SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
| [X] | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2002. |
OR
| [ ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to |
Commission File Number 0-25090
STILLWATER MINING COMPANY
| DELAWARE | 81-0480654 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
536 EAST PIKE AVENUE, COLUMBUS, MONTANA 59019
(Address of principal executive offices and zip code)
(406) 322-8700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| NAME OF EACH EXCHANGE | ||
| TITLE OF EACH CLASS | ON WHICH REGISTERED | |
|
|
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| Common Stock, $0.01 par value | The New York Stock Exchange | |
| Preferred Stock Purchase Rights | The New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X]YES [ ]NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). [X]YES [ ]NO
As of March 24, 2003, assuming a price of $2.81 per share, the closing sale price on the New York Stock Exchange, the aggregate market value of shares of voting and non-voting common equity held by non-affiliates was approximately $123.1 million.
As of March 24, 2003, the company had outstanding 43,820,592 shares of common stock, par value $0.01 per share.
TABLE OF CONTENTS
| GLOSSARY | 3 | |||||
| PART I | ||||||
| ITEMS 1 AND 2 | BUSINESS AND PROPERTIES | 6 | ||||
| ITEM 3 | LEGAL PROCEEDINGS | 32 | ||||
| ITEM 4 | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | 33 | ||||
| PART II | ||||||
| ITEM 5 | MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS | 33 | ||||
| ITEM 6 | SELECTED FINANCIAL AND OPERATING DATA | 34 | ||||
| ITEM 7 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 36 | ||||
| ITEM 7A | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 45 | ||||
| ITEM 8 | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 46 | ||||
| ITEM 9 | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE | 71 | ||||
| PART III | ||||||
| ITEM 10 | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT | 71 | ||||
| ITEM 11 | EXECUTIVE COMPENSATION | 74 | ||||
| ITEM 12 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT | 83 | ||||
| ITEM 13 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 84 | ||||
| ITEM 14 | CONTROLS AND PROCEDURES | 84 | ||||
| PART IV | ||||||
| ITEM 15 | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K | 85 | ||||
| SIGNATURES | 89 | |||||
| CERTIFICATIONS | 90 |
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GLOSSARY OF SELECTED MINING TERMS
The following is a glossary of selected mining terms used in the Form 10-K that may be technical in nature:
| Adit | A horizontal tunnel or drive, open to the surface at one end, which is used as an entrance to a mine. | |
| Anorthosite | Igneous rock composed almost wholly of the mineral plagioclase feldspar. | |
| Assay | The analysis of the proportions of metals in ore, or the testing of an ore or mineral for composition, purity, weight, or other properties of commercial interest. | |
| Autocatalysts | The catalytic converter used in an automobile’s exhaust and pollution control system. | |
| Close-spaced drilling | The drilling of holes designed to extract representative samples of rock in a target area. | |
| Concentrate | A mineral processing product that generally describes the material that is produced after crushing and grinding ore and then effecting significant separation of gangue (waste) minerals from the metal and/or metal minerals, discarding the waste and minor amounts of metal and/or metal minerals leaving a “concentrate” of metal and/or metal minerals with a consequent order of magnitude higher content of metal and/or metal minerals than the beginning ore material. | |
| Crystallize | Process by which matter becomes crystalline (solid) from a gaseous, fluid or dispersed state. The separation, usually from a liquid phase on cooling, of a solid crystalline phase. | |
| Cut-off grade | The lowest grade of mineralized material that qualifies as ore in a given deposit. The grade above which minerals are considered economically mineable considering the following parameters: estimates over the relevant period of mining costs, ore treatment costs, general and administrative costs, smelting and refining costs, royalty expenses, byproduct credits, process and refining recovery rates and PGM prices. | |
| Decline | A gently inclined underground excavation constructed for purposes of moving mobile equipment, materials, supplies or personnel from surface openings to deeper mine workings or as an alternative to hoisting in a shaft for mobilization of equipment and materials between mine levels. | |
| Dilution | An estimate of the amount of waste or low-grade mineralized rock which will be mined with the ore as part of normal mining practices in extracting an orebody. | |
| Drift | A major horizontal access tunnel used for the transportation of ore or waste. | |
| Ductility | Property of solid material that undergoes more or less plastic deformation before it ruptures. The ability of a material to deform plastically without fracturing. | |
| Fault | A fracture or a zone of fractures along which there has been displacement of the sides relative to one another parallel to the fracture. | |
| Filter cake | The PGM-bearing product that is shipped from the refinery for the next step in the refining process. | |
| Footwall | The underlying side of a fault, ore body, or mine working; especially the wall rock beneath an inclined vein, fault, or reef. | |
| Gabbro | A group of dark-colored igneous rocks composed primarily of the minerals plagioclase feldspar and clinopyroxene, with minor orthopyroxene. | |
| Grade | The average assay of a ton of ore, reflecting metal content. With precious metals, grade is expressed as troy ounces per ton of rock. | |
| Lenticular-shaped | Resembling in shape the cross section of a double-convex lens. |
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| Lode claims | Claiming the mineral rights along a lode (vein) structure of mineralized material on Federal land; typically lode claims are 1,500 feet in length along the trend of the mineralized material, the claim width typically being 600 feet wide. | |
| Mafic rocks | Igneous rocks composed chiefly of dark, ferromagnesian minerals in addition to lighter-colored feldspars. | |
| Matrix | The finer-grained material between the larger particles of a rock or the material surrounding mineral particles. | |
| Mill | A processing plant that produces a concentrate of the valuable minerals or metals contained in an ore. The concentrate must then be treated in some other type of plant, such as a smelter, to effect recovery of the pure metal. Term used interchangeably with concentrator. | |
| Millsite claims | Claiming of Federal land for millsite purposes or other operations connected with mining lode claims. Used for nonmineralized land not necessarily contiguous with the vein or lode. | |
