Sibanye Stillwater Limited (SBSW) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Stillwater Mining Company’s Third Quarter Results. At this time, all participants are on a listen only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mick McMullen. You may begin.

Thank you very much and thank you everyone for joining on a Friday, for our third quarter 2015 results. I’m here with Chris Bateman, our CFO and Mike Beckstead, our Head of IR and Brent Wadman, VP of Legal. We have an earnings deck that people can refer to which I’ll talk through as I go through this presentation. If you look at slide two of that on the forward-looking statements, I’d like people to read that and in particular just take time to go through each of those areas of that slide. Turning to slide three on the third quarter highlights, third quarter was characterized by some excellent cost control and all-in sustaining costs that came in at $667 per PGM ounce and for clarity of PGM ounce is when we refer to a mix of palladium and platinum in a ratio for this quarter of 3.4 of palladium to 1 platinum. That was well below our goal that I had set 1.5 years ago of being in the low 700s. Mine ounces were up 4% year-on-year to just over 128,000 PGM ounces. Our sales were lower by just under 11,000 ounces in production, given the way we saw prices go in the quarter, we didn’t feel the need to rush to sell all that metal. And as it turned out that’s been a great decision. I think it’s been very good in terms of the cost results and the production result that we’ve achieved during the quarter when we had made quite significant changes to our business and I think it’s a testament to the hard work of our people on-site. Our recycling business saw quite a significant jump in processed ounces, so approximately 161,000 ounces, which was a 37% year-on-year increase. We did however record a net loss attributable to stockholders’ round about $11.9 million or $0.10 per share, compared to net income in the previous period of the prior year of $18.1 million. Obviously we saw PGM prices move lower, significantly driven during the course of the quarter. Realized price of $693 per mined ounce was the lowest quarter for the last five years. That loss also includes a non-cash loss of approximately $4 million before tax or $2.5 million after tax, which relates to the great purchase of the convertible debentures. We also had about $1.7 million of before tax or $1.3 million after tax reorganization costs that were associated with the restructure that we did in the month of August. I’ve been really cleared before that I don’t really like debt. We saw an opportunity during the quarter to repurchase some of our convertible debentures at a price below par. We felt that it was a useful opportunity for us and good use of our cash and we took the opportunity to purchase about $63.3 million space value of those banks. We ended the quarter with about $460 million of cash and cash equivalents plus liquid investments, so a very strong liquidity balance still. And again, despite all the changes we made during the quarter to the business, our safety performance continues to be very good and we are running about 6% better than where we were this time last year. Turning to slide four, just looking at the title you can see, production was up, average realized price was down significantly from the prior year almost 30%. Our cash costs were down about 16%, all-in sustaining costs down 19% and you can see there that we saw a reduction of SG&A sustaining capital spend, project capital spend. So overall, I would say operationally, an excellent quarter for us, somewhat overshadowed by the falling of PGM prices which have since recovered. And significant increase in our PGM ounces processed I think is also very encouraging because this is an area in the business that we feel that we wanted to grow a year ago and we feel successful in doing so. Slide five just shows where we are for the three quarters of the year-to-date versus the same period for the prior year. As you can see, despite making some changes to the business, our production is actually up relative to prior year. Metal price, down obviously, cash costs down; all-in sustaining costs down and PGM ounces up. So again I think given the vision that we’ve set for the business about year and a half ago and more recently on the last earnings call, I think that’s -- we have made some significant steps in the right direction and we are now looking to take the business to the next level. Turning to slide six, I’m going to turn over to Chris Bateman, our CFO and he can talk about our net loss and income performance.

