Clinton Group, Inc. Calls for Changes at Stillwater Mining Co.
NEW YORK, Dec. 20, 2012
NEW YORK, Dec. 20, 2012 /PRNewswire/ --Clinton Group, Inc. ("Clinton")
announced today that it has sent a letter to the board of directors of
Stillwater Mining Company (NYSE: SWC) demanding changes to the strategy,
operations and management of the Company. Clinton Group owns a significant
stake in the Company.
The letter critiques the current management team and Board for a series of
strategic missteps and bad acquisitions; operating with a bloated cost
structure and marketing budget; and for issuing a high cost-of-capital
convertible bond in October. The letter goes on to demand the Board take seven
steps to improve the cash flow and operations of the business.
The letter also expresses the Clinton Group's view that the Company is
undervalued and that taking the steps outlined in the letter can help
stockholders realize fair value for the stock. The Clinton Group's valuation
analysis concludes that fair value is approximately $21-23 per share.
The complete text of the letter sent by Clinton Group to the board of
directors of Stillwater Mining is attached.
About Clinton Group, Inc.
Clinton Group, Inc. is a Registered Investment Advisor based inNew York City.
The firm has been investing in global markets since its inception in 1991 with
expertise that spans a wide range of investment styles and asset classes.
[Clinton Group Letterhead]
Board of Directors
Stillwater Mining Company
1321 Discovery Drive
Billings, MT 59012
RE: Maximizing Shareholder Value
Lady and Gentlemen:
I write on behalf of Clinton Group, Inc., which is the investment advisor to
various partnerships and investment vehicles (collectively "Clinton Group")
that own a significant stake in the Stillwater Mining Company ("Stillwater" or
Clinton Group is an enthusiastic owner of Stillwater stock and believes the
Company has assets and a market position that entitles it to generate
significant free cash flow going forward. The Company is the best positioned
Platinum Group Metals ("PGM") producer, with significant in-situ value and a
low cost of production, coupled with the most stable political and labor
dynamics of any of the major producers. With strong growth likely in key end
markets, especially in the auto market as the penetration of cars deepens in
emerging markets, we are bullish on palladium and the future of Stillwater.
But despite these solid fundamentals, the stock has performed poorly in the
last couple of years and is significantly undervalued today. The stock is down
45% in the two years ended November 30, 2012, and trades at a substantial
discount to the peers on the most relevant metrics. Even at these low stock
prices, half of the covering analysts have a neutral or sell recommendation
and 14% of the float is sold short.
We believe we know why.
Despite a great foundation for strong cash flow and growth in its core
operation, the Company has engaged in two value-destructive acquisitions in
pursuit of a questionable strategy, spent imprudently on "marketing" and other
administrative matters, and executed an unnecessarily costly and dilutive
financing transaction. These unforced errors have eroded shareholder
confidence in the judgment of management and the Board and left the Company
with a muddled strategy and motley collection of assets.
First, the Board and management team decided to diversify away from the
Company's historical roots, expanding into copper, gold, Canada and Argentina
and away from PGMs and the United States. Mr. McAllister acknowledged in our
recent meeting that this change in strategy was intended to provide "an
underpinning for the palladium play," and suggested that palladium's price
volatility necessitated a more stable asset and operational base. We could not
disagree more. Shareholders in Stillwater have historically sought its
exposure to PGMs mined in the United States, the most stable of geopolitical
environments. We cannot understand how the Board or management team could have
thought this radical shift in strategy – transforming the only US-based,
pure-play PGM company into a "diversified" mining company would benefit its
shareholders. As we explained to Mr. McAllister, any shareholder seeking
diversity could create that diversity in his own portfolio, in a degree and of
a character that best suited that particular shareholder.
Worse, of course, was the execution of this ill-founded strategy. It is clear
now that the Company bought Marathon in Canada without sufficient diligence
and could not have properly understood its value. The problems with the
Peregrine acquisition were manifestly worse: the Board and management team
authorized the use of precious shareholder money to purchase a speculative
copper mine that requires billions the Company does not have to fully develop,
in an unstable country, at a premium of 290% to its value in the public
markets and at more than 100 times Peregrine's cost basis in its assets.
These acquisitions are, as one analyst put it to us, "real head-scratchers,"
to say nothing of the fact that the acquisitions – supposedly, according to
Mr. McAllister, the best ones available to the Company after it had reviewed
more than 60 possible deals – do not match the supposed strategic rationale of
providing a stable "underpinning" for the Company's PGM assets. How the Board
could have thought that a Canadian development project or a speculative
Argentinian copper project would provide such an "underpinning" is beyond
The two acquisitions did, as the Third Quarter 10-Q noted, provide "some
additional geographic and product diversity." We are hard pressed to imagine
that Stillwater shareholders were desirous of exposure to undeveloped Andean
land, Argentinian monetary and natural resource policy or, for that matter, to
copper prices. And, any such shareholder could have simply bought Peregrine
stock in the public market, and done so for one-third the price that
These acquisitions have succeeded in distracting management, siphoning cash
away from the core PGM business, sowing seeds of doubt in shareholders' minds
about the judgment of the Board and destroying shareholder capital.
