks down our costs per ton, by area and by mine. If we look at the very bottom line, you can see that at the Stillwater Mine, quarter-on-quarter, we dropped about $25 per ton off our costs. At the East Boulder mine, we dropped approximately $15 a ton off our costs. And then if you go back up through the slide, you can see that really it's our mining costs where we've driven quite significant change in our costs. Again, I stress very heavily here, that we are very focused on cost control as a business going forward. I'd also like to point out, our milling costs at the East Boulder operation were down to $16 a ton. This is an excellent result, takes us back to where the costs were several years ago. Administration costs have gone up slightly at the Stillwater Mine. Now that does include royalties and, obviously, as metal prices go up and it's a percentage royalty, that does drive a bit of an increase in our admin costs. Byproduct credits went up slightly. Again, we're starting to see some high realized prices for those and recycling credits declined slightly. Overall, it was an excellent result for us in terms of cost control. There is much work to be done in this area, and we still think that we have potential here, but this is an important first step for us. Turning to Slide 6. In the last quarter, we rolled out a program called Securing the Future, and this is very much about turning the business into a profitable long-term PGM supply, here in Montana. We are very focused on cash flow and profitability. We demonstrated some very good progress during the second quarter. Excluding our recycling working capital increase, the operations generated approximately $37 million cash during the quarter. Again, we reduced our corporate overheads by 50% year-on-year. We had $17.9 million of net income, including our reorganization costs and our cash balance increased quite significantly. The reorganization program that we had underway led us to reducing our salary personnel by 48 people. We had 35 voluntary separations within our hourly employees. And we recognized $5.6 million worth of reorganization costs in the second quarter. This relates to -- both the salary rates and the hourly rates. And we believe that for the most part, that should be the end of those charges. The graph on the bottom right-hand side of that page shows our headcount. Over the last few years, you can see that it really did grow quite rapidly from 2011 through to 2013. We've now taken that down through the salary rate reduction, the voluntary separations within the hourly ranks and also through some natural attrition of the workforce. We're sitting around about 1,663 people at the end of the quarter. You can also see our cash cost per ounce, the trend had been significant increases; we've now flattened that out and we look to draw that down even further. Slide 7 just illustrates our quarterly net income and loss over the last 5 quarters. You can see really Q3, Q4 of last year, then we had significant impairments on our foreign assets, which drove a large loss. Q1, we had net earnings of $19.6 million. Q2, this year, $17.9 million, but as I said that does include $5.6 million of reorganization cost. So after stripping that out, a very strong result. Greg, I think we had some very minor reorganization costs in Q1 in the order of $100,000 or $200,000?

They were not big.