Yeah. Thank you, Mick. As Mick has mentioned, the loss for the quarter was 11.9 million and there were two non-routine expenditures in there which included the reorganization costs after-tax of 1.3 million and the early debt extinguishment. The biggest effect on earnings in the quarter was the drop in sales prices. We were at 693 for the quarter compared to 842 last quarter and 983 the corresponding quarter in 2014. So that had an impact. The excellent cost performance on the quarter will start to flow through the next quarter and wouldn’t have been reflected in this quarter’s cost of goods sold. Turning to slide seven, the main driver of the change in cash balance, we had 11.7 margin contributed from margin, that’s down from around 30 million in the prior quarter and as I said, driven by the sharp reduction in prices. Recycling, working capital was stable for the quarter. We are seeing a higher level of tolled ounces than purchased ounces than we’ve seen in prior years and the recycling business remains strong in Q3 as we said at the last conference call. Cash capital for the quarter was 25.2 million and the biggest expenditure related to the repurchase of the debt where we spend at 61 million.

Thanks, Chris. Moving to slide eight, we put this in here people want to model how our performance is going on the side level. And you can see, particularly at the Stillwater Mine we’ve had some very good success at driving the mining costs per ton down and overall, we’ve seen a very strong performance actually at both sides. And if you were to extend this back to the prior year, you could see that we had a very good performance at East Boulder in terms of driving costs down, East Boulder across some sort of stabilized at around this level now, but the Stillwater Mine continues to come down quite significantly and this is where we really focus most of our attention in terms of opportunity for cost reduction. So overall, I think a very tight performance in Q3, in terms of our cost per ton and again, against the backdrop of quite significant changes made in the business. Turning to slide nine, so all-in sustaining costs, this is the measure that we use to sort of track the long-term health of the business. Again, I think the result of 677 for Q3 was an excellent result. We are tracking year-to-date at about 742 so I think that really highlights just how strong that Q3 performance was. We have kept our guidance range unchanged at this stage for all-in sustaining costs. I think that the reorganization plan that we implemented during Q3 has demonstrated that we can deliver significant sustainable reductions in all-in sustaining costs, and you can see from the graph on the top right of the page just how successful we’ve been at that. In January of last year, we put out a goal of – it wasn’t a guidance but a goal of reducing our all-in sustaining costs towards the low 700s. I think we can say that we are achieving that now. We have now thought about what would our next goal be. We think at this stage getting our cost down sustainably in the mid-600s in the medium term is the appropriate goal for the company at this stage. Turning to slide 10 on our met complex and recycling business, again, continue to achieve growth. The backdrop of the overall market is fairly challenging. I think there has been a deception in some areas that there is a -- it was called a wave of supply coming from recycling. We don’t see that, we see actually the overall recycling market has having been down to flat at best. So I think the fact that we’ve increased our volume by 37% year-on-year is very strong signal about how successful we’ve been in expanding this business. We continue to move our business away from short-term contracts to long-term supply agreements to underpin the business and the weighted average length of contract we have now is approximately two years. We saw net income before taxes in this recycling business of about $3.3 million in Q3 which was a 60% increase from the prior quarter. And as noted on the last call, we see the profits lag the actual volume by two to three months due to our metal outturn times. So overall, we see this is a really strong part of our business. We continue to look to grow it. We continue to look to other types of products in the PGM space that we can put through our facility and I think that the success that we’ve had has been very good and we would like to build on that success and really take this business to the next level. Turning to slide 11 on the reorganization, so we implemented the re-org plan that we announced last quarter. I think the price decline in Q3 really gave validation to that plan and as to why we needed to do it. We moved quickly and I think we took concise action to protect shareholder interest. And I think it’s very important to position the company to be able to withstand all phases of the PGM pricing cycle and secure our long-term future for shareholders. Most of those changes have occurred at the Stillwater Mine and the updated mine plan have focuses on mining the most profitable stopes. And that’s not necessarily a high grading strategy, in fact, it’s quite the opposite. It’s going after those stopes where we have the best productivity and the lowest holdage costs and best infrastructure access. We reduced our development rate slightly, the developed state which is how many months of reserves we have developed, it’s the highest it’s ever been in the history of the company. We will be continuing to add to that. We felt but it wasn’t appropriate to continue to add to that but it wasn’t also appropriate to cut into it. So the development rate that we have at the moment is basically giving us some status quo. We reduce our headcount during the quarter by about 159 people through natural attrition and by workforce reduction. So we ended the quarter with 1,442 people within the company. We took the reorganization charge of $1.7 million before tax associated with that restructure and we expect those employee reduction will result in annual life savings of between $10 million to $12 million. That took place in the third week of August and so the full impact of that saving was not felt during Q3. Turn to slide 12, I’ll just talk very briefly about our Blitz project which is our main development asset. So every year we do a drill program from servers. That drill program is really our aim to sort of identifying where the giant – is located and allowing us to move our Tunnel Boring Machine in the correct direction. But we did see grades consistent with historical off-shaft mineralization in the 0.6 to 0.7 of an ounce to the ton. There are three components to this project, two of which have been underway, the third was a portal of decline that comes in from the far end which is called the Benbow portal. We had said previously we expect it