Palladium to help drive Sibanye-Stillwater debt reduction effort

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Macro image of a one ounce Palladium bar

AS Sibanye-Stillwater’s growth-by-acquisition strategy enters a period of hiatus focus has fallen on its efforts to deleverage the balance sheet, and consolidate its gold and platinum asset portfolio.

A two-year track record of aggressively buying platinum group metal (PGM) assets may have left the group with serious upside production potential, but there’s also debt – the repayment of which has been complicated by the recent strengthening of the rand.

Froneman is confident that deleveraging is “manageable” across a range of FX scenarios. The group has extended its debt covenants to 3.5x net debt to EBITDA until end 2018, and to 2.5x thereafter. “Various levers” were also available due to the sustained strong rand/dollar exchange rate, he told investors today.

In an interview with Miningmx on Thursday, he said there was a misconception in the market his firm relied on the earnings of its gold business to deleverage its balance sheet (Sibanye-Stillwater’s gold operations were largely cash-neutral).

“That perception is incorrect. We’ve been able to accelerate the integration of our new PGM assets and these assets are already generating cash,” he said.

“The gold operations are clearly earning less cash under the current rand exchange rate, but the South African PGM operations are working much better than anticipated. Of course we’d prefer the gold business to be doing better, but we’re not as dependent on it,” he said.

The US-based Stillwater PGM operations would “… print a lot of money in rand terms”.

Said Froneman: “While we are not ex-growth, and given the importance of pursusing value-accretive opportunities, we won’t use our cash. We owe the market a period of no corporate activity and clarity on what the business will produce. So for the next while, we’ll hunker down and deleverage, focusing on our operations and consolidating our business.”

Providing guidance for the year ahead, Sibanye-Stillwater expected its local gold operations to produce between 1.24 million and 1.29 million ounces of gold at all-in sustaining costs (AISC) of between $1,130/oz and $1,180/oz.

The South African platinum mines were expected to deliver between 1.1 million and 1.15 million oz at an AISC of between $825 and $860/4Eoz, while the US-based Stillwater operations should deliver between 580,000 and 610,000 oz at between $650 and $690/oz over the coming year.

OPTIMISM

Froneman has been among the most vocal of government’s critics, but he declared himself encouraged by recent informal interactions with the public sector lately. “I see a vastly more favourable outlook for investment,” he said following the appointment of Cyril Ramaphosa as South African president earlier this month.

“I was one of the biggest critics from last year, and it’s what you aren’t seeing that encourages me. There is lots of informal interaction with business to understand the issues, and this hasn’t happened in the last five years.

“I’m much more positive, and its not because of what I read,” he said during a presentation of the company’s year-end results.

He later told Miningmx that he has also been encouraged by the Portfolio Committee on Mineral Resources in-principle resolution to institute a full-scale inquiry into allegations of state capture against Mosebenzi Zwane, South African mines minister.

“It’s a very positive message and Sibanye will still play its part in being constructive and in ensuring that the changes are sustainable and will happen in the right way. I have to acknowledge, though, that we’re in a honeymoon stage and actions will speak louder than words. But it’s a sincere attempt to do the right thing and we should all support that.”

5 COMMENTS

  1. Dear Fellow readers,

    The armchair critic has had a look at SGL numbers. I am about to mess my pants thinking of the oncoming train wreck heading this company’s way regarding its balance sheet under the strong R/$ exchange rate. It is scary :

    ND : EBITDA

    Covenants for SGL dictate that for FY18 ND:EBITDA must be <3,5x , and from FY19 onwards must be R6622M (± $536M)

    Given that R1621M needs to be repaid /rescheduled for FY18, then possibly the end of FY18 ND = R21555M , thus FY19 EBITDA needs to be >R8622M .

