UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-13053

STILLWATER MINING COMPANY

(Exact name of registrant as specified in its charter)

Delaware		81-0480654
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

(Registrant’s telephone number, including area code)

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: YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large Accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES o NO þ

At July 25, 2011 the Company had outstanding 103,081,612 shares of common stock, par value $0.01 per share.

 

 

STILLWATER MINING COMPANY

FORM 10-Q

QUARTER ENDED JUNE 30, 2011

INDEX

PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosure About Market Risk			40
Item 4. Controls and Procedures			42
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 5. Other Information			43
Item 6. Exhibits			44
SIGNATURES			45
CERTIFICATIONS			46
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS

Stillwater Mining Company
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
(in thousands, except per share data)

		Three Months Ended								Six Months ended
		June 30,								June 30,
		2011				2010				2011				2010
Revenues
Mine production		$	139,733			$	92,570			$	261,713			$	187,769
PGM recycling			82,872				42,291				130,953				75,941
Other			—				—				—				4,622
Total revenues			222,605				134,861				392,666				268,332
Costs and expenses
Costs of metals sold
Mine production			65,094				54,980				125,344				112,843
PGM recycling			79,552				39,256				124,706				70,251
Other			—				—				—				4,622
Total costs of metals sold			144,646				94,236				250,050				187,716
Depletion, depreciation and amortization
Mine production			15,395				16,589				31,196				35,046
PGM recycling			265				39				527				83
Total depletion, depreciation and amortization			15,660				16,628				31,723				35,129
Total costs of revenues			160,306				110,864				281,773				222,845
Marketing			2,800				807				3,653				1,275
Exploration			75				—				75				—
Research and development			621				—				1,080				—
General and administrative			9,893				7,251				16,255				13,672
(Gain)/loss on disposal of property, plant and equipment			(207	)			9				(226	)			(208	)
Total costs and expenses			173,488				118,931				302,610				237,584
Operating income			49,117				15,930				90,056				30,748
Other income (expense)
Other			4				3				12				9
Interest income			951				532				1,733				933
Interest expense			(1,637	)			(1,636	)			(3,272	)			(3,269	)
Foreign currency transaction gain			—				—				182				—
Income before income tax provision			48,435				14,829				88,711				28,421
Income tax provision			(5,737	)			(239	)			(9,821	)			(472	)
Net income		$	42,698			$	14,590			$	78,890			$	27,949
Other comprehensive income (loss), net of tax			86				16				(104	)			(178	)
Comprehensive income		$	42,784			$	14,606			$	78,786			$	27,771
Weighted average common shares outstanding
Basic			103,037				97,735				102,688				97,390
Diluted			111,123				105,932				110,924				105,616
Basic earnings per share
Net income		$	0.41			$	0.15			$	0.77			$	0.29
Diluted earnings per share
Net income		$	0.39			$	0.15			$	0.73			$	0.28

See accompanying notes to consolidated financial statements

Stillwater Mining Company
Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share data)

		June 30,				December 31,
		2011				2010
ASSETS
Cash and cash equivalents		$	105,009			$	19,363
Investments, at fair market value			149,879				188,988
Inventories			156,285				101,806
Trade receivables			7,773				7,380
Deferred income taxes			29,027				17,890
Other current assets			11,952				13,940
Total current assets			459,925				349,367
Property, plant and equipment, net of $408,497 and $378,390 of accumulated depletion, depreciation and amortization			531,854				509,787
Restricted cash			35,070				38,070
Other noncurrent assets			12,088				12,246
Total assets		$	1,038,937			$	909,470
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	24,049			$	19,405
Accrued compensation and benefits			29,095				24,746
Property, production and franchise taxes payable			12,815				10,999
Income taxes payable			9,821				—
Other current liabilities			7,665				3,052
Total current liabilities			83,445				58,202
Long-term debt			196,027				196,010
Deferred income taxes			64,996				53,859
Accrued workers compensation			6,601				7,155
Asset retirement obligation			7,033				6,747
Other noncurrent liabilities			5,553				4,425
Total liabilities			363,655				326,398
Stockholders’ equity
Preferred stock, $0.01 par value, 1,000,000 shares authorized; none issued			—				—
Common stock, $0.01 par value, 200,000,000 shares authorized; 103,056,185 and 101,881,816 shares issued and outstanding			1,031				1,019
Paid-in capital			774,887				761,475
Accumulated deficit			(99,680	)			(178,570	)
Accumulated other comprehensive loss			(956	)			(852	)
Total stockholders’ equity			675,282				583,072
Total liabilities and stockholders’ equity		$	1,038,937			$	909,470

See accompanying notes to consolidated financial statements

Stillwater Mining Company
Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Cash flows from operating activities
Net income		$	42,698			$	14,590			$	78,890			$	27,949
Adjustments to reconcile net income to net cash provided by operating activities:
Depletion, depreciation and amortization			15,660				16,628				31,723				35,129
(Gain)/loss on disposal of property, plant and equipment			(207	)			9				(226	)			(208	)
Accretion of asset retirement obligation			145				133				286				263
Amortization of debt issuance costs			246				245				491				490
Stock based compensation and other benefits			2,689				2,523				5,789				5,489
Changes in operating assets and liabilities:
Inventories			(15,505	)			(13,243	)			(55,569	)			(20,178	)
Trade receivables			81				835				(393	)			(4,222	)
Accrued compensation and benefits			3,051				202				4,341				(457	)
Accounts payable			1,450				1,739				4,644				5,383
Property, production and franchise taxes payable			1,273				(624	)			2,944				641
Income taxes payable			5,737				239				9,821				472
Workers compensation			(78	)			875				(554	)			1,749
Restricted cash			—				—				3,000				(25	)
Other			1,571				(3,049	)			7,496				(1,610	)
Net cash provided by operating activities			58,811				21,102				92,683				50,865
Cash flows from investing activities
Capital expenditures			(23,110	)			(13,860	)			(46,295	)			(24,587	)
Purchase of long-term investment			—				—				(616	)			—
Proceeds from disposal of property, plant and equipment			207				—				228				265
Purchases of short-term investments			(32,801	)			(82,586	)			(98,096	)			(126,632	)
Proceeds from maturities of short-term investments			58,575				—				137,017				12,973
Net cash provided by (used in) investing activities			2,871				(96,446	)			(7,762	)			(137,981	)
Cash flows from financing activities
Issuance of common stock			7				190				725				441
Net cash provided by financing activities			7				190				725				441
Cash and cash equivalents
Net increase (decrease)			61,689				(75,154	)			85,646				(86,675	)
Balance at beginning of period			43,320				155,135				19,363				166,656
Balance at end of period		$	105,009			$	79,981			$	105,009			$	79,981

See accompanying notes to consolidated financial statements

Stillwater Mining Company

Notes to Consolidated Financial Statements

(Unaudited)

NOTE 1
GENERAL

     In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of Stillwater Mining Company (the “Company”) as of June 30, 2011 and the results of its operations and its cash flows for the three- and six- month periods ended June 30, 2011 and 2010. The results of operations for the first six months of 2011 are not necessarily indicative of the results to be expected for the full year. The accompanying consolidated financial statements in this quarterly report should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s March 31, 2011 Quarterly Report on Form 10-Q and in the Company’s 2010 Annual Report on Form 10-K.

     The preparation of the Company’s consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. The more significant areas requiring the use of management’s estimates relate to mineral reserves, reclamation and environmental obligations, valuation allowance for deferred tax assets, useful lives utilized for depreciation, amortization and accretion calculations, future cash flows from long-lived assets, and fair value of derivatives and other financial instruments. Actual results could differ from these estimates.

     The Company evaluates subsequent events through the date the consolidated financial statements are issued. No subsequent events were identified that required additional disclosure in the consolidated financial statements through the date of this filing.