to get the permit on that by year-end. We got that permit in August and we started construction on that in early September. Total spend by the end of the third quarter was just under $73 million. We anticipate total costs of this project to be round about $205 million. And you can see the other components of Tunnel Boring Machine has progressed about 8,900 feet in the quarter and the conventional drive is a little bit further along the TBM. On slide 13, we talk briefly about our portfolio management update. So Marathon which is our PGM copper asset up in Ontario, had been held by Mitsubishi in a joint venture with us. They own 25%. We purchased that interest at the end -- subsequent to the end of the quarter, for total consideration of $5.2 million which was a $1 million cash payment and 25% of the cash held in these subsidiaries. I think that provides us with some flexibility in terms of the way we take the project. We are doing some limited success-based exploration there and we have identified quite large the anomaly that’s been untested by drilling that does appear to have some narrow-ish but quite high grade copper nickel PGM mineralization associated with it. At Altar again, we are continuing to do some work there. Our geophysical program has highlighted quite interesting targets and we will look to see if we can drill those during the next field season as a means of progressing that project alone. Slide 14, I will discuss briefly the PGM market commentary and I guess this is a view that we hold not necessarily the widely held view, but it is a view that we hold. So the PGM prices obviously very heavily during the quarter, palladium got as low as 524 an ounce, platinum was down to a low of 908. For palladium especially these price levels were not reflective of the underlying supply demand fundamentals where we expect the metal to be in deficit of 2015 and for the foreseeable future. We’ve see palladium in a structural deficit going forward. And so for the price to fall from the level of start at the quarter to get down as low as 524 towards the end of August, we just did not think that reflected underlying fundamentals. We think that the palladium price movements seem to be have driven in the large parts by commodity fund liquidation of physical metal, combined with some short term weakness in the Chinese market particularly the auto market. Palladium prices have since recovered by about 28% from the lows of fundamentals have started doing some pricing again. We’ve seen very strong North American auto sales which as we all know is predominantly gasoline engine cars which is palladium. We’ve seen actually surprisingly strong European auto sales, both of those have been partially, not fully, but partially offset by weaker Chinese auto sales which do appear to have recovered through the course of September and October. Platinum prices are a little bit different in our view. They have recovered by a much more modest 9% from the Q3 lows which we think is reflective of the [indiscernible] fundamentals to play into palladium. We’ve seen relatively weak European diesel sales and Asian jewelry sales which were our very large component of platinum demand has been quite weak as well. It’s worthwhile commenting at this point on the European diesel market. It is obviously experiencing somewhat of a downturn associated with some of the events around emissions testing. And we continue to see what’s likely to happen if diesel market share in Europe will continue to fall and the slack will be picked up in a large part by gasoline engines and to some extent [indiscernible]. Gasoline engines and use for a large part palladium and again we think that’s why you’ve got a relative difference in the fundamentals between palladium and platinum. Turning to the next slide where we have the South African platinum industry cost curve. This is provided by HSBC, it’s a forward-looking cost curve so this is based on the guidance provided by the company there, in terms of where they think they will get their cost to not where they are today. And I think this is illustrative of why we also see the platinum and palladium markets to be somewhat different. Depending on which analyst you look at and where the prices are at any given day, somewhere between 70% to 80% of the South African platinum industry loses money in current prices on a cash plus CapEx basis. We think that that’s best not a sustainable industry long term and something will have to change for the survivors to be able to take their businesses forward. So what we see in the platinum industry especially is relatively weak demand and supply not coming off in the immediate term and therefore we expect to see the price differential between platinum and palladium will continue to move closer as we see the underlying fundamentals for palladium to be significantly stronger than for platinum. Moving to slide 16 our guidance, this is unchanged from the last quarter. I think we’re on track for meeting this and at this stage, we don’t believe it’s appropriate to change that irrespective of the very strong cost performance that we had in Q3. So in summary on the last slide, I think that our third quarter was defined by excellent operational performance, overshadowed by continued decline in PGM prices. And as I said, we’ve seen those prices bounce very strongly since then particularly for palladium. We’ve implemented our reorganization plan. We expect to see the full benefit of those labor savings in Q4, given that we really having had – on the previous quarters with those benefits. We are achieving the goal that we put out before being in the low 700s for all-in sustaining costs. We are now introducing a new metric, a new goal to get our all-in sustaining cost into the mid-600s in the medium term. We’ve made very good progress on our recycling business and again we looked five other types of products that are PGM bearing to putting to that business. We repurchased $63.3 million of our converts at a price of $96.04 in the toll up. So again at any time we can buy debt back at less than face value, we think that’s a good return for shareholders. Despite that, we maintained a very strong balance sheet. I think one of the best liquidity profiles you will see in the mining space, ended the quarter with $460 million of cash and cash equivalents plus liquid investments. And I think that strong cash position provides us with lots of optionality in the current market environment and I think also it provides shareholder some reassures that this business is strong and can survive all parts of the cycle. So with that, I’d like to hand it over to see if anybody has any questions and Chris and I will be happy to take them.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from David Gagliano with BMO Capital Markets. Please proceed with your question.

