AFTER riding the wave of record platinum group metals (PGM) prices since 2015, Sibanye-Stillwater’s last seven months have been a return to terra firma.
Firstly, PGM prices have softened. Secondly, the firm faces a $1.2bn legal suit, launched by Appian Capital Advisory, the UK private investor from which Sibanye-Stillwater had agreed to buy two mines in Brazil. It bailed on the deal in December, citing a “material adverse advent”, a legal ‘get-out’ that Appian is contesting in the UK’s High Court.
Then flood waters stopped production at Sibanye-Stillwater’s US PGM mines just as the group was coming out of a three-month strike at its gold mines in South Africa – an event that served to remind investors of its fragile relationship with the Association of Mineworkers and Construction Union, which had teamed up with the National Union of Mineworkers.
The strike was ended in June after unions agreed to an average 6.3% pay deal over three years – an outcome that was, on balance, a victory for Sibanye-Stillwater. However, the production losses the gold mines face this year will throw the spotlight on the fact that these are ageing assets. As a whole, Sibanye-Stillwater’s gold division – with its high-cost labour complexities – poses more risk than reward for shareholders.
“I think shareholders may even contribute negative value to our gold business,” said Neal Froneman, CEO of Sibanye-Stillwater, in an interview. He acknowledges gold market deal-making will be necessary if the group is to maintain its long-term exposure to the metal. Reserves indicate the current base of production will only persist until 2025.
“Is it big enough for us? At 10% of our earnings, no; it really makes very little contribution. Would we like to have a bigger gold portfolio? Absolutely. At the right time we will have a look at it.”
You are seeing a global economic reset taking place and the opportunity to make the right moves will probably happen in six to nine months’ time.
That time is not now, however. The gold price is heading for a further bout of weakness despite the fact that economic recession is in the air, says Froneman. (Macroeconomic distress is normally a positive force for gold ownership).
Froneman tried to renew Sibanye-Stillwater’s gold division a year ago, pitching mergers with AngloGold Ashanti and Gold Fields, both of which were rebuffed. Froneman didn’t fancy the prospect of time-consuming, energy-sapping hostile takeover attempts and so stepped away. In any event, the company had just unveiled the first transaction of a battery metals strategy.
Between February and November 2021, the company allocated $1bn in investment in two lithium projects, the Sandouville nickel refinery in France, and a base metals tailings reprocessing firm in Australia. Sibanye-Stillwater then doubled down with the $1bn proposed purchase of the Appian Capital assets in Brazil before pulling the plug in December. Froneman argued that killing the deal was a rational response, but analysts wondered if it would derail the firm’s acquisition push.
Froneman says confidence is as high as ever regarding its expansion through deals; at the same time, however, investors ought not to expect another transaction soon, he says. “You are seeing a global economic reset taking place and the opportunity to make the right moves will probably happen in six to nine months’ time. There’s too much froth in the market.”
Wheeling and dealing
Froneman has always been an executive in a hurry. Whether it was Aflease, Uranium One, Gold One – companies he has previously headed – or Sibanye-Stillwater, his preference has been to build through acquisition rather than ‘through the drill-bit’ – the mining sector’s sobriquet for exploration and resource development.
In an investment cycle that prizes investor returns more than growth – even in today’s metals-hungry market – Froneman’s strategy comes at a potential cost, according to a report by RMB Morgan Stanley. While Froneman’s companies are always an exciting ride, deal risk is the trade-off, it says. Free cash flow to dividend conversion “could continue to lag the peer group with investors in Sibanye-Stillwater primarily backing management’s ability to reinvest cash flows at higher returns via merger and acquisition and new project development”, the bank’s analysts said in a report earlier this year.
In Froneman’s view, however, his battery metals transactions of last year were to position the firm for earnings growth. Sibanye-Stillwater claims it has some form, knowing how the market will develop. By adding PGM production from about 2016, it perfectly anticipated massive gains in the prices of palladium and rhodium. To some extent, improvements in the lithium market, to which Sibanye-Stillwater is hoping to be exposed, had already been underway last year, with the mineral gaining 280% in price. But Froneman thinks there’s more upside to come.
Lithium is a critical ingredient in the manufacture of the lithium-ion batteries that power electric vehicles (EVs). To an extent still unknown, these batteries will compete directly with the internal combustion engine (ICE) technology that PGMs supply in the manufacture of autocatalysis over the next 10 years. And given the enormous political capital attached to carbon emission reduction by economies globally, the likelihood is that, eventually, ICE will be phased out.
Would we like to have a bigger gold portfolio? Absolutely. At the right time we will have a look at it.
However, Froneman is not certain this transition will be quick or linear. The scarcity of new metals production, such as lithium, means the market penetration of EVs will most likely be lower than expected and the widely expected decline in ICE metals will be more gradual, he believes.
“The big picture is that battery EVs have their role and they have significant roles, especially in Europe and in cities, and ICEs and fuel cells [an alternative zero-carbon technology that uses PGMs in its manufacture] have their roles,” says Froneman.
“We are in a fortunate position where we don’t have to promote one at the expense of the other. They will both have a place in the mobility sector and we intend to have exposure to both.”
Sibanye-Stillwater’s push into lithium production is somewhat different from its PGM strategy insofar as the latter was a classic extraction of operational synergies from existing cash-generating assets. The lithium investments, however, are ‘projects’ that have to be permitted, constructed and commissioned: mineral production from both is not likely until about 2024 at the earliest.
The most progressed is Keliber, a prospect situated in west Finland. On June 30, Sibanye-Stillwater announced it would buy out minority shareholders in Keliber Oy for €250m, taking an 80% stake in the project with Finnish Metals Group, a government-owned company, holding the balance of the shares. “It’s a beaut,” says Froneman. “It’s going to be one of the best lithium projects in the world; one of the greenest, one of the closest to the European markets.”
The company also has a foothold in Rhyolite Ridge, a lithium-boron project, through a $490m option agreement with Australian firm ioneer. The project, situated in Nevada, is facing permitting hurdles but Froneman says it’s “evolving very nicely”.
Keliber is a beaut. It’s going to be one of the best lithium projects in the world, one of the greenest, one of the closest to the European markets.
He also alludes to where Sibanye-Stillwater might look next for transaction: “We do need to build up our exposure to nickel, but it’s a three- to five-year strategy. Because we grew so rapidly in PGMs, there’s a perception that we need to do the same thing in battery metals. It’s not going to work that way.”
EV metals investment is also more complex. Given the strategic nature of the zero-carbon transition, there is public sector participation as per the Finnish Metals Group in Keliber. Secondly, the evolving nature of battery metals supply is precipitating commercial deals with original equipment manufacturers.
A year after agreeing the €85m Sandouville transaction in February last year, Sibanye-Stillwater unveiled a €25m investment in Verkor, an EV battery manufacturer with a proposed 16GWh gigafactory planned for Dunkirk, close to Sandouville’s Le Havre facilities, and which has the French government as a shareholder. Logically, the nickel refined at the Sandouville facilities will be supplied to Verkor.
Froneman says Sibanye-Stillwater is not interested in being “a contract miner” to EV battery manufacturers. Establishing commercial relationships allows the company to participate in the downstream and helps it influence market development. “Are we going to invest in a car company, no. But we do want strategic formal relationships because we want to work in ecosystems with likeminded people and become pandemic-resilient.
“I think you are going to see more of it,” Froneman says. “The supply of metal is going to be the key constraint in just about any of these transformations, so those that have the metal are going to have the leverage.”