Yes. So overall, Q2, I think the trend has been very positive. And we're starting to demonstrate some real progress in terms of the changes in the organization. Coming to Slide 8. On our all-in sustaining costs, again, down 6.5% from the same period last year. You can see that on the graph at the top there, that despite production ounces coming down slightly, we have actually managed to maintain that low all-in sustaining cost. We have been very disciplined in how we deploy our capital. And we're very focused on operational efficiencies. We have in this presentation and the earnings announcement this morning, decreased our guidance range again for this year to be $780 to $830 an ounce range. We still have a goal. This is not formal guidance, but we have a goal of reducing our all-in sustaining costs by approximately $100 an ounce from our 2013 numbers into the low $700s. Again on the graph there, you can see how the -- the title on the right-hand side there, you can see the drivers of that change in the all-in sustaining costs to a large extent have been corporate, and we've done that despite having a smaller recycling credit as well. Slide 9 is a slide that I'd like to spend some time on because, for me, this is one of the most important slides in the presentation. This talks about our cash over the quarter-on-quarter period. You can see that at the start of the period, we had $474 million in cash and investments. The operations added a significant amount of cash. We then had some G&A, but we did increase our recycling inventories by almost $10 million. I'd also like to point out that we paid our insurance renewals -- our annual insurance renewals in May of approximately -- Greg, $5.6 million from memory, which is a one-off annual payment. We had some additional cash coming from the slag inventories. Again, if people recall, in Q1 we talked about processing the slag. And we did receive some revenue from that. And then, we've got our capital costs and our taxes. Net-net over the quarter-on-quarter period, we increased our cash by significant amount of money despite all of the one-offs that we had. Subsequent to the end of the quarter, we redeemed our $30 million 8% bonds. This saves us approximately $2.5 million per annum. We felt that this was a good return, a guaranteed return, no risk, and we had the cash on hand. We increased our cash balance. And I'm very much in favor of reducing any debt that we can within the business. Slide 10. Operational improvements in mine planning. So during the course of the quarter, we completed a very detailed analysis of profitability by mining area at the Stillwater operation. What that told us, is what we suspected is, that some of the ounces we were previously mining, we were mining at a loss. And some other ounces we were mining, ahead of when infrastructure was in place, and if we wait until we get infrastructure in place, we can actually make significantly better margin. The initiative underway now is to focus on profitable ounces and redeploy our resources accordingly. We will only grow production that is profitable. This is a significant change in the culture of the organization. To help us with that we're implementing some new mine planning software, which will allow us to run various options faster and it will improve our planning structure. Broadly, there's somewhere between 12 -- 10,000 to 15,000 ounces that we've previously been producing that was either being produced at a loss or if we wait for the infrastructure to be in place we can make a significantly better margin on. This has led to a change in our guidance. We feel that this is the best way forward for the business. I can see no point in mining ounces if we don't make money on them. On Slide 11. With the metal inventories, so we reduced it by approximately 17,600 ounces during the quarter. I've talked before about how we changed our sales program and how we sell our metals. So before we used to sell on long-term contracts, typically at a discount to the spot price. We started changing that early in 2014. During the course of this quarter, for palladium we sold at a premium to spot between $2 and $8 an ounce. Platinum, we sold at between flat to spot, or a $5 premium per ounce. We entered into a sales and refining agreement with Johnson Matthey. For those of you who don't know Johnson Matthey, they are a very large player in the PGM space -- arguably the leading player. They will purchase all of our mines palladium and a significant portion of our platinum at a market-based formula, which allows us to collect any premium that's in the market. But it will also have the right to bid on any of available recycled ounces as well. Starting on the 1st of July, Johnson Matthey are refining all of our ounces, both mined and recycled ounces, at slightly improved terms. Importantly for us, Johnson Matthey, will assist us in securing additional fee for our recycling business. Again, this agreement only came into effect on the 1st of July, but already we're starting to see some benefit out of this agreement with Johnson Matthey. Also importantly, for us, there is a nominal breakthrough for Stillwater on the sales contract and on the refining contract, some years out. This allows us to have our relationship with Johnson Matthey, but I think, importantly, corporately, it does allow us some flexibility in the future. Our realized sales price during the quarter for our mined ounces was $962 an ounce. For our recycled material it was slightly higher -- we have a slightly different mix of metals, it was just over $1,000 an ounce. And our mined basket price today, as we sit here is $1,023 an ounce. So we've seen some increase in the metal price over the quarter. And again, we continue to realize the premium. You can see from that graph there that we have drawn down our inventory quite significantly; the processing of the slag was a large part of that. And again, the slag was material that we paid the majority of costs on, and we had the ability to recover some cash out of that, which we've done. Moving on to Slide 12. In Montana, we have some projects underway. Graham Creek is a project out at the East Boulder operation. It's essentially complete. We're just in the process of installing the vent fan now. It's an 8,800-foot development, west of the existing infrastructure at the mine with twin ventilation raises