| Mineral benefication | A treatment process separating the valuable minerals from the host material. | |
| Mineralization | The concentration of metals and their compounds in rocks, and the processes involved therein. | |
| Mineralized material | A mineralized body which has been delineated by appropriately spaced drilling and/or underground sampling to support a sufficient tonnage and average grade of metals. Such a deposit does not qualify as a reserve until a comprehensive evaluation based upon unit cost, grade, recoveries, and other material factors conclude legal and economic feasibility. | |
| Net smelter royalty | A share of revenue paid by the company to the owner of a royalty interest. At Stillwater, the royalty is calculated as a percentage of the revenue received by the company after deducting treatment, refining and transportation charges paid to third parties, and certain other costs incurred by Stillwater in connection with processing the concentrate at the Columbus smelter. | |
| Norite | Coarse-grained igneous rock composed of the minerals plagioclase feldspar and orthopyroxene. | |
| Ore | That part of a mineral deposit which could be economically and legally extracted or produced at the time of reserve determination. | |
| Outcrop | The part of a rock formation that appears at the earth’s surfaces, often protruding above the surrounding ground. | |
| PGM | The platinum group metals collectively and in any combination of platinum, palladium, rhodium, ruthenium, osmium, and iridium. Reference to PGM grades for the company’s operations mean measured quantities of palladium and platinum only. | |
| PGM rich matte | Matte is an intermediate product of smelting; an impure metallic sulfide mixture made by melting sulfide ore concentrates. PGM rich matte is a matte with an elevated level of platinum group metals. | |
| Probable (indicated) reserves |
Reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurements are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation. | |
| Proven (measured) reserves |
Reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or quality are computed from the results of detailed sampling; and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content |
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| of reserves are well established. | ||
| Recovery | The percentage of contained metal extracted from ore in the course of processing such ore. | |
| Reef | A layer precipitated within the Stillwater Layered Igneous Complex enriched in platinum group metal-bearing minerals, chalcopyrite, pyrrhotite, pentlandite, and other sulfide materials. The J-M Reef, which the company mines, occurs at a regular stratigraphic position within the Stillwater Complex. Note: this use of “reef” is uncommon and originated in South Africa where it is used to describe the PGM-bearing Merensky, UG2, and other similar layers in the Bushveld Complex. | |
| Refining | The final stage of metal production in which residual impurities are removed from the metal. | |
| Reserves | That part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. | |
| Shaft | A vertical or steeply inclined excavation for the purposes of opening and servicing an underground mine. It is usually equipped with a hoist at the top which lowers and raises a conveyance for handling personnel and materials. | |
| Silica oxide rich slag | Slag is a nonmetallic product resulting from the mutual dissolution of flux and nonmetallic impurities during smelting. A silica rich slag is a smelting slag that contains a relatively high level of silica. | |
| Sill | (1) With respect to a mine opening, the base or floor of the excavated area (stope); (2) With respect to intrusive rock, a tabular intrusive unit that is conformable with surrounding rock layers. | |
| Smelting | Heating ore or concentrate material with suitable flux materials at high temperatures creating a fusion of these materials to produce a melt consisting of two layers with a slag of the flux and gangue (waste) minerals on top and molten impure metals below. This generally produces an unfinished product (matte) requiring refining. | |
| Stope | An underground excavation from which ore is being extracted. | |
| Strike | The course or bearing of a vein or a layer of rock. | |
| Tailings | That portion of the ore that remains after the valuable minerals have been extracted. | |
| Troy ounce | A unit measure used in the precious metals industry. A Troy ounce is equal to 31.10 grams. The amounts of palladium and platinum produced and/or sold by the company are reported in troy ounces. There are 12 troy ounces to a pound. | |
| Ultramafic rocks | Igneous rocks composed chiefly of dark, ferromagnesian minerals in the absence of significant lighter-colored feldspars. | |
| Vein | A mineralized zone having regular development in length, width and depth that clearly separates it from neighboring rock. | |
| Wall rock | The rock adjacent to, enclosing, or including a vein, layer, or dissemination of ore minerals. |
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PART I
ITEMS 1 AND 2
BUSINESS AND PROPERTIES
INTRODUCTION AND 2002 HIGHLIGHTS
Stillwater Mining Company is engaged in the development, extraction, processing and refining of palladium, platinum and associated metals (platinum group metals or PGMs) from a geological formation in southern Montana known as the J-M Reef. The J-M Reef is the only known significant source of platinum group metals inside the United States and one of the significant resources outside South Africa and Russia. Associated byproduct metals of PGMs include minor amounts of rhodium, gold, silver, nickel and copper. The J-M Reef is a narrow but extensive mineralized zone containing PGMs, which has been traced over a strike length of approximately 28 miles. The company conducts its current mining operations at the Stillwater Mine near Nye, Montana and at the East Boulder Mine near Big Timber, Montana. Both mines are located on the J-M Reef. In addition, the company operates a smelter and refinery at Columbus, Montana.
PGMs are rare precious metals with unique physical properties that are used in diverse industrial applications and in the jewelry industry. The largest use for PGMs is in the automotive industry for the production of catalysts that reduce harmful automobile emissions. Palladium is also used in the production of electronic components for personal computers, cellular telephones, facsimile machines and other devices, as well as for dental applications. Platinum’s largest use is for jewelry. Industrial uses for platinum, in addition to automobile and industrial catalysts, include the manufacturing of data storage disks, glass, paints, nitric acid, anti-cancer drugs, fiber optic cables, fertilizers, unleaded and high-octane gasoline and fuel cells.