NOTE 2
SALES

Mine Production

     The Company mines and processes ores containing palladium, platinum, rhodium, gold, silver, copper and nickel into intermediate and final products for sale to customers. Palladium, platinum, rhodium, gold and silver are sent to third party refineries for final processing from where they are sold to a number of consumers and dealers with whom the Company has established trading relationships. Refined platinum group metals (PGMs) in sponge form are transferred upon sale from the Company’s account at third party refineries to the account of the purchaser. By-product precious metals are normally sold at market prices to customers, brokers or outside refiners. By-products of copper and nickel are produced by the Company at less than commercial grade, so prices for these metals typically reflect a quality discount. By-product sales are included in revenues from mine production. During the second quarter of 2011 and 2010, total by-product (copper, nickel, gold, silver and mined rhodium) sales were $8.0 million for each reporting period. During the first six months of 2011 and 2010, total by-product (copper, nickel, gold, silver and mined rhodium) sales were $15.5 million and $16.2 million, respectively.

     The Company has a supply agreement with General Motors Corporation (GM) that provides for fixed quantities of palladium to be delivered to GM each month. The agreement provides for pricing at a small discount to a trailing market price. The Company also has palladium and platinum supply agreements with Ford Motor Company and BASF and a platinum supply agreement with Tiffany & Co. The Company is continuing to negotiate potential supply arrangements with other large PGM consumers and in the meantime is selling its remaining mine production under month-to-month and spot sales agreements.

PGM Recycling

     The Company purchases spent catalyst materials from third parties and processes these materials in its facilities in Columbus, Montana to recover palladium, platinum and rhodium for sale. It also accepts material supplied from third parties on a tolling basis, processing it for a fee and returning the recovered metals to the supplier. The Company has entered into sourcing arrangements for catalyst material with several suppliers. Under these sourcing arrangements as currently structured, the Company advances cash against a shipment of material shortly before receiving the physical shipment. These advances are included in Other current assets on the Company’s consolidated balance sheet until such time as the material has been physically received and title has transferred to the Company. The Company holds a security interest in materials procured by its largest recycling supplier that have not been received by the Company. Once the material is physically received and title has transferred, the associated advance is reclassified from Other current assets into Inventories. Finance charges collected on advances and inventories prior to being earned are included in Other current liabilities on the Company’s consolidated balance sheet. Finance charges are reclassed from Other current liabilities to Interest income ratably from the time the advance was made until the out-turn date of the inventory.

     At the same time the Company commits to purchase recycling material, it typically enters into a fixed forward contract for future delivery of the PGMs contained in the recycled material at a price consistent with the purchase cost of the recycled material. The fixed forward contract commits the Company to deliver finished metal on a specified date that normally corresponds to the expected out-turn date for the metal from the final refiner. The purpose of this arrangement is to eliminate the Company’s exposure to fluctuations in market prices during processing, while at the same time creating an obligation for the Company to deliver metal at a future point in time that could be subject to operational risks. If the Company were unable to complete the processing of the recycled material by the contractual delivery date, it could either cover its delivery commitments with mine production or purchase finished metal in the open market. If open market purchases are used, the Company would bear the cost (or benefit) of any change in the market price relative to the price stipulated in the delivery contract.

Other

     The Company makes other open market purchases of PGMs from time to time for resale to third parties. The Company recognized revenue of $4.6 million for 10,000 ounces of PGMs that were purchased in the open market and resold for the six- month period ended June 30, 2010.

Total Sales

     Total sales to significant customers as a percentage of total revenues for the three- and six- month periods ended June 30, 2011 and 2010, were as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2011				2010				2011				2010
Customer A			24	%			15	%			24	%			18	%
Customer B			24	%			10	%			21	%			*
Customer C			19	%			47	%			21	%			51	%
Customer D			*				*				10	%			*
			67	%			72	%			76	%			69	%

NOTE 3
DERIVATIVE INSTRUMENTS

     The Company uses various derivative instruments to manage its exposure to changes in PGM market commodity prices. Some of these derivatives are designated as hedges. Because the Company hedges only with instruments that have a high correlation with the value of the underlying exposures, changes in the derivatives’ fair value are expected to be offset by changes in the value of the hedged transaction.

Commodity Derivatives

     The Company customarily enters into fixed forward contracts and on occasion it also enters into financially settled forward contracts to offset the price risk in its PGM recycling activity. From time to time, it also has entered into these types of contracts on portions of its mine production. Under these customary fixed forward transactions, the Company agrees to deliver a stated quantity of metal on a specific future date at a price stipulated in advance. The Company uses fixed forward transactions primarily to price in advance the metals acquired for processing in its recycling segment. Under the occasional financially settled forward transactions, at each settlement date the Company receives the net difference between the forward price and the market price if the market price is below the forward price and the Company pays the net difference between the forward price and the market price if the market price is above the forward price. These financially settled forward contracts are settled in cash at maturity and do not require physical delivery of metal at settlement. The Company typically has used financially settled forward contracts with third parties to reduce its exposure to price risk on metal it is obligated to deliver under long-term sales agreements.

Mine Production

     At present the Company has no outstanding derivative contracts pertaining to its mined production.

PGM Recycling

     The Company regularly enters into fixed forward sales relating to its recycling of PGM catalyst materials. The metals from PGM recycled materials are typically sold forward at the time the Company commits to purchase the materials and delivered against the fixed forward contracts when the ounces are recovered. All of these fixed forward sales contracts open at June 30, 2011, will settle at various periods through November 2011. The Company has credit agreements with its major trading partners that provide for margin deposits in the event that forward prices for metals exceed the Company’s hedged prices by a predetermined margin limit. As of June 30, 2011, no such margin deposits were outstanding or due.

     Occasionally, the Company also has entered into financially settled forward contracts on its recycled materials. Such contracts are utilized when the Company wishes to establish a firm forward price for recycled metal on a specific future date. No financially settled forward contracts were entered into during the second quarter of 2011. The Company generally has not designated these contracts as cash flow hedges, so they are marked to market at the end of each accounting period. The change in the fair value of the derivatives is reflected in the consolidated statement of operations and comprehensive income.

     The following is a summary of the Company’s outstanding commodity derivatives as of June 30, 2011:

PGM Recycling:

                                                   

Fixed Forwards

		Platinum								Palladium								Rhodium
Settlement Period		Ounces				Avg. Price				Ounces				Avg. Price				Ounces				Avg. Price
Third Quarter 2011			25,028			$	1,794				37,258			$	763				5,643			$	2,211
Fourth Quarter 2011			564			$	1,711				676			$	745				1,258			$	2,055

NOTE 4
SHARE-BASED COMPENSATION

Stock Plans

     The Company sponsors stock option plans (the “Plans”) that enable the Company to grant stock options or nonvested shares to employees and non-employee directors. Effective March 1, 2011, the Company ceased offering stock options as incentive compensation to employees and non-employee directors and in the future expects to issue only cash awards or nonvested shares in lieu of stock options. The Company continues to have stock options previously issued that remain outstanding. The Compensation Committee of the Company’s Board of Directors administers the Plans and determines the exercise period, vesting period and all other terms of

instruments issued under the Plans. Approximately 1.1 million shares were available and reserved for grant as of June 30, 2011.

Stock Options

     The Company received $0.7 million in cash from the exercise of stock options in the six- month period ended June 30, 2011. The Company received $0.2 million and $0.4 million in cash from the exercise of stock options in the three- and six- month periods ended June 30, 2010, respectively.

     The Company recognizes compensation expense associated with its stock option grants based on their fair market value on the date of grant using a Black-Scholes option pricing model. The Company recognizes stock option expense ratably over the vesting period of the options. If options are canceled or forfeited prior to vesting, the Company stops recognizing the related expense effective with the date of forfeiture. The compensation expense, recorded in General and administrative in the Consolidated Statements of Operations and Comprehensive Income, related to stock options during the three- month periods ended June 30, 2011 and 2010, was $61,500 and $36,000, respectively, and $131,000 and $74,000 during the six- month periods ended June 30, 2011 and 2010, respectively.