to the surface. Mine production began out of that during the second quarter ahead of schedule. It's currently providing around about 10% of East Boulder's ore feed. The East Boulder Mine has seen very strong performance, and it's enabled us to advance plans there for a third shift at the mill. So just to refresh people's memory, we have a mill there that currently operates 4 days on and 3 days off. We have lots of excess capacity, and it's all about getting the ore tons out of the mine in order to fill that mill up. When that third shift comes on during the current quarter, it will add around about 2,000 ounces of production per month. And we're looking to advance that as rapidly as we can based on the very strong performance out of the East Boulder Mine and the fact that Graham Creek has come online a little bit ahead of schedule. Over at the Stillwater Mine, our main project is called Blitz. This is a very large project. It will be completed around about early 2018. This consists of a 23,000-foot development to the east of the existing Stillwater Mine, on 2 levels at a Portal, called the Benbow portal. And the main -- all the access tunnel has been driven by a Tunnel Boring Machine, a TBM, as we call it. It's approximately 7,000 feet in. And there's a parallel drive 600 feet about that, which is a conventional drive and that's approximately 6,000 feet in. We're looking at ways to expedite the advance of this project. We see this project as a core project for us going forward. It opens up a very large strikling of mineralized roof [ph] . And because of its location being on the same level as the concentrator and relatively short haul to get in to the ore body, we see this is being -- having the ability to add significant low-cost production in the future. On Slide 14. Our portfolio. We have 2 foreign assets. One is called Marathon. This is a PGM and copper asset up in Ontario. The core business of the company is profitable PGM assets in low risk jurisdictions. And so Marathon is a PGM asset. It is in a low risk jurisdiction. At current metal prices, the project does not provide us a sufficient shareholder return in order to justify us advancing this. We have a fantastic joint venture partner there in the form of Mitsubishi, who own 25% of the asset, and we own 75%. We're currently working together to assess alternatives to determine the possibility of how we can get to a project that gives us the return that we need. We don't think we'll have a decision point earlier than early next year, but we are working very hard together to see if we can advance that decision point. In the interim, we have reduced staffing up there by 50% and scaled back our spend. And Altar is a very large porphyry copper asset in Argentina. It is a non-core asset for us by virtue of the fact that it's copper. It's in Argentina and it's actually -- it's a very large asset in terms of contained copper globally. This is probably about #12 on the undeveloped copper assets in the world. We've scaled back activity there at the moment. We're looking at the best ways to realize value from that project. Again, we've reduced staff in there. We have reached agreement with IPEEM, one of the tenement holders there, to extend some mineral leases through to next year. And we've done quite a bit of test work on some alternative concentrate treatment methods which looked to have some quite favorable results there. You can see from the table on that -- on that page, that we have reduced spend at both -- or at Marathon significantly over the quarter. We spent a little bit more in Altar, quarter-on-quarter. But overall, our spend level at both those assets is relatively small at this point. So coming onto Slide 15. And I expect some questions on this later. You can see with our new guidance, we have taken down our guidance range for mine production by 10,000 ounces. So the range that we're giving now is 510,000 to 525,000 ounces. This is very much being driven by the review work that we've done at the Stillwater operation, that indicates that some ounces we have been mining in the past have not been profitable, and we're taking those out of the mine plan for now. For the large part of those, it's a deferral of mining those ounces. We've been mining them ahead of when infrastructure has been in place. And so we are waiting until the infrastructure catches up and we can get those ounces mined and hauled on rail haulage, instead of being hauled in very small trucks over long hauls and being handled 3 or 4 times. This has no impact on our reserves. What it does have an impact on is when we will mine those ounces. Cash costs, again, we've left that the same. We have reduced our all-in sustaining cost guidance by $20 an ounce. And again, you can see where we've landed on the last quarter. We think we're sitting in good shape for coming in, in that guidance. Corporate overhead, we've left the same. We have reduced some of the capital expenditure guidance, partly in sustaining CapEx and partly in project capital. For -- again, for a large part, that is because we've been able to do the same things with less money in the capital area, and there's some other areas where we've been able to just take stuff out of the capital budget altogether. We are still continuing to spend at full pace on projects like Graham Creek and Blitz. And we are not reining back expenditure in core areas. So coming onto the summary slide. We have quite good momentum in terms of our financial performance. We have taken some reorganization actions to secure the long-term sustainability of this company. The third bullet point I think is really the key one here. We have demonstrated that we have a continued focus on cash generation and profitability. That is absolutely the metric for this company going forward is to demonstrate that we can provide a return to shareholders. We increased our cash by a significant amount of money, despite some line-offs and increasing our working capital in the recycling business, as we started to rebuild volumes there. And we've shown very good continued progress in capital allocation and cost control. And in a broader sense, we see there's obviously a very favorable PGM fundamental environment, particularly for palladium. And that concludes the presentation that I have today. I'll be happy to take questions from anyone and open up the floor.

