SWC's Metal Hedging and Forward Sell

Many people are concerned about SWC's metal hedging and forward sell contracts becaue the company loses profit due to such contracts when the metal price is booming. We know those hedging contracts should expire in the next few years so it is not a problem in long term. But nevertheless let's analysis exact what kind of impacts these hedging and forward sell contracts have on SWC's quarterly results.

Those contracts are documented in SWC's Q1, 2006 quarterly report. It's on page 12 and page 13. Let's look at platinum first. In 2007, 14% of the platinum mine production is subjected to a celling of $850. On top of that, certain amount of platinum mine production is subject to forward sell price. For Q1, 2007, the forward sell is 25K ounces at $898 per ounce.




For Q1, 2007, SWC produced 33K ounces of platinum. So accordingly, 14% of 33K ounces, 4.62K ounces, was sold at at the celling of $850. Then 25K is sold at forward selling price of $898. The remaining portion, 3.38K ounces, is sold at market price of $1149 per ounces. The total would be $30.260M, averaging $917 per ounces.

Now let's say in Q2, 2007, all the productions are the same, let's see how much improvement SWC will get due to improved platinum price:

Total 33K platinum mine production:
4.62K ounces at $850/oz
22K ounces at $941/oz (forward sell for Q2,07)
6.38 ounces at $1300 market price.

Total sales will be $32.923M, averaging $998 per ounces.

So all things equal, mine productions of platinum would improve SWC's quarterly gross earning by $2.663M, or about 3 cents per share.

In Q1,07, SWC also recycled 37K ounces of palladium, 27K ounces of platinum, and 6K ounces of rhodium, those are sold at market prices of $336, $1149, and $5052 per ounce respectively.

Right now the going price for the three metals are $380, $1300, $6020 per ounce. So the improvement in Q2 on the sale of recycled metals will be
37K * ($380-$336) + 27K * ($1300-$1149) + 6K * ($6020-5052)
= $11.513M

That's another improvement of $11.513M in gross income. So mine production and recycling combined, we should expect an improvement in gross income for about $14.176M, i.e., from losing $1.059M to gaining $13.117M. That would be a 14.3 cents quarterly profit before tax, for Q2, 2007. Or in other word, it will improve SWC's current P/E ratio down to 19.8. Very decent!!