[miningmx.com] – “CLEVER, ruthless and lucky.” That’s how one industry analyst described Neal Froneman, a 56-year old mechanical engineer who runs Sibanye Gold, the R17bn gold producer.
Sitting in Sibanye’s corporate office at Libanon gold mine near Carletonville west of Johannesburg, the place where he took his first job as a junior miner 31 years ago, Froneman doesn’t quite strike one as the Bond villain sketched by the analyst.
As far as hatching cunning plans go, the only visible evidence connecting Froneman to R9bn worth of corporate activity in four breathless weeks during September and October, is a map (or plan in mining-speak) on his desk.
It shows Sibanye Gold’s recent purchases: the Rustenburg mines of Anglo American Platinum (Amplats), and to the south, in what looks to be a stone’s throw, the shafts of Aquarius Platinum. There’s a line bolded in demarcating a rail line that runs through both properties as if the ownership boundary shouldn’t be there.
That, says Froneman, is exactly the point – and just one of the reasons why, logistically, buying these assets is an exercise in common sense.
Neither transaction is yet complete with the purchase of the Amplats mines in Rustenburg facing a year of legal and regulatory hurdles. There’s also opposition to the R4bn bid for Aquarius Platinum which John Biccard, an portfolio manager for Investec Asset Management, believes is an act of Froneman opportunism.
Froneman acknowledges there’s a degree of opportunism in his firm’s recent corporate efforts, but with the platinum market heavily over-supplied, and with asset valuations reflecting the surplus, he doesn’t take credit for the timing the Aquarius or Amplats bids.
“We’re not as clever as we look when it comes to the market, but we do have longer term positive views on [platinum] supply and demand,” he said in an interview.
“I’d love to claim credit for looking clever, but we worked on [Amplats’] Rustenburg for probably 18 months,” he said.
The bid for Aquarius was actually an earlier corporate ambition even though the offer only materialised after Sibanye had bid a figure of R4.5bn for the Rustenburg mines (which could increase depending on performance of the shafts).
“Aquarius was actually the first transaction we looked at in late 2013, but the company’s balance sheet was a mess,” he said. “It had to be restructured. We had very initial discussions with Jean Nel [CEO of Aquarius Platinum] but these things take time.
“The market could just as easily have gone up and we could have missed the opportunity,” said Froneman. “The market didn’t, but I suppose you can say we had the tenacity to enter it and I think our entry actually changed the sentiment of the market which was quite strange.”
Investec’s Biccard has urged Aquarius Platinum shareholders to vote against Sibanye’s offer of some R2,66/share which, at the time it was made public on October 6, was a 62% premium to Aquarius’ volume-weighted average share price of R1,64/share.
“Investors should not be looking at a 100% premium to the 12-month low being offered, but rather focus on the fact that Sibanye is buying two quality assets at 4% of their 10-year high valuation,” argued Biccard.
Squeezed between the offer for the two platinum assets, Froneman’s Sibanye also announced it may take control of a “secured convertible note” amounting to A$22.5m (about R225m) in Waterberg Coal Company (WCC), a Johannesburg- and Sydney-listed firm that is developing a thermal coal mine in South Africa’s Limpopo province.
Once it has recapitalised WCC, Sibanye will have enough shares in the company to control it, provided the deal passes a due diligence. But why is a gold producing company, having recently signalled diversification into platinum, now taking on coal?
According to Froneman, stage three load-shedding by Eskom, in which customers of the utility were required to throttle back power some 20% of total capacity, had cost Sibanye 270kg in lost gold production, equal to R125m in revenue, during the firm’s second quarter this year.
Electricity costs were likely to become a quarter of the group’s total costs from about a fifth currently. Therefore, the purpose of WCC is to become self-sufficient in energy supply which Sibanye hopes to achieve by establishing a joint venture with an independent power producer (IPP).
The proposed transaction also gives Sibanye potential to become a supplier to Eskom and the export market because the WCC Waterberg resources has scale on its side. According to WCC CEO, Stephen Miller, there’s a rationale for a 10 million tonnes/year (mtpa) thermal coal mine on the Limpopo province site.
This production effectively means Sibanye could secure the coal for the IPP for effectively nothing. “The entry is very cheap … or low cost,” Froneman corrects himself “We shouldn’t say cheap.”
As opportunistic (and possibly cheap) as Sibanye’s acquisitions may be, they still adds up to a capital outlay of about R10bn. Taking into account existing debt, Sibanye Gold’s net debt would rise to R11.5bn – two-thirds of the company’s current market value.