[Operator Instructions] Our first question is from the line of John Bridges with JPMorgan. John D. Bridges - JP Morgan Chase & Co, Research Division: I was just wondering, you mentioned some low value loss-making stopes that you've come across, but my understanding is that the big proven reserve that you're carrying is to avoid that sort of thing and allow you to sort of pick and choose where you go 1 year or so ahead of when you get there? So I'm just a bit surprised that you've come across stopes which are loss-making and you've not been able to avoid them. Could you give us a bit of color on that?

Yes, good question. I think that this level of review has not been done in the past. And so in a nutshell, average costs and average yields have been applied across some of these stoping areas and when we've really drilled down into the detail and applied specific costs for each stoping area, that's highlighted that some of those stopes are loss-making. And then, when we've drilled further down into it and said why are they loss making, to a large extent it's because we're mining them ahead of when the infrastructure is there. So to give you an example, some of those stopes have haulage costs that are $35 to $40 a ton more than if we wait for the rail haulage to get in place, and that just pushes them over into being either loss-making or in some areas, we're actually making a conscious decision to wait until the rail gets there and pick up that extra margin of $35 to $45 a ton. So this level of detail has not been done in the past in terms of evaluation. What that means is that in the short term, you will see a dip in production as we take some of those stopes out of service. But then we'll see production probably come back up as we redeploy those people into more productive areas. John D. Bridges - JP Morgan Chase & Co, Research Division: And you decided to take the nuclear option rather than just phasing in this new policy?

I wouldn't call dropping 10,000 ounces out of your production a nuclear option. I think that's -- you're better off to focus on margin always is my view. John D. Bridges - JP Morgan Chase & Co, Research Division: Okay. And Grahams Creek, a better news story, you're going to bring in another shift. And do you have any sort of idea as to when that's going to be up and fully -- performing fully and what sort of increment we can expect from that side?

Well, we've said in here -- in the current quarter, Q3, it will be towards the end of Q3. And it's around about 2,000 ounces per month. And look, to be honest with you, we actually have a large ore stockpile sitting on surface, that's waiting for that extra crew to start up, so that we can start moving our way through that. The East Boulder Mine has performed very, very well. Some of the other, smaller advantages of that third shift is that we can reduce the hourly throughput rate slightly in the mill, which allows us to pick up a little bit extra on recovery and also adds -- just adds ounces to us.

[Operator Instructions] The next question is from the line of Sam Crittenden of RBC Capital Markets.

Question on the slag inventory. I'm just curious if that impacted the cash costs? Was that treated as a credit in the cash costs in this quarter?

I might hand it over to Greg to answer that one.

Yes, again we used it for our mined production and some of this is -- some of the slag probably is mined and some of it is recycled, but we use kind of an average costing method. So that does draw cost as we pull that out on kind of an average basis. The -- obviously, the mining costs have already been incurred, they are in inventory. So on a cash basis, the -- those ounces in the period were less cash-intensive than the average production if you will. Is that helpful?

Yes, I guess what I'm getting at is, if all else is equal going into Q3 and Q4, will there be a bit of an increase in cash costs, just without that benefit from the slag inventory?

