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

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

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

has issued $345 millionconvertible notes due 2032.

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

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

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

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

At the same time, we assigned our 'B' issue-level rating (the same as thecorporate credit rating) to the company's $300 million convertible notes due2032. The recovery rating on the notes is '3', indicating our expectation formeaningful (50% to 70%) recovery in the event of payment default. We alsolowered the rating on Stillwater's existing $166.5 million convertible notesto '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 principalthat may come due under its existing convertible notes, which can be put tothe 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 debtbalances (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 linewith the current rating, with debt-to-EBITDA of between 5x and 5.5x byyear-end 2012 and funds from operations (FFO)-to-debt of around 15%. Assumingholders of the company's existing $166.5 million convertible notes exercise anoption to put the notes back to the company, which they are eligible to do inMarch 2013, we expect leverage will decline to between 3x and 4x and forFFO-to-debt to rise above 20%.

Under our base-case scenario, we expect the company's 2012 production ofplatinum group metals (PGM) to decline to about 500,000 ounces from about515,000 ounces in 2011 because of changes in mining conditions, the allocationof manpower, and associated differences in mining productivities. We expect2013 production to remain in the range of 500,000 to 515,000 ounces. As aresult of lower PGM prices and higher costs, we expect 2012 EBITDA ofapproximately $100 million, a significant decline from 2011's $220 million.Even if EBITDA remains around the same range in 2013, we expect leverage toimprove to between 3x and 4x, from between 5x and 5.5x in 2012, because weexpect investors will put the company's existing $166.5 million convertiblenotes back to the company. We consider these leverage ratios to be in linewith the current rating.

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

The rating also reflects our assessment that the company's mine developmentprojects will require significant capital spending in the next two to threeyears. We expect that this will result in negative free cash flow andincreased balance-sheet debt during this period. Our financial risk assessmentincorporates the aggressive capital spending plan that Stillwater has in thenear 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 orebody and the company's difficulty in mining ores compared with its competitorsthat 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 cashcosts to increase to $500 per ounce by the end of 2012 from $420 per ounce in2011. The increase in cash costs is primarily attributable to added labor inthe miner training program, higher contractual wage and benefit rates, generalinflation in supply costs, and lower mine production.

Liquidity

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

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

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

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

Pro forma for the transaction, we expect between $400 million and $500 millionof cash on the balance sheet by year end. We expect the company to useproceeds from the transaction to repay its existing $166.5 million convertiblenotes, which investors can put back to the company in March 2013. We alsoexpect the company to have around $70 million of availability on its $125million ABL. Availability under the ABL facility is subject to a borrowingbase of eligible receivables and inventory, and the facilities contain minimumfixed-charge covenants based on availability thresholds. Based on our currentassumptions, we expect the company to maintain adequate liquidity and nottrigger the fixed-charge covenants.

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

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

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

Outlook

The stable outlook reflects our expectation that Stillwater's credit metricswill remain in line with the 'B' corporate credit rating, in spite of higherdebt and lower PGM prices. We expect the company's debt leverage to improve tobetween 3x and 4x in 2013 from a range of 5x to 5.5x in 2012 because we expectthe company to repay its $166.5 million in existing convertible notes in March2013, when investors can put the notes back to the company. The rating is alsosupported by the company's liquidity, which we deem to be adequate.

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

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

Related Criteria And Research

-- Issuer Ranking: U.S. Metals And Mining Companies, Strongest ToWeakest, 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 MiningIndustry, June 23, 2009

-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008Ratings ListRating AffirmedStillwater Mining Co.Corporate Credit Rating B/Stable/--Rating LoweredTo FromStillwater Mining Co.Senior UnsecuredLocal Currency B B+Recovery Rating 3 2New RatingStillwater 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 onthe Global Credit Portal at

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

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