As a ratio of pre-tax earnings, however, Froneman thinks the debt is a conservative undertaking. Funding the initial purchase price of the Amplats deal – R1.5bn – and the R4bn for Aquarius increases Sibanye’s net debt from 0.2 x its EBITDA (earnings excluding interest, depreciation and tax) to about 0.8 x pretax earnings.
The ratio, which shows how long it would take for Sibanye to pay off its debt, is used by credit rating agencies. The agencies monitor indebtedness with particular scrutiny these days because the world’s mining sector is thought to have poorly allocated capital, wasting it on projects that failed to provide returns.
Although Froneman is anxious to keep clearing out Sibanye’s debt, it’s not only for that reason. “If we want to make further acquisitions – and yes we do – you want to clean up that debt.
“You want to get your firepower back so that you can make your next move. We still don’t think that our currency [value of shares] is at a level where we would use it. Most analysts now have us well over R30/share [versus R18.80/share at the time of writing],” said Froneman.
SWEETCAKES FOR THE MARKET
FRONEMAN is not a corporate creature. He is an entrepreneur who reluctantly wears a suit. The heart is also firmly on the sleeve. That’s why he responds too openly to criticism; market darts and barbs unsettle him more than they should, and belie the scope and confidence of his corporate activity.
This is perhaps fuelled by his experience as CEO of Uranium One, a company he brought into being in concert with the rise of the uranium price from about 2004 to 2008.
Uranium One’s South African uranium resouce – held in an asset called Dominion Reefs – was originally one of several assets in a company Froneman first bought in order to mine gold. The marginal nature of the gold assets, however, and the sudden market interest in uranium took him on another path.
By 2007, Froneman merged with UrAsia to create a $5bn entity that ranked among the world’s top four uranium producers. But his rapid-fire corporate activity ended calamatously in 2008 after Dominion failed to meet its uranium production targets.
It resulted in Froneman’s resignation in February 2008 which was followed by a period of hibernation. His comeback was in 2009 as CEO of Gold One – a gold production firm previously known as Afrikander Lease (Aflease). Froneman had bought Aflease in 2003; its uranium assets had formed the basis of Uranium One.
Froneman’s diehard critics see a repeat of this corporate ascent and decline in Sibanye Gold.
“He knows what the market eats for sweet cakes and so he is making sure he always has one more story, one more sweet cake to feed them when they get restless,” said an analyst.
This is the picture of Froneman as the master of “pump and dump’: that he launches companies with compelling market esprit, but then abandons them when the fuel runs dry. Froneman hates being reminded of Uranium One, but he seems more at peace with it than formerly.
“I would say my biggest disappointment was first of all when I left Uranium One,” said Froneman. The second was the failure to develop Dominion at all after his departure from the company. “It reflected very negatively against me and there was zip I could do.
“That was very hard for me so I have that, I suppose, on my CV as a failed project,” he said. The project is now in the hands of Shiva Uranium in which the influential Gupta family is a major shareholder.
He reacts strongly against critics who say, however, that Sibanye Gold has a simliar short-termism in its DNA.
“We are running a marathon and quite honestly you can have a year like we’ve had which, yes from a corporate point of view, looks like a great year, but from an operational point of view, we’re definitely not satisfied.”
Bernard Swanepoel, the former CEO of Harmony Gold to whom Froneman once reported when he was that gold group’s COO from 1996 to 2001, thinks the negative attention Froneman has attracted as “all-hat, no-cattle’ to be inaccurate.
“Neal is not “Mister Short-Term’. What he plans to do at the Rustenburg assets and Aquarius Platinum speaks out against the analysts who think Sibanye is just about harvesting gold assets. He seems to have a much longer-term approach.”
THE COMEBACK
THE creation of Sibanye Gold almost happened by accident.
Now at Gold One, Froneman, and his opposite number at Gold Fields, Nick Holland, were discussing the merits of a joint venture on adjacent uranium and gold tailings dams.
According to Froneman, Gold One had the best uranium surface deposit whilst Gold Fields’ Driefontein mine had the best gold dumps.
Neither side, however, could solve the tax leakage associated with putting the deposits together. The next move came from Holland.
“Nick said to me the only way he could move forward with his strategy was to unbundle Driefontein, Kloof and Beatrix and I shared that with my executive,” said Froneman.
Holland was motivated to act on the gold assets. Gold Fields had experienced a dark passage of highly confontational strike activity perpetrated by a new union with platinum industry roots – the Association of Mineworkers & Construction Union (AMCU).