The following table presents the total compensation expense (in thousands) not yet recognized related to nonvested stock options to be recognized over the remaining vesting periods:

		Compensation
(in thousands)		Expense
Remaining six months of 2011		$	97
2012		$	95
2013		$	32
Total		$	224

Nonvested Shares

     The following table summarizes the status of and changes in the Company’s nonvested shares during the first six months of 2011:

						Weighted-Average
Six Months Ended June 30, 2011		Nonvested Shares				Grant-Date Fair Value
Nonvested shares at December 31, 2010			1,563,886			$	9.37
Granted			310,681				23.02
Vested			(412,211	)			14.86
Forfeited			(714	)			16.57
Nonvested shares at March 31, 2011			1,461,642			$	10.72
Granted			46,907				21.33
Vested			—				—
Forfeited			(400	)			23.06
Nonvested shares at June 30, 2011			1,508,149			$	11.04

     Compensation expense related to grants of nonvested shares was $1.6 million in the three- month periods ended June 30, 2011 and 2010, respectively, and is included within General and administrative in the Consolidated Statements of Operations and Comprehensive Income. Compensation expense related to grants of nonvested shares was $3.1 million and $3.2 million in the six- month periods ended June 30, 2011 and 2010, respectively.

     The following table presents the compensation expense (in millions) of the nonvested shares outstanding at June 30, 2011 to be recognized over the remaining vesting periods:

		Compensation
(in millions)		Expense
Third quarter 2011		$	1.7
Fourth quarter 2011			1.6
2012			5.0
2013			2.9
2014			0.3
Total		$	11.5

NOTE 5
INCOME TAXES

     The Company determines income taxes using the asset and liability approach which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of those assets and liabilities, as well as operating loss and tax credit carryforwards, using enacted tax rates in effect in the years in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets and liabilities are recorded on a jurisdictional basis.

     At June 30, 2011, the Company has net operating loss carryforwards (NOLs), which expire at various times in years 2011 through 2030. The Company has reviewed its net deferred tax assets and has provided a valuation allowance to reflect the estimated amount of net deferred tax assets which management considers, more likely than not, will not be realized. As of June 30, 2011, the Company has accrued $5.7 million and $9.8 million for its estimated alternative minimum tax (“AMT”) obligations associated with earnings for the three- and six- month periods ended June 30, 2011. The Company has AMT net operating loss carry-forwards, and anticipates that up to approximately $80.5 million of 2011 AMT income will be subject to offset by available AMT NOLs. This reflects the provisions of Internal Revenue Code section 382, which imposes limitations on the usage of NOL carry-forwards following an ownership change of greater than 50%. The Company recognized an income tax provision of $0.2 million and $0.5 million for the three- and six- month periods ended June 30, 2010, respectively. Changes in the Company’s net deferred tax assets and liabilities have been offset by a corresponding change in the valuation allowance.

     The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in Income tax provision in the Consolidated Statements of Operations and Comprehensive Income. There were no interest or penalties for the three- and six- month periods ended June 30, 2011 and 2010. Tax years still open for examination by the taxing authorities are the years ending December 31, 2010, 2009, and 2008.

NOTE 6
COMPREHENSIVE LOSS

     Other comprehensive loss consists of earnings items and other gains and losses affecting stockholders’ equity that are excluded from current net income. As of June 30, 2011 and 2010, such items consisted of unrealized losses on available-for-sale marketable securities.

     The following summary sets forth the changes in Accumulated other comprehensive income (loss) in stockholders’ equity for the first six months of 2011 and 2010:

(in thousands)		Accumulated Other
Six Months Ended June 30, 2011		Comprehensive Loss
Balance at December 31, 2010		$	(852	)
Change in value			(190	)
Comprehensive loss		$	(190	)
Balance at March 31, 2011		$	(1,042	)
Change in value			86
Comprehensive income		$	86
Balance at June 30, 2011		$	(956	)

(in thousands)		Accumulated Other
Six Months Ended June 30, 2010		Comprehensive Loss
Balance at December 31, 2009		$	(90	)
Change in value			(194	)
Comprehensive loss		$	(194	)
Balance at March 31, 2010		$	(284	)
Change in value			16
Comprehensive income		$	16
Balance at June 30, 2010		$	(268	)

NOTE 7
DEBT

     On March 12, 2008, the Company issued and sold $181.5 million aggregate principal amount of senior convertible debentures due March 15, 2028 (“debentures”). The debentures pay interest at 1.875% per annum, payable semi-annually on March 15 and September 15 of each year, and commenced on September 15, 2008. The debentures will mature on March 15, 2028, subject to earlier repurchase or conversion. Each $1,000 principal amount of debentures is initially convertible, at the option of the holders, into approximately 42.5351 shares of the Company’s common stock, at any time prior to the maturity date. The conversion rate is subject to certain adjustments, but will not be adjusted for accrued interest or any unpaid interest. The conversion rate initially represents a conversion price of $23.51 per share. Holders of the debentures may require the Company to repurchase all or a portion of their debentures on March 15, 2013, March 15, 2018 and March 15, 2023, or at any time before March 15, 2028 upon the occurrence of certain events including a change in control. The Company may redeem the debentures for cash beginning on or after March 22, 2013.

     In October 2009, the Company undertook the exchange of $15.0 million face amount of the convertible debentures for 1.84 million shares of the Company’s common stock. The debentures so acquired were retired. There is $166.5 million face value of the debentures outstanding as of June 30, 2011.

     Amortization expense related to the issuance costs of the debentures was approximately $0.2 million for each of the three- month periods ended June 30, 2011 and 2010, respectively, and $0.5 million for each of the six- month periods ended June 30, 2011 and 2010, respectively. The interest expense on the debentures was approximately $0.8 million, respectively, for each of the three- month periods ended June 30, 2011 and 2010, and $1.6 million, respectively, for each of the six-month periods ended June 30, 2011 and 2010. The Company made cash payments of $1.6 million for interest on the debentures for each of the six- month periods ended June 30, 2011 and 2010, respectively.

     The Company also has outstanding a $30.0 million offering of 8.0% Exempt Facility Revenue Bonds, Series 2000, issued through the State of Montana Board of Investments and due July 1, 2020. The balance outstanding at June 30, 2011, was $29.5 million, which is net of unamortized discount of $0.5 million.

     Subsequent to June 30, 2011, in connection with the signing of the Peregrine arrangement agreement on July

11, 2011, the Company received a bridge capital loan commitment of $200.0 million in order to provide for additional working capital support if needed following the closing of the Peregrine acquisition.

NOTE 8
SEGMENT INFORMATION

     The Company operates three reportable business segments: Mine Production, PGM Recycling and Canadian Properties. These segments are managed separately based on fundamental differences in their operations.

     The Mine Production segment consists of two business components: the Stillwater Mine and the East Boulder Mine. The Mine Production segment is engaged in the development, extraction, processing and refining of PGMs. The Company sells PGMs from mine production under long-term sales agreements, through derivative financial instruments and in open PGM markets. The financial results of the Stillwater Mine and the East Boulder Mine have been aggregated, as both have similar products, processes, customers, distribution methods and economic characteristics.

     The PGM Recycling segment is engaged in the recycling of spent catalyst material to recover the PGMs contained in the material. The Company allocates costs of the smelter and base metal refinery to both the Mine Production segment and to the PGM Recycling segment for internal and segment reporting purposes because the Company’s smelting and refining facilities support the PGM extraction of both business segments.

     The Canadian Properties segment consists of the Marathon PGM assets (the majority of which is mineral property) and the Bermuda exploration mineral property. The principal Marathon property acquired is a large PGM and copper deposit located near the town of Marathon, Ontario, Canada. The Marathon deposit is currently in the permitting stage and will not be in production for several years. The Bermuda exploration mineral property is located adjacent to the Marathon property. Financial information available for this segment of the Company consists of total asset values, general and administrative costs, exploration costs and capital expenditures as the properties are developed.

     The All Other group primarily consists of assets, revenues, and expenses of various corporate and support functions.

