-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M96neZRfJ5zu6oBy6CSRUk5XFeflMFjqg9lsKU8KFbQF1svpFmHf+Qxti81sOcsB MpeVy9/RBaMFouGJf+pF2Q== 0000950134-01-504177.txt : 20010720 0000950134-01-504177.hdr.sgml : 20010720 ACCESSION NUMBER: 0000950134-01-504177 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010719 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STILLWATER MINING CO /DE/ CENTRAL INDEX KEY: 0000931948 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS METAL ORES [1090] IRS NUMBER: 810480654 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13053 FILM NUMBER: 1684175 BUSINESS ADDRESS: STREET 1: 1200 SEVENTEETH STREET STREET 2: SUITE 900 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3039782525 MAIL ADDRESS: STREET 1: 1200 SEVEENTH STREET STREET 2: SUITE 900 CITY: DENVER STATE: CO ZIP: 80202 10-Q 1 d89165e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ COMMISSION FILE NUMBER 0-25090 STILLWATER MINING COMPANY ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 81-0480654 ------------------------------- ------------------------------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 737 PALLADIUM PLACE COLUMBUS, MONTANA 59019 ---------------------------------------- ------------------------------ (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(406) 322-8700 ---------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES X NO __ AT JULY 13, 2001, 38,735,466 SHARES OF COMMON STOCK, $0.01 PAR VALUE PER SHARE, WERE ISSUED AND OUTSTANDING. 2 STILLWATER MINING COMPANY FORM 10-Q QUARTER ENDED JUNE 30, 2001 INDEX
PAGE ---- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS................................................... 3 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................... 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............. 21 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS...................................................... 23 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.............................. 23 ITEM 3. DEFAULTS UPON SENIOR SECURITIES........................................ 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 23 ITEM 5. OTHER INFORMATION...................................................... 23 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 23 SIGNATURES...................................................................................... 24
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS STILLWATER MINING COMPANY CONSOLIDATED BALANCE SHEET (Unaudited) (in thousands, except share and per share amounts)
JUNE 30, December 31, 2001 2000 -------- ----------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 36,281 $ 18,219 Funds held in escrow -- 2,636 Inventories 30,573 42,625 Accounts receivable 32,786 -- Deferred income taxes 3,476 7,732 Fair value of derivative financial instruments 6,482 -- Other current assets 12,122 2,943 -------- -------- Total current assets 121,720 74,155 PROPERTY, PLANT AND EQUIPMENT, NET 693,868 602,110 OTHER NONCURRENT ASSETS 6,653 2,761 -------- -------- Total assets $822,241 $679,026 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 19,449 $ 21,710 Accrued payroll and benefits 10,380 6,431 Property, production and franchise taxes payable 6,885 8,068 Current portion of long-term debt and capital lease obligations 6,452 1,970 Metals repurchase agreements payable -- 9,386 Current income taxes payable 5,089 97 Other current liabilities 13,132 11,533 -------- -------- Total current liabilities 61,387 59,195 Long-term debt and capital lease obligations 226,594 157,256 Deferred income taxes 67,907 55,457 Other noncurrent liabilities 9,042 6,504 -------- -------- Total liabilities 364,930 278,412 -------- -------- SHAREHOLDERS' EQUITY Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $0.01 par value, 100,000,000 shares authorized; 38,735,466 and 38,645,886 shares issued and outstanding, respectively 387 386 Paid-in capital 289,579 288,212 Retained earnings 162,710 112,016 Accumulated other comprehensive income 4,635 -- -------- -------- Total shareholders' equity 457,311 400,614 -------- -------- Total liabilities and shareholders' equity $822,241 $679,026 ======== ========
See notes to consolidated financial statements. 3 4 STILLWATER MINING COMPANY CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- --------- REVENUES $ 75,304 $ 55,390 $ 165,168 $ 97,525 COSTS AND EXPENSES Cost of metals sold 35,593 25,340 73,838 42,836 Depreciation and amortization 5,608 4,210 11,221 8,512 --------- --------- --------- --------- Total cost of sales 41,201 29,550 85,059 51,348 General and administrative expenses 5,003 2,243 10,455 4,298 --------- --------- --------- --------- Total costs and expenses 46,204 31,793 95,514 55,646 --------- --------- --------- --------- OPERATING INCOME 29,100 23,597 69,654 41,879 OTHER INCOME (EXPENSE) Interest income 678 185 1,246 465 Interest expense, net of capitalized interest of $4,733, $2,423, $8,948 and $5,079 -- -- -- -- --------- --------- --------- --------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 29,778 23,782 70,900 42,344 INCOME TAX PROVISION (8,486) (6,661) (20,206) (11,858) --------- --------- --------- --------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 21,292 17,121 50,694 30,486 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR REVENUE RECOGNITION, NET OF INCOME TAX BENEFIT OF $2,503 -- -- -- (6,435) --------- --------- --------- --------- NET INCOME $ 21,292 $ 17,121 $ 50,694 $ 24,051 ========= ========= ========= ========= BASIC EARNINGS PER SHARE Income before cumulative effect of accounting change $ 0.55 $ 0.45 $ 1.31 $ 0.80 Cumulative effect of accounting change -- -- -- (0.17) --------- --------- --------- --------- NET INCOME $ 0.55 $ 0.45 $ 1.31 $ 0.63 ========= ========= ========= ========= DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting change $ 0.54 $ 0.44 $ 1.29 $ 0.77 Cumulative effect of accounting change -- -- -- (0.16) --------- --------- --------- --------- NET INCOME $ 0.54 $ 0.44 $ 1.29 $ 0.61 ========= ========= ========= ========= WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 38,723 38,514 38,691 38,393 Diluted 39,332 39,178 39,366 39,257
See notes to consolidated financial statements. 4 5 STILLWATER MINING COMPANY STATEMENT OF COMPREHENSIVE INCOME (Unaudited) (in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------- ---------------------- 2001 2000 2001 2000 ---------- --------- --------- --------- NET INCOME $21,292 $17,121 $50,692 $24,051 OTHER COMPREHENSIVE INCOME: Change in net unrealized gains on derivative financial instruments, net of tax of $2,097, $0, $4,693 and $0 5,260 -- 11,774 -- ------- ------- ------- ------- COMPREHENSIVE INCOME $26,552 $17,121 $62,466 $24,051 ======= ======= ======= =======
See notes to consolidated financial statements. 5 6 STILLWATER MINING COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (in thousands)
SIX MONTHS ENDED JUNE 30, ------------------------- 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 50,694 $ 24,051 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 11,221 8,512 Deferred income taxes 16,706 3,847 Cumulative effect of change in accounting for revenue recognition -- 6,435 Changes in operating assets and liabilities: Inventories 12,052 (8,421) Accounts receivable (32,786) -- Accounts payable (2,261) 5,722 Other 923 8,411 --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 56,549 48,557 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (102,979) (99,197) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (102,979) (99,197) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt 202,611 33,100 Payments on long-term debt and capital lease obligations (126,155) (1,366) Payments for debt issuance costs (3,946) -- Net metals repurchase agreement transactions (9,386) 8,591 Issuance of common stock 1,368 9,000 --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 64,492 49,325 --------- --------- CASH AND CASH EQUIVALENTS Net increase (decrease) 18,062 (1,315) Balance at beginning of period 18,219 2,846 --------- --------- BALANCE AT END OF PERIOD $ 36,281 $ 1,531 ========= =========