I think you might see a little bit, but on the whole as I say, I think most of the cash costs has been incurred on those and taken care of. So my sense is you might see -- we did benefit from those certainly from the revenue, but on the cost side, I don't think you will see a lot of change.

Okay. And then just another question on costs. The overhead reductions and then employee number reductions, is that been fully kind of felt in the Q2 numbers? Are you going to see still more benefit from that going into Q3 and Q4?

The -- as accounting rules would require, we've accrued for everything that we can identify associated with those termination costs. So there may be some cash impact going forward. A lot of this is non-cash type compensation, but some of it is cash compensation. So you may see some cash impact, but the expense impact has been recognized already.

And we're not currently planning any further additional reorganization or restructuring going forward. So I think we're done with that. And so the one-off, $5.6 million reorganization cost we had in the last quarter, we don't expect to see that as an ongoing matter.

I think we do make comment that we'll be evaluating our manpower needs as we go forward. To a large extent, we believe that if we need to reduce, that attrition will take care of that.

And then just to take to a step back, so I guess you've got this goal of reducing your all-in sustaining cost by $100 per ounce. It seems to me have you made kind of immediate changes, and then and you've obviously seen some reduction in costs, but then that next, call it $60 an ounce, is that something that's going to take more time and be kind of gradual over the next 2 to 3 years?

It will certainly take time, and will be gradual. I'd like to think we can do it quicker than the next 2 to 3 years. And a lot of it will come about through some of the changes we're making now, which we're only just making now in terms of pulling out some of the high-cost ounces. That does have an impact on our all-in costs. And also productivity gains of the operations is where we expect to see the next lot come from.

Okay. And then just one last one. I think you mentioned there is -- the Stillwater Mine production was impacted by mining conditions. From that are you talking to those stopes that you didn't mine in or was there some other challenging ground conditions or something else going on?

No. It was more related to not so much ground, but just the reorganization changes, moving people around from stoping area to a different stoping area. That was probably more what that color was around.

Our next question is from the line of Garrett Nelson of BB&T Capital Markets. Garrett S. Nelson - BB&T Capital Markets, Research Division: Nice work on the costs side and being able to lower your all-in cost per ounce guidance again. Most of my questions have been answered about the Stillwater Mine, but I have a big picture question. I want to get your perspective on how you think the new South African labor agreement will affect the industries cash costs, and whether any shift in the global cost curve might improve your competitive position?

Yes, good question. And we had in the past put a cost curve in there. We -- from what we can see, and again, you'd be better off asking South Africans possibly, but we think it's pushed the -- on a platinum equivalent basis, we think it's pushed the cost curve up by about $70 to $80 an ounce. I think Greg, that was where we arrived, wasn't it?

That's right.

So again, just by virtue of us, firstly holding our costs then starting to drive them down, and their costs going up -- and they appear to be across the board in South Africa, we think that has put us in a comparatively better position. We said that last year on a platinum equivalent basis we were about the 35 percentile in the cost curve and our goal was to get us to about the 25 percentile. And I think that the agreements in South Africa have certainly helped us a bit on that -- in that front as well.

I think that the only other point I would make is that obviously all of the cost structure is very dependent on what the exchange rate is between the U.S. dollar, which is what the metal is priced in and the South African Rand. The Rand has been weak. Again, we're not here to project where it's going, but if it were to weaken further that would strengthen the South Africans relative to us -- yes.

Slightly. Garrett S. Nelson - BB&T Capital Markets, Research Division: Sure. And then, your cash position increased by about $22 million during the quarter, it looks like -- actually maybe a bit more...

$28 million. Garrett S. Nelson - BB&T Capital Markets, Research Division: Yes, $28 million. Any thoughts on uses of that free cash, paying a dividend or returning cash to shareholders in some form?