    From aforementioned, things are looking rather terrifying. BUT there is more horror:

    The production forecast for the FY 18 year is as follows:

    Gold Division = 38500 – 40000 kg Gold at AISC =R475K/kg – R495K/kg with CapEx =R3500M

    RSA Platinum = 1,1-1,15Moz PGM at AISC =R10750-R11250/4Eoz with CapEx= R1500M

    US Ops = 580- 610Koz at AISC = $650-690/2Eoz with CapEx = $222M

    Therefore , at current spot prices and Q4FY17 costs , the following arises :

    Gold Division EBITDA = R2121M
    RSA Platinum EBITDA = R972M
    US Ops = $275M ( R3162M)

    Total SGL EBITDA= R6255M R9759M to meet the covenant test then. But we all know that SGL CEO thinks like a recalcitrant chinese in far flung places, and regarding FY19 he will say ” The emperor is far away”. But to some of us, it is NOT that “far away” and requires a monumental step change in profitability!

    Heaping more agony on SGL shareholders is that Finance Expenses/charges for FY17 were R2971M (FY16: R903M). That is an increase of 229% y/y and Interest Expense of ±12,9%/yr on avg Debt of R23B, which renders borrowings very expensive! Even loan sharks do not charge that much!

    I previously wrote the following about SGL :

    “If my fears come to pass, then SGL will suffer from an unprecedented value-destructive bulimic M&A hangover in RSA.”

    HOW DID WE GET HERE?

    Readers must be begging to ask me: But GS, how did we get into this mess?

    Well, in one simple sentence: If you pursue head-over-heals debt-fueld M&A, operational rigour & discipline of your cashflow engines is a MUST absent which you are heading for train wreck!

    The SGL gold division is a >R10Bn/yr EBITDA business at a gold price of ± R550K/kg, therefore at current spot of R500K/kg, it is a R7500M. But under the following conditions:

    Driefontein Mine : This operation can , and has, to produce 4500-5000kg/qrt. Currently, it is doing 3500kg/qrt. Development & centares has lagged badly. This operation , with current complement , has the potential to deliver 100K m2/qrt but its only doing ±75K m2/qrt. So its grossly underperforming its potential due to lack of stewardship.

    Kloof Mine : This operation performance has improved and its back to 4000kg/qrt which is where s its production potential. The AISC are still too elevated for my liking given that at its current volumes , this shoud be a sub R400K/kg. Therefore, require more effort on costs containment given that its at production potential.

    Beatrix mine: This operation is grossly underperforming and cash flow negative at current spot prices. It has undergone restructuring recently, and I believe another round is required. It needs to be reconfigured and managed for 3000kg/qrt to contribute cash flows to dealing with the corporate debt load.

    Given that the Gold Division is sputtering , where else can the money come from? Well , Lonmin and RSA Platinum will NOT do it. They lack the profitability scale to generated , combined , >R2000M at PGM basket of ±R13000/4Eoz. All eyes will be on US Ops to contribute more than the slated $275M EBITDA. Therefore , Pt & Pd prices need to average >$1200/2Eoz for FY18. Anything short of that, SGL WILL NEED TO RESTRUCTURE ITS DEBT!

  2. Dear GS

    Personally, im waiting for a gold/usd breakout to the upside….do you see the Lonmin deal going ahead? and maybe a Rights issue at SGL?

    Many thanks TJ

    • Dear Trader Jason,

      The Lonmin deal looks priced in given that the share prices are tracking each other closely since announcement. The dilution has been massive for SGL shareholders over the last few years. Just for info, shares outstanding was 566M in FY13 (post Cooke Ops acquisition) and increased to NOW FY17 of 2168M fully diluted( YES, A >280% INCREASE) ( without Lonmin issuance). In that period FY13-FY17 , Tangible Net Assets have increased from $1,56B in FY13 to ±$3B in FY17 , thus 48% increase. There will be an argument advanced that it is more diversified etc BUT from a per share NAV add basis, value has been decimated.

      Rights issue again? Maybe! But the Chinese shareholders will revolt. Furthermore, Froneman just bought R50M worth of shares NOT <R1M.

      Regards,
      GS

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