Holding the faith
NEWS ANALYSIS: Looking beyond Sibanye-Stillwater’s bad news
Investor sentiment remains positive on Sibanye-Stillwater — despite some looming costs in the short term
By the end of a week in which Sibanye-Stillwater announced the retrenchment of almost 7,000 employees and contractors at loss-making operations, a proposal to allow bondholders to convert to equity and a warning that it would report a loss of at least R4.6bn for the year to December, its shares rose 10.9% to R19.84.
In the same week, the Public Investment Corp raised its stake in the group to 10.83% from 8.02%, VanEck increased its stake to 10.1% from 7% and Investec from 4.1% to above 5%. Of 16 analysts polled by Bloomberg, six rate the shares a "buy" and 10 rate them a "hold".
It may look as if shareholders weren’t listening to the bad news, but most of it was already known and investors are looking beyond it.
The gain in Sibanye’s shares was more than Harmony Gold Mining’s 1.7%, though both have significant SA exposure. Both companies have benefited from stronger gold prices. Gold has added US$7/oz to about $1,277/oz while the rand has weakened to R14.22/dollar from R14.10, putting the rand gold price at R580,200/kg on Friday from about R557,000/kg a month ago, a 4% appreciation.
The retrenchments were no surprise: Sibanye announced in August it was considering restructuring the three Cooke shafts and Beatrix West, at a potential loss of almost 10,000 jobs. The final job losses are smaller, after redeployment of some Cooke workers and an agreement to keep Beatrix West operating.
The three Cooke shafts and gold/uranium tailings, which Sibanye bought from Gold One for 150m shares or a 17% stake in 2012, were hit by low commodities prices, productivity issues and illegal mining. Sibanye shut the fourth Cooke shaft in 2016. Beatrix West, one of the assets that Sibanye took over from Gold Fields, was restructured in 2013 after a fire and put on a more sustainable footing, but volumes and grades have been declining. It will continue operating as long as it makes a profit for any continuous three-month period.
Vunani Securities head of research Hurbey Geldenhuys says it makes sense to close the Cooke shafts. There are significant closure costs but Sibanye could not continue to run loss-making operations.
Though Sibanye CEO Neal Froneman said in September there were potential buyers for these assets, Geldenhuys says he cannot think of any likely suitors. There were buyers for AngloGold Ashanti’s Klerksdorp assets but the Cooke operations are old and would require better gold and uranium prices before they become attractive. There are still some high-grade uranium seams underground.
Sibanye said in its production report for the September quarter that its remaining gold mines were performing well, despite the closure processes under way at Cooke and Beatrix, while its platinum mines in SA were maintaining production levels. It expected the improvements to continue into the December quarter. The Blitz project, which was part of the acquisition of North American platinum group metals (PGM) miner Stillwater, has delivered its first production ahead of schedule.
For the year as a whole, Sibanye will report an attributable loss of at least R4.6bn because of impairments, transaction costs on the Stillwater deal and a provision for silicosis claims. EPS will also reflect dilution from the $1bn rights issue to part-finance Stillwater.
Sibanye will hold a shareholder meeting on December 4 to vote on a proposal to allow the holders of the $1.05bn of bonds issued to finance Stillwater to convert their shares into equity. If all bondholders were to convert, it would dilute the shares by about 17%. Allowing bondholders to convert to shares would be cheaper than a cash settlement.
Geldenhuys says all the gold shares have been underperforming recently and they are catching up as investors believe they offer good value against their peers.
There are also positive factors for Sibanye’s PGM business, he says.
Apart from platinum, other metals in the PGM basket have appreciated — including rhodium, palladium, ruthenium and some of the other byproducts. At these prices, the PGM business is looking more profitable.
Sibanye has also announced some positive outcomes at the Blitz project and this was not necessarily factored into the acquisition price.
"I am very optimistic about Stillwater," Geldenhuys says. "Under Sibanye’s management it is likely to do better. The gold miners bring a particular skills set, which could deliver some positive surprises from that ore body."