Behind Sibanye’s Lonmin gamble
Three big deals this year have allowed the miner to diversify its exposure to foreign and domestic gold and platinum
After three ambitious takeovers in the past 12 months — of Stillwater in the US, a joint venture with DRDGold to exploit gold and uranium tailings dumps and a proposed all-share takeover of troubled Lonmin — Sibanye-Stillwater has built up a portfolio of assets in different geographies, resources and types of mining.
This is very different from the way in which SA gold and platinum miners used to expand, by sinking new deep-level shafts. Instead, Sibanye-Stillwater has chosen to buy existing assets with short-term or turnaround potential.
In the company’s latest annual report, CEO Neal Froneman says uncertainty about policies and regulations in SA has made it complex to commit to projects that have long lead times and are capital-intensive.
Earlier this year, Sibanye bought North American platinum group metals (PGM) producer Stillwater for US$2.2bn. It is also selling 100% of its West Rand tailings retreatment project to DRDGold in exchange for 38% of DRDGold’s shares, with an option to raise this to 50.1% within two years. Its latest deal is a takeover of Lonmin through offering 0.967 of a Sibanye share for every one of Lonmin’s — a 40% premium to Lonmin’s 30-day volume-weighted share price.
Froneman says Sibanye’s strategy has not changed. It still aims to consolidate its position as a precious metals producer, deleverage the balance sheet (the Lonmin transaction will be neutral for its debt) and address the "SA discount" in the minds of its offshore shareholders, which would allow it to better use its equity for offshore transactions.
With the Lonmin deal, Sibanye has achieved its PGM ambitions — but it is still interested in expanding its position in gold, particularly in North America, Froneman says.
Investec’s global mining analysts say the Lonmin deal is good news for that company’s shareholders, but it remains to be seen if Sibanye can turn Lonmin’s Marikana operations to profit without a major improvement in PGM prices. The key value case for Sibanye could be Lonmin’s smelting and refining assets.
Daniel Sacks, portfolio manager at Investec Asset Management, says the deal with DRDGold is essentially a disposal of Sibanye’s interests in the tailings project, as it will get DRDGold shares as payment, which it can sell.
However, it is not inevitable that Sibanye will sell its shares in DRDGold, Sacks says. The retreatment project used to be high on the list of Sibanye’s priorities, but these have shifted now that the company is trying to reduce its debt. The project is now being run by a proven operator in tailings retreatment and it no longer presents a distraction for Sibanye management, which is already stretched with other projects.
Shoaib Vayej, a portfolio manager at Afena Capital, says the deal with DRDGold "is quite a neat way to build scale in that business without incurring the cash-flow impact".
Asked if the spate of deals has put Sibanye’s executives and efficiencies under strain, Froneman says it is a good question — and one that Sibanye’s board has asked.
Sibanye has restructured its executive team and made a couple of new appointments to focus on three key areas: integration, producing to plan, and social and labour plan commitments. It will acquire good senior executives from Lonmin, who will slot into Sibanye’s management team.
However, Sibanye’s shares fell 5% to R15.30 after the Lonmin deal was announced. Sibanye’s stock has been trending downwards, from above R20, ever since the tie-up with DRDGold was announced in late November. At the same time, Lonmin’s stock has soared.
Vayej says the drop in Sibanye’s shares and rise in Lonmin’s are a fair reflection of the all-share offer. The ratio is approaching the offer level, indicating a high probability that it will be approved.
He says the deal has been widely anticipated for some time. It will help make the industry — and Lonmin’s mines — more sustainable.
Lonmin’s balance sheet has been increasingly strained by prolonged weak PGM prices. It deferred the release of its year-end financial results and was considering selling some of its assets to raise cash. Shareholders were apprehensive of another rights issue.
Lonmin CEO Ben Magara insisted the company had net cash of $103m at the end of September and still had the support of its lenders.
Lonmin has huge PGM resources and valuable processing infrastructure, but its older shafts are reaching the end
of their lives. Developing big new mines such as K4 and
Pandora will require substantial capital spending between 2022 and 2026.
Froneman says a revised plan still requires closing certain shafts, but delays the substantial capital investments.
There is an option to spend R1bn on a DC arc furnace, which would be able to treat the higher-chrome ore once Sibanye switches its processing from Anglo American Platinum to Lonmin.