When Sibanye bought Stillwater Mining, the market thought the firm’s CEO, Neal Froneman, had lost his mind.
Stillwater would cost about R30bn, R4bn more than Sibanye’s market capitalisation, and the asset was variable in quality. And who did Froneman think he was anyway? Sibanye had already bought Rustenburg Platinum from Anglo American Platinum in 2016, which had surprised the market. Hadn’t Froneman dedicated Sibanye to paying dividends? Was this a repeat of his overreach in uranium during 2009 when his JSE-listed Uranium One crashed and burnt?
The big concern was the balance sheet. Sibanye-Stillwater, as it became known, saw net debt to earnings before interest, tax, depreciation and amortisation test lender covenants, increasing to 2.5 times in 2018/2019. Shares in the company, which had reached a record high in August 2016 at about R69.12 a share, disintegrated in value, falling to R16.25 in September, just above Sibanye’s IPO in 2013. It was a hair-raising gambit on platinum group metal (PGM) prices.
Within two years, the critics fell silent. What they witnessed was either genius prescience or pot luck by Sibanye-Stillwater’s new business team. Palladium, a PGM, was trading at about $600 an ounce in 2016 — the year Sibanye bought Stillwater. By the time Sibanye-Stillwater concluded the purchase of another PGM asset, Lonmin, in May 2019, palladium was trading at more than $2,000/oz.
Important sister metals performed similarly well: rhodium was bobbing cheerily at $1,000/oz in 2016, but was worth $20,000/oz by 2019. Lonmin paid for itself in months: “We will never get deals like that again,” Froneman mused. He’s right, though that hasn’t stopped Sibanye-Stillwater from trying. Its next market wager is lithium, a mineral critical to the production of battery electric vehicles (BEVs).
“Defiant lithium,” said Morgan Stanley in a report last month. It is the only mineral in the bank’s coverage that hasn’t corrected this year — trading, at one point, at five times the marginal cost of production. There are a number of factors behind this, including restocking by Chinese original equipment manufacturers — which implies that that segment of demand is fleeting.
Lithium is among the most abundant elements on earth, but it’s difficult to mine
But there are fundamental reasons for believing lithium’s fortunes are interesting, if not quite on the same price trajectory as PGMs between 2016 and 2019.
One is the ability of miners to supply enough new lithium to meet demand. While there are a raft of new projects, there are also mining licensing problems, technical challenges, machinery and skills shortages, and a dearth of bank finance to support the private equity that’s currently financing new production. Lithium is among the most abundant elements on earth, but it’s difficult to mine. As Ana Cabral-Gardner, the co-CEO of Nasdaq-listed developer Sigma Lithium, observed during the FT Mining Summit last month: “We can’t go quicker because nine women can’t make a baby in one month.”
Set against this is demand growth. Despite acknowledging lithium’s price resilience this year, Morgan Stanley also warned in its report of a looming correction, possibly in the first quarter, as BEV consumption moderated in China. US bank Goldman Sachs has a similar view. “It can’t stay elevated forever,” says its metals strategist Nicholas Snowdon. “The pathway for the next two to three years will see a softening trend in the lithium price.”
Nonetheless, lithium demand is still growing. According to SFA (Oxford), a metals research company, demand is expected to rise nearly 25% every year from now until 2026, by which time about 944,000t of demand will come from BEVs alone. Market bears think, however, that global recession will dampen BEV demand, and governments, fearing embarrassment among voters, might be forced to row back on ambitious inner-city emission reduction targets predicated on the use of consumer BEVs.
This is true, but new supply is hard to source, even if demand tapers a bit. SFA can make a base case for 750,000t-815,000t in lithium supply from 2023 to 2026 against demand of 818,000t next year to 1.4Mt in 2026. “Probable projects” take lithium supply to about 1.1Mt in 2026; the rest is speculative, the research house says.
Sibanye-Stillwater has spent, or will commit, up to $849m to two lithium projects: Keliber, a joint venture with Finland’s government; and Rhyolite Ridge in the US, a project that also produces boric (boron) acid, a by-product credit that makes the project low-cost. If both work out, Sibanye-Stillwater will have control over 37,000t of lithium hydroxide production, a form of the mineral that carmakers can use and in which they are already building stockpiles, as evident in the price.
The lithium price ran away from us so we decided to consolidate on the assets we have
— James Wellsted
The company’s frustration is that the upside from lithium isn’t represented in the share price, which, after an especially volatile year, is now 3.6% down since January. Nonetheless, James Wellsted, head of corporate affairs for Sibanye-Stillwater, says the company would like to have more of it, and cobalt as well — another battery metal, though with a more mature market. “The lithium price ran away from us so we decided to consolidate on the assets we have,” he says.
Owning lithium in the US and Finland is also critical to the increasing localisation of raw material supply, especially as the West seeks to wrest control of the BEV supply chain from China.
“We want to be in these markets,” says Wellsted. Having now established a footprint, Sibanye-Stillwater’s next task is to begin mining the material. Unlike the PGM strategy where Sibanye-Stillwater turned around existing assets in a mature market, the lithium bet is a different order of risk altogether.
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