SWC Q2 Earnings In Retrospect

SWC just released Q2 earings. On paper it was a loss of $2.5M, or 3 cents per share, contrary to my very optimistic prediction. Where did I get it wrong, and where did I get it right?

My biggest mistake is assuming they will sell all the recycled metal they have. There are 34K leftover recycled metals from previous two quarters, plus Q2 processed 93.1K, totalling 127.1K. I expected them to sell at least 110K. But they actually sold only 69K. When you don't sell the metal, you don't realize sales revenue and profit on the paper. But the value is still there in the metal, although it is not on the paper. It's an accounting gimmick to pay less tax and preserve more shareholder value. Compare the balance sheets, SWC gained $6M in book value from Q1 to Q2. That is the real story of actual gain, 6.5 cents per share.

In Q1, The net loss of $1.1 million for the first quarter of 2007 included, by business segment, $3.8 million of income from mining operations and $5.3 million of income from recycling activities, less corporate costs including $8.8 million of G&A expense and $1.4 million of unallocated net interest expense.

In Q2, The reported net loss of $2.5 million for the second quarter of 2007 included, by business segment, a loss of $1.4 million from mining operations and $7.8 million of income from recycling activities, less corporate costs including $7.4 million of G&A expense and $1.5 million of unallocated net interest expense.

So, with 69K recycled PGM metal sold, SWC realized a gross margin of $7.8M. Had they sell 100K recycled metal as I expected, linear extrapolation says the recycling gross margin would be $12.435M margin. I projected a way more optimistic $30.42M margin, using the metal prices $368, $1288, $6090 for the three metals. But the actual realized metal price for recycled metals are less, at $355, $1225, $5923. Because I over estimated the metal prices, I over-estimated the gross margin by $11.52M. If I used the correct metal price, the gross margin would be $18.9M, I also under-estimate the cost for the recycled metal, which accounts for another $6.5M difference.

On the mine production side, my projection says Q2 will be about the same as Q1. But the actual result i mining in Q1 provided $3.8M profit margin, and contributed $1.4M loss in Q2. So that's a difference of $5.2M on the worse side. What gives?

I assumed SWC will being mining the same grade of ores. So a reduction of production means less ores are milled, leading to the savings of $3.142M cost. But insread, the ores mined are lower in grade. So SWC actually milled 309K ton versus 305K ton. Milled 4 tons more ores while producing less metal. so the cost of extra tons is $0.55M. So that's a discrepancy of $3.7M. The remaining discrepancy is explained by slightly increased cost per ton of ores milled.

My projection of price of mine prodution metal is quite on spot. Palladium sold at $386, versus my number $384. Platinum sold at $949, slightly less than my projection of $963.

The produced mine grade is 0.46 ounced per ton, versus 0.49 in Q1. That's the main contributing factor in increased cost. It should be a one time thing, not a long term trend.