Sibanye Bold*

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Neal Froneman, Sibanye-Stillwater CEO

NEAL Froneman has never been known for reticence. At a time when the mining industry was debt-shy, Sibanye Gold moved in the opposite direction as best demonstrated by its R30bn cash and share bid for Stillwater Mining, a US-based company.

No one quite believed him when in 2013, less than a year after Sibanye had been created from the demerger of Gold Fields’ South African mines, he resolved never to be a “Pacman”; that is, embarking on an aggressive merger and acquisition strategy.

Months after uttering these words, Sibanye had hoovered up the Cooke shafts west of Johannesburg and bid R407m for Wits Gold. A string of deals, including the quick-fire takeover of Aquarius Platinum and shafts in Rustenburg Platinum Mines, previously owned by Anglo American Platinum, duly followed.

It seems that now Froneman is drawing breath. Buying Stillwater Mining is a massive undertaking for Sibanye’s balance sheet, which shouldered $2.65bn in bridging finance. The sum was subsequently partly settled with $1.05bn in bonds and a $1bn rights issue – the largest ever in South Africa for a single transaction.

For Sibanye, the outcome is that it takes its platinum group metal (PGM) production to about 1.6 million ounces a year, more than matching its gold production, and sees the company establish geographic diversity at a time when the mining sector is in meltdown in South Africa following a series of regulatory shocks and blows to confidence.

I don’t see how any CEO can invest in this country at this point of time – Froneman

Reflecting on Sibanye’s break-neck growth as a precious metals company – it is the world’s third-largest palladium and platinum producer, and the world’s fourth-largest gold producer – one thinks of a description applied once by a UK banker to Brian Gilbertson, another aggressive expansionist, whom it was said was like a racing car; you might get a few prangs along the way, but you’d get there very fast. As a racing enthusiast, Froneman might appreciate the analogy.

For now, however, Froneman said there’s no immediate prospect of the company spreading its wings further; especially in South Africa owing to a downturn in its regulatory environment. Might this be a convenient excuse, though, for the fact that Sibanye has finally over-extended its financial resources, as some analysts claim?

“Yes, partially,” said Froneman during an interview at the firm’s Libanon mine offices – once the mine hospital – near Carletonville. “But I don’t think anyone who works with public money can actually sit in front of a shareholder and defend investing significant amounts of money where you can’t actually provide your investors with regulatory certainty, or have a reasonable amount of certainty in the outcome.”

He is referring, of course, to the disastrous re-draft of the Mining Charter which has set down some targets for black economic empowerment that the Chamber of Mines said was unrealistic, unreachable even. The Chamber also claimed that the Charter was written without much consultation with the mining industry.

The tipping point in respect of the investability of South African mining came somewhat earlier for Froneman, however, with the March 31 sacking of finance minister, Pravin Gordhan, by South African president Jacob Zuma.

“That was the final straw,” said Froneman. “Until there’s a change in attitude towards business, until this rhetoric around radical economic transformation stops, until we can actually provide our investors with regulatory certainty, I don’t see how any CEO can invest in this country at this point of time.”

Prior to these developments – the Cabinet reshuffle that spelled the end of Gordhan as finance minister and the publication of the Mining Charter – there was speculation that Sibanye would add to its platinum investments in South Africa.

It was speculation fuelled by Froneman himself who said that despite having bought Amplats’s Rustenburg mines and Aquarius Platinum, and notwithstanding the Stillwater Mining acquisition, a mine-to-market deal would transpire; in other words, Froneman would seek assets with refinery capacity that would give it an alternative to expensive toll smelting with a third party, currently Amplats.

“Let me say this: we have enforced our platinum strategy and it does involve getting to a mine-to-market model. There are many ways of getting there. For me, it’s difficult to comment on Lonmin. I think that the market always overreacts on the bottom side and the top side, so the potential for another ratings downgrade is real, which is going to have a very significant effect on the rand and that might ‘buy’ Lonmin time.”

“But our first priority is to stabilise our balance sheet, complete our financing, integrate Stillwater, and if there are opportunities post that, we can look into it. We can’t, especially for a risky asset, extend our balance sheet even further,” he said.

Quite apart from the theory of buying assets, there’s also the practical difficulty of both justifying and financing acquisitions in South Africa because of the deterioration in the business climate.

Said Froneman: “What practically happens is when you look at your weighted average cost of capital, there’s an equity portion and there’s a debt portion in terms of determining the discount factor. What’s happened here, because of the uncertainty and lack of investor friendliness, is those discount factors have gone up 4% to 5%, which means our projects do not meet our hurdle rate.

“Our hurdle rates have also had to go up because of the risks associated with it so I suppose we will always be balanced in our thinking. If there’s a ‘dripping roast’ that meets our hurdle rate, and it’s the best project or acquisition to do, it will be driven by proper financial analysis,” he explained.