     The Company evaluates performance and allocates resources based on income or loss before income taxes. The following financial information relates to the Company’s business segments:

(in thousands)		Mine				PGM				Canadian				All
Three Months Ended June 30, 2011		Production				Recycling				Properties				Other				Total
Revenues		$	139,733			$	82,872			$	—			$	—			$	222,605
Depreciation and amortization		$	15,395			$	265			$	—			$	—			$	15,660
Interest income		$	—			$	544			$	—			$	407			$	951
Interest expense		$	—			$	—			$	—			$	1,637			$	1,637
Income (loss) before income taxes		$	59,451			$	3,449			$	(766	)		$	(13,699	)		$	48,435
Capital expenditures		$	21,492			$	39			$	1,510			$	69			$	23,110
Total assets		$	402,990			$	89,855			$	192,859			$	353,233			$	1,038,937

(in thousands)		Mine				PGM				Canadian				All
Three Months Ended June 30, 2010		Production				Recycling				Properties				Other				Total
Revenues		$	92,570			$	42,291			$	—			$	—			$	134,861
Depreciation and amortization		$	16,589			$	39			$	—			$	—			$	16,628
Interest income		$	—			$	371			$	—			$	161			$	532
Interest expense		$	—			$	—			$	—			$	1,636			$	1,636
Income (loss) before income taxes		$	20,992			$	3,367			$	—			$	(9,530	)		$	14,829
Capital expenditures		$	12,163			$	1,684			$	—			$	13			$	13,860
Total assets		$	396,028			$	53,216			$	—			$	318,679			$	767,923

(in thousands)		Mine				PGM				Canadian				All
Six Months Ended June 30, 2011		Production				Recycling				Properties				Other				Total
Revenues		$	261,713			$	130,953			$	—			$	—			$	392,666
Depreciation and amortization		$	31,196			$	527			$	—			$	—			$	31,723
Interest income		$	—			$	919			$	—			$	814			$	1,733
Interest expense		$	—			$	—			$	—			$	3,272			$	3,272
Income (loss) before income taxes		$	105,399			$	6,339			$	(1,040	)		$	(21,987	)		$	88,711
Capital expenditures		$	36,747			$	64			$	9,350			$	134			$	46,295
Total assets		$	402,990			$	89,855			$	192,859			$	353,233			$	1,038,937

(in thousands)		Mine				PGM				Canadian				All
Six Months Ended June 30, 2010		Production				Recycling				Properties				Other				Total
Revenues		$	187,769			$	75,941			$	—			$	4,622			$	268,332
Depreciation and amortization		$	35,046			$	83			$	—			$	—			$	35,129
Interest income		$	—			$	659			$	—			$	274			$	933
Interest expense		$	—			$	—			$	—			$	3,269			$	3,269
Income (loss) before income taxes		$	40,088			$	6,266			$	—			$	(17,933	)		$	28,421
Capital expenditures		$	21,568			$	2,942			$	—			$	77			$	24,587
Total assets		$	396,028			$	53,216			$	—			$	318,679			$	767,923

NOTE 9
INVENTORIES

     For purposes of inventory accounting, the market value of inventory is generally deemed equal to the Company’s current cost of replacing the inventory, provided that the market value of the inventory does not exceed the estimated selling price of such inventory in the ordinary course of business less reasonably predictable costs of completion and disposal, and the market value may not be less than net realizable value reduced by an allowance for a normal profit margin.

     The costs of mined PGM inventories as of any date are determined based on combined production costs per ounce and include all inventoriable production costs, including direct labor, direct materials, depreciation and amortization and other overhead costs relating to mining and processing activities incurred as of such date.

     The costs of recycled PGM inventories as of any date are determined based on the acquisition cost of the recycled material and include all inventoriable processing costs, including direct labor, direct materials and third party refining costs which relate to the processing activities incurred as of such date.

     Inventories reflected in the accompanying balance sheets consisted of the following:

		June 30,				December 31,
(in thousands)		2011				2010
Metals inventory
Raw ore		$	1,313			$	943
Concentrate and in-process			47,973				40,818
Finished goods			87,705				42,236
			136,991				83,997
Materials and supplies			19,294				17,809
Total inventory		$	156,285			$	101,806

NOTE 10
EARNINGS PER SHARE

     Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if the Company’s dilutive outstanding stock options or nonvested shares were exercised or vested and the Company’s convertible debt was converted. Reported net income was adjusted for the interest expense (including amortization expense of deferred debt fees) and the related income tax effect for the convertible debentures for the three- and six- month periods ending June 30, 2011 and 2010. The Company currently has only one class of equity shares outstanding.

     A total of 78,418 and 48,450 options to purchase weighted shares of common stock were included in the computation of diluted earnings per share for the three- month periods ended June 30, 2011 and 2010, respectively. Outstanding options to purchase 96,671 and 47,935 of weighted shares of common stock were included in the computation of diluted earnings per share for the six- month periods ended June 30, 2011 and 2010, respectively. Outstanding options to purchase 54,302 and 478,354 of weighted shares of common stock were excluded from the computation of diluted earnings per share for the three- month periods ended June 30, 2011 and 2010, respectively, and outstanding options to purchase 70,745 and 488,371 of weighted shares of common stock were excluded from the computation of diluted earnings per share for the six- month periods ended June 30, 2011 and 2010, respectively, because the market price at the end of each period was lower than the exercise price, and therefore the effect would have been antidilutive.

     The effect of including outstanding nonvested shares was to increase diluted weighted average shares outstanding by 925,254 and 1,065,762 shares for the three- month periods ended June 30, 2011 and 2010, respectively. A total of 1,057,452 and 1,095,766 outstanding nonvested shares were included in the computation of diluted earnings per share for the six- month periods ended June 30, 2011 and 2010, respectively.

     All 7.1 million shares of common stock applicable to the outstanding convertible debentures were included in the computation of diluted weighted average shares in the three- and six- month periods ended June 30, 2011 and 2010.

     Reconciliations showing the computation of basic and diluted shares and the related impact on income for the three- month and six- month periods ended June 30, 2011 and 2010 are shown in the following table:

		Three Months Ended												Six Months Ended
		June 30, 2011												June 30, 2011
						Weighted												Weighted
						Average												Average
		Income				Shares				Per Share				Income				Shares				Per Share
(in thousands, except per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net income		$	42,698											$	78,890
Basic EPS
Income available to
common stockholders			42,698				103,037			$	0.41				78,890				102,688			$	0.77
Effect of Dilutive Securities
Stock options			—				79								—				97
Nonvested shares			—				925								—				1,057
1.875% Convertible debentures			994				7,082								1,987				7,082
Diluted EPS
Income available to common stockholders + assumed conversions		$	43,692				111,123			$	0.39			$	80,877				110,924			$	0.73

		Three Months Ended												Six Months Ended
		June 30, 2010												June 30, 2010
						Weighted												Weighted
						Average												Average
		Income				Shares				Per Share				Income				Shares				Per Share
(in thousands, except per share amounts)		(Numerator)				(Denominator)				Amount				(Numerator)				(Denominator)				Amount
Net income		$	14,590											$	27,949
Basic EPS
Income available to
common stockholders			14,590				97,735			$	0.15				27,949				97,390			$	0.29
Effect of Dilutive Securities
Stock options			—				49								—				48
Nonvested shares			—				1,066								—				1,096
1.875% Convertible debentures			994				7,082								1,987				7,082
Diluted EPS
Income available to common stockholders + assumed conversions		$	15,584				105,932			$	0.15			$	29,936				105,616			$	0.28

NOTE 11
REGULATIONS AND COMPLIANCE

     As of June 30, 2011, the Company believes all underground operations are in compliance with Mine Safety and Health Administration (MSHA) limits on diesel particulate matter (DPM) exposure for underground miners through the use of blended bio-diesel fuels, post exhaust treatments, power train advances and high secondary ventilation standards. No assurance can be given that any lack of compliance will not impact the Company in the future.

