exothermic reactions are cool --SWC got upgrades, lot of details here.....I hope this too is not a clownstock.....-g-
...SWC: Making Hay While the Sun Shines; Raising Price Target
Stillwater Mining Co(SWC)#
Rating: 1H
As of 01/13/2001
Last Changed 01/12/2001
Salomon Smith Barney ~ January 12, 2001
Stillwater Mining Company (SWC)#
SWC: Making Hay While the Sun Shines; Raising 1H (Buy, High Risk)
Price Target Mkt Cap: $1,551.2 mil.
January 12, 2001 SUMMARY
* Stillwater Mining Company appears to be on the verge of
PRECIOUS METALS improved operating performance after several disappointing
Leanne M. Baker years.
* Meanwhile, prices for platinum group metals (PGMs) are
surging -- with palladium setting new all-time highs above
Janice Day $1,000 per ounce and platinum at 12-year records.
* Current metal price levels suggest that 2001 could mark
a cycle peak, although palladium's structural deficit will
persist and Russian supply remains a bullish wildcard. We
are raising our 2001 palladium and platinum price
estimates to $800 and $540, respectively.
* Our increased 4Q and 2001 EPS estimates, new $50 price
target, and risk-revised 1H (Buy, High Risk) investment
rating reflect our improved confidence in the company's
ability to meet operating targets.
FUNDAMENTALS
P/E (12/00E) 22.7x
P/E (12/01E) 14.4x
TEV/EBITDA (12/00E) 14.8x
TEV/EBITDA (12/01E) 9.1x
Book Value/Share (12/00E) $9.71
Price/Book Value 4.1x
Dividend/Yield (12/00E) NA/NA
Revenue (12/00E) $231.6 mil.
Proj. Long-Term EPS Growth 20%
ROE (12/00E) 16.4%
Long-Term Debt to Capital(a) 28.9%
SWC is in the Russell 2000(R) Index.
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (1/10/01) $39.47 Current Rating 1H
52-Week Range $47.00-$24.56 Prior Rating 1S
Shares Outstanding(a) 39.3 mil. Current Target Price $50.00
Convertible No Previous Target Price $40.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/99A Actual $0.28A $0.21A $0.14A $0.35A $0.96A
12/00E Current $0.52E $0.31E $0.37E $0.54E $1.74E
Previous $0.52E $0.31E $0.37E $0.48E $1.68E
12/01E Current NA NA NA NA $2.75E
Previous NA NA NA NA $2.00E
12/02E Current NA NA NA NA $3.75E
Previous NA NA NA NA $3.87E
First Call Consensus EPS: 12/00E $1.72; 12/01E $2.30; 12/02E $3.50
OPINION
We are raising our price target on Stillwater Mining Company to $50 from $40
based on increasing confidence in the company's ability to deliver on its
2001-02 operating targets, and current strength in palladium and platinum
pricing. We are boosting our fourth-quarter 2000 EPS estimate to $0.54 from
$0.48, our second upward revision in three weeks, and our 2001 EPS estimate
to $2.75 from $2.00. Stillwater Mining addressed its late-2000 liquidity
issues with a new credit agreement, and strong PGM prices will help to ensure
adequate cash flow for the completion of the latest Stillwater Mine expansion
and continuing development of the new East Boulder Mine. As a result, we are
lowering our risk rating on the shares to High Risk from Speculative. Our
new $50 price target reflects a 2001 TEV/EBITDA ratio of 6.0.
PLATINUM GROUP METALS -- WHAT GOES UP . . . ?
The price of palladium -- the dominant PGM in Stillwater's ore reserves,
accounting for an estimated 80% of the company's 2000 revenues -- has surged
into uncharted territory, surpassing $1,000 per ounce on January 8 and
setting several new daily records day since then. Palladium more than
doubled in price in 2000, outperforming all other metals in 2000 and
averaging $685 for the year. Sister metal platinum has been buoyant as well,
climbing by 40% in 2000 to average $546, and currently trading in a $625-$650
range. We have been long-term bulls on palladium and more cautious bulls on
platinum since initiating coverage on Stillwater Mining following the
December 1994 IPO. It is appropriate, in our view, to assess the likelihood
that at long last, the PGMs are nearing a classic cycle peak.
