Shares in Sibanye-Stillwater cruised to a record high this month. On the face of it, that’s an important achievement, especially as 2022 has dealt mainly bad news to the precious-metals miner.
In January, Sibanye-Stillwater bailed on an agreement to buy copper and nickel assets in Brazil for $1bn. A month later the seller, UK-based private equity fund Appian Capital Advisory, served notice of a $1.2bn claim against Sibanye-Stillwater for, among other allegations, defamation. Appian chair Michael Scherb says legal action in the UK’s high court threatens to tie up Sibanye-Stillwater for more than a year.
Perhaps more damagingly, the nickel and copper acquisitions were an important prop in Sibanye-Stillwater’s diversification strategy — never mind that nickel, an important battery metal, has since broken through record price highs following Russia’s invasion of Ukraine. Sibanye-Stillwater’s next attempt at diversification will be watched particularly closely. But more of this later.
Also in March, a coalition of SA unions finally made good on threats to call 31,000 workers at Sibanye-Stillwater’s gold operations out on strike. The company subsequently locked out employees, thus putting a cap on at least 50% of gold mining costs. But a strike is another source of unwanted noise for Sibanye-Stillwater, especially as it sees itself pitted once again against restive union the Association of Mineworkers & Construction Union (Amcu). Amcu’s previous strike at Sibanye-Stillwater’s gold mines, in 2019, dragged on for five months and was pockmarked with fatal shootings and violent protest. At the time of writing, the current strike seems different in feel, which is good news for the company.
So why is Sibanye-Stillwater riding the crest of a wave? The answer is partly that a rising tide lifts all boats. As the world’s largest producer of platinum and a significant miner of the associated platinum group metals (PGMs), it is benefiting from a rebound in automotive production, Ukraine’s crisis notwithstanding.
The war is also putting pressure on palladium supply, as Russia controls 38%-40% of the market. Sibanye-Stillwater says it can’t immediately respond to possible palladium supply deficits. Nor can other miners, which is boosting the metal’s price significantly — it rose about a quarter in the first 10 days of March.
"We are pumping cash at the moment," says James Wellsted, head of corporate affairs for the miner. This explains why Sibanye-Stillwater is standing by its 7% gold wage offer instead of the 14% the Amcu-dominated union coalition is demanding. Gold mining comprised only 7% of Sibanye-Stillwater’s 2021 earnings before interest, tax, depreciation and amortisation (ebitda) and was, in fact, cash negative in the previous financial year. The fact is, Sibanye-Stillwater’s investment case sits squarely on the spectacular cash-generative power of PGM production. Based on spot prices in mid-March, the PGM assets were clocking margins of 55%-60%. In short, Sibanye-Stillwater is creaming it.
PGM prices are even making up for some deficits elsewhere in the business, such as production and cost, for which the guidance for 2022 was disappointing. "We think this [ guidance] is materially superseded by the global appeal of SA PGM equities’ hedge status versus Russian geopolitical risks," says Dominic O’Kane, an analyst for JP Morgan Cazenove.
However, the view at Sibanye-Stillwater is that the company remains fundamentally undervalued. Despite the new share price peak, the miner is worth R385bn less than Anglo American Platinum (Amplats) even though it mines about three-quarters the amount of Amplats’s output and sits competitively on the cost curve relative to Amplats. Sibanye-Stillwater is also worth less than Impala Platinum and, incidentally, than Gold Fields, from which its gold assets were demerged in 2012.
This is a source of enormous frustration for the company, says Wellsted.
Sibanye-Stillwater head of strategy Laurent Charbonnier said in November that the market simply didn’t know enough about the firm’s strategy to make a proper judgement. It’s perhaps no accident, therefore, that CEO Neal Froneman spoke for 20 minutes at Sibanye-Stillwater’s year-end presentation in February explaining how the company had positioned itself as a new-age, forward-looking organisation preparing for the fifth industrial revolution.
It was as "high level" as investors have probably seen Froneman get. He introduced the company’s concept of a "grey elephant", described as "a highly probable, high-impact yet neglected catalyst or force of change". Grey elephants include growing inequality, the prospect of multiple pandemics of which Covid was but the first, an angry planet (climate change) and "angry people" — online-fuelled outrage that would affect global attitudes.