     Nitrogen concentrates in groundwater have been elevated above background levels at both the Stillwater Mine and the East Boulder Mine as a result of operational activities and discharges currently authorized under permit. Noncompliance with standards has occurred in some instances and is being addressed by the Company through action plans approved by the appropriate federal and state regulatory agencies. Additionally, an Administrative Order on Consent (AOC) has been approved in response to exceedances at the East Boulder Mine which modifies enforcement limits and provides for Agency approval of remedial actions under the compliance plan. In view of its efforts to comply and progress to date in implementing remedial and advanced treatment technologies, the Company does not believe that failure to be in strict compliance will have a material adverse effect on the Company’s financial position, results of operations, cash flows or its ability to operate permitted facilities.

NOTE 12
FAIR VALUE MEASUREMENTS

     Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants and also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when

measuring fair value. The fair value hierarchy distinguishes three levels of inputs that may be utilized when measuring fair value: Level 1 inputs (using quoted prices in active markets for identical assets or liabilities), Level 2 inputs (using external inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability) and Level 3 inputs (unobservable inputs supported by little or no market activity based on internal assumptions used to measure assets and liabilities). The classification of each financial asset or liability within the above hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

     Financial assets and liabilities measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010, consisted of the following:

(in thousands)		Fair Value Measurements
At June 30, 2011		Total				Level 1				Level 2				Level 3
Mutual funds		$	1,269			$	1,269			$	—			$	—
Investments		$	149,879			$	149,879			$	—			$	—

(in thousands)		Fair Value Measurements
At December 31, 2010		Total				Level 1				Level 2				Level 3
Mutual funds		$	1,092			$	1,092			$	—			$	—
Investments		$	188,988			$	188,988			$	—			$	—

     The fair value of mutual funds and investments is based on market prices which are readily available. Unrealized gains or losses on mutual funds and investments are recorded in Accumulated other comprehensive income (loss).

     Financial assets and liabilities measured at fair value on a nonrecurring basis at June 30, 2011, and December 31, 2010, consisted of the following:

(in thousands)		Fair Value Measurements
At June 30, 2011		Total				Level 1				Level 2				Level 3
Convertible debentures		$	196,470			$	—			$	196,470			$	—
Exempt facility revenue bonds		$	40,547			$	—			$	—			$	40,547

(in thousands)						Fair Value Measurements
At December 31, 2010		Total				Level 1				Level 2				Level 3
Convertible debentures		$	193,973			$	—			$	193,973			$	—
Exempt facility revenue bonds		$	26,903			$	—			$	—			$	26,903

     The Company used implicit interest rates of comparable unsecured obligations to calculate the fair value of the Company’s $30 million 8% Series 2000 exempt facility industrial revenue bonds at June 30, 2011, and December 31, 2010. The Company used its current trading data to determine the fair value of the Company’s $166.5 million 1.875% convertible debentures at June 30, 2011, and December 31, 2010.

ITEM 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

     The commentary that follows should be read in conjunction with the consolidated financial statements included in this quarterly report and with the information provided in the Company’s March 31, 2011 Quarterly Report on Form 10-Q and in the Company’s 2010 Annual Report on Form 10-K.

Overview

     Stillwater Mining Company (the “Company”) is a Delaware corporation, headquartered in Billings, Montana and listed on the New York Stock Exchange under the symbol SWC. The Company mines, processes, refines and markets palladium and platinum ores from two underground mines situated within the J-M Reef, an extensive trend of PGM mineralization located in Stillwater and Sweet Grass Counties in south central Montana. Ore produced from each of the mines is crushed and concentrated in a mill at each mine site. The resulting concentrates are then trucked to the Company’s smelting and refining complex in Columbus, Montana which processes the mine concentrates and also recycles spent catalyst materials received from third parties. A portion of the recycling material is purchased for the Company’s own account and the balance is toll processed on behalf of others. The finished product of the base metal refinery is a PGM-rich filter cake which is shipped to third parties for final refining into finished metal.

     In the fourth quarter of 2010, the Company announced two new expansion projects along the J-M Reef. The first of these, known as the Blitz project, is expected to develop new underground drifts on two levels from the current Stillwater Mine toward the eastern extremity of the reef. The other project, known as Graham Creek, is expected to develop about 8,200 feet toward the west from the existing East Boulder Mine infrastructure, using a tunnel boring machine (“TBM”). East Boulder Mine’s TBM which was used about a decade ago to develop initial access to the JM-Reef and then the west footwall lateral access paralleling the mineralized JM-Reef, has recently been re-commissioned for this new project. Initial work will assess the continuity and structural controls related to the JM-Reef in this area on the far western end of the Stillwater Complex.

     The Company also completed on November 30, 2010, the acquisition of the PGM-Copper assets of Marathon PGM Corporation, or Marathon PGM, for $63.6 million in cash and 3.88 million Stillwater common shares with a fair value as of the date of the acquisition of $73.4 million. Assuming successful completion of exploration and development activities and issuance of full permitting, the Marathon PGM-Cu property is currently anticipated to support an annual production of approximately 200,000 ounces of PGMs and about 37.0 million pounds of copper per year beginning in 2014 or 2015. The acquisition expanded the Company’s leverage to PGMs, while diversifying the Company’s ore body exposure beyond the J-M Reef and brought a broader exposure to copper.

Significant Recent Developments

     On July 11, 2011 the Company entered into an arrangement agreement to acquire all of the outstanding shares of Peregrine Metals Ltd (“Peregrine”). Peregrine, based in Vancouver, Canada, owns the Altar project, a large, undeveloped property located in the San Juan province of Argentina with significant copper and gold deposits. If completed, the Peregrine acquisition will significantly diversify the Company’s ore body exposure into copper and gold. Based on the 118.0 million Peregrine shares outstanding on July 11, 2011, the Company expects to issue approximately 9.6 million shares of Stillwater common stock and $159.3 million in cash as consideration to the Peregrine shareholders upon the closing of this transaction. In addition, the Company also expects to issue up to approximately 2.5 million shares of Stillwater common stock and $41.2 million in cash upon the exercise of all outstanding Peregrine options and warrants prior to the completion of the acquisition. Exercise of these options and warrants could result in as much as $35.0 million in cash coming into Peregrine, which would be retained by the Company. To the extent outstanding Peregrine options and warrants remain unexercised as of the transaction closing date, they will be exchanged for options and warrants to purchase shares of Stillwater common stock and the option and warrant holders will receive cash upon exercise, in the same proportions as the acquisition consideration payable to Peregrine shareholders. The net cash outlay for Stillwater in the transaction after considering cash from the exercise of options and warrants will be approximately $164.0 million. While the final value of the transaction will depend upon the Company’s share price at closing and the number of Peregrine warrants and options ultimately exercised, the Company expects to issue about 12.1 million new shares and expend net cash of approximately $164.0 million in completing the acquisition. In addition, the Company expects to incur approximately $10.0 million of transaction costs. The acquisition is anticipated to close in the fourth quarter of 2011.

     The acquisition is subject to a number of closing conditions and contingencies, including approval by shareholders of Peregrine, review and approval under the Investment Canada Act and approval by the British Columbia Supreme Court. Subject to satisfaction of these conditions, closing is expected to occur in the fourth quarter of 2011. The completion of exploration, permitting and development of

the Altar project to achieve full-scale production is currently estimated to take between six and eight years and cost between $2.0 billion and $2.5 billion.

     These recent developments, particularly the Marathon acquisition and pending Peregrine acquisition, represent significant diversification opportunities beyond the Company’s operations in the J-M Reef. These acquisitions follow several years of evaluating possible acquisitions in an effort to reduce the Company’s exposure to a single mining property. The Company currently expects to finance the cash portion of the Peregrine acquisition consideration from its available cash and further expects to finance requisite working capital and the exploration, permitting and development of the two projects through a combination of cash flows from operations and future financing as opportunities warrant. The Company may also seek to partner with one or more other mining or development companies.

