Investing in distressed securities: The case of Sibanye Stillwater

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At a glance

Sibanye Stillwater is a leading international precious metals mining company, with a diverse portfolio of platinum group metal (PGM) operations in the United States and Southern Africa, gold operations and projects in South Africa, and copper, gold and PGM exploration properties in North and South America.

Sibanye Stillwater is the world’s largest primary producer of platinum, the second-largest primary producer of palladium and a top-tier gold producer, ranking third globally, on a gold-equivalent basis, as well as a significant producer of rhodium and other PGMs and associated minerals such as chrome.

Read: South Africa’s mining industry in turmoil, new publication shows

The group is also the globally leading recycler and processor of spent PGM catalytic converter materials.

If you do not already have Sibanye Stillwater shares in your portfolio as a long-term investment, then take heart. The consensus view among most brokers in the marketplace is that it is still a very strong “buy”. This view is supported by share price performance of the general miner over the last 12 months and beyond as well other strong fundamentals over the same period delivered by the group.

If you had bought the stock at the onset of the COVID-19 virus around March 2020 and its subsequent spread globally which sparked a worldwide sell-off on the capital markets, as of close of trade on the 13th of August, 2021 you would have enjoyed a capital appreciation of 374%! This is because shares in the precious metals’ miner were selling at that time at a price of R16.53 and as of close of trade they were selling at R61.75.

This is not bad for a year’s work of having capital deployed for you especially when you consider that the All Share Index which represents the broader market delivered a return of 157% over the same period. There is no doubt that shareholders in Sibanye Stillwater are smiling all the way to the bank. The company also announced this year that it would be reinstating the dividend after a long hiatus.

Read: Russia hopes to invest in Zimbabwe’s mining industry

It is not just the capital appreciation that has existing and prospective investors salivating. The stock is trading and price to earnings multiple of 5.85 which is significantly cheap when compared to its peers in the commodity space. Anglo American is trading at a PE ratio of 7.09 and BHP Billiton trades at 16.52. Sibanye Stillwater is trading at a bargain when compared to its peers in the same sector. The potential upside is further reinforced by Afrifocus Securities view of projected growth in share price. They project that the share price of this company will grow to R195.94. Given the present share price it is expected that it will triple in the next 12 months.

The respected South African mining media outlet Miningmx recently called this company a cash machine when it reported that Sibanye will “rack up an attributable interim profit of as much as R25bn when it reports its numbers on August 25” according to a statement the mining company had made early in August. The performance was based on improvements in production and the continuation of elevated pricing for platinum group metals (PGMs) and notwithstanding a 13% increase in the value of the rand against the dollar.

The outlook for the gold and platinum miner is bright and positive; however, it was not always the case just five short years ago. This company was in financial and operational distress which had led it to suspend the dividend and long-suffering shareholders had to contend with a declining share price and earnings.

Background 

Sibanye Stillwater originally started as Sibanye Gold. Its creation was the result of the unbundling of Gold Fields Limited, a company which owned Kloof, Driefontein and Beatrix mines. After this transaction was completed the ordinary shares and American Depository Receipts were then listed on the Johannesburg Stock Exchange and New York Stock Exchange respectively. 

Since then the company has pursued a highly aggressive growth strategy constituting of both organic and acquisitive growth. Sibanye in a very short space of time acquired the Cooke operations from Gold One International in 2013 and the Burnstone project from Wits Gold the following year. The aim of this aggressive growth strategy was to produce more sustainable gold operations. 

The story of growth did not stop there. 

Soon the company set its sights on the platinum sector and began to snap up various interests and operations in that space. In 2016 Sibanye acquired the Aquarius Platinum’s Rustenburg operations namely Kroondal mine as well as the Platinum Mile treatment facility in South Africa and in Zimbabwe it took over the Mimosa joint venture with Impala Platinum. Later that year the company also bought the Rustenburg operations of Anglo Platinum.

Read: Economic consultant in Bail Out blueprint warns of distressed Ugandan economy

Still in 2016, Sibanye then made a US$2.2bn offer to buy Stillwater Mining in the US which when completed in May 2017 was the largest transaction in the PGM sector globally in over a decade. It was after this transaction that the company began to formally trade under the name Sibanye Stillwater. 

From 2018-2019 the company was involved in strategic acquisitions securing funding to the tune of US$500 million ostensibly to shore up its balance sheet as well as to reduce leverage. The company entered an arrangement with DRD Gold to establish a mining tailings retreatment partnership. Sibanye also acquired SFA Oxford a consulting company to provide it with market intelligence on battery materials and precious metals for industrial, automotive, and smart city technologies. 

June 2019 was a watershed moment for the company when it acquired the entire share capital of Lonmin resulting in Sibanye Stillwater becoming the largest platinum miner in the world. An internal restructuring of the company followed in February 2020 changing the group holding company from Sibanye Gold Limited to Sibanye-Stillwater Limited. The group is now trading under the tickers JSE: SSW and NYSE: SBSW. 

As any rational investor and businessperson would imagine such an aggressive growth strategy would come at a great cost. The cost of consolidation of all the newly acquired businesses put considerable pressure on the group’s ability to generate cash flow which then led to reduced and gradually suspended dividend payments. The soft commodity prices from about 2013-2016 did not help matters much together with repayments on borrowings which was largely US$ denominated around the same period that the Rand was trading at all-time lows against its major trading partners. 

Additionally, Sibanye has had issues historically with safety in some of its operations.  In June 2018 the group lost three miners in an accident at one of its gold mines. In April 2019 a total of 1,800 miners were trapped underground after an incident at one of its platinum shafts. These are just some of the historical mine safety incidents and issues that have plagued the group. The safety issues had the effect of driving down the group’s share price with one prominent Johannesburg fund manager asserting that he would not invest in Sibanye on moral and ethical grounds. 

Fast forward… 

Today many if not all the operational and financial issues that had hounded Sibanye Stillwater have been resolved and as a testament to this fact the group delivered a 718% increase in last year earnings and announcing R1.3 billion dividends. Shareholders who have suffered long during the years of distress that the group endured over the years have been rewarded very richly in both capital appreciation and dividends. The company is not slowing down because there is still great scope for further capital appreciation if the forward guidance on expected share price by most brokerage houses is to be believed. 

In conclusion, Sibanye Stillwater, given its history and prospects, presents a strong buy even at the current price given the capable management of veteran miner Neal Froneman and his team. They have managed to get the operations of the group up to scratch and maintain a tight hold on the group’s finances.

Read: South Africa’s trade union declares dispute against gold producers

I am a financial services professional with a strong background in diverse areas of banking. My skill set includes among others International Banking, Trade Finance, Commercial Lending, Customer Service, Finance, Banking, Corporate Finance, and Investment Banking. Africa is my home and I am passionate about its development,

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