Sibanye Stillwater Limited

Michael J. McMullen - Chief Executive Officer, President, Executive Director, Member of Health, Safety & Environment Committee and Member of Technical & Ore Reserve Committee

David Gagliano - BMO Capital Markets Equity Research Andrew C. Quail - Goldman Sachs Group Inc., Research Division John D.

Bridges - JP Morgan Chase & Co, Research Division Garrett S. Nelson - BB&T Capital Markets, Research Division

Thank you very much. I'd like to welcome everybody to our first quarter 2015 results presentation.

I have here today with me Chris Bateman, our Chief Financial Officer; Mike Beckstead, our Head of Investor Relations; along with the most -- majority of our senior management team. We have a presentation that's available online, and I'll be referring to that today as we walk through the first quarter results.

I'd like to draw people's attention to the second slide, the forward-looking statements, and if people could read that at your leisure and just take note of the information contained in that. Moving to Slide 3, our first quarter highlights.

Our consolidated net income for the quarter was $23 million or $0.17 per diluted share. That was an increase of 17.5% from the same period in 2014.

We grew our cash by $9.7 million, or cash and cash equivalents, from our previous quarter, and we ended the first quarter with $541 million of cash, cash equivalents and liquid investments. Our AISC, all-in sustaining costs, I'll refer to this many times during the presentation, was $763 per mined ounce, which was down from $788 in same period in '14 but up from a very good result in the prior quarter.

I'd like to draw people's attention to the fact that when we refer to an ounce from the mines, that's a mix of palladium and platinum typically in the ratio of 3.4 palladium:1 platinum. It's important people understand that when we refer to ounces, it's just not an ounce of palladium.

Our G&A costs were down. They were at $8.3 million for the quarter, down from $9.8 million in the same quarter of the prior year.

Mine production was up slightly, again 133,300 ounces, up from 130,700 ounces in the prior year. We saw a 7.1% increase in our recycled ounces of palladium, platinum and rhodium over the corresponding period in the prior year.

We were at 108,700 ounces. And we have commenced negotiations regarding the Stillwater Mine and Columbus processing facility's union employment contract.

So if we go to Slide 4, we can delve into some of the detail. As I said, we sorted out a 2% increase in production year-on-year.

We saw a 5.5% reduction in total cash cost to $537 net of by-product credits. Our all-in sustaining costs were down 3.2% year-over-year.

G&A is down 14.7%. Our sustaining capital was up 13.2% year-over-year to $20.3 million.

We had said in the past that whilst we're looking to drive our all-in sustaining costs down quite significantly, we're not looking to do that by cutting back on sustaining capital. We believe that we need to invest in the future of the mine.

We continue to do that. Our project capital spend was down slightly to $7.6 million from $8.2 million.

And total capital expenditures, as a result, were up about 6.8% year-on-year. You can see there as well at the bottom of that page, the 7.1% increase in recycling PGM ounces, and I will talk to recycling on a later slide, but that is a pleasing result to see that, that number is moving in the right direction.

Going to Slide 5, if we look at our quarterly net income or loss over the previous 2 years, you can see there again it's very noticeable. In Q3 and Q4 of 2013, we took 2 large impairments.

As we've come out of that, we've now sort of got back to a normalized situation with our earnings. And for Q1 of '15, we had $23 million of earnings.

I will note on the bottom of that slide the average basket price that we've received for our metal. You can see that prices during Q1, Q2 and Q3 of '14 did have a fairly significant rise.

Subsequent to that, we've seen through Q4 of '14 and into this year that we've seen prices have softened. It is pleasing that despite that reasonably substantial drop in prices, we have still managed to maintain a reasonable earnings profile.

If we go to Slide 6, our change in cash and investment balance. Over the quarter, from quarter to quarter, we managed to generate $9.7 million in cash and liquid investments.

I will say that, that is not the rate at which we are seeking to grow cash. It's on the low side partly driven by price.