Driefontein, Kloof and Beatrix were also becoming more difficult to manage; reserves were falling, and so would production. Holland wanted to focus on South Deep, the largely undeveloped gold resource, also on the West Rand. It was then that Froneman put up his hand to run the demerged company.
Froneman said Holland was keen to play ball because he didn’t have a person to run the unbunbled assets, and were the unbundling to take place, it had to be successful.
Contrary to press reports ever since Sibanye’s meteoric rise – which play on Holland’s supposed jealousy of Froneman’s success at Sibanye – Holland needed Froneman to shoot the lights out.
“I’ve got to be careful what I say here: I’m not sure that the potential was seen [in Sibanye], but certainly what I can say is that Nick had a great need for this to be successful. An unsuccessful unbundling would have been a huge concrete block around their necks,” said Froneman.
Holland is visibly proud of Sibanye Gold. Asked if Gold Fields would now consider a dividend expansion programme given its recent run of healthy cash flow, he told said: “We won’t address the dividend policy, but we did do a scrip dividend in the form of Sibanye. The market sometimes forgets that every Gold Fields shareholder got a share in Sibanye”.
Sibanye’s raison d’etre was to run the one-time jewels of South African gold mining – Driefontein and Kloof – efficiently by controlling costs whilst tackling some R4bn worth of debt amassed largely by dint of the cost of sitting out an AMCU strike. It also promised to pay dividends.
The notion of dividend yield was gaining huge currency at the time of Sibanye’s creation in 2013 because so little of it had been provided to investors. Notwithstanding a decade of the commodity boom, investors felt cheated and dividend yield was their medicine.
Once listed on the JSE in February, 2013, progress was good. The company established a strong track-record of returns, it also promised to keep production at about 1.2 million ounces of gold for 10 to 15 years, as well as reversing the trend of declining reserves and resources at Driefontein and Kloof.
This year, however, cracks have developed. Amid a troubled operational period, typified by three fires at Kloof and the prospect of strike action by AMCU after it declined to sign a three-year wage deal, an earlier promise to pay a R1bn dividend looks unlikely.
“It’s going to be tough to reach the R1bn. We haven’t had a good year. We’ve had extreme cost escalation, especially on electricity which is our second biggest single cost that has eaten into margins. We’ve had under-delivery on our plans so it is tough to pay a dividend,” said Froneman.
Analysts are starting to twitch too.
“Every company has a bad quarter or two, that’s mining,” said Leon Esterhuizen, a gold analyst for CIBC Capital Markets. “However, the big question now is whether Q1 (January to March 2015) and the wage-talk related setbacks in Q3 (July to September 2015) are one-off events or whether the operating momentum has been broken?” he said.
They also think the corporate activity in which Sibanye has sought to diversify itself is clouding the picture of why the company was first created.
James Oberholzer, an analyst for Macquarie Bank, said in a note there was too much uncertainty in respect of Sibanye’s strategic outlook.
“We believe that the number of moving parts in Sibanye at present is likely to lead to investor uncertainty about the strategic outlook,” he said. “While initially sold as a high-yielding dividend play, it appears that there are several other avenues that could well get the call for cash,” he added.
Esterhuizen believes it’s crucial the gold mines continue to thrive as they provide the firepower for Sibanye’s growth by acquisition strategy.
“In a flat metals scenario, therefore, the operational performance of the gold assets will be the single most important factor driving cash generation and, thus, the success of the company,” he said.
“Operational slippages at the gold assets would strain the balance sheet as the company waits for PGM cash flows to materialise,” he said.
Hanre Rossouw, a portfolio manager for Investec Asset Management, said his company had identified a shift in the strategy at Sibanye Gold. “We have reduced our shareholding over the last year as there has been a shift in strategy from the turnaround of under-performing gold assets to something more opportunistic,” he said.
Said Froneman: “We don’t shoot from the hip. Where you have public shareholders, you clearly have to be pretty consistent in your strategy. You can’t keep on changing because you’ll lose them and you’ll lose your support.
“So although we’re entrepreneurial, I think we are entrepreneurial from the point of view of doing things differently, but consistently different.”
GOLD OPTION
FAR from an exercise in corporate ad-libbing, Froneman says the acquisition of assets in other commodities was long part of the Sibanye blue-print. He credits Dennis Tucker, the former Investec investment banker who now runs the under-the-radar boutique financier, Qinisele Resources.
“Dennis Tucker worked very closely [with Sibanye] and I have to give him credit for some of the strategy,” said Froneman. “The concept of moving into other commodities was established even before Sibanye was listed,” he said.