     Estimates of the project timing, cost, production yield and financing of the Marathon and Altar projects are preliminary and, in the case of Peregrine, have been formulated based on information pertaining to the Altar project derived from Peregrine. The Company has not yet completed a feasibility study with respect to the Altar project, and is currently conducting an advanced engineering study with respect to the Marathon Project and does not possess the same degree of knowledge and understanding of the Peregrine or Marathon properties as it does with respect to the mining properties it has owned and operated for a number of years. Accordingly, undue reliance should not be placed on the forward-looking information presented for these projects. The estimates presented herein are based on a number of assumptions and management decisions that are subject to significant uncertainties and contingencies, many of which are beyond the Company’s control. These assumptions and management decisions may prove incorrect, and many of the factors that will impact actual project timing, cost, production yield and financing plans are beyond the Company’s control. Many factors could cause the timing, cost, production yields and financing mix to differ from the Company’s current expectations and those differences could be material.

     The four-year labor agreement between the Company and United Steel Workers (“USW”) International Union Local 11-0001 covering represented employees at the Stillwater Mine and at the Company’s processing facilities in Columbus, Montana, expired on July 1, 2011. By mutual agreement, the existing contract was extended through July 9, 2011, in order to allow time for the union membership to vote on a new labor agreement. Voting on the contract was completed on July 8, 2011, affirming the new agreement. The Company experienced no work stoppage related to negotiation and ratification of the new agreement. The new labor agreement has a term of four years, expiring on June 1, 2015, and provides for increases in base wage rates of five percent in each of the first two years of the agreement and four percent in each of its final two years. It also restructures medical benefits to provide more focus on assisting employees and their families in maintaining good health, and it enhances certain incentive programs.

     On July 27, 2011, the Company’s common shares were conditionally approved for listing on the Toronto Stock Exchange (“TSX”), subject to the fulfillment of standard conditions. The Stillwater common shares are expected to begin trading on the TSX under the symbol “SWC” prior to the end of August 2011. The Company is reviewing its Canadian filings in order to comply with the filing requirements applicable to foreign entities whose shares are traded on the TSX.

Second Quarter Results

     During the second quarter of 2011, the Company reported mine production of 142,700 combined ounces of palladium and platinum — up from 112,600 ounces in the comparable quarter last year. The improved production reflected stronger ore grades in the off-shaft area of the Stillwater Mine and the restart in 2011 of production from the east side of the mine. Production at the East Boulder Mine was close to plan both in the second quarter of 2011 and 2010.

     For the second quarter of 2011, the Company reported net income of $42.7 million, or $0.39 per fully diluted share, an increase from $14.6 million, or $0.15 per share, reported in the second quarter 2010. PGM prices decreased during the second quarter of 2011, but remained substantially higher than a year earlier. The Company’s average realization on sales of mined palladium was $752 per ounce in the 2011 second quarter, up 53.2% from an average of $491 per ounce in the second quarter of 2010 but down from the $784 per ounce average in this year’s first quarter. Similarly for platinum sales, the Company realized an average of $1,769 per ounce in this year’s second quarter, up 15.9% from the average $1,526 per ounce in the same quarter last year but lower than from the $1,782 per ounce average in the 2011 first quarter.

     Factors that may have driven the increase in prices since the second quarter of 2010 appear to include the following:

•		Continuing recovery in PGM demand from the automotive sector worldwide, reflecting growth in car build rates and some inventory restocking;
•		Growth in ETF holdings of palladium and platinum, despite intermittent periods of liquidation;
•		Multiple production challenges, particularly for the South African producers;
•		Negligible exports of palladium during 2011 from the Russian state stockpile; and
•		Implementation of new emission standards in the United States for off-road diesel equipment in 2011.

     The Company’s PGM sales volumes from its mining operations increased to 136,600 combined ounces of palladium and platinum in the second quarter of 2011, up from 115,100 ounces in the first quarter of 2011 and 116,700 ounces sold during the second quarter of 2010. Despite the increased sales during this year’s second quarter, sold ounces continued to trail mined ounces produced. The main differences are a matter of inventory timing, as produced material may spend several weeks in processing before it becomes available for sale, and increased mined ounces produced quarter over quarter, which can result in fewer ounces available for sale during a particular period than ounces produced in the same period. Maintenance downtime in the smelter and the need to prioritize delivery commitments under recycling forward sales also from time to time may exacerbate these differences, although such differences should even out over time.

     The Company’s combined average realized price for each metal differs from equivalent average market prices as the result of various contractual provisions, including small contractual discounts and selling prices based on monthly averages which generally lag the market price by one month. In addition, the Company’s average realized price for mined metals differs from recycled metals due to contractual provisions and timing differences.

     The Company’s recycling volume increased to 125,200 ounces of PGMs, an increase of 26.2% over the 99,200 recycled in the second quarter of 2010. Recycled PGM ounces sold (which include palladium, platinum and rhodium) increased by 67.0% to 61,300 ounces in the 2011 second quarter, from 36,700 ounces for the second quarter of 2010. In addition, during the second quarter of 2011, the Company processed and returned 56,700 ounces of material tolled for third parties, compared to 76,700 ounces tolled and returned in the second quarter of 2010.

     Total consolidated cash costs per ounce, a non-GAAP measure of extraction efficiency explained more fully later in this discussion, at $384 per ounce during the second quarter were well below the Company’s annual 2011 guidance of $430 per ounce and lower than the $393 per ounce reported in the 2010 second quarter. Much of the improvement is attributable to strong mine production during the second quarter of this year. Year to date through June, total consolidated cash costs per ounce have averaged $410 per ounce, compared to $378 per ounce for the same period last year, in part reflecting higher royalties and taxes on higher PGM prices in 2011. Labor costs are also higher, reflecting higher wage rates and an increase in employee count since 2010.

     In monitoring the Company’s cost performance, management generally breaks total cash costs in any period (a non-GAAP measure discussed below that excludes inventory effects, recycling costs, depreciation and amortization, and in this case, calculated before recycling, by-products and development credits) into several key categories, including payroll and benefits, materials and supplies, utilities and fuel, contracted services, and royalties, taxes and insurance. The relative proportions of such costs vary, particularly because royalties, taxes and insurance are determined to a large extent by the level of metal prices and over the past several quarters have generally increased as PGM prices have increased. During the first six months of 2011, royalties, taxes and insurance comprised about 16% of operating costs, up from about 14% in the same period of 2010. During the same period, payroll and benefit costs declined to about 46% of total cash costs in the first six months of 2011 from about 49% in the first six months of 2010. Other cost components remained comparatively flat during the same period. The Company’s total available liquidity, expressed as cash plus short-term investments, strengthened during the quarter and at June 30, 2011, was $254.9 million, up from $208.4 million at December 31, 2010. Net working capital (including cash and investments) also increased over the quarter to $376.5 million at June 30, 2011 from $291.2 million at year end 2010. During the second quarter 2011, working capital uses increased $9.0 million as the recycling business grew.

Mining Operations

     As announced on July 11, 2011, the Company increased its 2011 annual forecast for mined palladium and platinum production to 515,000 ounces from its original guidance of 500,000 ounces. Mined production of palladium and platinum has exceeded original estimates for the first two quarters of 2011. Total mine production of PGMs during the second quarter of 2011 was 142,700 ounces and 273,800 ounces year to date in 2011. Production has exceeded expectations due primarily to more tons mined than anticipated, higher ore grades in the lower off shaft area of the Stillwater Mine and the contribution of higher grades from the east side of the mine. Although the Company believes that production for 2011 is likely to be higher than originally planned, this cautious increase recognizes that mining conditions at both mines may be a bit more difficult during the second half of this year and there may be a need to divert some mining resources into development.

     Capital spending is planned to increase from the $50.3 million in 2010 to about $120.0 million in 2011. Capital expenditures during the second quarter of 2011 totaled $23.1 million, and are expected to increase steadily as the year progresses. The higher 2011 spending target is primarily attributable to equipment replacement and expanded development efforts in the Montana mines, plus approximately $10.0 million of spending for the Marathon PGM-Cu project, $10.0 to $15.0 million for new resource developments within the J-M Reef, and $8.0 million for a new slag cleaning circuit in the Columbus processing facilities.