At December 31, 2002, the company had proven and probable ore reserves of approximately 41.9 million tons with an average grade of 0.60 ounce of PGMs per ton containing approximately 25.3 million ounces of palladium and platinum at a ratio of approximately 3.5 parts palladium to one part platinum. See “Business and Properties — Ore Reserves”.
Highlights of the year 2002 included:
| • | Revenues were $275.6 million in 2002, compared with $277.4 million in 2001. The company reported net income of $31.7 million in 2002 compared to a net income of $65.8 million in 2001. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Year Ended December 31, 2002 Compared to Year Ended December 31, 2001”. | |
| • | In 2002, the company produced a total of 617,000 ounces of palladium and platinum compared to 504,000 ounces in 2001. The company is implementing a long-range operating plan which focuses on reducing operating and capital costs, and has therefore lowered its total production target for 2003 to approximately 615,000 ounces of palladium and platinum. | |
| • | The total cash costs per PGM ounce were $287 in 2002, compared with $264 in 2001, an increase of $23 per ounce produced. The cash costs per ounce increased as a result of increased stope mining costs at the Stillwater Mine and the commencement of commercial production and ramp up of operations at the East Boulder Mine. | |
| • | Completion of a $60 million common stock offering in 2002. | |
| • | On November 20, 2002, the company and MMC Norilsk Nickel announced the signing of an agreement whereby Norimet, a wholly-owned subsidiary of Norilsk Nickel, will acquire 45.5 million newly issued shares of Stillwater common’s stock, constituting approximately 51% of the shares following such issuance, in exchange for $100 million in cash and approximately 877,000 ounces of palladium. Based upon the London PM Fix, the palladium consideration was valued at $241 million as of November 19, 2002 and $189 million as of March 24, 2003. The transaction is conditioned upon, among other things, the satisfaction of regulatory requirements and receiving approval of the company’s stockholders. On March 20, 2003, the company received the necessary amendment under its credit agreement in connection with the transaction. |
For a discussion of risks associated with the company’s business, please read “Business and Properties—Current Operations”, and “—Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
6
HISTORY OF THE COMPANY
Palladium and platinum were discovered in the J-M Reef by Johns Manville Corporation (“Manville”) geologists in the early 1970s. In 1979, a Manville subsidiary entered into a partnership agreement with Chevron U.S.A. Inc. (“Chevron”) to develop PGMs discovered in the J-M Reef. Manville and Chevron explored and developed the Stillwater property and commenced underground mining in 1986.
The company was incorporated in 1992 and on October 1, 1993, Chevron and Manville transferred substantially all assets, liabilities and operations at the Stillwater property to the company, with Chevron and Manville each receiving a 50% ownership interest in the company’s stock. In September 1994, the company redeemed Chevron’s entire 50% ownership. The company completed an initial public offering in December 1994, and Manville sold a portion of its shares through the offering reducing its ownership percentage to approximately 27%. In August 1995, Manville sold its remaining ownership interest in the company to institutional investors. The company’s common stock is publicly traded on the New York Stock Exchange under the symbol “SWC”.
GEOLOGY OF THE J-M REEF
The Stillwater Complex, which hosts the J-M Reef ore deposit, is located in the Beartooth Mountains in south central Montana. It is situated along the northern edge of the Beartooth Uplift and Plateau, which rise to elevations in excess of 10,000 feet above sea level. The plateau, and Stillwater Complex have been deeply incised by the major drainages and tributaries of the Stillwater and Boulder Rivers down to elevations at the valley floor of approximately 5,000 feet.
Geologically, the Stillwater Layered Complex is composed of a succession of ultramafic to mafic rocks derived from a large complex magma body emplaced deep in the Earth’s crust an estimated 2.7 billion years ago. The molten mass was sufficiently large and fluid at the time of emplacement to allow its chemical constituents to crystallize slowly and sequentially, with the heavier mafic minerals settling more rapidly toward the base of the cooling complex. The lighter, more siliceous suites crystallized relatively slower and also settled into layered successions of norite, gabbroic and anorthosite suites. This systematic process resulted in mineral segregations being deposited into extensive and uniform layers of varied mineral concentrations.
The uniquely PGM-enriched J-M Reef and its characteristic host rock package represent one such layered sequence. The geosciences community believes that the PGM-enriched suite and other minerals characterizing the J-M Reef, accumulated at the same time and by the same mechanisms of formation as the rocks enclosing them. Over time, the orientation of a portion of the original horizontal reef and layered igneous complex was faulted an estimated 20,000 feet to the northeast and was tilted upward at angles of 50 to 90 degrees to the north by the Beartooth Uplift. Localized faulting and intrusive mafic dikes are also evident along the 28-mile strike length of exposed Stillwater Complex. The impact of these structural events is localized along the J-M Reef and may affect the percent mineable tonnage in an area, create additional dilution, or result in below cut-off grade and barren zones. The impacts on ore reserves of these events are quantified under the percent mineable discussion under “Ore Reserves.” The upper portion and exposed edge of the reef complex were eroded forming the lenticular-shaped surface exposure of the Stillwater Complex and J-M Reef package evident today.
The J-M Reef package has been traced, at its predictable geologic position and with unusual gross uniformity over considerable distances within the Stillwater Complex. The surface outcrops of the reef have been examined, mapped and sampled for approximately 28 miles along its east-southeasterly course and over a natural topographic expression of over 7,600 feet vertically. That predictability of the J-M Reef has been further confirmed in subsurface mine workings of the Stillwater and East Boulder Mines and by over 19,000 drill hole penetrations.
The PGMs in the J-M Reef consist primarily of palladium, platinum and a minor amount of rhodium. The reef also contains approximately 3 volume-percent sulfides of iron, copper and nickel, and trace amounts of gold and silver. Five-year production figures from the company’s mining operations on the J-M Reef are summarized in Part II, Item 6, “Selected Financial and Operating Data”.