See notes to consolidated financial statements. 6 7 STILLWATER MINING COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - GENERAL In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the company's financial position as of June 30, 2001 and the results of its operations for the three- and six-month periods ended June 30, 2001 and 2000 and cash flows for the six-month periods ended June 30, 2001 and 2000. Certain prior year amounts have been reclassified to conform with the current year presentation. The results of operations for the three- and six-month periods are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the company's 2000 Annual Report on Form 10-K. NOTE 2 - NEW ACCOUNTING STANDARDS Effective January 1, 2001, the company adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 138, Accounting for Derivative Instruments and Certain Hedging Activities, an amendment to SFAS No. 133. SFAS Nos. 133 and 138 require that derivatives be reported on the balance sheet at fair value and, if the derivative is not designated as a hedging instrument, changes in fair value must be recognized in earnings in the period of change. If the derivative is designated as a hedge and to the extent such hedge is determined to be effective, changes in fair value are either (a) offset by the change in fair value of the hedged asset or liability (if applicable) or (b) reported as a component of other comprehensive income in the period of change, and subsequently recognized in earnings when the offsetting hedged transaction occurs. The company primarily uses derivatives to hedge metal prices. In accordance with the transition provisions of SFAS No. 133, the company recorded a net-of-tax cumulative-effect-type loss adjustment of $7.1 million in accumulated other comprehensive loss to recognize at fair value all derivatives that are designated as cash-flow hedging instruments at January 1, 2001. During the three and six months ended June 30, 2001, $(0.2) million and $3.5 million, respectively, of accumulated other comprehensive loss (income) was reclassified to earnings. The company expects to reclassify to earnings during the next twelve months $4.9 million of net unrealized gains existing at June 30, 2001, that are recorded in accumulated other comprehensive income. Effective January 1, 2000, the company changed its method of accounting for revenue recognition. Pursuant to the guidance in Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition for Financial Statements, the company now recognizes revenue as title passes to the customer. In accordance with accepted industry practice, the company previously recognized revenue when product was shipped from the company's metal refinery to an external refiner. The company implemented SAB No. 101 during the fourth quarter of 2000. The implementation was treated as a change in accounting principle with the cumulative effect of the change on retained earnings at the beginning of 2000 included in restated net income of the first quarter of 2000. The second quarter and first half of 2000 financial statements were restated to reflect the change in accounting for revenue recognition. The effect of the accounting change on the second quarter of 2000 was to increase net income by approximately $4.9 million ($0.13 per basic and diluted share). The effect of the accounting change on the first half of 2000 was to decrease net income by approximately $8.6 million ($0.22 per basic and diluted share), which includes the cumulative effect of $6.4 million ($0.17 per basic and $0.16 per diluted share). The $6.4 million cumulative effect adjustment includes $26 million of revenue previously recognized in 1999, which is reflected as revenue in 2000 under the company's new method of accounting. 7 8 Effective January 1, 2000, the company also implemented Issue No. 00-14 of the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF), Accounting for Certain Sales Incentives. The consensus reached by the FASB EITF requires a company to classify any cash sales discounts as a reduction in revenue. Prior to the implementation of EITF 00-14, the company classified sales discounts associated with long-term sales contracts as a component of cost of metals sold. The company implemented EITF No. 00-14 during the fourth quarter of 2000. Pursuant to the consensus, financial statements for the three- and six-month periods ended June 30, 2000 have been reclassified. NOTE 3 - COMPREHENSIVE INCOME In accordance with SFAS No. 130, Reporting Comprehensive Income, the company reports comprehensive income and its components in the consolidated financial statements. Comprehensive income consists of net income and other gains and losses affecting shareholders' equity that, under accounting principles generally accepted in the United States of America, are excluded from net income. For the company, such items consist of unrealized gains and losses on derivative financial instruments. The following summary sets forth the components of other comprehensive income (loss) accumulated in shareholders' equity (in thousands):
DERIVATIVE FINANCIAL INSTRUMENTS -------------------- Balance at December 31, 2000 $ -- Cumulative effect on adoption (9,985) Reclassification to earnings 3,544 Change in value due to change in metals prices 12,923 -------- 6,482 Tax provision (1,847) -------- Balance at June 30, 2001 $ 4,635 ========
NOTE 4 - INVENTORIES Inventories consisted of the following (in thousands):
JUNE 30, December 31, 2001 2000 -------- ----------- Metals inventory Raw ore $ 202 $ 1,086 Concentrate and in-process 8,255 13,971 Finished goods 14,328 21,864 ------- ------- 22,785 36,921 Materials and supplies 7,788 5,704 ------- ------- $30,573 $42,625 ======= =======
NOTE 5 - LONG-TERM DEBT CREDIT FACILITY In February 2001, the company obtained a $250 million credit facility (the "Credit Facility") from a syndicate of financial institutions. The Credit Facility provides for a $65 million five-year term loan facility (Term A), a $135 million seven-year term loan facility (Term B) and a $50 million revolving credit facility. Amortization of the term loan facilities will commence on March 31, 2002. The final maturity of the Term A and the revolving credit facility is December 30, 2005 while the Term B facility final maturity date is December 31, 2007. Of the term loan facility proceeds, $125 million was used to repay borrowings 8 9 under the prior credit facility with the remaining proceeds to be used to fund the company's expansion plans as required. Proceeds of the revolving credit facility will be used for general corporate and working capital needs. As of June 30, 2001, the company had $200 million outstanding under the term loan facilities, bearing interest at 6.56% and 7.31% for the Term A and Term B facilities, respectively. The loans are required to be prepaid from excess cash flow as defined in the Credit Facility, proceeds from asset sales and the issuance of debt or equity securities, subject to specified exceptions. At the company's option, the Credit Facility bears interest at the London Interbank Offered Rate (LIBOR) or an alternate base rate, in each case plus a margin of 2.0% to 3.25% which is adjusted depending upon the company's ratio of debt to operating cash