But again, we see this as a result that we would like to improve on, and I think that we have room to do that. Having said that, ending the quarter with a cash balance -- cash and liquid investments balance of $541 million does put us in a very solid position with regards to our balance sheet.

We really are prepared for all eventualities. And in the mining industry, I think having a very strong, bulletproof balance sheet is your best defense against all things that may come up in your business.

Moving to Slide 7 now. We introduced this slide a few quarters ago so that we could demonstrate the change in our cost base.

We're very focused on cost of this business. And for Stillwater Mine and East Boulder and on a consolidated basis, we are showing here our mining, milling, downstream processing, which is our smelter BMR costs, admin at site and our credits and bridge operation by quarter.

You can see here that we had a very strong reduction from the start of last year through to the end of last year in our costs at both operations. We did see in the first quarter of this year an uptick in costs at both operations, particularly in the mining costs at both sites.

You can also see from the quantum of those costs that the mining costs at each site are, by far and away, the largest component of our costs. This is the area that we're focusing on.

We must drive these costs down. You can also see we now added a tons milled line on the bottom of this table so you can see the tons milled at both sites.

Well, actually, Stillwater Mine was down a bit from Q4 to Q1, and that does drive some of the cost per ton increases because we had less tons to amortize those fixed costs over. So I would say we made some good performance over the last 12 months in this area, but we still have significant amount of work to do.

If we move on to our Slide 8, all-in sustaining costs. So you can see we have had some success in driving our costs down.

It was a good result in Q1. It was within our guidance range.

However, I do note that it was up from the prior quarter, and that's something that we really would like to try and reverse that trend. We have got a very disciplined approach to capital deployment and we are focused on operational efficiencies.

We are confident in additional opportunities to further reduce those costs. We are working very diligently on driving those costs down.

Our guidance range for this year is in the $730 to $780 range per ounce. Our goal, as we've stated this goal for over a year now, is to drive our all-in sustaining costs per ounce back down to the low $700s, which is broadly where it was in 2011.

Moving on to Slide 9 on the operational improvements. If you'll recall during the middle of last year, we made a change at the Stillwater Mine to move away from mining some of our high-grade stopes but significantly low -- lower productive stopes into areas that will give lower grade but much more productive.

In January of this year, we pushed out the second phase of that redeployment of the workforce to focus on more profitable ounces. Previously, we were producing some ounces either at a loss or, as was the case for many of them, less profitably than possibly if we waited for the infrastructure to catch up.

We have some of those stoping areas that will come back online late in Q3 or probably early in Q4. We expect that to have a positive impact on both our production and our cost base.

At the end of the first quarter, the company had 1,609 employees, down from 1,773 at the start of 2014. As of today company-wide, we have 1,603 employees, and we've achieved that through voluntary and involuntary programs as well as through natural attrition.

I do note that for a variety of reasons, our attrition rates at the company are some of the lowest ever seen in the history of the company, and we've had a minimal impact on mined production. And again, we've seen that like for like, year-on-year production was actually up this quarter relative to the last year.

We are continuing to evaluate our optimal staffing levels. We need to continually assess the right numbers of staffing that we have.

And I think that given where the PGM basket price is, at the lowest level in 5 quarters, the cost structure is going to be adequate to withstand that volatility. And again, the core focus of this business at this stage is not on producing more ounces, it's on producing more profitable ounces.

Going on to Slide 10. If people can recall at the last earnings call, I said that the recycling business and met complex was going to get significant attention this year.

It’s had that attention. We have made some significant progress in growing the recycling business.

We're also transitioning how we run that business. Historically, it's been all about short-term contracts.

We're moving that, where we can, to long-term supply agreements, either on fixed volumes or, where the supplier can't give us a fixed guarantee, on an exclusivity basis. We signed 2 fairly large recycling contracts during the first quarter.

Deliveries of those -- that material started early in the second quarter. So recycling material received to date for the first month of the quarter has averaged 26.5 tons per day compared to 16.7 tons per day average for the first quarter.