     During the fourth quarter of 2010, the company announced two new resource development projects along the Stillwater Complex in Montana: the Blitz project, immediately to the east of the Company’s Stillwater Mine, and the Graham Creek project, immediately to the west of the Company’s East Boulder Mine. Depending on the ultimate quality of the resource in these areas, these projects have the potential to extend the life of the existing mines and may allow the Company to increase annual mine production. In addition, these projects provide the opportunity to expand the Company’s understanding of undeveloped areas along the J-M Reef.

     The Blitz project now anticipates developing two 20,000-foot parallel drifts east from the existing infrastructure of the Stillwater Mine. One of these drifts will be driven conventionally, the other with a newly acquired and refurbished TBM. The Company expects to take delivery on the TBM late in 2011 and have it in operation by the second quarter of 2012. Full completion of the Blitz project is expected to take between five and six years, but initial ore production from Blitz could begin as early as 2015. Although the Blitz project will share some facilities with the Stillwater Mine, it will be operated independently of the Stillwater operation. The cost of the Blitz project is anticipated to be approximately $180.0 million spread over about six years. The Company is also seeking to permit a separate surface access for ventilation and delivery of materials in support of this project.

     The Graham Creek project will utilize an existing TBM at the East Boulder Mine to extend the existing drift about 8,200 feet to the west from the current western extremity of the mine. The resource evaluation, with its more limited scope, is expected to take about five years to complete at a cost of approximately $8.0 million. The plan would require installing a new ventilation raise at the end of the drift and constructing additional infrastructure once the development phase is completed. Year to date in 2011, the TBM has developed approximately 1,250 feet of new drift before idling it temporarily to allow for definitional drilling and an access breakout behind it. The TBM is expected to resume operation in November of 2011.

     Second quarter 2011 palladium and platinum production at the Stillwater Mine totaled 108,900 ounces, an improvement of 10.4% over the 98,600 ounces in the first quarter of 2011 and an increase of 25.8% over the 86,600 ounces produced in the fourth quarter of 2010. The increased production in the second quarter was driven by a combination of more tons mined, improved ore grades in the lower off shaft and resuming production from the east side of the mine that was idled in 2008.

     Stillwater Mine’s total cash costs of $367 per ounce for the second quarter of 2011 were lower than the $387 per ounce for the second quarter of 2010. Cash costs per ore ton mined at the Stillwater Mine were $190 for the second quarter, higher than the $165 per ton reported for the second quarter of 2010, in part reflecting the higher costs of mining on the east side. Capital expenditures at the Stillwater Mine were $16.3 million for the second quarter of 2011, less than planned, but more than the $9.1 million spent during the second quarter of 2010. Primary and secondary development for second quarter 2011 at the Stillwater Mine were about 5.8% behind plan with primary development advancing about 8,300 feet, and secondary development advancing about 3,900 feet. Diamond drilling footage totaled about 84,200 feet at the Stillwater Mine for the second quarter of 2011, about 13.2% less than planned. The shortfall in development and drilling footages is mainly the result of resources being allocated to mining. The mine would expect to make up most of these development shortfalls by year end.

     Management’s assessment of mining conditions for 2011 suggest that future ore grades in the lower off-shaft area of the Stillwater Mine are likely to remain more variable on average than in the past, reflecting the trend toward smaller stopes in that area than experienced in the past. This inherently leads to higher unit costs. In planning for 2011, the Company has taken these lower grades into account and has resumed planned production on the east side of the mine. In the past the east side has enjoyed higher ore grades but also encountered more difficult mining conditions and higher costs. These higher cost stopes are economic at current PGM prices.

     Mining production at the East Boulder Mine was on plan for the second quarter of 2011, with combined palladium and platinum production of 33,800 ounces. Total cash costs of $442 per mined ounce were slightly below plan for the quarter. During the second quarter of 2010 the East Boulder Mine produced 33,400 ounces of palladium and platinum at a total cash cost of $407 per ounce. The increased cash costs were directionally in line with a manpower increase of 17.8%, plus the effect on royalty and tax expense of higher PGM prices. Capital expenditures at the mine were $4.2 million in the second quarter of 2011 compared to $1.2 million in the second quarter of 2010. Actual primary development at the East Boulder Mine advanced about 3,400 feet during the 2011 second quarter, and secondary development advanced 2,700 feet during the quarter. In total, development footage at the East Boulder Mine is ahead of plan, in part because the TBM is operating. Diamond drilling footage totaled about 21,500 feet for the second quarter, behind plan, but is expected to catch up to plan during the remainder of the year.

PGM Recycling

     The Company also recycles spent catalyst material, commingled with its mine concentrates, through its smelting and refining facilities in Columbus, Montana, ultimately recovering the palladium, platinum and rhodium from these materials. As noted previously, total recycle ounces processed (purchased and tolled) in the second quarter of 2011 were 125,200 ounces, up 26.2% when compared to 99,200 ounces in the second quarter of 2010. For the second quarter of 2011, the Company earned $3.4 million from recycling operations on revenues of $82.9 million, reflecting a combined average realization of $1,330 per sold ounce. For the second quarter of 2010, the Company also reported net income from recycling operations of $3.4 million, on revenues of $42.3 million and a combined average realization of $1,106 per sold ounce. Higher combined average realizations and higher sales volumes were offset by lower volumes of toll ounces processed and increased costs as a result of modifications to supplier contracts that allow the Company to remain competitive in the recycling business. Total tons of recycling material processed during the second quarter of 2011, including tolled material, averaged 21.0 tons per day, compared to 16.6 tons per day in the second quarter of 2010. Higher PGM prices continue to create a strong incentive for suppliers to collect recycling material. During first quarter 2011, the Company entered into sourcing arrangements for catalyst material with several new suppliers.

     During the past couple of years, the Company has completed a number of projects in support of its recycling activities. In May 2009, the Company commissioned a new electric furnace in the Columbus smelter, increasing throughput capacity and creating backup furnace capacity in the event of planned or unforeseen outages. During the third quarter 2010, the Company commissioned a dedicated catalyst receiving, crushing and sampling plant that allows for the segregation and handling of multiple batches of recycling material simultaneously. During the first quarter of 2011, the Company commissioned a state-of-the-art assay laboratory, constructed and equipped in 2010, which utilizes an automated x-ray facility that provides accurate results with faster turnaround times than conventional fire assay methods. New laboratory software supports this automated x-ray system, as well as other laboratory processes.

     These investments are intended to increase the Company’s capacity to receive and process spent catalytic materials and to speed up the processing of such material. The aim is to strengthen the Company’s competitive position in the recycling business by sharply reducing the turn-around time on recycling lots, allowing suppliers to receive settlement payments more quickly and so reduce their working capital requirements. Faster assay information also allows the Company and its suppliers to keep pace with an increasingly complex array of different catalyst formulations.

     In sourcing recycled automotive catalysts, the Company only advances funds to its suppliers when the associated material for recycling is awaiting transit or is already in transit to the Columbus processing facilities. The new recycling sampling and assay facilities should allow the Company to accelerate final settlements with suppliers, thereby reducing the amount of working capital they require. Outstanding procurement advances that were not backed up by inventory physically in the Company’s possession at June 30, 2011 and 2010, totaled $2.6

the pricing floors in the Company’s automotive contracts expired at the end of 2010.

     Stillwater continues to be a palladium producer with an expanding palladium production profile. Existing mining operations are expected to yield in excess of 500,000 ounces of palladium and platinum this year at a ratio of palladium to platinum of 3.3 to 1. The Company pursues a vigorous marketing campaign for palladium. These efforts target both palladium jewelry and the industrial markets and have been successful in fostering new markets and in nurturing existing markets. In 2011 the Company budgeted $10.0 million for palladium marketing and to date in 2011 has expensed $3.4 million in its efforts to market palladium through the Palladium Alliance International, a trade organization established for that purpose in early 2006.