flow. Substantially all the property and assets of the company and its subsidiaries and the stock of the company's subsidiaries are pledged as security for the Credit Facility. Covenants in the Credit Facility restrict: (1) additional indebtedness; (2) payment of dividends or redemption of capital stock; (3) liens; (4) investment, acquisitions, dispositions or mergers; (5) transactions with affiliates; (6) capital expenditures (other than those associated with the expansion plan); (7) changes in the nature of business conducted or ceasing operations at the principal operating properties; and (8) commodities hedging to no more than 90% of annual palladium production and 75% of annual platinum production (excluding the sales covered by the company's marketing contracts and similar agreements). The company is also subject to financial covenants including a debt to operating cash flow ratio, a debt service coverage ratio and a debt to equity ratio. Events of default include: (1) a cross-default to other indebtedness of the company or its subsidiaries; (2) any material modification to the life-of-mine plan for the Stillwater Mine; (3) a change of control of the company; (4) the failure to maintain agreed-upon annual PGM production levels; or (5) any breach or modification of any of the sales agreements. The company is in compliance with all aspects of the credit agreement, including all financial covenants as of June 30, 2001. EXEMPT FACILITY REVENUE BONDS On July 6, 2000, the company completed a $30 million offering of Exempt Facility Revenue Bonds, Series 2000, through the State of Montana Board of Investments. The bonds were issued by the State of Montana Board of Investments to finance a portion of the costs of constructing and equipping certain sewage and solid waste disposal facilities at both the Stillwater Mine and the East Boulder Project. The bonds mature on July 1, 2020 and have an interest rate of 8.00% with interest paid semi-annually. The bonds have an effective interest rate of 8.57%. Net proceeds from the offering were $28.7 million. NOTE 6 - EARNINGS PER SHARE The company follows SFAS No. 128, Earnings per Share, which requires the presentation of basic and diluted earnings per share. The effect of outstanding stock options on diluted weighted average shares outstanding was 609,391 and 663,721 shares for the three-month periods ending June 30, 2001 and 2000, respectively. Outstanding options to purchase 419,175 and 46,375 shares of common stock were excluded from the computation of diluted earnings per share for the three-month periods ended June 30, 2001 and 2000, respectively, because the effect of inclusion would have been antidilutive using the treasury stock method. The effect of outstanding stock options on diluted weighted average shares outstanding was 674,190 and 864,261 shares for the six-month periods ending June 30, 2001 and 2000, respectively. Outstanding options to purchase 390,075 and 26,450 shares of common stock were excluded from the computation of diluted earnings per share for the six-month periods ended June 30, 2001 and 2000, respectively, because the effect of inclusion would have been antidilutive using the treasury stock method. 9 10 NOTE 7 - INCOME TAXES Income taxes for the three- and six-month periods ended June 30, 2001 and 2000 have been provided at the expected annualized rate of 28.5% and 28.0%, respectively. NOTE 8 - COMMODITY INSTRUMENTS The company maintains long-term sales contracts with General Motors, Ford Motor Company and Mitsubishi Corporation. The contracts are not subject to the requirements of SFAS No. 133 as the contracts qualify for the normal sales exception provided in SFAS No. 138. The floors and ceilings embedded within the long-term sales contracts are treated as part of the host contract, not a separate derivative instrument and are therefore also not subject to the requirements of SFAS No. 133. In addition to the long-term sales contracts, the company may also enter into transactions for the sale and repurchase of metals held in the company's account at third party refineries. Under these transactions, the company will enter into an agreement to sell a certain number of ounces at the then current market price. The company will simultaneously enter into a separate agreement with the same counter party, to repurchase the same number of ounces at the same price at the repurchase date. The company utilizes the following types of derivative financial instruments: fixed forwards, cashless put and call option collars and financially settled forwards. For derivative instruments outstanding as of June 30, 2001, the company has designated the derivative as a hedge of a forecasted transaction ("cash flow" hedge). Currently, all derivatives have been assessed as highly effective cash-flow hedges of forecasted transactions. Changes in fair value of derivatives that are highly effective as hedges and that are designated and qualified as a cash-flow hedge are reported in other comprehensive income until the forecasted transactions occur. From time to time, the company may enter into cashless put and call option collars under which the company receives the difference between the put price and the market price only if the market price is below the put price and the company pays the difference between the call price and the market price only if the market price is above the call price. The company's put and call options are financially settled at maturity. Since the put/call instruments hedge forecasted transactions, they qualify for cash flow hedge accounting. They are considered to be highly effective since the intrinsic value of the put/call will offset the change in value associated with future production not subject to the long-term sales contract. For the six-month period ended June 30, 2001, the company reclassified a realized loss of $2.4 million to reduce revenues and earnings for cashless put and call option collars that were recorded in accumulated other comprehensive loss at January 1, 2001. The company has no cashless put and call option collars outstanding at June 30, 2001. The company may enter into fixed forward contracts to sell metals at a future date and at a fixed price in order to reduce the risk associated with future metals prices for ounces produced in excess of the company's long-term sales contracts. These instruments are considered to be highly effective derivatives that will qualify for cash flow hedge accounting since they are an "all-in-one-hedge" instrument, meaning that all of the components (ounces, delivery date, and price) are fixed as part of the original commitment. The company has no fixed forward contracts outstanding at June 30, 2001. The company also enters into financially settled forwards. They differ from fixed forwards in that the net gain or loss is settled at maturity. The company uses the financially settled forwards as a mechanism to hedge the fluctuations in metal prices associated with future production not subject to the long-term sales contracts. The financially settled forwards qualify as a cash flow hedge and are considered to be highly effective, since the change in the value of the financially settled forward will offset changes in the expected future cash flows related to future production not subject to the long-term sales contracts. For the three and six month periods ended June 30, 2001, the company reclassified a realized gain of $0.7 million and a realized loss of $1.1 million, respectively, to revenues and earnings from accumulated other comprehensive income for financially settled forwards. 10 11 A summary of the company's derivative financial instruments as of June 30, 2001 is as follows.