This is a fairly substantial increase. We have seen in the marketplace a fairly large shift from purchasing material to tolling material.

We expect that trend to continue during the course of this year. That does benefit our working capital.

Effectively, the difference is that -- where we purchase material we have an amount of working capital tied up from when we buy the material to when we then get paid at the outturn of the metal. When we toll the material, we do not buy it.

We charge a service for effectively turning the recycled material back into metal. And as a consequence, we don't have any working capital tied up in the tolling material.

Just because we've had some success in this area does not mean that we're sitting back and resting now. We do have significant excess capacity in that facility still.

We are working very closely with several additional potential new customers, and our goal is to continue to keep growing this business. We do note that market conditions for this type of material do remain subdued, but we have grown our market share fairly successfully, I think, and we do want to continue to grow that business to utilize our asset base more fully.

Again, at the last call, we talked about depressed scrap steel prices were depressing the volume in the overall market. Depressed or lower PGM markets were leading to some hoarding.

I think what we've seen in the last few weeks is that some of that material that had been hoarded is definitely coming back on to the marketplace now, and our goal is to continue to not only keep our own market share, but we do want to grow market share in that business. On to our Montana development projects on Slide 11.

Graham Creek, as you would recall, is an 8,800-foot development to the west of the East Boulder Mine. The infrastructure there is complete.

Production began in 2014, added in the order of 2,000 ounces a month of production there. And Q4 of '14 was the last full -- the first full quarter of that.

That has gone very well. It really has underpinned a very good performance out of the East Boulder Mine, particularly over the last 8 months.

And as a consequence, we've accelerated the development and drill-out of the next ramping system at the East Boulder west end in the Graham Creek project. Blitz is our key development project.

As you'll recall, it's a circa 23,000-foot development. It's got the tunnel-boring machine drive and then a conventional drive above that.

I will say that we've had quite some difficult ground in the TBM drive, and progress has been certainly slower than we budgeted for. We have added extra crews on to that.

We appear to be getting through the worst of that ground now. Offsetting that has been the conventional drive above that has had a fairly substantial jump in advance rates over the last 12 months.

It has not only caught up but is now sort of accelerating past the TBM. We expect, once the TBM gets through the bad ground, with the 3 crews we plan to run on that, that it will then outpace the conventional drive again.

Drill-out from underground is a key aspect of this project. We have commenced the drill-out from the 56 incline.

This allows us to drill that out and, subject to the results, to potentially add on some reserves there. And we're pushing on with that as fast as we possibly can.

It's probably about a quarter ahead of where we initially planned it a year ago. And finally, on the Blitz project, the other key component of that is permitting of the Benbow portal at the other end.

We do anticipate the permit by the end of the year. We are looking to -- subject to getting that permit, we are looking to commence surface construction there by year end.

Moving on to Slide 12, our guidance. We have not changed our guidance for the year at this stage.

And again, I think it -- where we've landed for the first quarter puts us in the middle to the lower end of all of those or the better end all of those guidance numbers. We will continue to look at our guidance.

And as when things come to light during the course of the year, we may reevaluate it. But we feel that at this stage, our guidance is appropriate.

Slide 13, if we just have a quick talk about corporate governance. We held our annual shareholder meeting on the 4th of May.

I would like to note that we had a very favorable proxy results. All 7 board members, 6 of them were independent, had an average For vote of 97.3%.

Executive compensation, which I know was a hot button topic for shareholders a couple of years ago, we have changed that significantly. The executive compensation is very closely aligned with stakeholder outcomes.

And that advisory vote on executive compensation came in at a 95.6% of votes cast in favor. That is up from an increase -- or that's an increase from the 93.3% we saw last year, and it's a fairly significant increase over the result in 2013.

So in summary, I think we've had a fairly strong start to the year. Mined production is at the high end of the guidance range.

We have had some significant progress in the recycling business, both in terms of volume and in terms of those 2 new, long-term agreements. We've got continued efforts to improve liquidity by growing the cash balance.

