Wing: Stillwater’s Purchase Of Peregrine Metals: A Move Into Copper, Gold

September 05, 2011

Mining acquisition targets Argentina’s copper-rich Altar property.

In July, Stillwater Mining Co. (SWC) announced a $450 million deal to acquire Peregrine Metals (PTTDF.PK) of Vancouver, British Columbia. For the Billings, Mt.-based miner of platinum and palladium, the purchase represents a bold diversification move into copper and gold. Stillwater Chief Financial Officer Greg Wing recently took time to speak with HAI Managing Editor Drew Voros about the deal and strategy behind the company.

Hard Assets Investor: Why did Stillwater buy Peregrine Metals?

Greg Wing: There are several reasons. We have been concerned about the fact that we are not particularly diversified; that is, we specialize in platinum and palladium. And those are wonderful products to specialize in, but they’re also somewhat cyclical. And if you look back over the last decade or so, there have been about three occasions where the price of palladium, in particular, has cratered.

We were fortunate in each of those circumstances that we had contracts in place that had minimum selling prices. We were able to realize more than the market price for a period of time when the market turned down. Unfortunately, those contracts have expired. And in the current market, they're not replaceable. We need a little bit of diversity in the company to be able to weather those kinds of downturns. Despite that attitude, we remain very strong believers in platinum and palladium. We think that the dynamics of those markets are very exciting.

We have also been closely watching various companies in the mining industry. And while our first focus would be on platinum and palladium, we also would look at other opportunities. Another reason for buying Peregrine is that we believe Altar is a very unique opportunity. They don’t come along very often for sale. It is a large copper porphyry in the Andes. It is at a stage where we can still afford it. It’s early, but we believe that the potential of the property is much, much greater than what has been defined already.

HAI: Altar is the Argentine copper mine that Peregrine owned, correct?

Wing: It’s not a mine, it’s a property. We believe that the opportunity to expand the amount of copper there, through additional exploration, is very significant. There is also gold along with the copper. And there is separate gold discovery on the tract of property as well that’s over and above what may come with the copper. We saw the acquisition as an opportunity to get in fairly early and add value as we finish defining it. The exploration folks who own the property, at this point, obviously are getting a nice premium. But we believe the premium is well worth what the potential is on the property, over the long term.

HAI: Would are the capital expenditures to mine that property?

Wing: First of all, the acquisition cost is $450 million. Then, on top of that, it would be somewhere between $2 billion and $2.5 billion to develop it. We’re still probably five years from the time when that financing would be necessary. Our thought is that we should go ahead and define what’s on the property. It’ll cost us about $25 million a year of exploration for the next three years or so to finish defining what’s there. Then we will do a feasibility study and then the full value of the property should be evident. At that point, we believe we could potentially bring in a partner or other forms of financing to be able to cover it.

Because we’re at the moment primarily platinum and palladium, that also gives us an opportunity to decide how much exposure we want to the copper or if we want to bring in partners that would perhaps take some of the copper in return for a portion of the project.

HAI: Is this acquisition a bigger move into copper than gold?

Wing: Yes. At this point, it has more copper than gold. The gold would be more or less byproduct gold, at this point. It might be treated as a coproduct, but there’s a lot less gold than there is copper in the main discovery.

HAI: Could this acquisition be interpreted as a bullish bet on commodities?

Wing: Yes. Having said that, we feel — at today’s prices for copper and gold — that the price we’re paying is more than justified. Our analysis, working with the banks, is that the net asset value of the property is about $1.5 billion. So we’re paying maybe 30 percent of that.

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