“That doesn’t mean that there’s no scenario where there’s further steps in South Africa. At the same time, assets in South Africa are going to become cheaper and cheaper under this scenario and in some ways, that will balance out. But I think under current conditions, you still remain with huge uncertainty which means that it’s unlikely that any of the South African assets and projects are going to meet hurdle rates.

“It doesn’t matter how competitive, or the fact that you’re the only buyer here, you are still dealing with shareholders’ money.”

ANALYSTS have been critical of the Stillwater Mining deal, claiming it is heavily dilutive, both of Sibanye’s stock and future earnings. According to a report by Citi in May, it believed the deal would result in a 19% to 48% decrease in Sibanye’s headline share earnings between 2017 and 2022, and a 28% decline in Sibanye’s net present value per share. The bank also noted, however, that shares in Sibanye had already factored in these effects. It concluded at the time, that Sibanye was its favoured South African gold share.

In the view of Goldman Sachs, the bid for Stillwater was a “leveraged play” on palladium prices despite a run in the price of the metal at time, which it attributed to the prospect of US tax cuts that might lead to increased demand for automotives. This is because Stillwater is, unusually in the PGM supply-side sector, predominantly a palladium producer in a ratio of about 78% to 22% platinum. And the prospect for palladium divides analysts.

“The key market for palladium, the US (which is 25% of total autocatalysis demand), is peaking with our autos team forecasting US sales to come down over the next couple of years,” said Goldman Sachs. “The significant long positioning in the commodity post the US election on expectations that potential would lead to higher auto demand. As such, we remain bearish on palladium in the near term.”

Investec Securities said in a report in July that palladium was its preferred metal in terms of price prospects: “We expect palladium’s discount to platinum to narrow further, with constrained supply and a superior demand outlook underpinning superior price prospects for palladium, with only modest risk of substitution while the discount to platinum remains.”

Said Froneman: “We still see a significant deficit in palladium to the point where we need to consider how we include more platinum in gasoline autocats.

“I think the market could well [do that]. If it does, we need to ensure there’s no price bubble in palladium, and therefore we need to make sure that there’s not a substantial shortage and that substitution does happen in a responsible way.”

ALTHOUGH the takeover of Stillwater adds to the list of transactions Sibanye has completed since listing on the Johannesburg Stock Exchange just four years ago, it is the first that isn’t predicated on a turnaround, or where the assets are to be selectively mined, or even where synergies are to be extracted. In a sense, Stillwater represents the “finished article” for Froneman – a point he acknowledged.

“It’s completely different to a Rustenburg and an Aquarius which are acquisitions that we bought for turnaround and synergies. In Stillwater, there’s practically no turnaround and there’s very little synergies,” he said.

What we are being very careful not to do is to arrive as South Africans and tell them there’s a better way to run the company – Froneman

There are a few changes that Froneman is planning to make including accelerating Stillwater’s Lower East Boulder project – an expansion that stands in addition to the $175m to $190m Blitz expansion, which is already underway. “They are talking about eight to 10 years,” he said in terms of the development of East Boulder whereas Froneman is thinking of some five years.

In the main, however, Froneman intends to give support to what’s already there although he does intend to devote roughly half of his management time to Stillwater. “What we are being very careful not to do is to arrive as South Africans and tell them there’s a better way to run the company.

“That’s not what we bought.

“We bought a company where the value is not fully recognised by the market because the market hasn’t been able to factor in Blitz; it hasn’t been able to factor in all the additional productivity and therefore the cost improvements. And that’s the benefit to shareholders.

“So we don’t want to disrupt it; if anything, we want to play a much more supporting role than a disruptive one.”

*Sibanye announced on August 30 it planned to rebrand itself Sibanye-Stillwater in recognition of the important addition of the Stillwater Mining asset.

8 COMMENTS

  1. Hmmm. Sebanye can get cash from sales of its Altar (Argentina copper) and Marathon (Canada PGM’s) properties. Altar was bought for about 1/2 billion US. Hey GS, what about imminent Chinese pgm demand?

  2. No analyst ever gave Sibanye recognition for the purchase of Witsgold. If you look at the original resource statement it contains some of the best gold resources after the current ones are depleted. In my opinion they also overlooked the area in the “Potch” gap where Anglo American planned a new mine in the 1980’s, which were shelved due to a drop in commodity prices, the first strike action in 1987 and the resultant decline in the gold mining industry in SA.

  3. Froneman, his whole history, is up for question. I urge investors to go back and look at it. He should not be trusted. Investing in his company(ies) has brought me nothing but trouble.

  4. Dear Fellow Readers,

    Froneman has made a contribution ( East Modder Mine) to the mining industry and he should be accorded his due. But I don’t think we should stultify ourselves into believing that the deals done by SBGL will all workout just fine. Furthermore, its unfair to expect sensible people to tag along with journalistic view of accepting Froneman’s opinion on this as a final per se.