Palladium Sales Platinum Sales Ounces Price Ounces Price ---------- ----- -------- ----- 2001 Financially settled forwards 33,000 $700 6,000 $575 2002 Financially settled forwards 24,000 $700 12,000 $575
In November 2000 and March 2001, the company renegotiated certain of its long-term sales contracts. The new arrangements establish higher floor and ceiling prices on a portion of the current contracts, extend the term of the contracts through 2010 with new floors and ceilings and increase the amount of platinum committed. The contracts provide for floor and ceiling price structures as summarized below:
PALLADIUM PLATINUM ------------------------------------------------- ------------------------------------------------------- % of Avg. Floor % of Avg. Ceiling % of Avg. Floor % of Avg. Ceiling Year Production Price Production Price Production Price Production Price ----------- ----------- ----------- ------------- ------------- ------------- ------------- ------------- 2001 90% $347 30% $400 87% $402 39% $556 2002 100% $363 30% $400 92% $407 36% $591 2003 100% $350 30% $400 90% $408 20% $601 2004 100% $371 39% $644 80% $425 16% $856 2005 100% $355 16% $981 80% $425 16% $856 2006 80% $400 20% $980 80% $425 16% $856 2007 80% $400 20% $975 70% $425 14% $850 2008 80% $385 20% $975 70% $425 14% $850 2009 80% $380 20% $975 70% $425 14% $850 2010 80% $375 20% $975 70% $425 14% $850
11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STILLWATER MINING COMPANY KEY FACTORS (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ OUNCES PRODUCED (000)(2) Palladium 93 75 189 161 Platinum 30 23 58 49 ---- ---- ---- ---- Total 123 98 247 210 TONS MINED (000) 182 148 381 317 TONS MILLED (000) 195 149 395 318 MILL HEAD GRADE (OUNCE PER TON) 0.73 0.68 0.69 0.70 TOTAL MILL RECOVERY (%) 91 91 90 91 SUB-GRADE TONS MILLED (000) 17 30 35 44 SUB-GRADE MILL HEAD GRADE (OUNCE PER TON) 0.21 0.30 0.21 0.24 TOTAL TONS MILLED (000) 212 179 430 362 COMBINED MILL HEAD GRADE (OUNCE PER TON) 0.65 0.61 0.64 0.64 OUNCES SOLD (000)(2) Palladium 103 85 212 152 Platinum 29 25 58 52 ---- ---- ---- ---- Total 132 110 270 204 AVERAGE REALIZED PRICE PER OUNCE(2) Palladium $591 $523 $648 $499 Platinum 541 472 535 456 Combined(1) 580 512 624 488 AVERAGE MARKET PRICE PER OUNCE Palladium $654 $600 $795 $594 Platinum 595 529 598 504 Combined(1) 640 583 749 573
(1) Stillwater Mining reports a combined average realized and market price of palladium and platinum at the same ratio as ounces are produced from the base metals refinery. The combined average realized price represents revenues of the company excluding contract discounts divided by ounces sold. The combined average market price represents the average London PM Fix for the actual months of the period. (2) Effective January 1, 2000, the company changed its method of accounting for revenue recognition. The company now recognizes revenue as title passes to the customer. Ounces sold and average realized prices for the three- and six-month periods ended June 30, 2000 have been restated accordingly. The differences in ounces produced and ounces sold are caused by the length of time required by the smelting and refining processes and the specified delivery dates under the long-term sales contracts. The differences between the realized prices and market prices occur due to contract pricing provisions and hedge positions. 12 13 STILLWATER MINING COMPANY KEY FACTORS (CONTINUED) (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2001 2000 2001 2000 ------ ------ ------ ------ PER TON MILLED CASH OPERATING COSTS $127 $125 $125 $122 Royalties and taxes 23 17 25 20 ---- ---- ---- ---- TOTAL CASH COSTS (1) $150 $142 $150 $142 Depreciation and amortization 26 24 27 24 ---- ---- ---- ---- TOTAL PRODUCTION COSTS (1) $176 $166 $177 $166 ==== ==== ==== ==== PER OUNCE PRODUCED CASH OPERATING COSTS $220 $228 $218 $212 Royalties and taxes 39 30 44 32 ---- ---- ---- ---- TOTAL CASH COSTS (1) $259 $258 $262 $244 Depreciation and amortization 47 43 46 41 ---- ---- ---- ---- TOTAL PRODUCTION COSTS (1) $306 $301 $308 $285 ==== ==== ==== ====
(1) Income taxes, corporate general and administrative expense and interest income and expense are not included in either total cash costs or total production costs. RESULTS OF OPERATIONS Three months ended June 30, 2001 compared to three months ended June 30, 2000 PGM Production. During the second quarter of 2001, the company produced approximately 93,000 ounces of palladium and approximately 30,000 ounces of platinum compared with production of approximately 75,000 ounces of palladium and 23,000 ounces of platinum in the second quarter of 2000. The increase was primarily due to an 18% increase in total tons milled in the second quarter of 2001 compared to the second quarter of 2000, and a 7% increase in the average grade of material milled. The increase in tons milled is the result of additional mine production. Revenues. Revenues were $75 million for the second quarter of 2001 compared with $55.4 million for the second quarter of 2000, an increase of 36% and were the result of a 13% increase in realized PGM prices and a 20% increase in the quantity of metal delivered to customers. Palladium sales increased to approximately 103,000 ounces in the second quarter of 2001 from approximately 85,000 ounces in the second quarter of 2000. Platinum sales increased to approximately 29,000 ounces in the second quarter of 2001 from approximately 25,000 ounces in the second quarter of 2000. The combined average realized price per ounce of palladium and platinum sold in the second quarter of 2001 increased 13% to $580 per ounce, compared to $512 per ounce in the second quarter of 2000. The combined average market price rose 10% to $640 per ounce in the second quarter of 2001, compared to $583 per ounce in the second quarter of 2000. The average realized price per ounce of palladium was $591 in the second quarter of 2001, compared to $523 per ounce in the second quarter of 2000, while the average market price of palladium was $654 per ounce in the second quarter of 2001 compared to $600 per ounce in the second quarter of 2000. The average realized price per ounce of platinum was $541 in the second quarter of 2001, compared to $472 per ounce in the second quarter of 2000, while the average market price of platinum was $595 per ounce in the second quarter of 2001 13 14 compared to $529 per ounce in the second quarter of 2000. Costs and Expenses. Total cash costs per ounce for the quarter ended June 30, 2001 of $259 was approximately the same as $258 per ounce in the quarter ended June 30, 2000. Total production costs per ounce in the quarter ended June 30, 2001 increased $5 or 2% to $306 per ounce from $301 per ounce in the quarter ended June 30, 2000. This increase is due to an increase in depreciation relating to completed expansion assets. General and administrative costs increased $2.8 million primarily as a result of $1.6 million of increased administrative support required to transition the company from a single site producer to a multi-location producer and $1.0 million related to legal expenses arising from various corporate matters. Operating Income. The company reported operating income of $29.1 million for the quarter ended June 30, 2001, compared with operating income of $23.6 million for the quarter ended June 30, 2000. The higher operating income was mainly the result of higher realized prices and increased metal deliveries to customers. Net Income. The company reported net income of $21.3 million or $0.54 per diluted share for the second quarter of 2001 compared with net income of $17.1 million, or $0.44 per diluted share for the second quarter of 2000. Six months ended June 30, 2001 compared to six months ended June 30, 2000 PGM Production. During the first half of 2001, the company produced approximately 189,000 ounces of palladium and approximately 58,000 ounces of platinum