And again, I'll point out that having small amounts of debt and large amounts of cash is always good thing in a mining company. It was a fairly good all-in sustaining cost per mined ounce.

It was near the midpoint of the guidance range. Our G&A costs did come in at the low end of the guidance range.

Overall, solid first quarter results, and our guidance for the year has remained unchanged. Again, I will note that the continued volatility in the PGM markets and the PGM prices requires unrelenting scrutiny on our costs and efforts to improve operating efficiencies.

With that, I'd like to open it up to any questions that anybody may have.

Okay, great. My -- I just had a couple questions related to -- actually to Slide 7.

As we look at the cost breakdown here, I had 2 questions. First, at the Stillwater Mine, tons milled went down a decent amount, and I understand there's definitely been some changes here.

How should we be thinking about tons milled at the Stillwater Mine as we progress through '14 and into -- I'm sorry, as we progress through '15 and into -- and then in '16? That's my first question.

Well, Dave, thanks for the question. And I think yes, the tons milled did go down from Q4 to Q1.

But if you look at sort of Q3 and Q2 of last year, you can see that tons milled is still up relative to where we were in those quarters. We did say that Q4 of '14 really was an outstanding quarter.

And whilst I would like to better each quarter quarter-on-quarter, it really was a very big jump from the prior quarters. So I think, again, we don't give specific guidance in terms of tons.

It's just contained within our overall guidance. But I would like to say that we might get back closer to the sort of Q4 numbers over the next 12 months.

Okay. All right, that's helpful.

And then on the East Boulder Mine, mining costs versus tons milled. I'm just wondering, again, sequentially, we had a $19 per ton increase in mining costs and yet tons milled went up a little bit.

I'm wondering, what changed quarter-over-quarter for the increase in mining costs? And how should we be thinking about that number specifically moving forward?

Sure. Well, we had -- if you do recall, Dave, we had the last of the pay rises under the old union contract come into effect on the -- at the start of the year for East Boulder.

So that was a 4% cost across the early workforce that we had to wear. And I think it's fair to say that there was a few one-off items in Q1 at East Boulder, maintenance items, some of which sort of had been scheduled for late last year and fell into -- yes, fell into Q1 of this year.

And I think that we'd like to see those costs come back down, but again we had a couple of one-off costs there.

Okay, great. And then just on the recycling business, a quick question, obviously the switchover a little bit more to the tolling side.

And if I remember correctly, the -- previously, the mines were effectively hedged, right, when they came in the door. I'm wondering, is there a way to frame any change in the terms typically from tolling versus just buying and processing?

No, not really. And just for clarity, the -- when you buy the material, it's actually hedged at the time we buy it, not when it comes in the door.

But yes, you're right, there is a difference there. Not overly.

I think that the margin on tolled material was we -- bearish on custom, and the custom was slightly lower on tolled than it is on purchased material. But again, that's offset by the fact that we have no working capital.

So if you look at the working capital numbers, you would have seen a decrease in working capital gradually over the last 12 months as the market has moved more to a tolling. And I think our strategy has been that we're somewhat agnostic as to whether we make money from buying it as a principal or whether we toll it.

We're more interested in making sure that we actually get the material through the door. One thing that you should note, obviously, is that when you look at our top line revenue as we move away from purchasing to tolling, you do see a reduction in our top line revenue because obviously, we're not buying the material.

The net economic effect to us is pretty much the same whether we buy it or toll it.

Mick, Chris and Mike, everyone there, congratulations on a very strong quarter, I thought. And I think the market likes it, too.

Got a couple of questions, I think, as the last speaker was saying, just on costs. Is the increase of Q-on-Q anything to do with weather?

Obviously, we saw a pretty brutal winter. And if so, is that going to be something that going forward, maybe Q1 might be a touch higher than the other quarters?

Well, actually, as it turns out, the winter in Montana this year has been quite mild unlike for everybody back East. So now it's more -- we do see some seasonality.