ORE RESERVES
The company’s proven and probable palladium and platinum ore reserves as
of December 31, 2002 and 2001 are set forth below and were 41,940,000 tons and
41,943,000 tons, respectively, with an average grade of 0.60 contained ounce
per ton. The company utilizes statistical methodologies to calculate ore
reserves based on interpolation and extrapolation between sample points. These
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sample points consist of surface and underground diamond drilling with
sample spacings between 50 and 100 feet for proven reserves and up to 1,000
feet for probable reserves. The maximum extrapolation distance for reserves is
1,000 feet horizontally and in depth from sample points. This extrapolation is
based on the known continuity of the J-M Reef and geostatistical confirmation
of the basis for the projection of zones of influence from sample points.
Extrapolation and interpolation is limited by modifying factors including
geologic evidence, economic criteria and mining constraints. All sample points
within the ore reserve area are utilized in determining the ore reserves. The
proven reserve estimate utilizes geostatistical and modeling software to
provide estimates of tonnages and contained ounces. The probable reserve
estimate also utilizes geostatistical methods to provide estimates of tonnages
and contained ounces. Proven and probable reserves give effect to an average
mining dilution of 10% at zero grade based on actual mining experience. The ore
reserves assume a combined palladium and platinum price of $365 per ounce.
The December 31, 2002, ore reserves were reviewed by Behre Dolbear &
Company, Inc. (“Behre Dolbear”), independent consultants, who are experts in
mining, geology and ore reserve determination. The company has utilized Behre
Dolbear to carry out independent reviews and inventories of the company’s ore
reserves since 1990. Behre Dolbear has consented to be a named expert herein.
See “Business and Properties — Risk Factors — Ore reserves are very difficult
to estimate and ore reserve estimates may require adjustment in the future;
changes in ore grades could materially impact the company’s production and
reported results.”
Table of Contents
| DECEMBER 31, 2002 | DECEMBER 31, 2001 | ||||||||||||||||||||||||||
| AVERAGE | CONTAINED(4) | AVERAGE | CONTAINED (4) | ||||||||||||||||||||||||
| TONS | GRADE | OUNCES | TONS | GRADE | OUNCES | ||||||||||||||||||||||
| (000's) | (OUNCE/TON) | (000's) | (000's) | (OUNCE/TON) | (000's) | ||||||||||||||||||||||
Stillwater Mine |
|||||||||||||||||||||||||||
Proven Reserves |
2,490 | 0.71 | 1,777 | 2,779 | 0.71 | 1,982 | |||||||||||||||||||||
Probable Reserves |
17,443 | 0.68 | 11,803 | 17,515 | 0.66 | 11,473 | |||||||||||||||||||||
Total Proven and Probable Reserves (1) |
19,933 | 0.68 | 13,580 | 20,294 | 0.66 | 13,455 | |||||||||||||||||||||
East Boulder Mine |
|||||||||||||||||||||||||||
Proven Reserves |
648 | 0.48 | 308 | 529 | 0.48 | 252 | |||||||||||||||||||||
Probable Reserves |
21,359 | 0.53 | 11,386 | 21,120 | 0.53 | 11,257 | |||||||||||||||||||||
Total Proven and Probable Reserves (1) |
22,007 | 0.53 | 11,694 | 21,649 | 0.53 | 11,509 | |||||||||||||||||||||
Total Company Reserves (3) |
|||||||||||||||||||||||||||
Proven Reserves |
3,138 | 0.66 | 2,085 | 3,308 | 0.68 | 2,234 | |||||||||||||||||||||
Probable Reserves (2) |
38,802 | 0.60 | 23,189 | 38,635 | 0.59 | 22,730 | |||||||||||||||||||||
Total Reserves (1) |
41,940 | 0.60 | 25,274 | 41,943 | 0.60 | 24,964 | |||||||||||||||||||||
The company’s proven ore reserves are generally expected to be extracted utilizing the existing mine infrastructure. Additional capital expenditures will be required to extract the company’s probable ore reserves.
| (1) | Reserves are defined as that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Proven reserves are defined as reserves for which (a) quantity is computed from dimensions revealed in outcrops, trenches, workings or drill holes, grade and/or quality are computed from the results of detailed sampling and (b) the sites for inspection, sampling and measurement are spaced so closely and the geologic character is so well defined that size, shape, depth and mineral content of reserves are well-established. Probable reserves are defined as reserves for which quantity and grade and/or quality are computed from information similar to that used for proven (measured) reserves, but the sites for inspection, sampling, and measurement are farther apart or are otherwise less adequately spaced. The degree of assurance, although lower than that for proven (measured) reserves, is high enough to assume continuity between points of observation. The proven and probable reserves reflect variations in the PGM content and structural impacts on the J-M Reef. These variations are the result of localized depositional and structural influences on the distributions of economic PGM mineralization. The historical weighted average percent tonnage that could be mined economically for the Stillwater Mine is 33% and for the East Boulder Mine it is 61%. Areas within the reserve boundaries of the two mines include areas where as little as 7% and up to 100% of the J-M Reef is economically mineable. There are significant portions of the reef that are known to be barren. The reserve estimate gives effect to these assumptions. See “Business and Properties — Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results and Financial Condition.” | |
| (2) | Total probable reserves include 17.4 million tons and 17.5 million tons in the area of the Stillwater Mine and 21.4 million tons and 21.1 million tons in the area of the East Boulder Mine, all at December 31, 2002 and 2001, respectively. Significant sustaining capital investments will be required to access the company’s probable reserves. See “Business and Properties — Current Operations — East Boulder Mine” and “Business and Properties – Current Operations – Stillwater Mine.” |
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| (3) | Expressed as palladium plus platinum ounces per ton at a ratio of 3.5 parts palladium to one part platinum. | |
| (4) | The average mine grade dilution of 10% has not been included, and the average mill processing recovery of 90% has not been deducted from the contained ounces. |
Ore reserves, primarily proven ore reserves, are consumed during mining operations and the company generally replaces proven ore reserves by drilling on a close-spaced pattern probable ore reserve or mineralized material which has been identified geologically but not yet established as proven ore reserves. Because of the expense of the close-spaced drilling necessary to establish proven mining reserve estimates, the company has set an objective to achieve and maintain proven ore reserves to support approximately three years of mine production.
