The long-running Association of Mineworkers and Construction Union strike at South Africa’s platinum and palladium mines has ended. However, an increase in auto demand combined with news of a strike by another South African union has seasoned investors and analysts worried about platinum-group metals (PGMs) supply. It’s thus unsurprising that Stillwater Mining Company (NYSE:SWC) CEO Mick McMullen is confident in long-term demand for the white metals.
Stillwater’s website states that its J-M Reef deposit is currently the only known significant source of PGMs in the United States. Notably, it is also one of very few sources of the metals outside South Africa and Russia, which produce the lion’s share of the world’s platinum and palladium.
Based in Montana, the company has taken a vertically integrated approach. In addition to mining operations, it is engaged in the processing, smelting, refining and recycling of platinum and palladium. Stillwater produces primarily palladium from its mining operations.
Palladium Investing News (PIN) recently had the chance to speak with McMullen about Stillwater and the PGMs markets. In the interview below, McMullen discusses Stillwater’s activities and operations, as well as the significance of the company’s recent agreement with Johnson Matthey (LSE:JMAT). He also speaks about future demand for PGMs and shares his thoughts on what is important for investors to consider when looking at the PGMs space.
PIN: Just to start off with, I don’t think we’ve covered Stillwater extensively on our network before, so could you tell our readers a bit about your company?
MM: Sure. We’re a large PGMs miner and recycler here in North America. Last year we produced 524,000 ounces of PGMs from our mines, and just over 600,000 ounces from our recycling business as well. So between the two we did a total of about 1.1 million ounces last year. Within the mines, we’re predominantly palladium, with about 78 percent palladium and the rest being platinum. We’re obviously based here in Montana, and we’ve got a very high-grade ore body. It runs about a half an ounce to the tonne of PGMs, and it’s a very large ore body. It’s approximately 40 kilometers long, well over 100 meters deep and it’s complemented by the smelter we have here in Montana — that’s where we smelt our material and also treat recycling material, which is autocatalysts for the most part.
PIN: I see. And about your deposit, what is the geology of the J-M Reef like? Is it entirely contained within the Stillwater Mining complex or does it extend beyond the property? Do you know if there are other companies exploring in the area?
MM: No, we’ve pretty well got the entire ore body. There’s some historical chrome mining in the area, but we own all the claims on top of the ore body, or that have been discovered so far.
PIN: Okay. So you are one of the only primary PGMs producers outside of South Africa and Russia. Those jurisdictions have been problematic in the past, but are the world’s largest PGMs producers. What is the importance of platinum and palladium projects outside of those jurisdictions?
MM: Well, I think obviously the recent strike issue in South Africa and tensions in Russia have really highlighted the strategic nature of our deposit here. We’re finding from our customers that they really are starting to value the local place that we’re in now. Similarly, for our shareholders, we’ve seen our shares have a decent run over the last six months. I think those geopolitical issues and social issues in South Africa have really highlighted the fact that being in the US with the highest-grade ore body, really a world-class deposit here, has got some strategic value.
PIN: That’s excellent. Also, last month, you announced a significant agreement with Johnson Matthey that involves the offtake of a large portion of your mined PGMs production. What is the importance of agreements like that for PGMs miners and for Stillwater in particular?
MM: We think that it’s a very important agreement for us. Johnson Matthey used to have the Anglo American Platinum (OTCMKTS:AGPPY) offtake in South Africa for many, many years, and they lost that at the end of last year. They are a very big player in the PGMs space, and they produce a lot of autocatalysts, so they needed to know they had security of supply. They, like many people, were very concerned about supply, and they were very keen to lock up some supply with us. So we did a deal with them whereby we will sell the bulk of our mined production to them at spot plus whatever the premium is. There’s usually a premium in the marketplace for our metal. So we haven’t forward sold at a price, it’s just whatever the price on the day is what we receive.
And importantly for us, they will do all of our refining as well. They will pay us faster than we get paid now, which will release some working capital for us, but also they will send us a lot of recycling material. Our facility here in Montana is quite empty, the recycling business, but we have the ability to expand it quite significantly for basically no capital. And we think that this will be a good alliance between us and Johnson Matthey in terms of them sending more material, and importantly for us, we’ve got an out clause, or a break clause, for, in the event that someone wanted to pay us a very high price for our metal, or perhaps wanted to buy the company in order to secure the metal, we could opt out of this agreement with Johnson Matthey. We’d be free to do that. So I think it’s a good deal for us because it gives us lots of flexibility, but it’s a good deal for Johnson Matthey in that it gives them a supply metal, a long-life asset in a really low-risk jurisdiction.