It's probably more to do with the timing of spend and things just sort of falling into Q1 that maybe were budgeted in Q4 but just couldn't be spent -- physically couldn't be spent fast enough and then the costs end up turning up in Q1. I think that's probably more to do with the seasonality rather than the winter -- this winter.

Last winter, definitely we had a much more severe winter. And we do also have some things like some annual refresher, annual training, things that do fall into Q1, which will be a few dollars an ounce that would push that up.

I can say just on our all-in sustaining costs, and again it's sort of a number that we've been going through our spares inventory, which is not a small number. And as we find obsolete material, we are writing that off.

That does get charged to our all-in sustaining costs. Off the top of my head, it's not an exact number, but that was probably in the order of $3 to $4 an ounce of obsolete inventory that we've paid for, meaning, in some cases, 5 years ago, which we wrote off in this quarter, which did come into our all-in sustaining costs.

Okay. And then just this one on G&A.

I mean, obviously, it's trending down. But how much more is there to squeeze out of that?

And can you sort of see -- you're heading towards the bottom into your range in terms of Q1. But for -- is that something you guys are trying to do even more?

Andrew, I think you should know me well enough to -- by now that there is no area of this business that is not getting cost attention. But clearly, if you've already halved your G&A, well, in the last 2 years since I came on as a director, you get to the point of diminishing returns.

But yes, for sure, there's no area. For example, our insurance cover, we managed to reduce that by $1.5 million last year.

We've reduced it by around about another $0.5 million this year. We've not reduced the cover -- the level of cover at all.

In fact, we've increased substantially the insured values. We've taken out some extra cover that we previously didn't have.

But we've worked very, very hard. There is no area of this business that is not getting the cost attention: every single supplier, every area of the business.

But so far, the cuts have been, by far and away, the heaviest in corporate and SG&A. So again, we're sort of -- we're getting to the bottom of where we might potentially get more out of it.

We won't give up.

No, good. And the last one is on cash.

I mean, obviously, you guys are generating free cash flow. And even at these prices, I think we see higher prices.

It's going to accelerate a fair bit. Looking, I suppose, a longer-term view in strategy even -- maybe even to the second half, have -- what -- how do you look at sort of paying back some of that debt that I know that is on your mind given the interest rate.

And how adverse is sort of even paying a dividend?

Well, I think, Andrew, it's probably a little bit premature at this stage to sort of indicate how we might use our cash. I think -- you're right, I do not like debt.

And if we could get rid of that debt at a reasonable cost, I think that would be fairly high on our list of things to do. We just need to sit back.

Whenever we deploy capital -- and again, I'm very firm with my team here, is that -- and the board is very firm with me. Whenever we deploy capital, we must look at how we get a reasonable risk-adjusted return to shareholders on that capital.

And so again, if paying off debt, the $30 million of Montana State bonds we paid of last year was costing us 8%, we can redeem that at face value, that was a risk-adjusted return that was very good for us. We just have to look at that.

I think at some point, we would like to do something for shareholders. The view back from shareholders at this point seems to be we obviously -- we want to make sure we're in a position where we're just generating free cash flow quarter in, quarter out on a sustainable basis.

Interestingly, some shareholders have sort of indicated that they -- if we can see other things to do with that cash that gives a better return, then we should look at that. I don't think we've formed a firm view one way or the other at this point.

We obviously have a few things ahead of us over the next 3 months here, but we need to -- that we need to make sure is our operations are running really strongly. And at that point, we can sit back and decide what we do.

But I think the other thing we need to look at whenever you look at what to do with your cash is what's happening in your price basket. And we just want to make sure that we're bulletproof under all circumstances.

I was just wondering with the drilling at Blitz, when are you likely to start reporting that? Would it be before the end of the year?

Well, I think we won't be reporting drill hole by drill hole. But I think our goal at this stage -- and again, it's all subject to the drilling out, how it progresses.

So far, it's going well but obviously subject to results. Our goal is to try and get that drilling incorporated into our 2015 reserve update, which we would be publishing towards the end of February of '16.