Yes. Well, you will have noted, we paid off -- just after the quarter ended, we paid off $30 million of a bond that was costing us 8%. So we felt that, that was a very good no-risk return to us. It made a lot of sense. So even after paying it off, we still do have a significant amount of cash. I still would like to be in a position to return something to shareholders, probably in the medium term. But we haven't decided in what form that may or may not take. I would like to see how we go just with some of the operational changes that we're making at the moment to make sure that's all bedded in, and just see how much cash generation we can drive out of these operations. And then at that point, we can look to do something for shareholders I think. Garrett S. Nelson - BB&T Capital Markets, Research Division: Okay. And then with the Johnson Matthey agreement, how will that impact gross margin for the recycling segment? Will that help improve the gross margin? It looks like gross margin in that business was about 2% during the quarter. Given that, that agreement went into effect at the beginning of July, should we expect any improvement in the results of that business?

I don't know if the margin per se will improve, but the total volume should improve. And you also need to remember on that business, we have every 3 to 4 years, when we rerig the furnace, we typically pick up a pile of ounces. So last year we did have that. So we made $35.5 million in that business last year. So you sort of need to normalize earnings in it -- all those ounces, because it is a bit lumpy as and when we rerig that furnace. So I think the margin actually is -- once you do that, is a bit higher than 2%. Historically, it's been 3.5% to 4.5% I think when you run that out. So I don't think the margin will grow because of the Johnson Matthey agreement. I think what will happen is the total dollars that we make from that business should grow as we start to get the benefits of that agreement for more volume. I will say, that even though the agreement did only start on the 1st of July, we did sign it a few months earlier than that and the relationship has been quite fruitful for us so far. Garrett S. Nelson - BB&T Capital Markets, Research Division: Okay. One final question. I've noticed the diluted share count was quite a bit higher than the basic share count, what was behind that?

I'll hand that over to Greg to talk to you about the intricacies of our convert.

We do have a convertible debenture out there. The higher number, the 156, I think it is million shares. It assumes that the -- each of the convertible debentures converts into the maximum number of shares that it possibly could. I think in the real world, it's unlikely that, that would happen -- that it would be that diluted, but nevertheless, so it's kind of how the accounting process works at this point. So if anything, we're a bit overstated in how diluted we are there perhaps, although we're certainly following the accounting guidance in doing it that way. Though you may recall those debentures come due in October -- I'm sorry, become redeemable in October of 2019. So there is some time out there until that, we come to that juncture. I can go into a lot more detail, but I'm not sure you want to hear it. So if you have questions I'm open to them.

Our next question is from the line of Sam Dubinsky of Wells Fargo Advisors.

I know your stock's down, but it seems like you're executing on your strategy pretty well, so I'm surprised by the movement. But I just had a quick follow-up on recycling. I know comps are difficult because of the furnace brick from last year. What do you think a good target long-term run rate is for this business on volumes and then I have a follow-up?

Well, we don't give formal guidance on the business just because of the nature of it, but I think we'd like to target something where we could grow that 10% year-on-year. And then you have to remember that last year, it was a bit of an exceptional year. We grew at 38% year-on-year. So what we're seeing now, there was a couple of -- there was some situations in the industry last year, which sort of led us to picking up a lot of volume from one other player. But I think if we work on it, growing 10% year-on-year is probably where I think is a reasonable target for us to be.

We don't give formal guidance.

Absolutely, we don't give formal guidance on that business just because of the nature of the business.

Okay, I understand. And then based on your experiences and conversations with Johnson Matthey, from a supply perspective, how do you think this cycle compares to prior PGM cycles? And do you think there will be enough palladium to handle all of the demand? It just seems like a lot of your competition is going by the wayside?

