uploads/2016/03/Cost-curve1.png

Can Stillwater Defend Its Place on the Cost Curve?

By

Updated

Currencies are helping costs

Stillwater Mining (SWC) is the only major producer of platinum group metal (or PGM) products in the United States. About 80% of the supply for palladium, Stillwater’s largest mined product, comes from Russia and South Africa. Stillwater forms ~6% of the global supply of palladium.

Local currencies for South African players such as Anglo American Platinum (AGPPY), Impala Platinum (IMPUY), Aquarius Platinum (AQPTY), and Russian players such as Norilsk Nickel (NILSY) are depreciating, providing them cost advantage. In contrast, Stillwater’s US-dollar-denominated (USDU) (UUP) cost base isn’t getting any such help. The South African rand and the Russian ruble have depreciated by 25% and 20%, respectively.

On the other hand, when emerging market (EEM) currencies depreciate, the US dollar usually appreciates. This pushes Stillwater up the cost curve. Stillwater had an all-in sustaining cost (or AISC) of $709 per ounce of platinum and palladium for 2015.

Investors should note that Aquarius shareholders have approved the takeover by Sibanye Gold (SBGL).

Article continues below advertisement

Platinum cost curve

According to the South African platinum cost curve presented by Stillwater during its 4Q15 results, about half of the South African industry is losing money at current prices. Stillwater believes that it’s not a sustainable business format. Investors should note that the effective costs for South African miners have declined since the above cost curve was prepared, as it’s based on rand prices for October 25, 2015. The rand has depreciated 12% more since then.

Cost curve position

Compared to these miners, Stillwater Mining is still in the first quartile of the industry cost curve. This is due to its robust cost structure, higher productivity, higher grades, and stable input costs.

While currencies are providing a nice tailwind to South African and Russian producers of PGM, Stillwater Mining is doing everything it can to lower its cost profile to remain competitive. We’ll have a look at the company’s cost-saving efforts in the next part of our series.

Advertisement

More From Market Realist