What Sibanye-Stillwater’s bond says about its prospects

SHARES in Sibanye-Stillwater were hammered yesterday as investors took short positions while others bailed on the stock.

This was after the precious metals miner announced a five-year $500m convertible bond. It will pay a relatively low interest rate of 4% to 4.5% while using $200m of the cash to buy a  recycling business in the US. But it comes with major negatives.

We asked an analyst to explain what went on.

What happened to Sibanye-Stillwater’s price yesterday?
It’s share price was down on the dilution potential of the convertible bond it announced. It also crystallised the balance sheet risk which many investors were worried about.

If it coverts Sibanye-Stillwater has to issue more shares. Or they have to buy it back. But convertible shares are a very expensive way to raise cash.

Why is the company doing this?
In order to shore up the balance sheet as it funds more deals. Look, it’s proactive, but the company is springing large sums on mergers and acquisitions in a potential down cycle. That means, as a strategy, it’s very risky. But Neal Froneman, Sibanye’s CEO, has got it right before when he bought platinum group metal (PGM) mines in South Africa, and in the US. So now the company is going at it again.

The share was down about 23% Do any investors like the bond?
I think investors in the US are generally in support of it but I’m not sure asset managers in Cape Town like the risk. One of the reasons the share declined was that investors that took the convertible bond also took out short positions because they don’t know where the share will be in five years’ time.

Why else did the share price tank?
Overall, the biggest reason for me is that it basically highlights the risk in Sibanye-Stillwater in a downcycle. Although this funding could give the company some breathing room in the near term, it may have to raise more funding in future if PGM prices do not increase sharply from current levels.

Anything else we should be worried about?
Well it’s certainly a wake-up call for investors. At these PGM prices, company free cash flows and balance sheets will be under all sorts of pressure. One view is that Sibanye-Stillwater moved early because it expects the very limited pool of capital available for these kind of debt structures will be exhausted in the coming weeks or months.

Other companies could be coming to the market looking to fund their balance sheets with equity. That’s if the PGM markets don’t react positively.

What are the chances of that happening?
Hard to call. There’s a view out there automakers have largely destocked from having fulfilled contracts during the Covid pandemic and the semi-conductor supply crisis when it was hard to sell units. If that’s true, and some restocking occurs, the PGM basket price could recover, and potentially ease the pressure on the likes of Sibanye-Stillwater.