I think that's the earliest we would really have anything that we could put out there. And again, it's completely subject to results.

We can't say what those results would be at this stage. But assuming that we come up with something reasonable, our goal is to incorporate it into that '15 reserve update.

Okay, that should be an interesting number. Graham Creek, you -- well, sorry, East Boulder held by Graham Creek, your tonnage is picking up.

But what sort of profile are you expecting in terms of tonnage at East Boulder for the rest of the year?

I think relatively flat from where we are at the moment. There may be some up and down.

But again, we don't see any step changes coming on. The key there is that we needed to drill out that next ramp system, which is about another 2,200 feet of the Graham Creek project.

We're drilling that out now. We drilled probably 2/3 of the drilling, I think.

Results are coming in. We need to get all that incorporated.

We then need to go and physically put the development in. And we do have a little bit of a constraint there on ventilation, so we need to work something out on vent.

So again, we -- for the next 12 months, I don't expect to see a step change at that operation for tonnage. We have got a big focus on grade.

I will note that during the first quarter, we did have a little bit of a drop in grade at one point, and the grade has come back up quite nicely. So that's really the focus there for getting ounces there, is just to make sure we keep the grade as high as we can.

It's been running above reserve grade, and that has driven that and the extra tonnage out of the first ramp system at Graham Creek and really driven the outperformance at East Boulder. And again, I know our cost per ton did go up a little bit at that mine.

I will say that our cost per ounce is still very good at that operation. And from a productivity standpoint, it is running actually very well.

Okay. And when the other ramps come on, will that lead to a step up in tonnage?

Well, again, we'd have to put that into a formal guidance. But yes, subject to the drilling, subject to us sorting out vent, we certainly have excess capacity in the milling circuit.

That's currently running 5 days a week still at the moment. Then that would certainly lead to an increase in production.

But that -- we wouldn't see that for 18 months as a minimum.

Okay. And then finally, the labor contract, any dates that we can look out for, for that?

Or is that just in the next...

Well, it's in progress. It is publicly known that, that contract obviously expires at the end of May, and I can't really comment on anything else regarding the negotiation.

It looks like you recycling volumes were down a bit in Q1. Is there anything we should read into that?

Why was that?

We did have a bit of a change of material, the mix of materials. So on a ton per day basis, we were down.

But on an ounce basis, we were up. It was a bit higher-grade material.

And that's just reflective of the type of material we had. As I said, we've had a near-on 50% increase from the run rate in the March quarter to April deliveries.

So again, we had a couple of big contracts we've been working on for quite a while. They sort of got signed and deliveries started literally in the first couple of days of April.

So we have seen a significant jump in just tons per day and ounces going through that facility now.

Okay. And then just a question on costs.

You've achieved a lot in the past year or so in bringing the company's costs down. What are some of the other levers that you can pull on the cost side to bringing costs down to low $700 per ounce on a quarter in, quarter out basis?

Well, I touched briefly on the productivity at East Boulder. And clearly, productivity gains are the big thing for us here.

We need to get our infrastructure in place at the Stillwater Mine such that we can be as productive as we can be. We are spending capital there to try and get it set up more like the East Boulder Mine where we can use gravity and we can use rail.

But that really is the key thing for us, is given that labor is such a large component of our cost base, getting productivity gains is clearly the key for us. On top of that, we're doing everything.

As I said earlier, every single supplier, we are having that conversation with them about cost reductions and both in absolute basis in terms of their rates and also how do we -- just how do we do things better. So our explosives supplier, we're working with them to see if we can use less material.

Our electricity contract at the Stillwater Mine and Columbus, we've renegotiated that. And from June onwards, we've negotiated about a $1.7 million a year saving.

So there are many things that we need to do through the business, and there is no stone being left unturned. The single biggest thing we can do is productivity gains.

That will outweigh all of the other wins or losses that we have throughout the business, is productivity gains.

Thank you, everyone, for dialing in. I appreciate the questions, and we look forward to talking to you after the next earnings release.

Thank you very much.