Possible bottom fishing: SWC
Full details at this link:
stockhouse.ca
Here's some details on the metal palladium used in catalytic converters. Then some details on SWC, a palladium miner.
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Regardless of current platinum/palladium prices, automotive demand is
poised to explode over the next decade as a result of more stringent
emission standards globally and the growing popularity of diesel
vehicles.
Diesel catalysts rely strictly on platinum and will require
increasingly large loadings of the metal, which have already risen
significantly to meet new European standards.
European consumers have flocked to diesel because of its fuel
efficiency. Mark Gulley, managing director and senior
specialty-chemicals analyst at Banc of America Securities, expects
demand for diesel catalysts to ramp up to $900 million by 2010. He
believes the value of the precious-metals content to exceed the
average $100 worth of content in gasoline catalysts.
We will also witness an increase in palladium demand as higher
emission standards are enacted around the globe,
There is some talk that fuel cells could be dominant in the future and
replace the smog spewing gasoline engine. This could be true, but the
current leading fuel cell technology uses a catalyst exchange membrane
of PGEs. There is more PGE content in a fuel cell that would replace a
gasoline/diesel catalytic converter so demand will actually increase
with deployment of fuel cells.
The Opportunity
There is a unique opportunity in the PGE market right now, especially
with palladium. I believe the drop in palladium is temporary.
Palladium went too high in price too quickly and has now fallen too
far. Platinum is priced much higher than palladium but it is only a
matter of time before palladium moves back to a premium to platinum
prices. There is a unique and temporary set of factors at work in the
palladium market.
Many of the PGM stocks have come down to levels we have not seen in
years with the drop in PGM prices. I believe the drop in these stock
prices is temporary and we will see higher prices before too long.
What is unusual is that platinum prices have been strong but palladium
weak. The palladium market has failed to recover with platinum because
this market has been in a tizzy since Ford had to reveal a large
palladium inventory writedown. Let me explain:
Ford made the same mistake that speculators make, chasing the metal
prices too high for their catalytic converters. The auto giant
disclosed the value of palladium it acquired last year at a price of
$1,500 per ounce. Industry analysts believe Ford bought at least 1.9
million ounces from Engelhard, paying $400 more per ounce than the
highest price of $1,100 palladium reached last February.
Ford's announcement that it was taking a $1 billion write-down in its
precious metals inventory, largely palladium, created a great deal of
uncertainly and confusion in the palladium market. What was
significant was Ford's disclosure that its stockpile was so large. It
represents 41 percent of total Russian sales of palladium last year or
38 percent of U.S. imports of the metal in a good year. It is larger
than annual sales out of Russia's own stockpile of palladium. The
market is concerned. What will Ford do?
If Ford keeps the palladium and reduces the inventory until it can be
used in the production line, U.S. demand for imports this year will
fall substantially. If Ford sells, then it will be competing against
Russian sales. Either way, it looks like the price of palladium will
remain weak until this situation changes. Ford's financial situation
is not good and they have been cutting costs everywhere possible. It
is possible that Ford could sell a big chunk of this inventory so this
is weighing down prices. Since Ford has already taken the writedown
and they are under pressure to cut costs, I expect Ford will not be a
buyer of palladium and will work down their inventory. This means much
lower palladium demand in 2002, but this factor is already in the
palladium price.
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Stillwater SWC on NY Recent Price US$6.20
Entry Price $13.20 Opinion - average down, strong buy
52 week range $6.05 to $20.50 (new 52 week low yesterday)
The stock was knocked down to a very cheap level, below $15. If this
was not enough, on September 4th the company announced they were
revising their PGM production target for 2002 to approximately 640,000
ounces of palladium and platinum, a decrease of 40,000 ounces from the
previous target of 680,000 ounces. For the second half of the year,
the Stillwater Mine is now forecast to produce approximately 240,000
ounces of palladium and platinum and the East Boulder Mine is forecast
to produce approximately 70,000 ounces of palladium and platinum.
Stillwater claimed that, continued industrial relations issues and the
delay of certain infrastructure projects at the Company's Stillwater
Mine required them to revise short-term production level targets.