It became apparent to Tucker’s team at Qinisele, and Froneman, that the gold industry alone provided limited growth, especially if the plan was to be South African-focused in which case it would leave Sibanye trying to consolidate with only two other management teams, AngloGold Ashanti and Harmony Gold.
“If you start expanding what you think are your core competencies … you don’t have to be a rocket scientist to see platinum,” said Froneman.
Tucker, a long-standing advocate for structural change in the ownership of South Africa’s gold industry, in particular, said Froneman was an ideal candidate to act as industry catalyst.
“What’s different about Neal is that he has a strong technical capability. Unlike a chartered accountant, he actually knows what is going on underground as well as the corporate side of the market,” he said.
In a sense, Froneman adopted a strategy that seems to have been on the minds of his two South African gold counterparts with Harmony’s Graham Briggs financing the Golpu gold deposit in Papua New Guinea while Srinivasan Venkatakrishnan, AngloGold’s CEO, saw plans to demerge the firm’s South African gold mines and create a diversified South African champion turned down by shareholders.
Does this imply that standalone South African gold mines have a questionable business case, and that Sibanye’s expansion strategy reflects this insecurity? Bernard Swanepoel thinks it’s become increasingly difficult to turn a profit from mining gold in South Africa.
“It’s hard to allocate capital to the South African gold industry because the returns are not acceptable,” he said.
“It’s not that the orebodies are suddenly worse, it’s more the increase in input costs such as electricity and human capital. Add that to the long lead times of, say, 20 years to build a mine and you can see why the gold mining sector is not getting the capital anymore.”
Froneman won’t say quite where he’ll move next as he builds out Sibanye Gold – which Froneman has hinted may change its name to something like Sibanye Resources – but it seems nothing is off limits.
Asked if Gold Fields’ long-standing problems with its only remaining South African asset South Deep could present joint venture opportunities, Froneman said: “We have, I suppose, expressed an interest in all good quality South African assets, including South Deep, if there’s an opportunity to partner with Gold Fields”.
South Deep is the enormous west Rand gold mine owned by Gold Fields. It is considered the last of the great gold resources bequeathed to South Africa’s Witwatersrand Basin, but Froneman said there would be no “hostile approach’ on the mine which has been valued at R40bn.
“There is a value to South Deep, there’s no doubt, but I also don’t know that it’s R40bn,” said Froneman. “But again, I suppose under the right circumstances we would be interested and it’s really up to Gold Fields if they thought we were a partner that could add value.”
CHAMPION
GIVEN the scope of Sibanye’s expansion, it has been inevitable that remarks have been made about how the group fits the bill of an South African mining champion.
This is the concept introduced by the former mines minister, Ngoako Ramatlhodi who said Government wanted to establish a local investor that would buy the assets no longer wanted by the likes of Anglo American and BHP Billiton.
Froneman said earlier this year his company had put up its hand in this regard. And there have been meetings. He said the ANC was receptive to his company’s plans and that it was cognisant of how the company had invested in the sector and flown the South African flag at international conferences.
Yet Government as a whole is a source of enormous frustration to Froneman. He is an outspoken critic. “First of all, I still think generally the government despises the mining industry. It is going to have to stop that; it is going to have to nurture the industry,” he said.
The second change of behaviour would be to stop taxing the sector so heavily. According to Sibanye Gold estimates, the combined impact of the National Treasury’s proposed carbon tax and the tax recommendations proposed by the Davis Tax Committee would cost the company R800m a year.
“If anyone in their right mind thinks that’s not going to affect jobs …. They’ve got to drop. The carbon tax is five shafts in our business and 15,000 people,’ said Froneman. “I do see a scenario where we resolve all these things and you actually create jobs.
“It is very sad that our strategy is underpinned by a lack of competition here. We saw it two years ago, three years ago. How sad is that you build a business because there’s no competition.”
With 2016 just over a month away, Froneman knows Sibanye has to get its gold operations back on track, or face more criticism that management attention has been deflected by the headline acquisition strategy. And the demand for dividend and payback by investors has become more intense, not less, as the mining market continues to deteriorate.
“We’ve been very clear that dividends will be paid, and they’ll be paid on the same number of shares,” said Froneman. “The gold market has been squeezed. Yes, the rand gold price has gone up, but we’ve seen enormous inflation in terms of electricity and others, so your margins have been squeezed.
“But the company is in no worse position because of the platinum acquisitions,” he said.