compared with production of approximately 161,000 ounces of palladium and 49,000 ounces of platinum in the first half of 2000. The increase was due to a 19% increase in total tons milled in the first half of 2001 compared to the first half of 2000. The increase in tons milled is the result of additional mine production. Revenues. Revenues were $165.2 million for the first half of 2001 compared with $97.5 million for the first half of 2000, an increase of 69% and were the result of a 28% increase in realized PGM prices and a 32% increase in the quantity of metal delivered to customers. Palladium sales increased to approximately 212,000 ounces in the first half of 2001 from approximately 152,000 ounces in the first half of 2000. Platinum sales increased to approximately 58,000 ounces in the first half of 2001 from approximately 52,000 ounces in the first half of 2000. The combined average realized price per ounce of palladium and platinum sold in the first half of 2001 increased 28% to $624 per ounce, compared to $488 per ounce in the first half of 2000. The combined average market price rose 31% to $749 per ounce in the first half of 2001, compared with $573 per ounce in the first half of 2000. The average realized price per ounce of palladium was $648 in the first half of 2001, compared to $499 per ounce in the first half of 2000, while the average market price of palladium was $795 per ounce in the first half of 2001 compared to $594 per ounce in the first half of 2000. The average realized price per ounce of platinum was $535 in the first half of 2001, compared to $456 per ounce in the first half of 2000, while the average market price of platinum was $598 per ounce in the first half of 2001 compared to $504 per ounce in the first half of 2000. Costs and Expenses. Total cash costs per ounce for the six months ended June 30, 2001 increased $18 or 7 %, to $262 per ounce from $244 per ounce in the six months ended June 30, 2000. The increase in per ounce operating costs is primarily a result of higher royalties and taxes associated with higher metal prices of $11 per ounce and higher mine operating costs of $11 per ounce, offset by lower support services of $9 per ounce and lower byproducts of $9 per ounce. The higher mine operating costs are primarily the result of increased throughput tonnage costs. Total production costs per ounce in the six months ended June 30, 2001 increased $23, or 8% to $308 per ounce from $285 per ounce in the six months ended June 30, 2000. This increase is due to the above factors as well as an increase in depreciation relating to completed expansion assets. General and administrative costs increased $6.2 million primarily as a result of $4.4 million of increased administrative support required to transition the company from a single site producer to a multi-location producer and $1.7 million attributable to management realignment. 14 15 Operating Income. The company reported operating income of $69.7 million for the six months ended June 30, 2001, compared with operating income of $41.9 million for the comparable period of 2000. The higher operating income was mainly the result of higher realized prices. Net Income Before Cumulative Effect of Accounting Change. In its first half of 2001, the company has provided for income taxes of $20.2 million or 28.5% of income before taxes compared to a provision of $11.9 million, or 28% of pretax income for the first half of 2000. The company reported net income before the cumulative effect of an accounting change of $50.7 million, or $1.29 per diluted share compared to $30.5 million, or $0.77 per diluted share in the first half of 2000. Cumulative Effect of Change in Accounting for Revenue Recognition. Effective January 1, 2000, the company changed its method of accounting for revenue recognition. Pursuant to the guidance in Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition for Financial Statements, the company now recognizes revenue as title passes to the customer. The change was implemented during the fourth quarter of 2000 and was treated as a change in accounting principle with the $6.4 million ($0.17 per basic and $0.16 per diluted share) cumulative effect of the change on retained earnings at the beginning of 2000 included in restated net income of the first half of 2000. See Note 2 to the financial statements attached for a description of new accounting standards applicable to the company. Net Income. The company reported net income of $50.7 million or $1.29 per diluted share for its first half of 2001 compared with net income of $24.1 million, or $0.61 per diluted share for the first half of 2000. LIQUIDITY AND CAPITAL RESOURCES The company's working capital at June 30, 2001 was $60.3 million compared to a deficit of $10.5 million at June 30, 2000. The ratio of current assets to current liabilities was 2.0 at June 30, 2001, compared to 0.8 at June 30, 2000. Net cash provided by operations for the six months ended June 30, 2001, was $56.5 million compared with $48.6 million for the comparable period of 2000, an increase of $7.9 million. The increase was primarily a result of increased net income of $26.6 million and an increase in non-cash expenses of $9.1 million offset by an increase in net operating assets and liabilities of $27.8 million in the first half of 2001 compared to the first half of 2000, primarily due to an increase in accounts receivable of $32.8 million. A total of $103.0 million of cash was used in investing activities in the first six months of 2001 compared to $99.2 million in the same period of 2000. The capital expenditures incurred in the first six months of 2001 relate to the development of the East Boulder Mine, the Stillwater Mine and the company's Columbus ancillary facilities. For the six months ended June 30, 2001, cash provided by financing activities was $64.5 million compared to $49.3 million for the comparable period of 2000. The financing activities in the first half of 2001 were primarily attributed to borrowings of $203 million under the company's $250 million Credit Facility offset by repayment of $125 million on the prior credit facility. As a result of the above, cash and cash equivalents increased by $18.1 million for the first six months of 2001 compared with a decrease of $1.3 million for the comparable period of 2000. Based on cash on hand and expected cash flows from operations, along with the remaining credit of $50 million available at June 30, 2001 under the existing Credit Facility, management believes there is sufficient liquidity for the next twelve months' operating and capital needs. See Note 5 to the financial statements for a description of the company's credit facility. In addition, the company may, from time to time, also seek to raise additional capital from the public or private securities markets or from other sources for general corporate purposes and for investments beyond the scope of the current phase of the current 15 16 expansion plans. FORWARD LOOKING STATEMENT; FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION Some statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and, therefore, involve uncertainties or risks that could cause actual results to differ materially. Such statements include comments regarding expansion plans, costs, grade, production and recovery rates, permitting, financing needs, and capital expenditures, increases in processing capacity, cost reduction measures, safety, timing for engineering studies, and environmental permitting and compliance, litigation and the palladium and platinum market. Factors that could cause actual results to differ materially from those anticipated include: o worldwide economic and political events affecting the supply and demand of palladium and platinum; o price volatility of PGMs; o potential cost overruns, difficulty in making reliable estimates in connection with expansion, uncertainties involved in developing a new mine and other factors associated with a major expansion; o fluctuations in ore grade, tons mined, crushed or milled; o variations in concentrator, smelter or refinery operations; o geological, technical, permitting, mining or processing problems; o availability of experienced employees; o financial market conditions; o compliance of the company and significant customers with marketing contracts; and o the other factors discussed under "Risk factors", below and in "Business and Properties -- Risk Factors" in the company's annual report on Form 10-K for the year ended December 31, 2000. Investors are cautioned not to put undue reliance on forward-looking statements. The company disclaims any obligation to update forward-looking statements. 