Geologists from Johns Manville Corporation (Manville) discovered palladium and platinum in the Stillwater Complex (Montana), also known as the J-M Reef, during the early 1970s. In 1979, a Manville subsidiary and Chevron USA set out to develop platinum group metals (PGMs, see below). After seven years of exploration, commercial mining commenced in 1986.
Stillwater Mining Company (SWC) was incorporated in 1992, and in October 1993, Chevron and Manville transferred all pertinent assets, liabilities, and operations. Chevron and Manville each held a 50% ownership interest. In 1994, the company redeemed Chevron’ stake, and subsequently completed an initial public offering. Manville gradually reduced its ownership percentage, selling its remaining interest to a group of institutional investors in 1995.
PGM refers to a group of six metals (platinum, palladium, iridium, rhodium, ruthenium, and osmium). But since platinum and palladium account for a significant portion of total production, we will focus our attention here.
Stillwater Mining’s primary asset is the J-M Reef, the only known source of PGMs inside the U.S., and one of the most significant resources outside South Africa and Russia. The company generates revenue by supplying these two PGMs to the automotive industry, which produce catalysts that reduce harmful automobile emissions. These metals possess unique physical properties, leading to its consumption in a number of other end markets. Platinum is used to produce jewelry, data storage devices, fiber-optic cables, fertilizers, fuel cells, fiber glass, paints, etc. Palladium’s market includes petroleum, dental applications, as well as electronic components for personal computers, cell phones, tablets, and so on.
Though commodity markets have cooled recently, with platinum and palladium approximating $1,395 and $575 an ounce, respectively, both metallic elements hold favorable prospects. Platinum’s outlook is especially encouraging. It is highly efficient in safely processing carbon monoxide and hydrocarbons, making platinum desirable for diesel applications. For gasoline-powered engines, palladium and platinum are equally effective. However, since the former is trading at a sharp discount, it is gaining momentum. Palladium’s supply appears to be restricted. Russia, which historically accounted for more than half of the metal’s output, has curtailed supplies in recent years. There are reports that the country has either depleted the metal or is conserving it for future usage.
Stricter emissions regulations in the developed world and growing disposable incomes in emerging countries, are boosting automobile sales, which are in turn leading to increased demand for catalytic converters. Despite a break-neck pace of vehicle purchases in China during the last two decades, there appears to be room for additional growth. In the world’s most populous country, there are less than 100 automobiles per 1,000 people. In comparison, there are more than 400 automobiles per 1,000 consumers in the Europe and the United States. The same metric is even lower in emerging countries, leading us to expect brighter days for the auto industry.
In response to strong long-term fundamentals for palladium and platinum and production constraints at existing mines, the company has announced two new development and potential expansion projects. First is the Blitz development, followed by Graham Creek. A total of $180 million has been budgeted for these projects.
Acquisitions also have the potential to make meaningful contributions. Under a $118 million deal for Marathon PGM Corporation, the company is positioned to enhance production by 200,000 ounces of palladium and platinum a year, along with 39 million pounds of copper. In comparison, the company is looking to produce 500,000 ounces this year. Production is scheduled to start in 2014. The other notable deal ($164 million plus the issuance of 12 million SWC shares) was for Peregrine Metals (PM). PM’s portfolio is highlighted by the Altar project, a large undeveloped property in Argentina with significant copper and gold deposits. Both transactions will not only boost output, but help to diversify operations. Moreover, Marathon PGM and PM mitigate Stillwater Mining’s exposure to steep fluctuations in PGM prices.
For more information in regard to Stillwater’s business prospects and the investment merits of the stock, subscribers are encouraged to check out our full-page report in The Value line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.