I think what spooked investors and caused the sell off was this
statement in the news release
"As a result, it is possible that the Company will not comply with the
ramp up in its bank credit facility production covenant as early as
the third quarter of this year, and it is also possible that certain
financial covenants might also be breached in the fourth quarter of
this year. The Company is working closely with the lenders in its
credit facility to waive or amend the relevant covenants in its credit
agreement in light of the above circumstances and the adjusted
production figures. The Company is hopeful of reaching a satisfactory
resolution, although there can be no assurance that the Company will
be successful."
These days when ever the subject of credit and loans come up, investors
fear bankruptcy.
There is no way this mine is going under and the stock price represents
a steal. This mine is a gem and way to valuable to go out of business.
I don't think the major shareholders and auto companies would allow it.
Palladium is simply too valuable.
You can see by the chart above that the stock has never been this
cheap and this comes at a time when reserves and production are at their
highest levels ever.
You can see from last years results and the first six months of 2002
that the mine is very profitable. Stillwater has supply contracts that
guarantee palladium prices above the current spot price.
In 2001, SWC achieved record palladium and platinum production, the
Stillwater Mine produced 504,000 ounces of PGMs, excluding 22,000
ounces of PGMs recovered from construction and development activities
at East Boulder. Cash operating costs before royalties and taxes for
2001 were $233 per ounce, compared to $226 per ounce in 2000. Total
cash costs per ounce for the year 2001 of $264 were comparable to the
prior year.
For the year ended December 31, 2001, the Company reported net income
of $65.8 million or $1.68 per share, which includes a fourth quarter
restructuring charge of $11 million, on revenue of $277.4 million,
compared to net income of $61.5 million or $1.57 per share, on revenue
of $225.2 million for 2000.
For the six months of 2002, the Company reported net income of $27.6
million or $0.65 per share, on revenue of $151 million compared to net
income of $50.7 million or $1.29 per share, on revenue of $165.2
million for the six months of 2001.
During the second quarter of 2002, the Company produced a total of
165,000 ounces of palladium and platinum compared to 123,000 ounces
for the second quarter of 2001, a 34% increase as a result of a 9%
increase in production at the Stillwater Mine and the contribution of
31,000 ounces from the East Boulder Mine. Realized prices per ounce
for the second quarter 2002 were $442 for palladium, and $511 for
platinum, compared to $591 and $541, respectively, in the second
quarter of 2001.
At the Stillwater Mine cash costs before royalties and taxes during
the second quarter of 2002 were $219 per ounce, compared to $220 for
last year. After including the East Boulder cash costs for the
quarter, consolidated cash costs before royalties and taxes for the
second quarter of 2002 were $239 per ounce compared to $220 per ounce
in 2001. Total cash costs per ounce at the Stillwater Mine for the
second quarter of 2002 were $247 compared to $259 in 2001. After
including the East Boulder costs for the quarter, total cash costs per
ounce on a consolidated basis for the second quarter of 2002 were $270
compared to $259 for the same period in 2001 due to higher operating
costs primarily related to the East Boulder Mine. The higher cash
costs at East Boulder are due to the higher quantity of low-grade
development material that is being milled as the mine ramps up to its
design capacity.
Summary
The stock is trading for just 5 to 6 times earnings and based on
reserves the stock has a very low valuation. The stock could go lower
but it already is an exceptional bargain. I would buy at current
levels with a plan to add to positions if it drops further. Following
is a snap shot of their financial situation and a valuation per ounce
of palladium reserves
Total current assets 120,556
Total assets $906,657
Total current liabilities 52,082
Long-term debt and
capital lease obligations 209,397
Deferred income taxes 75,222
Other noncurrent liabilities 13,537
Total liabilities 350,238
Shares outstanding 43,335,416
Price $6.20
Market Cap 268,679,579
Long term debt/liabilities 222,934,000 million
Cash 41,709,000
Total Value (market cap+debt - cash) 449,904,579
Reserves 25,000,000
Value/oz of reserves US$18.00
A value of just US$18/oz in the ground is a ridiculous low valuation
for a 25 million oz. PGM deposit that is producing over 600,000 ounces
of palladium a year. It is only a matter of when before the stock
moves much higher or a worse case scenario would be a takeover.
Newmont who is a major shareholder would be the most likely buyer.
Newmont has the cash that they could easily pay off the 200 million
credit facility. I expect any take over would be at least double the
current stock price.
The Stillwater mine is a jewel and before long will command a much
higher valuation. Take advantage of the bargain. |