16 17 RISK FACTORS Set forth below are certain risks faced by the company. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Forward Looking Statements; Factors That May Affect Future Results and Financial Conditions" above. VULNERABILITY TO METALS PRICE VOLATILITY--CHANGES IN SUPPLY AND DEMAND COULD REDUCE MARKET PRICES. Since the company's sole source of revenue is the sale of platinum group metals, changes in the market price of platinum group metals significantly impact profitability. Many factors beyond the company's control influence the market prices of these metals. These factors include global supply and demand, speculative activities, international political and economic conditions and production levels and costs in other platinum group metal producing countries, particularly Russia and South Africa. Current economic and political events in Russia could result in declining market prices. If Russia disposes of substantial amounts of platinum group metals from stockpiles or otherwise, the increased supply could reduce the market prices of palladium and platinum. Financial, economic, or political instability in Russia and economic problems could make Russian shipments difficult to predict and the risk of sales from stockpiles more significant. Volatility was evident during 1997 through 2000 when apparent tightness in the market for platinum group metals led to high prices for current delivery contracts and "backwardation," a condition in which delivery prices for metals in the near term are higher than delivery prices for metals to be delivered in the future. See "Business and Properties - Competition: Palladium and Platinum Market" in the company's annual report on Form 10-K for the year ended December 31, 2000 for further explanation of these factors. The company enters into hedging contracts from time to time in an effort to reduce the negative effect of price changes on the company's cash flow. These hedging activities typically consist of contracts that require the company to deliver specific quantities of metal, or to financially settle the obligation in the future at specific prices, the sale of call options and the purchase of put options. At July 13, 2001, the market prices for palladium and platinum were $559 and $560 per ounce, respectively. See Note 8 to the financial statements attached hereto for a discussion of the company's outstanding hedge obligations. Thus, while hedging transactions are intended to reduce the negative effects of price decreases, they may also prevent the company from benefiting from price increases. During first half 2001 and 2000, respectively, the company reported hedging losses of approximately $3.5 million and $4.1 million, respectively. The company has entered into long-term sales contracts that provide a floor price for sales of a portion of the company's production. For additional discussion of the sales contracts, see Note 8 to the financial statements attached hereto. EXPANSION PLAN RISKS - ACHIEVEMENT OF THE COMPANY'S LONG-TERM GOALS IS SUBJECT TO SIGNIFICANT UNCERTAINTIES. The company's achievement of its long-term expansion goals depends upon its ability to increase and sustain production at the Stillwater Mine and its related facilities and its ability to develop and bring into production the East Boulder Mine. Each of these tasks will require the company to construct mine and processing facilities and to commence and maintain production within budgeted levels. Although the company believes its goals and estimates are based upon reasonable assumptions, the company has previously and may need to further revise its plans and cost estimates for the Stillwater Mine and East Boulder Mine as the projects progress. See "Business and Properties - Current Operations - - East Boulder Project" and "Business and Properties - Expansion Plans" in the company's annual report on Form 10-K for the year ended December 31, 2000 for further discussion of the company's expansion plans. Among the major risks to successful completion of the Expansion Plan are: o potential cost overruns during development of new mine operations and construction of new facilities; 17 18 o possible delays and unanticipated costs resulting from difficulty in obtaining the required permits; and o the inability to recruit sufficient numbers of skilled underground miners. Based on the complexity and uncertainty involved in development projects at this early stage, it is extremely difficult to provide reliable time and cost estimates. The company cannot be certain that either the Stillwater mine expansion or the development of East Boulder will be completed on time or at all, that the expanded operations will achieve the anticipated production capacity, that the construction costs will not be higher than estimated, that the expected operating cost levels will be achieved or that funding will be available from internal and external sources in necessary amounts or on acceptable terms. During 2001, the company expects to continue underground development, detailed engineering and commissioning of the concentrator and ancillary facilities at East Boulder. The East Boulder Mine is expected to begin commercial production during 2002. However, new mining operations often experience unexpected problems during the development and start-up phases, which can result in substantial delays in reaching commercial production. The company currently estimates the cost of developing the project to enable it to commence initial production at approximately $370 million. Additional sustaining capital expenditures will be necessary to achieve and maintain the mine's initial design capacity of 2,000 tons of ore per day. This estimated cost and schedule may change based upon the results of the mining planning work to be completed during 2001. East Boulder is a development project and has no operating history. Thus, estimates of future cash operating costs at East Boulder are based largely on the company's years of operating experience at the Stillwater Mine portion of the J-M Reef. Actual cash operating costs and economic returns may differ significantly from those currently estimated or those established in future studies and estimates, although the company anticipates that the operating characteristics at East Boulder will be similar to the Stillwater Mine. COMPLIANCE WITH BANK CREDIT AGREEMENT - THE RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENTS COULD NEGATIVELY AFFECT OUR ABILITY TO ENGAGE IN CERTAIN ACTIVITIES. The company's agreement with the syndicate of financial institutions provides a credit facility that is being used to finance a portion of the expansion plan and contains certain covenants relating to the accomplishment of certain production objectives, capital cost and financial targets. In the event the company was not able to comply with the debt covenants, the company would seek to amend the existing contract or to seek alternative financing. See Note 5 - - Long-Term Debt for a discussion of the company's credit facility. DEPENDENCE ON AGREEMENTS WITH SIGNIFICANT CUSTOMERS - WE DEPEND UPON A FEW CUSTOMERS AND OUR SALES AND OPERATIONS COULD SUFFER IF WE LOSE ANY OF THEM. Palladium, platinum, rhodium and gold are sold to a number of consumers and dealers with whom the company has established trading relationships. Refined PGMs of 99.95% purity in sponge form are transferred upon sale from the company's account at third party refineries to the account of the purchaser. By-product metals are purchased at market price by customers, brokers or outside refiners. During 1998, the company entered into long-term sales contracts with General Motors Corporation, Ford Motor Company and Mitsubishi Corporation, each of whom represent more than 10% of the company's revenues. The contracts apply to the company's production over the five-year period from January 1999 through December 2003. Under the original contracts, the company committed between 90% to 100% of its palladium production and 20% of its platinum production. Metal sales were priced at a discount to market. The remaining production is not committed under these contracts and remains available for sale at prevailing market prices. 