In the second quarter of 2002, the company announced that it was engaged in discussions with the SEC concerning its estimate of probable ore reserves. The reserve discussions arose in connection with the SEC’s review of the company’s “shelf” registration statement, which was filed in December 2001. As a result of these discussions, the company determined to modify certain parameters used in determining its probable ore reserve estimate. Historically, the company has vertically projected its probable ore reserves in certain ore blocks for distances of up to 1,900 feet beyond sample points. These projections were based on demonstrated ore continuity within the J-M Reef, the company’s knowledge of geologic features affecting ore continuity and reconciliation of prior ore reserve estimates with actual mining results. The revised parameters limit ore reserve projections to 1,000 feet beyond sample points. These changes caused a decrease in the company’s aggregate ore reserves of approximately 10%. The effect of this change on the company’s depletion rate is reflected in the company’s financial statements as a change in estimate commencing with the second quarter of 2002. The impact was not material to the company’s financial condition or results of operations. The company will continue its practice of selectively limiting ore reserve projections to distances less than 1,000 feet on the basis of its knowledge of geologic features. The company filed with the SEC an amended Form 10-K for 2001 giving effect to the ore reserve change. The company is subject to certain stockholder litigation in connection with the ore reserve issue. See “Stockholder Suits” under Item 3 hereof.
CURRENT OPERATIONS
The company’s original long-term deposit development strategy and certain elements of its current planning and mining practices on the J-M Reef were founded with initial feasibility and engineering studies conducted in the 1980’s. Initial mine designs and practices were established in response to available technologies and the particular characteristics and challenges of the J-M Reef ore deposit. The company’s current development plans, mining methods and ore extraction schedules are designed to provide systematic access and development of the ore deposit within the framework of current and forecast economic, regulatory and technological considerations as well as the specific characteristics of the J-M Reef ore deposit. Comprehensive optimization, development and capital planning is conducted for proven and probable ore reserves in the context of ongoing ore reserve expansion programs and a longer term life-of-mine development strategy for the entire J-M Reef. Some of the challenges specific to the development of the J-M Reef include:
| • | Surface access limitations (property ownership and environmental sensitivity) | |
| • | Topographic and climatic extremes involving rugged mountainous terrain and substantial elevation differences | |
| • | Specific characteristics of the mineralized zone (narrow – average width 5 feet, and long – approximately 28 miles in length) | |
| • | Downward angle of mineralized zone dipping from near vertical to 38 degrees | |
| • | A deposit which extends both laterally and to depth from available mine openings | |
| • | Probable ore reserves extend for a lateral distance of approximately 32,000 feet at the Stillwater Mine and approximately 17,000 feet at the East Boulder Mine — a combined distance of approximately 9.3 miles. |
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STILLWATER MINE
The company wholly owns and performs underground mining operations at the Stillwater Mine, near Nye, Montana. The mining operation accesses, extracts and processes PGM ores from the eastern portion of the J-M Reef from mine openings located in the Stillwater Valley. In addition, the company owns and maintains ancillary buildings that contain the concentrator, shop and warehouse, changing facilities, headframe, hoist house, paste plant, water treatment, storage facilities and office. All structures and tailings management facilities are located within a 2,450 acre Stillwater Mine Operating Permit area. Ore reserves developed at the Stillwater Mine are controlled by patented mining claims either leased or owned outright by the company. The mine is located approximately 85 miles southwest of Billings, Montana and is accessed by a paved road. The mine has adequate water and power from established sources. See “Business and Properties — Risk Factors.”
The Stillwater Mine accesses and has developed a 5.6-mile segment of the J-M Reef, between the elevations of 7,000 and 2,900 feet above sea level. Access to the ore at the Stillwater Mine is accomplished by means of a 1,950-foot vertical shaft and by a system of horizontal adits and drifts driven parallel to the strike of the J-M Reef at vertical intervals of between 200 feet and 300 feet. Seven main adits have been driven from surface portals on the west and east slopes of the Stillwater Valley at various elevations between 5,000 and 5,900 feet above sea level. Five principal levels have been developed below the valley floor by ramping down from the 5,000-foot level to extract ore from the reef down to the 3,800-foot elevation. Four additional major levels below the 5,000-foot level are accessed principally from a vertical shaft and shaft ramp system. The company is currently developing a decline system from the 3,200-foot elevation to access and develop deeper areas in the central part of the mine below those currently serviced by the existing shaft.
The 1,950-foot vertical shaft was constructed between 1994 and 1997 as part of the company’s plan to increase output from 1,000 to 2,000 tons of ore per day and was sunk adjacent to the concentrator to increase efficiency of the operation. Ores and any waste rock to be transported to the surface from the off-shaft and deeper areas of the mine are crushed prior to being hoisted up the shaft. The production shaft and underground crushing station reduced haulage times and costs, improved the material handling of ore and waste and improved the grinding capabilities of the concentrator. Ore from those areas above the 5,000-foot west elevation is hauled to the surface by train. Waste not used for backfill in underground excavations is transported to the surface and used in the rock embankment of the tailings dam or placed in the permitted waste rock disposal sites.
