Sibanye investors want ‘Mr Fix-It’ Froneman back
Once the antidote to an indebted and growth-obsessed industry, Sibanye now has the second-highest debt in the sector, thanks to its foray into platinum — and it’s making people nervous
In 2013, Sibanye Gold was marketed as the antidote to an indebted and growth-obsessed gold mining industry. Today, its borrowings are the second-highest in the sector and the company is digesting its biggest deal yet.
Sibanye, spun off from Gold Fields four years ago under mining industry veteran Neal Froneman, was supposed to be a steady, dividend-paying operator of three ageing but profitable South African gold mines.
Since then, Froneman has pursued acquisitions outside gold, to the extent that Sibanye will produce more ounces of platinum group metals than bullion this year.
The $2.2bn takeover of Stillwater Mining this year has left Sibanye with net borrowings more than double its annual earnings and the company cancelled its dividend last month.
It’s not a distressed balance sheet but it’s a balance sheet that needs to be addressed
The executive who earned the nickname Mr Fix-It for his turnaround successes in the 1990s now needs to show he can run the new mines profitably and reduce debt.
"We’ve seen Neal the deal maker and we want to see more a Neal-of-old coming back — Neal the operator," said Hanre Rossouw, a Cape Town-based money manager at Investec Asset Management, a top 10 investor in Sibanye, according to data compiled by Bloomberg.
"There’s not a lot of room on the balance sheet for more acquisitions so the focus will be on delivery."
Froneman says he’s taking advantage of rivals’ recent focus on selling assets and curtailing budgets to repay borrowings taken on during gold’s bull run that ended in 2013.
The precious metal was up 0.2% at $1,336.32 an ounce at 6.51am in London, bringing this year’s gain to 16%.
"In the past four to five years, as companies have dealt with debt and fixed up their balance sheets, they’ve forgotten about growth and the future," Froneman said in an interview on August 30. "We’re ahead of the pack."
So far, shareholders have been well rewarded. Sibanye’s stock has more than doubled since listing in February 2013, compared with a 32 % decline in a Bloomberg Intelligence gauge of major gold producers.
"They’ve communicated the change in strategy well and have been quite savvy at buying undervalued PGM assets at the bottom of the cycle," Rossouw said.
Froneman won plaudits in Sibanye’s early days by improving performance at the former Gold Fields mines.
The company paid a dividend even after gold dropped 28% in 2013 and bigger rivals such as Barrick Gold and AngloGold Ashanti cut or cancelled theirs.
But with production from the three old mines scheduled to halve by the late 2020s, the CEO decided he couldn’t stand still.
In 2015, Sibanye agreed to buy Aquarius Platinum and made a deal for some ageing, high-cost platinum mines from Anglo American Platinum. A year later, the Stillwater acquisition was announced.
While the initial purchases were fairly small and involved assets in Southern Africa, Stillwater was a much bigger leap, both in terms of size — the purchase price exceeded Sibanye’s market value at the time — and expansion onto a new continent.
Stillwater had a cumulative net profit between 2010 and 2016 that added up to less than $50m, according to data compiled by Bloomberg.
In defence of the purchase, Froneman says the Montana mines have the highest concentrations of platinum group metals in the world.
He also argues that an expansion project, named Blitz, had been undervalued by investors. About 78% of Stillwater’s reserves are palladium, a metal that has climbed 28% since the deal was announced.
"We have taken on the debt in order to acquire a high-quality, low-cost PGM asset that is growing by 50% at the bottom of the commodity price cycle," James Wellsted, Sibanye’s spokesman, said on Wednesday. Stillwater’s assets provided "significant risk diversification due to its commodity mix and geographic location", he said.
Froneman’s own career hasn’t been without its hitches. After turning around shafts at Harmony Gold Mining in the 1990s, he became CEO of Aflease Gold and spun out SXR Uranium One in 2005 in a merger with a Canadian company. Three years later, he resigned after prices collapsed and production stalled.
For now, said Rossouw, Sibanye needed to focus on generating cash and paying down debt.
The company’s net debt is 2.8 times earnings before interest, taxes and depreciation, and only Zijin Mining Group has a higher level among global peers, according to data compiled by Bloomberg.
"It’s not a distressed balance sheet but it’s a balance sheet that needs to be addressed," Rossouw said.