Is Stillwater Mining Company (NYSE:SWC) A Smart Takeover?

Back in September, I wrote that the Stillwater Mining’s stock price was under pressure amid a weakening Platinum. The metal’s price action signaled that another drop below $1000 was in the cards. Indeed the metal price has lost “one digit” sinking to a low of $890 last month from the $1030 level when I wrote the post.

Stillwater Mining Company (NYSE:SWC) followed the metal’s drop and fell from $12.43 to $11.19 last October, but then it started to rocket higher and hit the 2-year maximum at the $17.50 level last December despite the new low in the platinum price. The clear answer to this contradiction in the metal and stock price behavior came on the 9th of December, 2016. That day, “The Last Mohican” of pure American platinum-group metals (PGM) producers announced that it would be acquired by a South African company for $2.2 billion in a deal that requires U.S. government approval. The purchase price was set at $18 per share and this explains the robust growth of the stock price on the market.

Call it a divine providence, but I was surprised how the title for the Stillwater’s price chart given last September came true. It was said: “Stillwater Mining Company Monthly Chart: Death or Rebirth?” I am puzzled now, which one to choose – Death or Rebirth as both are suitable. Let’s start with the “Death” – yes the takeover means that the company could lose its brand name (and the US flag) for a buyer. And “Rebirth” is also a good title as the company will continue to do what it did with fresh energy, which is coming from the buying company.

To answer the question put in the title of this post, let’s first check some fundamentals of the SWC.

The first thing to look at is a debt figure as mining activities require huge investments and quite often companies have a big debt burden, sometimes inadequate. Stillwater Mining Company has a sound Cash-To-Debt ratio at 1.63, which is almost at a 10-year high level. The Total-Debt-To-Equity ratio stands at a low 0.29 level and it is stable as a Long-Term-Debt-To-Equity has the same reading.

The P/E (Price-To-Earnings) ratio stands at a very high level at the 243 (the less the better) compared to industry median, at the 18.7. But the Forward P/E looks much, much better at the 23, which means that the analysts expect a strong earnings growth this year and it makes the stock price more attractive for the future perspective. Price-To-Book value is at the 2.26, which is around the industry median at the 1.97.

The profitability figures show the bright picture overall. Operating margin is at 2.02% vs. industry median at 0.59%. Return-On-Equity (ROE) is at the modest 0.87%, but very good compared to the industry average of minus 11.26%. The company indeed makes money for its owners despite industry depression. Return-On-Assets (ROA) is at the positive 0.61% as the industry median stands at negative 9.42%. The recent earnings figure beats 5 times analysts’ estimates at $0.10 per share vs. $0.02 expected at the end of October for the 3Q 2016.

The company has a diversified metals’ deposit portfolio. In addition to PGM group of metals the company also has good deposits of copper and gold (both of the metals broke the downtrend last year). Also the company has a smelter, refinery and catalyst recycling divisions, which adds to the diversity of the business model. To finish the portrait of the company I would like to add a technical chart of platinum below to show you what to my mind could attract the buyer.

Chart 1. Platinum Monthly: More Down And Then Big Up

Chart courtesy of tradingview.com

Last September’s chart focused on the current consolidation phase on the market, highlighted in red, which takes already the 9th year of the time spent. I didn’t reconstruct the old labels as I want to focus here on the long term perspective to show you what could make the SWC purchase to be so attractive.

The left blue arrow highlights the strong uptrend from 1998 to 2008, which increased the price of platinum almost seven folds from $334 to $2300. Then the market started to consolidate and the price dropped dramatically during the first leg of correction. The metal lost almost 70% of its value just in one year. Then there was a period of a strong bounce off the price to the $1900 level.

Now we are at the end of a consolidation period and the price could make another drop from the current levels to hit the previous bottom at the $752.5 mark within the red downtrend. After that I expect the metal to resume its upside move as highlighted in the right blue arrow, which aims at the conservative target at the $2300 mark, where the previous top is located and even could surpass it.

That move would triple the price at least and bring the nice profit to the owner of platinum or platinum deposits in case of the Stillwater Mining Company (NYSE:SWC) buyer in the long run. I think that the synergy of the strong fundamentals listed above and the bright perspective of the metal’s price attracted the acquirer.

I highly appreciate if you leave a comment with your reasoning below the post.

Intelligent trades!

Aibek Burabayev
INO.com Contributor, Metals

Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.