The Stillwater Mine currently uses its 28 footwall laterals, totaling approximately 220,000 feet, and 6 primary ramps, totaling approximately 57,000 feet, and vertical excavations to provide personnel and equipment access, supply haulage and drainage, intake and exhaust ventilation systems, muck haulage, backfill plant access, powder storage and/or emergency egress. To date, all footwall laterals continue to support mining activities. The footwall lateral and primary ramp systems will continue to provide support of production and ongoing development activities. Currently, all underground infrastructure, including footwall laterals, are located adjacent to the company’s proven and probable ore reserve area and are intended to be used for the life of the mine. The company’s capitalized mine development, including footwall laterals and ramps, consist of permanent infrastructure that is integral and necessary not only for current operations, but also for all future planned operations. Accordingly, it is appropriate that these costs be amortized over the proven and probable ore reserves to be benefited utilizing the unit of production method. In addition, certain mine levels are required as an integral component of the ventilation system and serve as required intake and or exhaust levels, or as parallel splits to maintain electrical ventilation horsepower balance and to meet Mine Safety and Health Administration (“MSHA”) requirements. In addition, MSHA regulations contain requirements for alternate (secondary) escapeways from mine workings. These levels, in addition to comprising critical functional components of the ventilation and escapeway system, serve as permanent mine service and utility infrastructure for road and rail transportation, dewatering and backfill pumping facilities designed and intended to be used for the life of the mine. The cost of the company’s capitalized mine development (which only includes the costs measured to date) is amortized over the proven and probable ore reserves to be benefited utilizing the unit of production method. Significant additional development costs will be required to exploit the company’s probable reserves. These estimated future costs are not reflected in the amortization rate; however, the company gives effect to all of its proven and probable reserves in its determination of its amortization rate.
Prior to 1994, almost all of the company’s mining activities utilized “cut-and-fill” stoping methods. This method extracts the orebody in ten-foot high horizontal cuts. The open space created by the extraction of each cut is filled with waste rock and coarse concentrator tailings and becomes the floor for the next level of mining as the process moves upward. Commencing in 1994, the company introduced two mechanized mining methods: “ramp-and-fill” and “sub-level stoping.” Ramp-and-fill is a mining method in which a succession of horizontal cuts are extracted from the orebody using mobile equipment. Access to the orebody is from ramps driven in or adjacent to the orebody allowing the use of hydraulic drills and load-haul-dump equipment. Sub-level stoping is a mining method in which blocks of the reef approximately 50 feet high and up to 75 feet in length are extracted in 30-foot intervals utilizing
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mobile electric hydraulic long-hole drills and remote control rubber tired load-haul-dump equipment. The reef is mined in a retreat sequence and mined out areas are filled with development waste. Mechanized mining accounted for approximately 96% of total tons mined in 2002. The company determines the appropriate mining method to be used on a stope-by-stope basis.
The company processes ore from the Stillwater Mine through a concentrator plant adjacent to the Stillwater Mine shaft. The mill has a capacity of 3,000 tons per day. Ore is fed into the concentrator, mixed with water and ground to a slurry in the concentrator’s mill circuit to liberate the PGM-bearing sulfide minerals from the rock matrix. Various reagents are added to the slurry to separate the valuable sulfides from the waste rock in a flotation circuit. In this circuit, the sulfide minerals are floated, recycled, reground and refloated to produce a concentrate suitable for further processing. The flotation concentrate, which represents approximately 1.5% of the original ore weight, is filtered and transported in bins approximately 46 miles to the company’s metallurgical complex in Columbus, Montana. Approximately 55% of the tailings material from this process is returned to the mine and used for backfill to provide a foundation upon which additional mining activities can occur. The balance is placed in tailings containment areas. No additional steps are necessary to treat any tailings placed back into the mine. Tailings placed into the impoundment areas require no additional treatment and are disposed of pursuant to the company’s operating permits. Mill recovery of PGMs was 90%, 90% and 91% for 2002, 2001 and 2000, respectively.
In 1998, the company received an amendment to its existing operating permit which provided for the construction of a lined tailings impoundment that would serve the Stillwater Mine for approximately the next 30 years. During 1999, construction commenced on the tailings impoundment which was completed and placed into operation in late 2000. See “Business and Properties — Current Operations — Regulatory and Environmental Matters — Permitting and Reclamation”.
During 2002, the Stillwater Mine produced approximately 491,700 ounces of palladium and platinum, compared to approximately 504,000 ounces in 2001 and approximately 430,000 ounces in 2000. See “Selected Financial and Operating Data.” The Stillwater Mine’s total cash costs were $263 per ounce in 2002 compared to $264 per ounce in each of 2001 and 2000.
EAST BOULDER MINE
The East Boulder Mine is located in Sweet Grass County, Montana and provides access to the western portion of the J-M Reef. The mine is fully permitted independent of the Stillwater Mine and serves as a second access to the J-M Reef. Surface facilities for the East Boulder Mine are situated on unpatented mill site claims maintained on federal lands administered under the Gallatin National Forest but all facilities are wholly owned and operated by the company. Proven and probable ore reserves for the mine are controlled by patented mining claims owned by the company. The mine is located approximately 45 miles southeast of Big Timber, Montana, and is accessed by a public road. All surface facilities including the tailings management complex are located within a 977-acre operating permit area. Development of the mine commenced in 1998 and consists of underground mine development and surface support facilities, including a concentrator, shop and warehouse, changing facilities, storage facilities, office and tailings management facility. The mine commenced commercial production effective January 1, 2002.
