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TEXT-S&P rates Stillwater Mining notes 'B'

Friday, 12 Oct 2012 | 4:48 PM ET

(The following statement was released by the rating agency) Overview

-- U.S.-based Stillwater Mining Co.

has issued $345 million convertible notes due 2032.

-- We are affirming our 'B' corporate credit rating on Stillwater. We are assigning a 'B' issue rating and '3' recovery rating to the notes.

-- At the same time, we are lowering the rating on Stillwater's existing convertible notes to 'B' and are revising the recovery rating on the notes to '3'.

-- The stable outlook reflects our view that Stillwater's credit metrics will remain in line with the 'B' corporate credit rating, in spite of higher debt and lower platinum group metals prices.

Rating Action On Oct. 12, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate credit rating on Billings, Mont.-based mining operator Stillwater Mining Co. The outlook is stable.

At the same time, we assigned our 'B' issue-level rating (the same as the corporate credit rating) to the company's $300 million convertible notes due 2032. The recovery rating on the notes is '3', indicating our expectation for meaningful (50% to 70%) recovery in the event of payment default. We also lowered the rating on Stillwater's existing $166.5 million convertible notes to 'B' from 'B+' and revised the recovery rating on the notes to '3' from '2'.

We expect the company to use the proceeds from the issuance to repay principal that may come due under its existing convertible notes, which can be put to the company in March 2013, as well as for general corporate purposes.

Rationale

The rating affirmation follows Stillwater's announcement that it has issued $300 million new convertible notes due 2032. Despite higher pro forma debt balances (book debt will increase to about $500 million by year-end 2012 from $200 million at year-end 2011), we believe credit metrics will remain in line with the current rating, with debt-to-EBITDA of between 5x and 5.5x by year-end 2012 and funds from operations (FFO)-to-debt of around 15%. Assuming holders of the company's existing $166.5 million convertible notes exercise an option to put the notes back to the company, which they are eligible to do in March 2013, we expect leverage will decline to between 3x and 4x and for FFO-to-debt to rise above 20%.

Under our base-case scenario, we expect the company's 2012 production of platinum group metals (PGM) to decline to about 500,000 ounces from about 515,000 ounces in 2011 because of changes in mining conditions, the allocation of manpower, and associated differences in mining productivities. We expect 2013 production to remain in the range of 500,000 to 515,000 ounces. As a result of lower PGM prices and higher costs, we expect 2012 EBITDA of approximately $100 million, a significant decline from 2011's $220 million. Even if EBITDA remains around the same range in 2013, we expect leverage to improve to between 3x and 4x, from between 5x and 5.5x in 2012, because we expect investors will put the company's existing $166.5 million convertible notes back to the company. We consider these leverage ratios to be in line with the current rating.

The ratings on Stillwater reflect Standard & Poor's assessment of the company's business risk profile as "vulnerable" and financial risk profile as "aggressive." Stillwater is a small producer of palladium and platinum and recycles PGMs from auto catalysts. Our view of the company's profiles stems from Stillwater's very limited operating diversity, high cost profile, and exposure to volatile metals prices.

The rating also reflects our assessment that the company's mine development projects will require significant capital spending in the next two to three years. We expect that this will result in negative free cash flow and increased balance-sheet debt during this period. Our financial risk assessment incorporates the aggressive capital spending plan that Stillwater has in the near to intermediate term.

In addition, although Stillwater has made efforts to lower costs, in our view, they remain relatively high overall. This is due to the geology of the ore body and the company's difficulty in mining ores compared with its competitors that produce PGMs in higher quantities and as a byproduct of other metals. Because of increased development activities, lower overall mine production, and the effect on royalties and taxes of higher PGM prices, we expect cash costs to increase to $500 per ounce by the end of 2012 from $420 per ounce in 2011. The increase in cash costs is primarily attributable to added labor in the miner training program, higher contractual wage and benefit rates, general inflation in supply costs, and lower mine production.

Liquidity

We view Stillwater's liquidity as "adequate" based on the following expectations:

-- Liquidity sources (including cash and availability under its $125 million asset-based lending {ABL} revolving credit facility) will exceed uses by at least 1.2x over the next year;

-- Liquidity sources will continue to exceed uses, even if EBITDA were to decline by 15%; and

-- The company would continue to exceed the availability threshold under its credit facility, even if EBITDA drops 15%.

Pro forma for the transaction, we expect between $400 million and $500 million of cash on the balance sheet by year end. We expect the company to use proceeds from the transaction to repay its existing $166.5 million convertible notes, which investors can put back to the company in March 2013. We also expect the company to have around $70 million of availability on its $125 million ABL. Availability under the ABL facility is subject to a borrowing base of eligible receivables and inventory, and the facilities contain minimum fixed-charge covenants based on availability thresholds. Based on our current assumptions, we expect the company to maintain adequate liquidity and not trigger the fixed-charge covenants.

We expect free operating cash flow to be negative in 2012 and 2013 due to higher capital expenditures of between $150 million and $200 million for mine development projects. We do not anticipate that Stillwater will pay a dividend on its common stock in the foreseeable future.

Stillwater's nearest maturity is March 2013, when its existing $166.5 million convertible notes become putable.

Recovery analysis The rating on Stillwater's $345 million convertible notes and existing $166 million convertible notes is 'B', the same as the corporate credit rating, and the recovery rating is '3', indicating our expectation for a meaningful (50% to 70%) recovery in the event of payment default. For the complete recovery analysis, please see the recover report on Stillwater, to be published on RatingsDirect shortly following the release of this report.

Outlook

The stable outlook reflects our expectation that Stillwater's credit metrics will remain in line with the 'B' corporate credit rating, in spite of higher debt and lower PGM prices. We expect the company's debt leverage to improve to between 3x and 4x in 2013 from a range of 5x to 5.5x in 2012 because we expect the company to repay its $166.5 million in existing convertible notes in March 2013, when investors can put the notes back to the company. The rating is also supported by the company's liquidity, which we deem to be adequate.

We could take a negative rating action if PGM prices decline significantly from current levels, further weakening profitability and eroding the company's liquidity. This could occur if industry fundamentals change and demand lessens because of lower automobile production rates or if supply increases because of higher production. Stillwater might not be able to recoup its cash costs if platinum prices fall to less than $1,000 per ounce within the next several quarters. In addition, we would consider a negative rating action if the company uses proceeds from the transaction to fund its capital expansion projects, rather than pay down debt.

An upgrade seems less likely in the near term given our view of the company's vulnerable business risk profile. In addition, we believe the company could increase debt significantly to fund its existing mine development projects.

Related Criteria And Research

-- Issuer Ranking: U.S. Metals And Mining Companies, Strongest To Weakest, Oct. 2, 2012

-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012

-- Key Credit Factors: Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Rating Affirmed Stillwater Mining Co. Corporate Credit Rating B/Stable/-- Rating Lowered To From Stillwater Mining Co. Senior Unsecured Local Currency B B+ Recovery Rating 3 2 New Rating Stillwater Mining Co. Senior Unsecured

US$345 mil 1.75% conv nts due 2032 B

Recovery Rating 3

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at

. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))

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