PIN: So you have a mine, a smelter and a recycling operation. You’re very vertically integrated. What is the advantage of that approach for Stillwater?
MM: In the PGMs business, the smelters typically make all the money, so having the smelter means that we’re not giving that value away to someone else, and it can be quite a substantial portion of the value of the mine output that goes to the smelter. Also, the payment pipeline in PGMs is very long. If you’re sending to a third-party smelter, you might not get your money back for six months. So working capital without your own smelter is a huge number, and having our own smelter has been — it’s a lot cheaper for us, it frees up a lot of working capital. The company built the smelter in the mid ’90s, and it really has been a core part of the business in the treating line of production. And because we run the smelter all the time, we then have the ability to bring in some of this recycling material as well, which adds to our bottom line.
PIN: That makes sense. On another note, I was hoping for a comment on the miners’ strike ending in South Africa. How will that affect the PGMs markets?
MM: Interestingly, we’ve seen previously that when rumors of the strike being settled have been out, PGMs have fallen. I noticed this morning though that despite the strike being over, PGMs prices are actually up a bit. Fundamentally, I think that particularly palladium is structurally short, structurally in deficit. Johnson Matthey this year is forecasting a deficit of about 1.6 million ounces of palladium. They’re forecasting that even with the mines in South Africa coming back to work, and they’re forecasting deficits really for the next 10 years of around about a million ounces a year. So I think what’s likely to happen in South Africa is that production will continue to get less and less every year. I don’t think it will fall off a cliff, but I just see production sort of gradually winding its way down in South Africa. The demand side for nickel and palladium is very, very strong, so again there’s that gradual deficit position for the next 10 years.
So for us, we’re on a pretty good side. I see, in terms of the prices, palladium probably strengthening relative to platinum, just because of the fundamentals. But both, I think, will go up. With the new wage deal in South Africa, we’re just trying to work out what it means in terms of costs, on a dollar-per-ounce basis, for the South Africans. However, it’s clear to me that the costs will only go up in South Africa, they’re not going down. Overall, the outlook looks pretty good, I think, even with the strike coming to an end, supposedly.
PIN: Finally, given your experience in the PGMs space, what do you think is important for investors to consider when looking at PGMs, or PGMs companies like Stillwater, as compared with other commodities?
MM: I think the big differentiator in the PGMs world relative to say gold or copper and base metals is that you’ve really got a very narrow investment horizon for people investing for different companies. There are really only three or four big companies in South Africa and us, and of course the geopolitical issues become very important because 42 percent of palladium production is in Russia and about 41 percent is in Southern Africa; there are not a lot of jurisdictions you can go to invest and get your palladium exposure — I mean, in what you would call a low-risk jurisdiction.
Unlike base metals or gold, where you can invest in lots of different places and get that exposure, it’s one of those commodities where you’ll always have the potential for strike action or geopolitical issues. Also, I think that it’s a business where the secondary supply of recycling is becoming more and more important, and you don’t sort of see that in some of the others. Again, unlike copper or iron or stuff like that, the secondary supply, or recycling feed, is very important for PGMs.
PIN: Good advice. Was there anything else you wanted to add?
MM: Not really, apart from that as a company we’ve got a strong balance sheet. We’ve got almost half a billion dollars in cash, which I think puts us in a great position, and we’ll maintain a very strong balance sheet.
Mining is a cyclical business, and I think we’re a company that’s in the process of changing. We’re becoming much more focused on profits than just growing production. We won’t grow production just for the sake of growing it. We’re being quite disciplined with how we deploy capital and we’re very focused on the bottom line.
PIN: Yes, I read an article in The Wall Street Journal recently where you said you won’t increase production in reaction to supply fears because you see long-term demand for platinum and palladium.
MM: That’s pretty well it. Let’s maximize the free cash flow out of the operation rather than just continually investing and never actually making any money.
PIN: Very responsible of you. Well, thank you for taking the time to talk to us about Stillwater today.
MM: Thank you.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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