Hi, thank you for taking my questions. I had a couple of quick ones. First of all, on the – just wanted to do a quick reconciliation, the production versus the sales volume. I missed it if it was mentioned in the prepared remarks, but should we expect that to reverse -- that inventory built to reverse in the next couple of quarters?

Yes, Dave, we should. So, strong mining performance and we saw an inventory build in the Columbus complex and we weren’t in a hurry in Q3 when the prices dipped viciously to get it out the door. So we should see that reversing in Q4.

Okay. All of it in Q4, just so for modeling purposes?

I think a good portion, let’s see how the rest of the quarter goes and obviously we have stronger mining performance at the backend were flowing through but we are flushing that through the system.

Okay. On the 10 million to 12 million of savings tied to the restructuring on the labor side, you mentioned that not much of it flowed through. Can you tell us how much actually did flow through in the quarter?

As Mick mentioned, that was five weeks of the lower labor rates, so five over 52.

Just pro rata?

Yeah, that’s right.

Perfect. And then just the last thing, I was wondering if you comment a little bit more, I noticed on the recycling volumes, jumped up quite nicely quarter-over-quarter even though I know prices were weak, which -- recycling volumes may be come down a little bit. I was wondering if you could give us a little more color on the driver there and is that sustainable moving forward?

Yeah, Dave. As I said in one of the previous quarters, we won a couple of significant contracts, fairly large contracts and it just took a while for that volume to start flowing through. And what we also saw a few – through the detail of the – we did see some high grade material come through. So whilst tons per day was up, I think it was 20% ounces were up, 37% so we saw a bit of change of mix of material as well and that also gave us a pretty good bump in terms of ounces processed during the quarter. And we think it’s sustainable at this stage, obviously as contracts run off and you have to renew them, you need to continue doing that. But our goal is to try and maintain the business and actually as we start to look at these other type of products from say the petroleum refinery catalyst business, we think there’s a big opportunity to sort of move into that market. It’s early days yet, so we’re not just sitting back on our – resting, we like to park some more volumes for that.

Okay, perfect. Thank you very much.

Okay, well if there is no more questions, we might wrap this up and I’d like to thank everyone for the time on a Friday.

We do have one more question in the queue if you’d like to take it.

Sure. That’s fine.

That’s Andrew Quail with Goldman Sachs.