Stillwater's stock has been cut in half and hundreds of millions have been
Certainly, if the Board was hoping that these acquisitions would cause the
Company's stock price to de-couple from the price of PGMs, the acquisitions
have been an abject failure. The Company's stock price still trades in line
with the prices of its basket of metals – just with a lower coefficient. In
the seventeen months prior to the acquisition of Peregrine, the Company's
stock typically traded at approximately 2.0% of the basket price. In the
seventeen months since the acquisition, the Company's stock has traded at
closer to 1.3% of the basket price. In both periods, the correlation between
the basket price and the stock price has been above 90%.* In short, the
Peregrine acquisition did not serve to decouple the stock from PGM price
volatility, it just destroyed shareholder value.
As you can imagine, we are not comforted to read in the Company's most recent
quarterly report that management continues to look "around the world" for
"opportunities to establish a broader operating base." In light of your track
record on acquisitions, we urge you to put our checkbook down. Indeed, the
best way to create value for shareholders would be to reverse the acquisition
of Peregrine entirely by selling it, at almost any price, to a speculator more
suited for this sort of development project. Such a move would bring PGM
investors – who would no longer need to fear the distraction, dilution and
diversity the Argentinian project entails – back into the stock.
Second, the expense base of the Company has grown substantially and is
draining cash flow away from shareholders. In the first decade of this
century, the Company operated with SG&A expenses that on average were less
than half the 2011 and 2012 annual expense base and the Company managed to
produce, on average, 10% more ounces of metal.
Moreover, although the Company supplies just 4% of the world's palladium, it
has taken on the burden of marketing the metal by itself through the
inappositely named Palladium Alliance International. We do not believe the
Company's $12 million annual spend – mostly, it appears, on adorning Pamela
Anderson, Kelly Osborne and Angela Kinsey with palladium jewelry – is a good
investment. For those dollars to produce a good return, the price of palladium
must be at least $35 more per ounce than it would be without these "marketing"
We see no evidence of that. If the marketing efforts could affect prices this
much, the suppliers of the other 96% of the world's palladium would seemingly
be willing to shoulder their share of the expenses. So far, it appears, no one
has joined the so-called "Alliance". Moreover, since the Company stepped up
its Alliance-based marketing program in early 2011, the price of palladium has
fallen approximately $80 per ounce. In the two years prior to this heightened
spend, when the Alliance had just one-sixth of its current budget, the price
of palladium increased $600 per ounce.
Taken together with the spending in Argentina and other increased
administrative costs, this marketing spend is indicative of a bloated expense
base that is not tied to shareholder returns. We fear this management team is
more interested in building a global empire and hiring Hollywood celebrities
to wear palladium jewelry to movie premiers than in producing strong and
recurring cash flow for shareholders by knuckling down and mining the core
Third, in October, the Company issued a dilutive and expensive piece of
convertible debt in exchange for proceeds of nearly $400 million. We believe
that the Company could as easily have issued high-yield, non-convertible
bonds, with a significantly lower all-in cost of capital. Instead, the Company
issued bonds that have several unusual features, including conversion price
adjustments for a wide spectrum of future events that turn the senior notes
into a significant participant in the equity upside of the Company. As your
Chief Financial Officer said to us, the notes "can get very expensive if [the
stock] price goes up." We generally think it is a bad idea for a company to
bet against its own stock price.
Moreover, the bonds were priced inefficiently, causing the issue to be
over-subscribed with enthusiastic purchasers by "mid-afternoon on the first
day of marketing," according to the Company's Chief Financial Officer. The
rich deal was a boon for the convertible bond investors who participated –
those bonds traded at 115 on the two-month anniversary of their issuance – and
a concomitant value destroyer for those of us who own Stillwater stock.** This
transaction alone cost equity owners approximately $40 million. Worse yet, we
have the sense from speaking with both Messrs. McAllister and Wing that they
did not and do not fully appreciate the unusual nature of the ratchets, the
dilutive impact of the notes in a sale of the company or the true
cost-of-capital on a financing deal they just completed. How can we have
confidence they will make the right decisions in the future?
We thus are not surprised that the market has afforded Stillwater – a company
with terrific mines in Montana and a unique position in the PGM market – with
a low valuation. The strategic missteps, bloated cost structure and inane
financing program have left investors without the confidence in management and
the Board needed to support a fair stock valuation.
We believe change is needed.
First, it is time for Mr. McAllister to retire and to be replaced by a proven
executive with a commitment to operating the Montana mines efficiently and to
ridding the Company of its prospecting and speculative investments in Canada
and Argentina. Mr. McAllister has had his chance; he has served as Chief
Executive Officer and Chairman for more than a decade. And while the Company
has rewarded him handsomely – with more than $34 million in pay – stockholders
are worse off: the stock is down 65% during his tenure. Just last year, Mr.
