Sibanye: ringing the PGM bell?

Sibanye-Stillwater is known for its bold calls on metal prices.

Notably, its much-criticised 2017 purchase of Stillwater in the US was motivated by its rosy outlook on palladium. And the $2.2bn gamble paid off — big time. The price of the metal has vaulted successive record highs, helping Sibanye rake in super-profits and slash the debt that was taken on to buy the mine.

So the company’s knack for calling the market is the reason its view — that palladium is likely to soften in years ahead — may have investors thinking twice about the future of platinum group metals (PGMs).

Recent share sales from Sibanye executives, including CEO Neal Froneman, will also have some investors wondering if PGM prices have peaked.

But Sibanye says the sales do not reflect the executive team’s outlook on the share price. Rather, they are the result of an incentive scheme that has vested, requiring that a chunk of the shares be sold to cover the associated tax liabilities.

Still, if one thought the Sibanye share had the potential to double or triple, cashing them now would be a costly way to cover a tax bill.

So are we at the top of the cycle?

Certainly, locally listed platinum shares have had a spectacular run. In three years, Sibanye’s share has surged more than 730%, from R7.68 to R61 now. Anglo American Platinum’s share price has grown 400% to R1,686 at the time of writing, while the Impala Platinum stock has rallied an extraordinary 1,111% to this week’s R241.

Yet some believe the shares are still undervalued.

In fact, analysts at asset manager Ninety One argue the shares are trading at a discount, considering they expect the supply of PGMs to remain tight until the middle of this decade.

Until the adoption of electric vehicles gains critical mass, increasing PGM loadings in autocatalysts of internal combustion engines is the most credible route to reducing car emissions, the analysts say in a note. They see a rerating of PGM shares as metal prices stay stronger for longer.

"PGM companies are generating record cash flows, have strong balance sheets and have limited options for growth capex, all of which are supportive for increased future cash returns to shareholders," reads the note.

Nedbank CIB analyst Arnold van Graan says the PGM stocks do appear to be cheap at the moment. On the one hand, he says the market was perhaps a bit overheated and overdue for a correction. The market may also be uncertain as it considers how long the rally will run. "But in our view, we believe the stocks are trading at a discount, and maybe that the discount is a bit wide and it offers an opportunity," he says.

Nedbank CIB expects strong PGM prices on the back of a stimulus-led recovery. "What we’re seeing is that global infrastructure plans … will require vehicles — light-duty and heavy-duty vehicles. And we see that as a key demand driver. We’ve already started to see signs of that in places like China, and we expect something similar in the US."

This will also have secondary effects, like job creation, which will bring liquidity into the real economy, boosting demand for vehicles.

While Nedbank CIB forecasts growing deficits in palladium and rhodium, it expects this will lead to greater substitution of platinum in autocatalysts, in which case platinum should perform better than the other PGMs.

In January, Froneman told Bloomberg there is no reason platinum cannot go to $2,000 an ounce and higher in coming years.

Overall, the industry is undercapitalised. In other words, with little investment in new projects, no significant increase in ounces will come onto the market in the foreseeable future. "On the back of that, we see prices remaining strong for the next two to three years. But beyond that we think there could be a normalisation," says Van Graan.

But Mergence Corporate Solutions director of mining Peter Major says that even though the platinum shares are underpriced for today’s commodity prices, they are trading at fair levels if you don’t think prices will hold. And he doesn’t think they will.

"I’m afraid to go long on any of these platinum shares just now. I know they look cheap, but I was a gold analyst for years and the exact same thing applied to [gold] shares. They usually looked cheap, with large dividend yields, but it was because people didn’t believe the gold price was going up — and it usually wasn’t."

Major doesn’t entirely buy into a sustained supply deficit story either.

"If you add up all the platinum and palladium produced in the past 100 years, you have over 250-million ounces each. Most of that’s not lost. It’s out there. If the price goes high enough, those above-ground stocks all of a sudden come into the market. That’s certainly applied before in the case of platinum … and the fact that the rhodium price is now down 35% from its peak means there’s enough above-ground stocks to satisfy its demand too."

Major’s scepticism that current price levels can be sustained is rooted in his view that the commodities industry is not in the middle of a super-cycle, but at the tail end of it.

"It’s hard to believe we are not in a super-cycle, with commodities running since early in the millennium. Plus, it’s very broad. Also, you have so many commodities trading at multiples of their long-term price and some trading at multiples of their previous high."

Major’s only question now is: how will it end?

"Because it’s been an 18-year super-cycle, maybe it’s not going to just fall in a heap [like the mini-cycles have done]. Maybe the fall will be more gradual. But maybe that’s wishful thinking."

One thing is for certain, he says: in the end gravity always wins.