Supply/demand dynamics of palladium and platinum are closely intertwined,
given that they occur together in ore deposits, and, to some degree, can be
substituted for each other in autocatalysts. South Africa and Russia
dominate global PGM production, but each supplies the lion's share of a
different metal, because the ore grades can vary so substantially from one
deposit to the next. South Africa's long-lived PGM mines along the Merensky
and UG2 reefs in the famed Bushveld Complex produce 2-to-2.25 ounces of
platinum for each ounce of palladium. Meanwhile, the Russian
nickel/PGM/copper deposits centered in Norilsk (in Upper Siberia, above the
Arctic Circle) contain roughly 3 ounces of palladium for each ounce of
platinum. In 2000, South Africa accounted for 75% and 25% of platinum and
palladium supplies, respectively, with Russia's respective shares reversed at
20% and 66%. Stillwater's PGM ratios are similar to those in Russia, with
palladium accounting for 76% of estimated 2000 PGM production.
In the last decade, palladium clearly has been the best performing PGM. From
1989 to 1999, demand climbed by an impressive 11% CAGR, to 9.4 million ounces
from 3.3 million ounces. From a similar absolute demand base of 3.4 million
ounces in 1989, platinum demand climbed by a more subdued 5% CAGR to 1999
demand levels of 5.6 million ounces. Most of palladium's growth is
attributable to increasingly stringent vehicle emission requirements -- which
not only boosted the overall use of PGM-bearing catalytic converters, but
favored growth in palladium share relative to platinum and rhodium because of
its unique chemical characteristics. From 1989 to 1999, autocatalyst demand
for platinum actually edged lower, to 1.2 million ounces from 1.3 million
ounces, while that for palladium burgeoned to 5.7 million ounces from a
modest 195,000 ounces -- an outsized 29-fold increase.
Although price performance continued to favor palladium in 2000,
supply/demand estimates released by Johnson Matthey suggest that consumers
are beginning to adjust their preferences to reflect the realities of annual
PGM production. In 2000, platinum autocatalyst demand climbed by 13% to 1.34
million ounces, while palladium autocatalyst demand tumbled by 13% to 4.93
million ounces as consumers worked off of their stockpiles. Record-high
prices also took a toll on dental and jewelry/other demand, both down by 22%
to 870,000 ounces and 270,000 ounces, respectively. Even in electronics,
where palladium demand increased by almost 5% to 2.1 million ounces, the
substitution of nickel-based electrodes in multi-layer ceramic capacitors
(MLCCs) continued at a frenetic pace. However, palladium-based electrodes
managed to hold their own because worldwide MLCC production surged by roughly
50% to 650 billion units in 2000.
In the next two to three years, we believe that the response of autocatalyst
and electronics consumers to the vagaries of the PGM markets will determine,
in large part, the magnitude and the duration of the current classic cycle
price peaks that appear to be unfolding for palladium and platinum. The
current price spike, particularly for palladium, mostly reflects the
continuing inability of the Russian bureaucracy to organize shipments to the
market from its Government stockpiles of the metal. Key supply/demand
drivers include the following:
* Plans by vehicle producers to adjust PGM consumption ratios in catalytic
converters. In recent months, both General Motors and Ford officials have
stated publicly that they plan to switch away from palladium-based
autocatalysts where possible, as well as reduce PGM loadings and improve
metal recoveries from spent catalysts. With autocatalysts accounting for
about 60% of palladium demand and only 25% of platinum demand, the risk of
a meaningful decline in palladium's share of the autocatalyst market
appears high in the next several years, in our view. We believe that auto
companies have built up stockpiles of the metals, which provides additional
cushion when prices spike. Finally, the vehicle production and sales
declines taking place in the U.S. market this year will further reduce
demand for the metals. During periods when market sentiment toward the
PGMs turns more negative than it is now, prices can be especially
susceptible to the "headline impact" of major announcements by consumers.
* Planned increases in mine production in South Africa and North America.
