Marathon PGM Acquisition Would Provide Diversification

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Stillwater CEO: Marathon PGM Acquisition Would Provide Diversification

01 October 2010, 11:04 a.m.
By Allen Sykora
Of Kitco News
http://www.kitco.com/


Stillwater Mining Co. (SWC) would achieve both geographic and metals diversification through its planned acquisition of Canadian exploration company Marathon PGM Corp., said Frank McAllister, chairman and chief executive officer of Stillwater.

A $118 million cash-and-stock deal with Marathon PGM (TSX: MAR) was announced on Sept. 7. Marathon’s flagship project is a platinum group metals/copper deposit, not yet developed, in southern Ontario. The acquisition is expected to increase Stillwater’s PGM output by 40% in three years.

Combined platinum and palladium output from the project is projected at around 200,000 ounces annually with a life of 12 years, of which 160,000 would be palladium. Copper output is projected at 40 million pounds.

“It’s an opportunity for Stillwater to step out and diversify ourselves in two different realms,” McAllister said. “First of all, there is geographic diversification.”

Stillwater’s current properties are the Stillwater Mine and East Bounder Mine, both located in Montana on the 28-mile-long J-M Reef. Stillwater, which is the only U.S. producer of platinum and palladium, is based in Columbus, Mont.

“The second thing this provides is a product diversification, yet fitting like a hand and glove,” McAllister said.

The Marathon property is similar to Stillwater’s Montana operations in that it has platinum group metals, the majority of which is palladium. The ratio of palladium to platinum at the Canadian project would be 4 to 1, whereas the Montana properties have a palladium/platinum ratio of 3.4 to 1.

With the acquisition, however, Stillwater would also mine copper as a by-product. In fact, at current prices, some 45% of the value of the material coming from the Marathon operation would be copper, McAllister said.

“It is a palladium-platinum mine, but the copper provides us with some resiliency in terms of diversification for product, because it will give us a good copper by-product,” he said.

The Marathon property would be an open-pit mining operation, McAllister said. Furthermore, Stillwater would control other portions of a mining district that have exploration potential.

“We’re very optimistic that the resource that has been identified so far by the Marathon PGM people can be expanded over time,” McAllister said. “We would expect the resource is going to have a longer life than the 12 years that has currently been outlined.”

The transaction has been approved by the boards of directors of both companies, but requires approval from Marathon PGM shareholders. A vote is still to be scheduled, likely in November.

Marathon has already begun the process of securing environmental permits. This will take two or three years. During the process, Stillwater will determine how to develop the property.

“We would plan to follow what Marathon already has under way and work with their same plans,” he said. Still, there likely will be at least some changes, he said.

Expectations are that the first production will occur in around three years, depending on the permit process and construction, McAllister said. The construction cost is projected at C$400 million to C$450 million.

Stillwater To Increase Output Of Higher-Grade Ore In Montana

Stillwater anticipates hitting projected annualized production of around 515,000 ounces of PGMs from its Montana operations by the fourth quarter after a decline in the second quarter that was mostly due to infrastructure projects that temporarily limited access to higher-grade ore, the CEO explained.

Stillwater said on its second-quarter earnings report that its two Montana mines collectively produced 112,600 ounces of platinum and palladium, down 18.2% from 137,700 in the year-ago quarter, mostly due lower-grade ores. Still, earnings rose from a year ago due to higher prices.

The company was held back from some of the higher-grade areas while reinforcing tunnels and work areas to make them safer, McAllister said. This meant greater reliance upon lower-grade material.

“These infrastructure requirements were addressed during the second quarter and some of that spilled over into the third quarter. So we would expect by the fourth quarter, we would be back at the rate we projected we would be producing at for the year—about 515,000 ounces,” McAllister said.

The company has undertaken engineering studies and determined there are further areas that can be mined--if the price is high enough to provide the incentive and Stillwater can attract the necessary workforce of skilled miners.

The Montana operations would seem to have decades of life remaining. Stillwater is mining from a Montana formation that that is 28 miles long, with about one and one-half miles of vertical height, and an average of five feet in width.

“We’ve mined about six miles of that at Stillwater and about two miles of it at the East Bounder Mine,” McAllister said. “So you can see there is a fairly extensive resource.”

Stillwater currently lists reserves of some 20 million ounces. At an annual production rate of 500,000, there would be some 40 years of remaining mine life. McAllister explained, however, that the company has been able to effectively add reserves as it mines existing ones.

“To a certain extent, we replace our reserve that we mine each year with new reserves,” he said. “While it is not on a one-for-one basis each year, typically each year we would on average extend that reserve so that the 20 million-ounce reserve probably stays about at that level going forward for a period of time.”

Recycling Operation Picking Up Again After 2009 Decline

In August, Stillwater started up a new scrap recycling plant to recycle the platinum group metals out of catalytic converters. The company has been recycling spent converters since 1997.

Stillwater collected around 400,000 ounces of recycled platinum group metals in 2008. This declined in 2009 and early 2010 as U.S. new-car sales fell, meaning fewer old vehicles going to junkyard and thus less recycling. Also, lower PGM prices since 2008 meant scrap dealers held onto some of their inventory, waiting for prices to recover again.

“By the end of this year, we’ll be back up to that 400,000-ounce level,” McAllister said.

Stillwater also is in the process of completing an industrial-sized assay facility. When done, this should significantly shorten the time requirement for receiving and finalizing settlements with shippers, thereby encouraging more shipments of recycling material, he said.

McAllister Looks For Palladium To Outperform Platinum

McAllister expects prices of platinum group metals to rise, but with palladium likely to outpace platinum.

Some 55% of the world’s PGMs come from South Africa, and this country faces challenges in trying to maintain output, he said. For instance, South Africa has insufficient electrical capacity, which has sometimes curtailed mining operations in recent years. Safety issues have resulted in temporary closures. Additionally, companies must continually go deeper under the ground to mine metal, making operations more expensive.

“So the issue is, ‘can the production be increased at current prices?’” McAllister asked rhetorically. “My guess is there is not enough incentive at this point in time at current prices for production to be increased, and perhaps barely enough incentive for them to maintain their (current) production.”

Meanwhile, rising platinum prices encourage more technological studies in which the auto industry seeks to either use less metal, or else a different metal, for catalytic converters, he said. Of the three metals used for converters – platinum, palladium and rhodium – palladium is by far the cheapest per ounce. This could mean the industry is motivated to shift toward more use of palladium.

China also has become the world’s largest car market, fueling more demand for PGMs. And, the country uses mainly gasoline-powered vehicles, which can use palladium, while diesel vehicles tend to rely upon platinum.

Still, some demand shift from platinum to palladium won’t necessarily depress the platinum price, McAllister said. This is because platinum is likely to be driven more by the supply issues, he said.

“If you don’t have supply, then the price of platinum is going to trade up and the price of palladium up against it,” McAllister said.

Whereas the palladium price is currently some 35% of the price of platinum, this may eventually rise to 50%, McAllister said.

“That would suggest that at $1,650 (for platinum), you would have to have a price of $825 (for palladium). It isn’t going to go there tomorrow. But over time…you will wind up having that type of price push.”


By Allen Sykora of Kitco News; asykora@kitco.com