The J-M reef is accessed by two 18,500-foot, 15-foot diameter tunnels. The access tunnels intersect the orebody at an elevation 6,450 feet above sea level. The orebody is currently developed by two levels of footwall lateral drives parallel to the orebody totaling approximately 11,600 feet, and by two primary ramps totaling approximately 5,100 feet. The orebody will initially be developed vertically by ramp systems driven approximately every 1,000 feet along the length of the deposit. The predominant mining methods are sub-level stoping and ramp-and-fill mining methods. During the first half of 2002, a sand fill plant was constructed and commissioned underground to facilitate the application of the cut-and-fill mining method to portions of the orebody.
The ore is transported by rail haulage to the surface and processed through a concentrator plant, which has a capacity of 2,000 tons per day, in which the ore is mixed with water and ground to a slurry in the concentrator’s mill circuit to liberate the PGM bearing sulfides from the rock matrix. Consistent with the process at the Stillwater Mine, reagents are then added to the slurry to separate the valuable sulfide from the waste rock in a flotation circuit. The sulfide minerals are floated, recycled, reground and refloated to produce a concentrate. The flotation concentrate, which represents 1.8% of the original ore weight, is filtered and transported in bins approximately 90 miles to the company’s metallurgical complex in Columbus, Montana. Approximately 50% of the tailings material from this process is returned to the mine and used for backfill to provide a foundation upon which additional mining activities can occur. The balance is placed in tailings containment areas. No additional steps are necessary to treat any tailings placed back into the mine. Tailings placed into the impoundment areas require no additional treatment and are disposed of pursuant to the company’s operating permits. The impoundment area has an estimated life of approximately 20 years at the original planned production and processing rate of 2,000 tons per day. During 2002, mill recovery of PGM’s was 87%.
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During 2002, the East Boulder Mine produced approximately 125,000 ounces of palladium and platinum. During 2001, the mine recovered 22,000 ounces of PGMs generated from construction and development activities. Proceeds of $7.1 million received from the sale of this material were credited against capitalized mine development during 2001.
OPERATING PLAN
The global economic downturn beginning in early 2001 and the events of September 11, 2001 caused a steep and unexpected decline in commodities prices, including PGM prices. In early September 2001, the prices of palladium and platinum on the London PM Fix had fallen to $460 per ounce and $450 per ounce, respectively, down from $1,090 per ounce and $639 per ounce, respectively, earlier in the year. Demand for PGMs also began to fall sharply in 2001, as the company’s primary customers, automobile manufacturers, themselves faced decreased demand due to the economic slowdown. Following the September 11 events, the price of palladium fell to approximately $320 per ounce by early October, representing a 71% decrease from the price of $1,090 in late January, 2001. The price of platinum, approximately $420 per ounce in October 2001, was less affected. See “Competition: Palladium and Platinum Market” below.
As a result of the significant decline in the demand for and price of palladium and platinum, on November 5, 2001, the Board unanimously approved an optimization plan for the business operation and development of the East Boulder and Stillwater mines. The plan was implemented because the Board recognized that increasing production (and incurring the associated capital costs) did not make sense in the face of lower demand and prices for platinum and palladium. The plan held production at Stillwater Mine at a constant level of approximately 2,500 tons per day and reduced the initial production targets for the East Boulder Mine to 1,000 tons per day, while preserving the company’s ability to gradually increase production at the Stillwater and East Boulder mines if PGM prices improved.
During 2002, the company experienced a number of problems in achieving its production goals. In an effort to reduce costs, in June 2002, the company amended certain provisions of the incentive bonus plan at the Stillwater Mine which reduced the amount of incentive bonus paid to affected employees by 25% and which restructured the manner in which these bonuses are paid. As a result the company experienced industrial relations problems, including reduced production in the third quarter of 2002. In the summer of 2002 the company increased the level of production at the Stillwater Mine in an area of the mine known as the upper west. The ore grade from the upper west was lower than the grade for the other ore mined by the company, thus reducing the company’s ability to produce ounces in line with its prior forecasts. East Boulder Mine ore grade improved during 2002, but was below the company’s target. In addition, the company experienced delays with infrastructure modifications for ventilation and electrical services at the Stillwater Mine, which also affected production. By August 2002, the price of palladium had dropped to $318 per ounce and subsequently decreased to a low of $222 per ounce on December 23, 2002. This resulted in a further modification of the 2003 operating plan. The company is now implementing a long-range operating plan that focuses on reducing operating and capital costs. The Stillwater Mine will change from a production-driven to a cost-driven emphasis. Following an adjustment period in the first half of 2003, the mining rate at the Stillwater Mine is expected to be 2,250 tons of ore per day. The mine will begin to focus on production from the offshaft higher-grade areas of the mine and de-emphasize production from the upper west area. The production capacity of the East Boulder Mine will be increased to better realize the economic cost benefits of its design capacity. The East Boulder Mine is expected to increase its mining rate to 1,250 tons of ore per day in 2003. The company is considering ramping up the rate over the next three to four years to 1,650 tons of ore per day. This ramp up will require additional capital expenditures of approximately $7.7 million, to take advantage of the surface plant design capacity. In connection with fully implementing this plan, the company received an amendment to its credit agreement on March 20, 2003. See “Credit Agreement” below.
EXPLORATION AND DEVELOPMENT ACTIVITIES
The J-M Reef has been explored from the surface along its entire 28-mile strike length by surface sampling and drilling. Surface exploration drilling consists of an array of over 900 drill holes with a maximum horizontal spacing between holes of 1,000 feet. Exploration activities have also included driving and underground drilling from two exploratory adits, the West Fork Adit and the Frog Pond Adit. Comprehensive evaluation of PGM mineralization encountered in the J-M Reef has allowed delineation of probable reserves adjacent to the Stillwater and East Boulder Mines and confirmation of the existence of mineralized material over much of the remaining strike length. Exploration to date has defined sufficient probable reserves to sustain mining for a number of years in the
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future. It is the company’s practice to systematically convert its established probable reserves to the proven category coincident with planned advances of underground development. The company’s exploration focus is on its current delineated PGM reserves and adjacent mineralization along the J-M Reef within the company’s mining claims rather than the exploration of other mineral occurrences within the Stillwater Complex or at other prospective mineral properties. Consequently, exploration does not presently represent a significant expenditure for the company.