     The Company has continued its pursuit of growth, first in the palladium sector, recognizing that such growth is limited by the scarcity of attractive PGM resources worldwide and in particular outside of South Africa and Russia. The Company has long communicated that it needs diversity in order to provide longer-term sustainability, and that it would consider copper or nickel operations, particularly if such projects contained precious metals — with a primary bias towards PGMs but also considering investments in gold and/or silver. If the Company is successful in developing the Peregrine property, it will have achieved a meaningful diversification and become a broader mining company with three principal products, namely palladium, copper and gold.

     1. Existing Operations and Opportunities Strategic Emphasis

     The Company holds patented and unpatented lode or mill site claims along the alignment of the J-M Reef, a high-grade PGM resource uplifted within the Beartooth Mountains of south-central Montana just north of Yellowstone National Park. The J-M Reef extends 28 miles horizontally, averages about 1 ¹/2 miles in height and is typically about 5 feet wide. It is the highest-grade PGM deposit and one of the largest precious metal reserves controlled by a single company in the world. The Company’s proven and probable ore reserves, at the end of 2010, totaled 40.8 million tons at an average grade of 0.49 ounces per ton. Broken out by mine site, the Stillwater Mine has 15.7 million tons at an average ore grade of 0.63 ounces per ton, containing 9.8 million ounces; and the East Boulder Mine has 25.1 million tons with an average grade of 0.40 ounces per ton, containing 10.0 million ounces.

     The Company initiated two additional projects in 2010 along the J-M Reef which have the potential to significantly expand the Company’s ore resource there and may provide the potential for increased production over time. The Blitz project is situated immediately to the east of the Company’s Stillwater Mine and the Graham Creek project just to the west of the Company’s East Boulder Mine. Initial development of the two projects will require capital of approximately $188.0 million over the next six years.

     In late 2003 the Company stepped up its efforts to develop and grow a sustainable PGM recycling business. The Company’s recycling business is facilitated by the copper and nickel by-products in the concentrate stream produced from the Montana mines, which act metallurgically as PGM collectors in the molten bath of the Company’s electric arc furnace. The recycling business became sufficiently large that in 2008 the Company determined to add additional infrastructure to support its growth. This included a new electric arc furnace in 2009, a unique catalytic converter preparation and sampling plant in 2010 and a state of the art automated assay laboratory commissioned earlier this year. The Company is currently rebuilding the former furnace, which will operate as a slag-cleaning furnace for the growing recycle volumes and provide operational back-up for the new furnace. The slag-cleaning furnace is expected to be operational by the end of this year.

     2. Markets and Marketing Strategic Emphasis

     The Company’s Montana mineral reserves and resources are palladium rich, like most all northern-hemisphere PGM deposits, with the J-M Reef having an average palladium to platinum ratio of about 3.3 to 1. Being palladium rich, the Company’s PGM production has a lower weighted average market basket price than the South African producers, which are platinum rich, often enjoying platinum to palladium ratio of about 2 to 1. Thus, with palladium currently at $804 per ounce and platinum at $1,780 the Stillwater PGM market basket price is about $1,030 per ounce, while the South African market basket is $1,490 per ounce. This difference puts Stillwater at a competitive disadvantage.

     There has been a dramatic improvement in the Stillwater PGM market basket price over the last 18 months. Prior to that, the price of palladium generally averaged about 25-26% of the price of platinum. If that were still the case today the Company’s PGM market basket price would only be about $760 per ounce, 26% lower (and the South African PGM market basket would be about $1,343, or 10% lower). The change over the last 18 months has been a rerating of the price of palladium upwards against the price of platinum, so that today the price for palladium is 45% of the price of platinum — a 73% improvement.

     The Company has highlighted for several years the misalignment of the palladium price relative to the price of platinum. Until recently, however, this marketing effort has been conducted in the face of a continuing oversupply of palladium, attributable principally to the Russian government’s ongoing liquidation of its vast strategic stockpile of palladium over the last 20 years. This stockpile, which at its peak contained an estimated 30 million ounces of palladium, is now thought to be nearly exhausted. The Company’s marketing efforts in recent years have been aided by recovery in demand from the catalytic converter market, the dominant market for both platinum and palladium, as automotive production has surged strongly ahead and palladium has predominated in catalytic converters due to favorable economics. Indeed today palladium constitutes over 90% of the metal used for catalytic conversion of emissions from gasoline engines.

     While the palladium market has been through a tumultuous decade, this new market dynamic emerged strongly in 2010 as the price of palladium moved up against platinum. In considering the changing market dynamics for palladium, the Company believes that the convergence between the palladium and platinum prices is not yet finished, and that going forward palladium may trade yet higher against the price of platinum. Supporting this is the fact that catalytic converter technology now permits a one-for-one substitution ratio between palladium and platinum for gasoline emission catalytic converters, and also a one-for-one substitution ratio for the 50% portion of diesel catalytic converters that can utilize palladium. Thus, at the current price ratio palladium predominates in the catalytic converter market. The catalytic converter market in 2010 consumed approximately 64% of the 8.5 million ounces of palladium supplied to the market, which included about one million ounces of residual palladium coming from the Russian government’s strategic stockpile. Without the Russian inventory sales, in 2010 catalytic converters consumed 73% of the palladium supplied from primary mine production and recycled materials. Not far behind is platinum, however, where in 2010 catalytic converters consumed 49% of the 7.5 million ounces supplied from primary mine production and recycled materials.

     Further, the fundamentals behind palladium’s pricing shift appear to signal a new economic dynamic for palladium. The price of platinum, due to constraints on production worldwide, is being pressured upward by “cost push economics” — in order to have sufficient supplies of platinum available in the market, the price must rise to cover the marginal cost of production. Numerous challenges, particularly in South Africa, have combined to drive up the cost of producing platinum — and to an even greater degree, the cost of replacing each ounce of platinum produced. At the same time, due to the one-for-one substitutability of palladium for platinum in catalytic converters, the palladium price is now being driven by “price pull economics.” As the platinum price rises due to increasing costs, there is growing demand for the limited supply of less expensive palladium, which in turn pulls its price higher against that of platinum as producers seek it as a substitute for platinum. This dynamic may be reducing the Company’s traditional risk as a swing producer of palladium (over 90% of palladium is produced secondarily as a by-product of either platinum or nickel production) to one where the price of palladium is driven by the price of platinum. As a swing producer, Stillwater and the other primary palladium producers at low palladium prices have had to consider suspending or restructuring operations, while the palladium production of the major producers largely continued, driven by the economics of their primary product — either platinum or nickel. Indeed one of the Company’s competitors was compelled to suspend production following the price drop in 2008. Stillwater was able to maintain its production during the same period as a result of the floor prices in its then-existing auto contracts, which have since expired.

     3. Growth and Diversification Strategic Emphasis

     In early 2010, recognizing that the market for palladium was likely to change, the Company began evaluating expansion opportunities along the J-M Reef, resulting in the Blitz and Graham Creek projects. It also moved swiftly to assess other available PGM properties. Along with the acquisition of the Marathon PGM-Cu project in Ontario, near the north shore of Lake Superior, the Company also purchased the adjacent Bermuda property from

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(1)		Ounces sold and average realized price per ounce from PGM recycling relate to ounces produced from processing of catalyst materials.
(2)		By-product metals sold reflect contained metal. Realized prices reflect net values (discounted due to product form and transportation and marketing charges) per unit received.
(3)		The Company’s average realized price represents revenues, which include the effect of any applicable agreement floor and ceiling prices, hedging gains and losses realized on commodity instruments and agreement discounts, divided by ounces sold. The average market price represents the average London Bullion Market Association afternoon postings for the actual months of the period.
(4)		The Company reports a combined average realized and a combined average market price of palladium and platinum at the same ratio as ounces that are produced from the base metal refinery.

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