Is Froneman being heard over market noise?

[miningmx.com] – SHARES in Sibanye Gold gained 7% in Johannesburg on a day when its peer group were static or lost ground, a development that perhaps suggests investors are turning at least an ear to CEO Neal Froneman.

At 120 cents/share, adjusted interim headline earnings almost halved year-on-year, even without including the cost of having to impair Beatrix West (although corporate affairs manager, James Wellsted, hastens to add that the write-down is due to the fire at the mine, not optimistic gold price assumptions). Regardless, one wonders what investors like so much today about the Sibanye Gold message?

Perhaps the starting point is not what Froneman said, but what has happened to Sibanye Gold since listing, especially during the April meltdown in the gold price. The upshot is that the stock seems to have been shouted down in all the market noise, coupled with bad headlines about potential wage protests.

As a result, Sibanye Gold is under-rated. As Froneman pointed out, the company generated in cash during the first six months of this year about 40% of its market capitalisation. At just under five, the company’s p:e ratio is lower than its entire South African peer group – a position Froneman dismissed as “just ridiculous”.

Secondly, the company is producing cash. Debt of R4bn has been halved since the beginning of the year.

Thirdly, second quarter advances in cost containment are expected to continue for the remainder of the year. The company took out 3,000 jobs through “natural wastage” and voluntary retrenchments. A further 1,500 to 2,000 will be cut of which only 500 are contractor positions.

Then there’s Froneman’s no-nonsense outlook on gold industry wage negotiations. “We wanted to go into wage negotiations with R2bn in the bank, and the ability to access debt, which puts us in a very strong position,” he said. In other words, there can be strikes, but Sibanye Gold will wait it out.

That would not be the preference, however. Investors are probably taking a shine to Sibanye Gold because they are starting to believe it will offer a dividend. A lengthy strike – which Froneman thinks is unlikely anyway – will harm payouts.

“I remain optimistic and don’t think that there will be long disruptions,” said Froneman of the possibility of a strike. “Workers don’t have appetite for strikes,” he added.

Froneman has waved a stick at unions before when he fired workers on an unprotected strike while he was CEO of Gold One International. It’s a strong message and a bit of a crowd pleaser for investors, but one suspects it’s a tad risky to test unions by saying they don’t have staying power. They have it, and lots other power besides.