As part of the company’s ongoing development activities, it continues to convert its established probable ore reserves to proven ore reserves through the lateral and vertical development of the Stillwater and East Boulder Mines. These ongoing activities involve the construction of mine development workings to access established ore reserves and the continuous advancement of definition drilling, engineering and mine plans to replace depleted ore reserves. During 2002, 2001, and 2000, $31 million, $86 million and $74 million respectively, were incurred in connection with capitalized mine development activities and are included in total capital expenditures.
During 2002, to advance the company’s continuing evaluation of structural controls on deep mineralization and to facilitate longer term planning at the Stillwater Mine, drill penetrations of the J-M Reef were accomplished in two areas of the extrapolated mineralized material zone beneath limits of the company’s established probable reserves. Results of the drilling provided additional PGM intercepts as well as geologic information valuable in confirming the existence of PGM mineralization at depth and allowing further interpretation of significant structural features. The limited deep drilling conducted during 2002 resulted in a modest increase to the company’s inventory of mineralized material.
Diagrams of the Stillwater and East Boulder Mines as currently developed and as planned to be developed in the future are as follows:
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METALLURGICAL COMPLEX
Smelter. The company owns the land and a 37,199 square foot smelter plant located in Columbus, Montana. Concentrates from the mine sites are fed to a 5.0-megawatt electric furnace, where it is melted and separated into a silica oxide rich slag and a PGM rich matte. The matte is tapped from the furnace and granulated. The granulated furnace matte is re-smelted in a top blown rotary converter (TBRC), which separates iron from the converter matte. The converter matte is poured from the TBRC, granulated and transferred to the refinery for further processing. The granulated converter matte, approximately 10% of the original smelter feed weight, consists of copper and nickel oxides containing about 2% PGMs.
The gasses released from the smelting operations are routed through a gas/liquid scrubbing system, which removes approximately 99.8% of the sulfur dioxide. Spent scrubbing solution is treated in a process that converts the sulfur dioxide to gypsum, or calcium sulfate, and regenerates clean scrubbing solution. The gypsum is used by local farmers as a soil amendment.
The company has continued to expand smelter capacity since 1997, increasing the daily smelting capacity from 22 tons of concentrate per day in 1997 to 100 tons of concentrate per day at year-end 2001. The expanded facility consists of a larger furnace, a new top blown rotary converter (TBRC), an additional granulator and additional gas handling and solution regeneration systems. During the fourth quarter of 2001, the company completed the installation of a second TBRC to treat the additional material expected from the East Boulder Mine.
Refinery. In 1996, the company constructed and commissioned the refinery on property it owns adjacent to the smelter in Columbus, Montana. The refinery utilizes the patented Sherritt Process, whereby sulfuric acid is used to dissolve the nickel, copper, cobalt and iron from the converter matte. This process upgrades the converter matte product substantially from 2% PGMs to 55-60% PGMs. During 2001 and 2002, the refinery was expanded to its current 49,000 square-foot facility and in 2002 additional surge capacity was added to the copper treatment circuits.
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In the refinery, relatively minor amounts of byproduct copper, nickel, cobalt, and other accessory metals are separated from the PGM bearing converter matte and marketed as byproducts. Iron precipitated from an iron-copper-nickel-cobalt solution and returned to the smelter to be processed and removed in the slag. A nickel crystallizer circuit produces a crystalline nickel sulfate byproduct containing minor amounts of cobalt is which is marketed into sales contracts with refineries in Canada and Finland. A copper electrowinning circuit removes copper from solution as cathode copper which is marketed into sales contracts with smelters in Arizona and New York.
A PGM rich filter cake, containing minor amounts of gold and silver, is shipped via airfreight to finish refineries in New Jersey and California and is returned to the account of the company as 99.95% PGM sponge after approximately 18-35 days. The refined material is then available for delivery to the company’s customers. The company pays its refiners a refining charge in United States dollars per ounce for the toll processing of the refinery filter cake.
During 2002, 2001 and 2000, total byproduct sales were approximately $10.6 million, $8.2 million and $8.6 million, respectively, and were credited against production costs.
SECONDARY MATERIALS PROCESSING
Recycled autocatalysts are processed by the company through the metallurgical complex. A sampling facility for secondary materials was completed in late 1997 to crush and sample spent autocatalysts prior to being blended for smelting in the electric furnace. Several test lots were processed during 1997 to determine that the spent autocatalysts were suitable for processing at the company’s facilities. Since 1998, the company has been processing small shipments of spent autocatalysts. The facility processed approximately 1,035 tons, 1,358 tons and 795 tons of spent autocatalysts in 2002, 2001 and 2000, respectively, recovering 46,200 ounces, 68,800 ounces and 29,900 ounces of palladium and platinum in 2002, 2001 and 2000, respectively. The income generated from the processing of recycled autocatalysts in 2002, 2001 and 2000 reduced production costs by approximately $1.0 million, $2.0 million and $1.2 million, respectively.
OTHER PROPERTIES
The company owns a 17,600 square foot warehouse facility and also leases 10,100 square feet of office space in buildings in Columbus. The annual lease expense for the executive offices in Columbus, Montana is approximately $83,100 per year. The company believes that its existing facilities are adequate