    Lets unpack this deals :

    A. WITSGOLD : This was a R407M offer , with total acquisition costs of ±R1360M ( Offer price + R950M for Burnstone). The acquisition was meant to deliver DBM , Bloemhoek & Burnstone projects within 5 – 7yrs at production total >500koz/yr. We are now 4yrs in and there is no sign of such production uplift. At acquisition 2P = 24Moz , now the same projects 4,9Moz at FY16. The big headache is Burnstone Mine which collapsed Great Basin Gold after spending $800M ( yes, EIGHT-HUNDRED MILLIONS DOLLARS OF UNITED STATES OF AMERICA CURRENCY !) . Lets be clear, mining Kimberly reef is NOT for the junior miners, even Harmony got burned at Evander & Doornkop. The kimberley reef lack consistent payability and structure requiring extensive footwall development and face length to achieve commensurate profitable tonnage volume. ITS A TOUGH ASK! The mine was meant to have required additional R950M to get it to good footing by modifying the mining method and appropriate extent of foot-wall development within 3kms of the shaft. Well, to date R531M has been spend with fcast total CAPEX = R2100M all before FY 2021. The benefit of R650M to Beatrix from DBN has not even been registered. Attention has gradually shifted away from this mess to SWL etc.

    B. GOLD1 Westrand Assets : Formally known to many of us as Cookes Section Operations. The lest said about this silly adventure the better. It was a stitch-up to get the chinese to tell a good story back home. The cost of the deal was R5,3bn paid for with repaying some debt and 17% of SBGL . The deal baseline had fcasted prod = 270Koz/yr and cum.OCF (total to FY17) = R3,4bn. Now this R5,3bn has been impaired over the 3-4yrs period , with the last impairment instalment of R2,2bn last week. The Losses to date are R1750M. The WRTRP is for all intends and purposes dead and never to be resuscitated. The only winners out of this saga are the Chinese sitting pretty with R10Bn worth of SBGL shares.

    C. AQP deal : He just never learns does he? SBGL was at it again by entering at the bottom of the PGM market. It turnout that the said “Bottom” had a “basement underneath”. The AQP deal was truly remarkable in that debt was now being used to fund a knowingly expensive acquisition. The lure : “Kroondal Mine”. This mine had a reputation as being low-cost producer & mechanised etc from the spin which was successfully fostered by Stuart Murray. Well, unit costs are only part of the story the other being your revenue/price realisation in PGM mining. So whatever Kroondal mine benefit was making in unit costs IT WAS passing-on to AngloPlat in its PoC contract and P&S agreement. I have commented in another story about its price being overly rich by some $150M. Cum. OCF ( to 1H FY17) = -R896M and counting….against the deal baseline fcast of R1040M!

    D. Rustenburg Platinum Mines : Mark Cutifani made it clear to Chris (CEO of AngloPlat) that the days of empire building were over and he got Tony Oniel to guard the technical chaps at Angloplat to achieve the said objectives. Reinvestments were to be stopped/curtailed given the latent production capacity of some 3,5Moz Pt in 2013 excluding projects (De Brochen & Twickenham). Angloplat had too much Pt production than was necessary for value creation given Invested Capital. So assets which were in need of re-investment of their mining leases were to be sold. Froneman wanted to please the public and he did a deal for >R3Bn , if we excl. some of the deal miniatures/modalities. AngloPlat ensured that the assets were +ve Net Mine OCF before deal closure etc. Now SBGL owns these things full-stop. I always tell people that a mining deal has 2x parts….meet baseline prod OR baseline Cash Flows ….or better meet & exceed them both. Xstrata (including old Harmony in the early 2000s) used to do this successfully with their roll-up models. These ops must generate FCF =+R600M this FY17 , at 1H FY17 we are FCF= -R122M.

    D. SWL MegaDeal : ” An expensive deal is an EXPENSIVE DEAL” It really does not matter what happens thereafter. The Pt & Pd prices can go parabolic and astronomical BUT it just won’t compensate. The bridge loan unwinding has been shambolic given the net-debt/EBITDA blowout despite assurances given 6xmonths ago. My fellow South Africans , $2650M is a LOT OF MONEY. Even if SBGL were to get top-dollar for Altar & Marathon , they still wont offset such price. Overpaying on an M&A always require some offset i.e bankable synergies & committed asset sales etc NOT hope! I see none in this deal with all its accompanying headaches & hangovers. 2P = 20Moz is truly a non-event in PGM mining , even Brian Gilberson’s Sedibelo mine has 25Moz ! Grade helps OPEX. The recycling business is marginal and does not pay mega loans off. I foresee write-offs and impairments ahead…AGAIN!

    So overall, none of the deals have proven successful thus far with the balance sheet in distress with a hoped for improvement from the Gold division to rescue the situation. It’s a totally reckless and unwarranted place to be BUT we are here now. Lets hope the board of SBGL will now narrow the focus on operational discipline so that we don’t have an unmitigated disaster.

    Yours truly,
    Goldspeculator

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