These highfalutin concepts raised a few eyebrows, but according to Wellsted this is the business philosophy behind Sibanye-Stillwater’s $1bn worth of mergers and acquisitions of last year (excluding the now dead $1bn Brazil deal). These deals involved among others two lithium projects — in the US and Finland — as well as a nickel processing facility in France. This facility will supply battery manufacturing factories throughout Europe, the first of which Sibanye-Stillwater is part financing through a newly created fund, BioniCCube.
Some investors don’t like the pace of investment. It brings uncertainties such as that the lithium-boron project in Nevada, Rhyolite Ridge, is facing the opposition of a US environmental organisations because the development threatens a rare buckwheat plant.
Elsewhere, deal complexities make it tricky for analysts to forecast Sibanye-Stillwater’s cash flow.
Its purchase of Rustenburg Platinum from Amplats is a case in point, as 35% of cash flow returns to Amplats, which benefits from a concentrate treatment agreement (due to expire this year). Analysts and investors want cash to travel in straight lines through an organisation rather than being vulnerable to volatility.
Froneman, however, stands firmly behind the firm’s merger and acquisition strategy. "There’s a perception we do deals on whatever comes along, but that’s not right. We must have looked at 76 opportunities but chose to do five of those, of which one was cancelled. We are not desperate to do deals," he says.
Says Wellsted: "Imagine if we’d listened to the analysts before 2016 telling us to not bother buying into PGMs and to focus instead on reaping dividends from our gold business. We’d probably not have much of a company now."
Yet Wellsted acknowledges that Sibanye-Stillwater’s strategy places bets on future market prices more than most. This makes Sibanye-Stillwater an outlier, and hard to value. "I can’t argue with that," he says.
Despite this, Froneman says more transactions are planned, possibly to be unveiled later this year. All in all, Sibanye-Stillwater would like to generate a third of total ebitda from battery minerals production. The uncertainty about the future of the company’s gold mines, however, is exactly the kind the market doesn’t prefer. One mine, Beatrix, in the Free State, has about four years’ life of economically mineable reserves remaining. How an extended strike might affect management attitudes towards its continuation is worth considering.
One deal doubter is Nedbank Securities analyst Arnold van Graan. "The market isn’t that enthusiastic on the whole metals diversification strategy," he says. "Even people who completely bought into the idea of battery metals taking over the world were a bit unenthusiastic about Sibanye-Stillwater’s strategy." Van Graan thinks Sibanye-Stillwater should stick to its core precious-metals mining. "I think people might have liked that more."
Market speculation is that after Froneman announced the deal to buy the Brazilian base metal mines, one of Sibanye-Stillwater’s prominent shareholders, BlackRock, was on the end of a phone to Froneman. There was a robust exchange of views, one source tells IM.
Wellsted won’t comment directly, but says: "We don’t listen to shareholders.
"We are the management; we make the calls. [With] every deal we’ve done the share price has lost about 15%."
Another thing investors don’t like about Sibanye-Stillwater’s merger and acquisition activity is that it holds back things like special dividends. Froneman has confirmed that Sibanye-Stillwater will not be paying one any day soon. Yet it completed an R8.5bn buy-back programme last year, he argues. The company also announced R13.8bn in total dividends for 2021 in line with its 25%-35% of earnings policy, while the final dividend of R5.3bn represented a yield of 9.8%.
Sibanye-Stillwater says its deal-making track record is extremely good. The PGM mines generated enough cash flow last year to pay back all three its SA acquisitions.
Some do recognise the strategy: "Froneman was an early mover in getting out of SA by buying Stillwater, and now he’s an early mover in future-facing metals," says Mick McMullen, the former president and CEO of Stillwater Mining, the US firm Sibanye-Stillwater bought for $2.2bn in 2016. "If [the deals] pay off, they will [differentiate] his company from some of the other traditional SA mining companies."
"The market is always right," said Charbonnier last year when addressing why Sibanye-Stillwater trades at a discount. Since then, the company has delivered more detail about its intentions, yet investors remain reticent. The market fears the high-risk nature of Sibanye-Stillwater’s empire-building in an environment wracked by existential anxiety about matters that range from climate change to world war.
It was once said of another empire-builder, BHP Billiton founder Brian Gilbertson, that like a racing car he would get you to where you wanted to go very quickly … but there’d be a few crashes on the way. Froneman, a petrolhead of note, might appreciate the allusion. The market’s not sure, however, whether Sibanye-Stillwater is the best vehicle for today’s course.
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