McAllister received $5.6 million in compensation while the stock fell 51%.***
The Company needs new leadership and alignment of executive pay with
Second, the Company should cease all but absolutely necessary spending in
Argentina and look to sell the Altar asset as soon as practicable. With the
political and currency environment, it may be hard to sell the Argentina
assets today, but there should be no further cash flow leakage to a
speculative project in such an unstable part of the world. This asset should
essentially be reclassified as "held for sale".
Third, the Company should quickly determine whether its Canadian asset is
worthy of further development or whether the due diligence mistakes made by
the Company are so severe as to render the project uneconomic. We hope the
Company will be lucky and these PGM assets can be profitable for shareholders
going forward, but we certainly think no additional betting should be done
without first accurately assessing the resource.
Fourth, the Company should accelerate in any way possible its capital spending
program and development of Graham Creek, to bring production from that
resource online as quickly as possible. In all other practical ways, the
Company should focus on getting more PGM out of the ground in Montana as
quickly as possible. We believe there is a work force ready to be deployed and
tangible opportunities in 2013 and beyond to increase production of PGMs.
Shareholders are not well served by resource that remains buried.
Fifth, all spending on the Palladium Alliance should be suspended unless the
Alliance can attract other palladium suppliers as supporters. We are, as
noted, skeptical of the value of this spending; in all events, the Company
should not be carrying the industry by itself.
Sixth, a complete review of all overhead and administrative spending should be
conducted with a goal of bringing spending levels back to those in the earlier
part of this century. There is no excuse for mining markedly fewer ounces with
higher administrative and selling expenses.
Seventh, with due respect to the Board, we believe none of the problems we
have cited or changes we are promoting are obscure. And, we regard it as your
task, as our fiduciaries, to block strategy drift, value-destructive
acquisitions, cost-base creep and bad financing decisions. You are responsible
for ensuring we have strong executive leadership and alignment of pay with
performance. You are tasked with ensuring capital is allocated to marketing
programs and development projects with clear and attractive returns on
investment. And you are responsible for moving the Company in a direction
desired by the owners. You have failed at each of these core responsibilities.
We believe the Board should be re-made to provide shareholders with a Board
that will succeed at these tasks and inspire confidence in the future. With
shareholder input, you should augment the Board with new directors and the
long-serving incumbents should resign.
On a fundamental basis, the Company is worth substantially more than the stock
price currently reflects. We believe that the Board can best close the gap by
adopting the changes listed above. We note, for example, that a return to the
historical ratio of basket price to stock price would yield a stock price over
$18. The major PGM companies trade with a median enterprise value to EBITDA
multiple that is 50% higher than that of the Company, despite having greater
political, labor and power risk andhigher effective tax rates.**** Just
getting to the median multiple (which requires in our minds convincing
shareholders that their capital will not be diverted nor their equity diluted)
would yield a price of more than $18, even before marketing and administrative
costs are brought in line (which could create as much as $2 per share of
additional value) and the spending in Argentina is curtailed (another $1+ per
share).And, of course, there is some, additive value in the Peregrine assets
upon liquidation and in the Marathon assets if they prove economic, perhaps as
much as $3 to $4 per share. Even with the dilution from the convertible bond,
we thus believe the stock would be valued at $21-23, if only the Board and
management team would focus on the core Montana assets and operated the
Given the Company's opportunity to create significant shareholder value with
the assets already in hand, we would like to discuss our recommendations with
you at your convenience. We will come to Montana, or you are welcome here, at
any time. In the absence of movement on these items, you should expect that we
will take our case to Stillwater shareholders this Spring and seek a new Board
whose allegiances are to the Stillwater shareholders and whose resolve to
create value is strong.
Gregory P. Taxin
Joseph De Perio
Senior Portfolio Manager
* "Basket price" defined as 0.77 * palladium price + 0.23 * platinum price,
reflecting the Company's resource split. Source: Bloomberg.
** Of the 19 convertible bond deals completed by US issuers since October 1,
only one has traded higher than the Company's bond. Source: CapitalIQ.
*** CEOs of the Company's peers did nowhere near as well. The peer companies
chosen by the compensation committee of the Board are on average five times
larger in enterprise value, six times larger in EBITDA and had stock
performance that was much better than the Company last year. Yet, the pay of
the CEOs of the peers, on average, was just $3.6 million. Source: Company
filings and Capital IQ.
**** The PGM companies we included for this analysis are Anglo American
Platinum, Aquarius Platinum, Impala Platinum, Lonmin, North American
Palladium, Northam Platinum and Royal Bafokeng Platinum. Source: CapitalIQ.
SOURCE Clinton Group, Inc.
Contact: Connie Laux, +1-212-825-0400
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