Advance payment to cut heavily indebted Sibanye-Stillwater's debt by 28%
The producer will deliver a percentage of gold and palladium produced from its US operations to Wheaton until the $500m is paid back in full
Heavily indebted Sibanye-Stillwater, which has been dogged by numerous fatalities at its mines and a floundering share price, has secured $500m from Wheaton Precious Metals International that will slash the company’s debt by more than a quarter.
In terms of the streaming deal, Sibanye will deliver a percentage of gold and palladium produced from its US operations to Wheaton until the $500m is paid back in full.
Sibanye’s net debt of R23bn will be reduced 28.6% to R16.5bn when the deal is completed in about two weeks, said Sibanye CEO Neal Froneman.
"It’s an important step forward in line with our strategy to deleverage our balance sheet," he said.
The diversified miner has been under pressure to reduce debt following its acquisition of Stillwater in 2016, and the high number of fatalities from its gold operations did not bode well for the company’s share price, which has dropped about 50% so far in 2018.
Streaming of a primary metal, such as palladium in the case of the Stillwater operation, is unusual as a company would not want to use its priority mineral in a deal where it would be locked in if there was an uptick in prices.
However, Froneman said the palladium price "has run quite nicely, it is 30% higher than when we announced Stillwater, while the platinum price remains depressed".
"If we had streamed platinum we certainly would have given away a lot more on the upside once the platinum price upside recovers.
"So in our view it was more important to stream the palladium than the platinum," Froneman said.
Gold production will contribute 43% of the stream, while palladium will make up 57% of the deal. The transaction will reduce net debt to adjusted earnings before interest, taxation, depreciation and amortisation (ebitda) by between 0.6 times and 0.7 times, and will cut the company’s leverage ratio to "well below" covenant requirements.
Seten Naidoo, fund manager at Capricorn Capital, said while it was a welcome relief on the company’s balance-sheet stress, a comfortable debt level would be about 1.5 times.
Sibanye’s current net debt to ebitda is 2.4 times.
Froneman said the deal brought the net debt to ebitda below two times, which was a far more comfortable position from a covenant point of view.
The company’s covenant steps down from 3.5 times to 2.5 times at end-2018.
Naidoo said that with the lock-in of Sibanye’s gold and some of its palladium, palladium prices might drop.
"If palladium prices turn against you materially in the next two years, due to unforeseen events, such as China or trade wars [that] have an impact on trade and lead to negative prices, I guess that palladium could be 20% lower, for example, and we will be hitting back at management, saying why did you not lock in the price when your balance sheet was under stress," Naidoo said.