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What’s the Production Upside for Stillwater in the Long Term?

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Global palladium production

Globally, palladium prices (PALL) have little bearing on production decisions. That’s because most palladium is a by-product rather than a primary product. In Russia, it’s a by-product of nickel. In South Africa, most palladium is a by-product of platinum (PPLT) mining. Only ~10% of production, mostly in the United States and Canada, is primarily for palladium.

The decisions of South African miners are based on considerations of platinum production. These miners include Anglo American Platinum (AGPPY), Impala Platinum (IMPUY), and Aquarius Platinum (AQPTY), which is to be acquired by Sibanye Gold (SBGL) subject to certain approvals.

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Due to the nice tailwind in the form of currency depreciation, these miners are expected to continue producing at current levels in the short-to-medium term. Lower sustaining expenditures might catch up with these players in the long term. Norilsk Nickel (NILSY), on the other hand, upped its production guidance for palladium for 2016 at 2.3–2.4 million ounces and for platinum at 542,000–586,000 ounces.

Stillwater’s palladium production

Stillwater Mining (SWC) produces palladium as a primary metal. Its production for palladium and platinum for 2015 was 520,800 ounces. Production at its East Boulder mine increased by 13.6% year-over-year (or YoY), and production at the Stillwater mine declined by 6.2% YoY, mainly due to the decision to stop production at some higher-cost stopes.

Long-term production upside

Stillwater is ramping up Blitz, a new project and its main development asset. The company expects the first product from it in mid-2018. However, it will take several years for the mine to fully ramp up. After it’s fully ramped up, the project is expected to contribute 150,000–200,000 ounces to annual production.

Management clarified during the company’s latest earnings call that these ounces will be additional ounces and not replacement ounces for Stillwater mine operations. The company also said that the ounces from Blitz will be its lowest cost ounces due to high-grade and infrastructure sharing benefits.

In the next part of this series, we’ll see how Stillwater is placed on the cost curve compared to its peers.

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