18 19 In November 2000 and March 2001, the company renegotiated certain of its long-term sales contracts. The new arrangements establish higher floor and ceiling prices on a portion of the current contracts, extend the term of the contracts through 2010 with new floors and ceilings and increase the amount of platinum committed. See Note 8 to the financial statements attached hereto for additional information about sales contracts. The company, therefore, is subject to the customers' compliance with the terms of the contracts, their ability to terminate or suspend the contracts and the customers' willingness and ability to pay. The loss of any of these customers could have a material adverse effect on the company. In the event the company becomes involved in a disagreement with one or more of its customers, their compliance with these contracts may be at risk. For example, the company has negotiated floor prices that are well above historical low prices for palladium and platinum. In the event of a substantial decline in the market price of palladium or platinum, one or more of these customers could seek to renegotiate the prices or fail to honor the contracts. In such an event, the company's expansion plans could be threatened. In addition, under the company's syndicated credit facility, a default or modification of the sales contracts could prohibit additional loans or require the repayment of outstanding loans. Although the company believes it has adequate legal remedies if a customer fails to perform, termination or breach could have a material adverse effect on the company's expansion plans and results of operations. The contracts are designed to limit the downside risk of metal prices at the risk of foregoing a portion of upside price potential should market prices exceed the price ceilings. During first half of 2001, the price ceilings reduced the average price realized by $115 per ounce. See Note 8 to the financial statements attached hereto for additional information about the sales contracts. 19 20 SUBSTITUTION OF MATERIALS - USERS OF PGM'S MAY SUBSTITUTE OTHER MATERIALS FOR PALLADIUM AND PLATINUM IF PGM PRICES CONTINUE TO RISE. High PGM prices may lead users of PGMs to substitute other materials for palladium and platinum. The automobile, electronics and dental industries are the three largest sources of palladium demand. In response to supply questions and high market prices for palladium, some automobile manufacturers may seek alternatives to palladium and may reduce their PGM purchases. Recently, a representative of one automobile manufacturer indicated that such manufacturer would seek to reduce PGM loading quantities per vehicle by up to 30% over the next 12 to 18 months as engineers continue to design more efficient exhaust systems. There has been some substitution of other metals for palladium in electronics and dental applications. Substitution in all of these industries may increase significantly if the PGM market price continues to rise. Significant substitution for any reason could result in a material PGM price decrease, which could have a material adverse effect on the company's business, financial condition and results of operations. LIMITED AVAILABILITY OF ADDITIONAL MINING PERSONNEL AND UNCERTAINTY OF LABOR RELATIONS - OUR OPERATIONS DEPEND SIGNIFICANTLY UPON THE AVAILABILITY OF QUALIFIED MINERS, AND IF WE ARE NOT ABLE TO ATTRACT AND RETAIN THESE MINERS, OUR PRODUCTION TARGETS MAY NOT BE MET. The operations of the company depend significantly on the availability of qualified miners. Historically, the company has experienced high turnover with respect to its miners. In addition, the company must compete for individuals skilled in the operation and development of mining properties. The number of such persons is limited, and significant competition exists to obtain their skills. The company cannot be certain that it will be able to maintain an adequate supply of miners and other personnel or that the company's labor expenses will not increase as a result of a shortage in supply of such workers. The company currently employs 404 miners and expects to require an additional 230 miners within the next five years. Failure to maintain an adequate supply of miners could adversely effect the company's expansion plans and results of operations. The company currently has approximately 1,566 employees, about 980 of whom are covered by a collective bargaining agreement with PACE Local 8-001, expiring June 30, 2004. The company expects to employ approximately 1,800 persons by the end of second quarter 2002. In the event the company's employees were to engage in a strike or other work stoppage, the company could experience a significant disruption of its operations and higher ongoing labor costs, which could have a material adverse effect on the company's business, financial condition and results of operations. AVAILABILITY OF ELECTRICITY - IF WE ARE UNABLE TO NEGOTIATE SATISFACTORY LONG-TERM CONTRACTS FOR ELECTRICAL ENERGY, WE COULD EXPERIENCE A SIGNIFICANT INCREASE IN OPERATING COSTS OR PRODUCTION DISRUPTION. The company uses significant amounts of electrical energy at its operations. The total cost of electricity in 2000 for the Stillwater Mine, the East Boulder Mine and at the smelter/refinery complex was $6.5 million. The company purchases energy at regulated rates from Montana Power for the Stillwater Mine and the smelter/refinery and purchases energy from Park Electric Cooperative Inc. under a long-term contract for the East Boulder Mine. Park Electric receives the bulk of its energy supply under long-term contracts from Bonneville Power at an average cost to Stillwater Mining of $0.026 per kWh. Actual total energy costs at the mine site are a function of power factors, transmission and distribution costs and administrative costs and will average $0.047 per kWh in 2001. Energy purchased from Montana Power is covered by regulated rates through June 30, 2002. The energy portion of the rate will average $0.028 per kWh for 2001 and the total rate, including transmission and distribution, etc., will average $0.037 per kWh. The requirement for the company to move to deregulated supply is currently June 2005; however, regulated rates have not been set beyond June 2002. Should the company be required to move to market prices or be unable to negotiate satisfactory long-term contracts for electrical energy, it could experience a significant increase in operating costs or production disruptions. 