Hi, Mick. Thanks very much for taking my question. Good quarter, specially on the costs. Just a couple of questions, when you talk about the medium term, is that sort of something you’re targeting for next 12 months, may be probably into this time next year we might be getting to that mid-600s?

Well, I think when I started and I gave the goal of getting to the mid-700s in the medium term also, that was January of last year and we have achieved that now. So, I’m thinking medium term in the sort of within the one to two year timeline sort of thing.

And last one on cash, I think it’s good you guys bought back those convertibles, [inaudible], is there a strategy going forward on this? Is there a cash balance that you guys are comfortable with in the business, obviously you’re producing free cash flow, is there a cash balance where you will not go below?

There is, we don’t give that out, but I think we look at it at any given day, we look at where we’re going to deploy our cash to get a reasonable return. And if you can’t get a reasonable return, we don’t feel the need to spend it. So, I think in this market having more cash rather than less is a good strategy, if you look at –

Would it be around the other…

Sorry?

Would it be around the other 100 million?

I think probably a bit north of that where we would be comfortable, just giving the scale of that business. We don’t really sort of disclose what the number is but I think it would be north of 100 is where we’d want to be.

Thanks, guys.

Thanks, Andrew.

[Operator Instructions]. Our next question comes from Lucas Pipes with FBR Capital Markets. Please proceed with your question.

Hey good morning, everybody and thanks for taking my question.

Sure.

So, I wanted to follow up a little bit on the sustaining capital. If I look at Q3, it annualizes pretty nicely below 2015 guidance, and I wondered is that sustainable as we look into 2016? Is that something may be where we could expect further savings in terms of the cash flow?

Well, we haven’t given out 2016 guidance yet, so you probably need to wait until we give that. But, clearly one of the big changes we made in the – with this new mine plan at the Stillwater Mine has been that we are adding to our developed state which is the all-in sustaining CapEx broadly. We are continuing to add that, so you’re right that we were spending sustaining capital was not just sustaining the business but was actually adding to our developed state. We are now spending in a right way we are, where we’re not eating into our developed state, but we’re also not adding to our developed state, if that sort of made sense.

Got it, got it. No, that makes a lot of sense. In a way, one way to think about it would be that your prior sustaining CapEx had some component of a growth CapEx to it and now it’s really just sustaining.

Correct. That would be a fair assessment.

Great. Well, good job and appreciate you taking my question.

Thank you very much.

Our next question comes from John Bridges with JP Morgan. Please proceed with your question.

Hi morning Mick, everybody. Just following on from that one, on the developed state, was that increase in developed state a result of improved productivity or was it that you had excess people because you are cutting back on your production and you put them into development?

That’s a good question, John, I would say a bit of both. I would say that – if you look historically, we have typically always done sort of more development than budget. And so, if you do more development than budget, then you end up increasing your developed state and you spend more sustaining CapEx than you want to. But also as productivity has improved, we have seen development pull ahead and also as we did some reorganization last year and some people came out of production areas because we didn’t have the infrastructure in place and then they went on to development infrastructure projects and now we sort of said, okay, the developed state at Stillwater Mine is broadly about five years and at the East Boulder Mine is broadly about six years. So that’s a pretty weak developed state for an underground mine, so we just didn’t feel the need to, in this price environment especially to continue to add to that.

That’s a big insurance policy, but then palladium is very volatile. On Blitz, you said you are getting nice grades on that. Have you thought more about what sort of production you can pull out of Blitz next year or is that something that we can look forward to at the end of Q4?

Yeah, I think just given that we run our reserves and everything at the end of the year, we sort of need to wait till we get that out of the way. And we’re still targeting first production there in about 2018.

Okay, okay. But what about…

Sorry, I think the key thing for this quarter just finished has been getting the permit for the Benbow portal, actually ahead of time which allowed us to accelerate some of the work before it got cold. That was really the one thing that was hanging up there that we needed to get that permit in place.

Okay, brilliant. Well done on the results.

Thanks, John.

There are no further questions at this time. I’d like to turn the call back over to Mick McMullen for closing remarks.

Well, thank you everyone for taking the time on a Friday and I look forward to speaking to you again when we present our fourth quarter results. Thank you.