SMC posts $27 million second quarter profit loss

Platinum Group Metal mining is a complicated business.
Look no further than the Stillwater Mining Company for evidence of that.
At first blush, the second quarter profit report released last Friday looks troubling, with a $27.5 million net loss. It is nearly identical -- but in the opposite direction -- to the first quarter profit of $26 million.
Couple that with two failed contract negotiations with USW International Union Local 11-0001 members, planned workforce reductions and a continued slump in the PGM market and the situation could begin to look unsettling.
A closer look at the events of the second quarter and the company’s overall plan provides a clearer look.

A rough second quarter
The bulk of the $27.5 million net profit loss for the second quarter is due to a $34.4 million impairment charge against the carrying value of SMC’s Marathon mineral property in Canada, which knocked the carrying value to approximately $8.6 million.
 Stillwater began scaling back at the PGM-copper project site in September 2014 when it was determined that current markets did not provide for a favorable return on the investment. The Mitsubishi Corporation is a 25 percent partner on the project. The property was purchased in 2010.
Also making a financial impact on profits during the second quarter was a scheduled multi-day maintenance and repair shutdown at the Stillwater site in June.

“This was a major maintenance shut down,” said SMC CEO Mick McMullen during a conference call last Friday.

For the time in the mine’s history, the concentrator, production hoist and underground crusher were all worked on, with some of the heavy equipment being brought up to surface level. The shutdown was scheduled for one week and was extended by an additional week due to repairs needed to the production hoist.

Also factoring into the loss was the continued slumping PGM market, which saw a drop in palladium prices this year. That slump is expected to continue at some level.
“We do see some significant headwinds facing the PGM industry,” said McMullen.

Sustainability making stillwater strong
SMC is the sole producer of palladium in the United States and although it accounted for just 6 percent of the palladium produced world-wide in 2014, it is the most stable. Mines in South Africa, Russia and Canada are operating in less than favorable political, labor and operating conditions. In Russia in particular ore grades appear to be declining, according to the second quarter earnings report.
The Stillwater and East Boulder mine sites sit on the JM Reef, which is the world’s highest grade PGM deposit. There is more than 22 million “proven and probable” ore reserves with only 11 miles of a 28-mile strike developed to this point. Exploration suggests a possible 100 million tons of undeveloped material.
At the processing facility in Columbus, commonly referred to as the smelter, business is booming.
June was a record processing month. During the first month of the second quarter, the smelter averaged 26.5 tons per day of recycling material, compared to 16.7 tons per day during the first month of the first quarter. Also reflected in the second quarter earnings are short-term contracts cultivated into long-term contracts last quarter. New customers are being developed, with the primary smelter customer continuing to be the auto industry.

Workforce reduction
The ongoing organizational restructuring aimed at knocking down the workforce number has been in motion since 2013 and will continue, McMullen said last Friday. At the end of the first quarter the workforce numbered 1,609. There have been 11 lay-offs in recent weeks, dropping that to approximately 1,598.

Bottom line
Due to the volatile PGM market, SMC says it must continue to cut costs where reasonable and operate more efficiently in order to stay in a position to capitalize on the tremendous reserves of ore at the Montana mines.

Contract Negotiations

The Stillwater Mining Company has offered its third -- and final -- proposed contract to USW International Union Local 11-0001 members.
“We believe we’ve reached impasse on the negotiations,” said Stillwater Mining Company CEO Mick McMullen during a conference call last Friday regarding the second quarter earnings report.


“We want them to continue working,” McMullen said. “It’s a very difficult pricing environment at the Stillwater mine and changes need to be made.”
Union members failed to ratify a second proposed contract last week that had been recommended by the union negotiating committee. McMullen said last Friday the union was notified of the final proposed contract offer on Thursday, July 30.
 His comments came in response to questions asked in an question and answer session following the second quarter earnings report presentation.
Both sides have agreed to not speak with media pending the outcome of the negotiations.
Another bit of somewhat new information about SMC to come from the conference call was the announcement of anticipated “head-count reductions” expected to result in annual labor savings of $10 million to $15 million annually, said McMullen.
While it may have been the first time employee reduction numbers were spoken about in those terms, down-sizing of SMC has been an ongoing process since Dec. 2013. Thus far, the SMC workforce has been cut by more than 160. That has been the result of “voluntary, involuntary severances as well as normal worker attrition,” according to second quarter earnings report