Well, that's a fair observation. I've been pretty clear before that I don't really subscribe to a doomsday scenario in the palladium market. I think that irrespective of what happens with Russia and potential sanctions, we will continue to see the Russian metal come out. And similarly, in South Africa, I think that the exchange rate will sort of normalize to the level that just takes the bulk of that South African production -- profitable on a cash basis, probably not sufficient to reinvest long-term. And I think the gap in or the apparent gap in demand -- between supply and demand for palladium, to a large extent is going to be built -- filled in by recycling. So overall, we still think that the fundamentals, for palladium especially, look really very strong. We're starting to see that in the metal price now, which incidentally has gone up significantly since the strikes in South Africa ended. So overall, we think that the outlook for palladium looks very strong. I don't think you're going to get to -- we could call it peak palladium, where you actually run out of the stuff. And if you look at what people can substitute for palladium, really it's platinum or rhodium. Rhodium is a very thin market, and the minute someone says they're going to substitute with rhodium, the price will go very high again, which takes out any benefit from it. And you can get to a one-to-one substitution with palladium to platinum now. So that's telling you that in theory at least, the palladium price could run a long way yet, before you get real substitution risk.

Okay. And my last question is on recycling capacity, assuming there may not be a lot of palladium relative to supply -- relative to demand, in terms of recycling, is there enough smelter capacity? I know the industry in theory has enough, but is there any chance we can actually see pricing or margins get better in smelting, or is that always going to be kind of that low-single-digit margin business?

I think it will be a low-single-digit margin business in the auto cap recycling sector. There are some other smelting options, i.e. command [ph] product, which I think have a significantly better margin, and there's certainly an area that we're investigating.

[Operator Instructions] The next question is from the line of Leon Esterhuizen of CIBC.

Just sort of, I'm trying to get sort of the big kickers in your company, Mick. If I look at your net income of let's call it $18 million for the quarter, are you talking about, about $6 million worth of reorganization that could have been added to that? And if you look at the current price differential about $50 on what you had in the previous quarter, given your current run rate that's about $6 million again. So just roughly, you could have added $12 million to that $18 million, so you could have been running $30 million net income. But my problem is that you also have this inventory gain of almost $20 million or $18 million. So if I look through into the next quarter assuming everything stays where it is now, you gain 12, but you lose 18, so there's 6 down quarter-on-quarter. What it comes down to for me is that you really, I think need to somehow start adding volume, you need to add more production ounces. And I know, you're not focused on ounces, you're focused on margin, but I'm just thinking, I'm trying to find the real kicker -- the thing that gets you off to the races, so to speak?

Yes, and look we will add some volume, but you need to add volume that's making you money. If you're losing $200 or $300 an ounce, there's no point in producing it, simple as that. And so what we're looking to do is to redeploy some of our workforce in -- out of areas that have been losing money and redeploy them into areas where they got high productivity, which eventually will translate into more ounces. But you need to make that transition first and get them into those areas. And that's what we're doing there. We've started rolling that out in -- towards the end of last quarter. We'll do it this quarter. That may translate into higher ounces as we go forward, but for the rest of this year, the guidance that we're giving now, we feel that is the correct number. We feel that what we're doing now will actually give us a better cash position at the end of the year than the plan we were previously on -- in fact we know it will.

Okay. So if you roll this thing slightly forward with your new areas coming on, I know you don't want to give guidance, but there must be a feeling that you're going to be producing more profitable ounces, let's say, over the next 24 months?

That's correct. And we would probably see production again. It's not guidance but we would probably see over that period the production would go up. But importantly for us costs will continue to go down. That's the key for us. As Greg mentioned, even though we're in a pretty good position on the cost curve now, if the Rand was to depreciate suddenly, our position in the cost curve would worsen. So we must focus on our costs, so we must focus on cash flow generation. And -- we did generate some cash out of the inventory, out of the slag. But that's been sitting there for a long time. I saw no point in letting it sit there. We might as well have it as cash in our balance sheet. Similarly, the ounces that are sitting in the stock pile over as East Boulder, same story. It's cash sitting there that we can -- we've paid most of the costs on. We're going to pull that out into ounces and convert that into cash over the next quarter or 4 months.

At this time, I would like to turn the floor back to Mr. McMullen for closing comments.

Well, I'd like to thank everybody for dialing in and for all the questions. In summary, we think we had a pretty strong quarter. And we look -- we look forward to building on this base and really just continuing to build on cash. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.