At the beginning of October, I used this column to lament the lack of capital allocation skills in SA boardrooms, when management teams full of operators suddenly become valuation experts because someone had a bright idea to try out this "M&A thing" — after all, you can become a global group almost overnight!
My point was that the combination of capital allocation and operational skills is rare. Neal Froneman’s track record with Sibanye-Stillwater suggests that this mining group is an exception. After a flurry of announcements last week, I haven’t seen anything that has changed my mind.
I must highlight that Sibanye is a risky business because mining is a risky business, not least of all in SA. It’s important to size these positions correctly in a portfolio. In my case, Sibanye carries an allocation of about 2.2% and I’ll add to that in coming months, depending on what the market does.
I know there’s a school of thought that portfolios should be far more concentrated, but my view is that the impact of randomness and luck in the market means that I’m better off with a wider range of positions that I believe in, rather than a few hills that I’m willing to die on. Ask people with a huge allocation to $SNAP how they feel about being 30% down last week, just because Apple changed the game for social media advertising with significant privacy enhancements in iOS.
Cyclical businesses (like mines) are something to behold. The best time to buy is when nobody is talking about them. The next best time is when people are complaining about them. When everyone is gushing over earnings and dividends, it’s often too late unless the valuation still looks reasonable. A good example would be Royal Bafokeng Platinum, which has caught the eye of Impala Platinum for a potential buyout.
After laying it all on the line in recent years, the platinum group metals (PGMs) cycle played out in Sibanye’s favour and the company printed cash over the past 18 months or so. More than 90% of group adjusted earnings before interest, tax, depreciation and amortisation (ebitda) in the quarter ended September 2021 was generated from PGM-related operations. Sibanye’s SA PGM businesses are about 3½ times larger than its US PGM businesses in terms of adjusted ebitda contribution.
Of course, precious metal prices are incredibly volatile, which is why cyclical businesses can look so "cheap" at or near the top of the cycle. The share price will usually be strongly correlated with spot metal prices and the immediate outlook, rather than historical accounting earnings. A perfect example of this volatility would be the adjusted ebitda from gold operations at Sibanye. In the third quarter of last year, the average gold price was over R1m/kg and the gold operations ran at an adjusted ebitda margin of 37%, generating R3.2bn in adjusted ebitda. Life was good.
The story goes that when mines start doing major deals, the top is in and it’s time to take profit and get out
In the third quarter of this year, the average rand gold price was 16.5% lower and the adjusted ebitda margin fell to 19%. Adjusted ebitda came in at R1.4bn, 44% lower year on year. This is the operating leverage effect that is a feature of mining.
Because of high fixed costs in the operating structure, bottom-line earnings swing more violently than top-line revenue. When spot prices are high, there’s a cash bonanza. When spot prices fall sharply, the profits vaporise. This is why PGM miners in particular trade on modest multiples.
The market is obsessed with trying to call the top of the commodity cycle. The old story goes that when the mines start doing major deals, the top is in and it’s time to take profit and get out. Sibanye’s flurry of recent deal-making has sparked those conversations, but is it so simple this time?
The other market obsession is environmental, social and governance (ESG). Central to this trend is the electric vehicle (EV) movement, with adoption rates increasing quickly as carmakers shift to EVs. The primary use of PGMs is in catalytic converters, used in internal combustion engine vehicles to meet emissions standards. Traditional engines aren’t about to disappear overnight, but Sibanye needs to position itself for the next phase in global transportation.
This is achieved through investment in "green" metals — lithium, nickel, copper and others, all used in battery technology. Sibanye dipped its toes in the green water in 2019 with the acquisition of SFA (Oxford) to provide market intelligence on battery metals.
Sibanye is anticipating market deficits in lithium from 2021 and in copper from 2025 as electrification drives a global push for decarbonisation.
After a couple of years of planning, Sibanye pulled the trigger on five acquisitions in 2021. The targets are in the US, Europe and South America.
Global energy needs are changing fast and I’m comfortable with Sibanye’s team making the required capital allocation decisions with my money.
The author holds shares in Sibanye
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