20 21 MINING RISKS AND POTENTIAL INADEQUACY OF INSURANCE COVERAGE - OUR BUSINESS IS SUBJECT TO SIGNIFICANT RISKS THAT MAY NOT BE COVERED BY INSURANCE. Underground mining and the company's milling, smelting and refining operations involve a number of risks and hazards, including unusual and unexpected rock formations, ground or slope failures, cave-ins and other mining or ground-related problems, environmental hazards, industrial accidents, labor disputes, metallurgical and other processing, smelting or refining problems, flooding and periodic interruptions due to inclement or hazardous weather conditions or other acts of God, mechanical equipment and facility performance problems and the availability of materials and equipment. Such risks could result in damage to, or destruction of, mineral properties or production facilities, personal injury or death, environmental damage, delays in mining, monetary losses and possible legal liability. Fatalities have occurred at the company's mine since operations began in 1986. During the first six months of 2001, the company experienced three fatalities at the Stillwater Mine. Industrial accidents could have a material adverse effect on the company's business and operations. Although the company believes that it maintains insurance within ranges of coverage consistent with industry practice, it cannot be certain that this insurance will cover the risks associated with mining or that the company will be able to maintain insurance to cover these risks at economically feasible premiums. The company might also become subject to liability for pollution or other hazards which it cannot insure against or which it may elect not to insure against because of premium costs or other reasons. Losses from such events could have a material adverse effect on the company. DIFFICULTY OF ESTIMATING RESERVES ACCURATELY - RESERVES ARE VERY DIFFICULT TO ESTIMATE AND RESERVE ESTIMATES MAY REQUIRE ADJUSTMENT IN THE FUTURE; CHANGES IN ORE GRADES COULD MATERIALLY IMPACT OUR PRODUCTION. While the company's 2000 ore reserves have been reviewed by independent consultants, the ore reserve estimates are necessarily imprecise and depend to some extent on statistical inferences drawn from limited drilling, which may prove unreliable. Reserve estimates are expressions of judgment based on knowledge, experience and industry practice. Although the company believes its estimated ore reserves are well established, it cannot be certain that its estimated ore reserves are accurate, and future production experience could differ materially from such estimates. Should the company encounter mineralization or formations at any of its mines or projects different from those predicted by drilling, sampling and similar examinations, reserve estimates may have to be adjusted and mining plans may have to be altered in a way that might adversely affect the company's operations. Declines in the market prices of platinum group metals may render the mining of some or all of the company's ore reserves uneconomic. The grade of ore may vary significantly from time to time and between the Stillwater Mine and the East Boulder Mine, as well as with any operation. The company cannot give any assurances that any particular level of metal may be recovered from the ore reserves. Moreover, short-term factors relating to the ore reserves, such as the need for additional development of the orebody or the processing of new or different grades, may impair the profitability of the company in any particular accounting period. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The company is exposed to market risk, including the effects of adverse changes in metal prices and interest rates as discussed below. COMMODITY PRICE RISK The company produces and sells palladium, platinum and associated by-product metals directly to its customers and also through third parties. As a result, financial risks are materially affected when prices for these commodities fluctuate. In order to manage commodity price risk and to reduce the impact of fluctuation in prices, the company enters into long-term contracts and uses various derivative financial instruments. Because the company hedges only with instruments that have a high correlation with the value of the hedged transactions, changes in derivatives' fair value are expected to be offset by changes in the value of the hedged transaction. 21 22 The company has entered into long-term sales contracts with General Motors Corporation, Ford Motor Company and Mitsubishi Corporation. The contracts apply to the portions of the company's production over the period through December 2010 and provide for a floor and ceiling price structure. See Note 8 to the financial statements attached hereto for additional information about sales contracts. As of June 30, 2001, the company had sold forward 33,000 ounces of palladium for delivery in 2001 at an average price of $700 per ounce and 24,000 ounces of palladium for delivery in 2002 at an average price of $700 per ounce. In addition, the company had sold forward 6,000 and 12,000 ounces of platinum for delivery in 2001 and 2002, respectively, at an average price of $575 per ounce. Under a financially settled forward, at each settlement date, the company receives the difference between the forward price and the market price if the market price is below the forward price and the company pays the difference between the forward price and the market price if the market price is above the forward price. The company's financially settled forwards are settled at maturity. The fair value of the company's financially settled forwards was a gain of approximately $6.5 million at June 30, 2001. INTEREST RATE RISK At the present time, the company has no financial instruments in place to manage the impact of changes in interest rates. Therefore, the company is exposed to changes in interest rates on the portion of its credit facility which carries a variable interest rate based upon LIBOR. At June 30, 2001, no amounts were outstanding under the revolving credit portion of the facility. The credit facility provides for a $65 million five-year term loan facility (Term A), a $135 million seven-year term loan facility (Term B) and a $50 million revolving credit facility. The final maturity of the Term A and revolving credit facility is December 30, 2005, while the Term B facility final maturity date is December 31, 2007. As of June 30, 2001, the company had $200 million outstanding under the term loan facilities, bearing interest at 6.56% and 7.31% for the Term A and Term B facilities, respectively. 22 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the company's consolidated financial position, results of operations or liquidity. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders (a) The annual meeting of stockholders was held on May 24, 2001. (b) The following individuals were elected to continue as Directors at the meeting: Richard E. Gilbert, Apolinar Guzman, Patrick M. James, Francis R. McAllister, and Peter Steen. (c) Set forth below are the votes cast for the election of Directors:
For (*) Withheld ------- -------- Richard E. Gilbert 34,506,251 547,449 Apolinar Guzman 34,536,616 517,084 Patrick M. James 34,531,185 522,515 Joseph P. Mazurek 34,535,991 517,709 Francis R. McAllister 28,121,573 6,932,127 Malcolm W. MacNaught 34,537,401 516,299 Peter Steen 34,498,186 555,514
*Stockholders have cumulative voting rights in connection with the election of directors. Stockholders were asked to ratify the appointment of KPMG LLP as the company's independent accountants for the fiscal year ending December 31, 2001. Votes cast for were 34,670,127, against were 345,128 and abstaining were 38,445. (d) None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 23 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STILLWATER MINING COMPANY (Registrant) Date: July 19, 2001 By: /s/ FRANCIS R. McALLISTER ------------------------------------ Francis R. McAllister Chairman and Chief Executive Officer (Principal Executive Officer) Date: July 19, 2001 By: /s/ JAMES A. SABALA ------------------------------------ James A. Sabala Vice President and Chief Financial Officer (Principal Financial Officer) 24 -----END PRIVACY-ENHANCED MESSAGE-----