The South African PGM industry has benefited not only from rising dollar-
denominated metal pricing, but a depreciating domestic currency as well --
and the industry is launching a spate of new and expanded mines in the
Bushveld Complex that looks to rival the boom that occurred a decade ago.
Anglo Platinum is taking the lead, with its new Bafokeng-Rasimore mine now
in production and ramping up to 250,000 ounces by mid-2002, the Amandelbult
and Lebowa expansions targeted to add 100,000 ounces, and the new
Mandagshock and Waterval projects in development. Anglo has announced its
intention to grow platinum production by 1.5 million ounces by year-end
2006, to 3.5 million ounces. Impala Platinum is reopening Crocodile River
and developing Winnaarshock, with new projects also planned by Lonmin,
Northam and several small producers. If the South Africans are able to
boost platinum production by 2 million ounces in the coming decade,
palladium production should climb by 1 million ounces. In North America,
Stillwater is targeted to boost palladium production at its Stillwater and
new East Boulder mines by about 550,000 ounces, while North American
Palladium is planning to increase its palladium production by more than
200,000 ounces.
* The eventual depletion of the official Russian palladium stockpiles. In
the past decade, Russia has become an increasingly important -- and
volatile -- supplier of PGMs to the West. Russia's willingness to sell
metal not only from Norilsk annual production, but from official stockpiles
as well, helped to underpin palladium's dramatic growth rates in demand and
ironically, kept prices from spiking higher much earlier in the decade.
Since the demise of the former Soviet Union, Norilsk has managed to wrest
partial control of the marketing rights to its own production, which
ensures capital availability for its much-vaunted reinvestment program.
Control of the Government stockpile, however, appears to shift between the
Central Bank and Ministry of Finance, and stockpile sales as a result have
been quite erratic. Russian palladium sales peaked at 5.8 million ounces
in 1998, accounting for 69% of supply, according to Johnson Matthey. Sales
of 5.2 million ounces in 2000 measured 65% of total supply. Stillwater
Mining estimates that since 1990, the Russians have depleted more than 20
million ounces of palladium from stockpile, and our longstanding
bullishness toward the metal has been predicted on the fact that the
stockpile simply cannot last forever.
In recognition of current PGM pricing strength -- and assuming for now that
2001 will mark a cycle peak of some sort -- we are raising our 2001 palladium
price estimate to $800 from $550 and our platinum price estimate to $540 from
$450. In the short term, palladium prices will be most vulnerable to a
resumption of shipments from Russia. For now, we assume the average prices
in 2002 will be lower than this year, with palladium at $600 per ounce and
platinum at $500 per ounce.
We believe it is imperative that in the coming year, management must focus on
maximizing cash flows from a strong PGM market -- in essence, "making hay
while the sun shines." If it can do so, thus restoring credibility lost by
missteps in the past few years, the shares can recoup some of their allure as
the most compelling EPS growth story in the metals universe. Even if PGM
prices are lower next year, Stillwater's EPS likely will be higher as it
completes the current expansion of its Stillwater Mine and begins production
at East Boulder. For now, we maintain our 2002 EPS estimate of $3.75, which
incorporates lower PGM prices ($600 for palladium and $500 for platinum) but
success in expanding PGM production towards 1.2 million ounces (which should
be acheived in 2003) and a lowering of per-ounce costs to $200 from an
estimated $275 in 2000 and $245 in 2001.
We are raising our price target to $50 from $40 to reflect our increased
confidence that the company will be able to achieve targeted operational
improvements at its Stillwater Mine, which is undergoing an expansion to
3,000 tons per day (tpd) from the current 2,000 tpd. In addition, it is
developing the new East Boulder Mine, which is slated to begin production in
2002 and ramp up to full capacity of 2,000 tpd in 2003. We also are boosting
our estimated long-term EPS growth rate to 20% from 15%. Given the company's
improved earnings prospects, and the late-2000 credit line renewal that
shored up its balance sheet as it seeks to complete its capital program, we
also are raising our risk rating to High Risk from Speculative.
Stillwater will release full-year 2000 results on Monday, January 29. |
