Sibanye-Stillwater’s five-year glitch

Sibanye-Stillwater CEO, Neal Froneman. Pic: Martin Rhodes

Neal Froneman emerges from his office looking worse for wear. I remark so. “I’ve got a lot on my shoulders at the moment,” he replies. It’s only two days since the latest underground fatality at Sibanye-Stillwater’s West Rand gold mines, this time at Driefontein. The event means the firm has lost 21 miners this year; 19 of them in gold mining. Sleep is hard to come by at the moment because you’re never sure if you’ll get “the call” from the mine, he says.

Times are currently hard for Sibanye-Stillwater. Not only have the gold mine fatalities attracted a barrage of criticism from society as far apart as Parliament to Canada’s National Bank, but questions are also being raised about the firm’s balance sheet which, at the time of writing, was not grievously indebted, but enough so to create expectations of a discounted rights offer. The expectation is reflected in the share price.

James Wellsted, head of investor relations for Sibanye-Stillwater, acknowledges pressure on the firm’s share suggests the market isn’t entirely convinced the company has its debt entirely under control and that a rights offer may be in the offing. “The market’s previous experience, from Lonmin for instance, and then Petra [Diamonds], is where you’ve got bank covenants and you breach them. Then, essentially, the banks are in control.

“They [the banks] don’t want you to get more debt so the easiest way for them is to force you to do an equity issue and that’s what the market is betting on,” he says.

Says Froneman: “And the equity issue is normally done at a discount so the market understands there is value in the company, but they’re waiting for a rights offer at a discount”.

But neither think that will be required. A streaming deal, which will most likely involve Sibanye-Stillwater’s by-product platinum group metals (PGM) production, is being constructed, and may well have been announced to the market before publication. 

Currently, Sibanye-Stillwater thinks it can raise $500m from such a transaction which basically involves it selling forward some metal in return for cash now which it will plough into the balance sheet. [A $500m streaming transaction was announced on July 16 and considerably eased pressure on the balance sheet. You can read this article here].

This is all a far cry from when Sibanye-Stillwater was still Sibanye Gold consisting only of the Kloof, Driefontein and Beatrix mines, which had been demerged from Gold Fields. Even then, though, the company battled against scepticism. In fact, during the first six months of existence, shares in Sibanye Gold trundled down to half its debut value on the JSE to about R3.50/share.

A year later, with some operational track-record under its belt, the company had regained its listing price; and a year after that, it was double again, assisted to an extent by the fall in the value of the rand as then president, Jacob Zuma, began replacing cabinet ministers with more pliant incumbents. South Africa’s business environment was entering what became the apogee of the Zuma years, but Sibanye Gold was flying.

Investors even responded well to Sibanye Gold’s diversification into platinum following the purchase of Aquarius Platinum and, in Froneman’s typical quick-fire fashion, the acquisition of Rustenburg Platinum from Anglo American Platinum only a month or two later. So far so good: Sibanye Gold was a firm on the up with a share price to match.

The trouble came in September 2016, following the R30bn bid for Stillwater Mining, the US firm, which resulted in one of the largest rights issues ever to materialise, in any sector, in Johannesburg.

As a piece of corporate action, it was as bullish and as brassy as anything seen in South Africa; akin, in fact, to Brian Gilbertson, the creator of Billiton, or Mick Davis, who built Xstrata, at their high-flying best. But the market, also worrying about the effects of a stronger rand, disliked the transaction.

Shares in the company fell from nearly R30/share to just under R10 in five months. The suspension of the dividend, which Froneman had said previously would be a defining feature of Sibanye-Stillwater’s investment character, also weighed heavily on the stock. As if this wasn’t enough, two new proposals were hatched in which Sibanye-Stillwater would merge with Lonmin, and take an investment in DRDGold in an effort to create a significant gold retreatment business. The share continued to falter, exacerbated by the improving value of the rand which worked to depress Sibanye Gold’s revenue line.

The view of Leon Esterhuizen and Arnold van Graan, mining analysts at Nedbank Corporate & Investment Bank, is that, while the rand strength and the heavy debt assumed following the Stillwater deal had put the company’s share under pressure, the current share price trough reflected a more fundamental concern with Sibanye-Stillwater’s merger and acquisition strategy. They think Froneman’s strategy of hand-over-fist growth, a striking out in all directions, has resulted in a more unwieldly and higher-cost company than is uncomfortable for investors. The acquisition of higher-cost assets has come to dominate the debate over the company more than, say, just debt, they argue.

Certainly Sibanye-Stillwater is a more complex company than before. It’s vulnerability to the unpredictable ebb and flow of South African labour relations has increased as employment numbers have risen: from 36,000 in 2013 to 64,000 and perhaps again to 97,000 if the merger with Lonmin is completed. It is also more exposed to South African underground mining. Esterhuizen and Van Graan also believe Sibanye-Stillwater is more reliant on higher metal prices than before the Stillwater Mining deal, and since it is no longer positioned as a dividend paying stock, it will increasingly be seen as a simple option on metal price upside.

“We continue to question the effectiveness of its strategy,” said Esterhuizen and Van Graan. “Not only has this strategy resulted in excessive share dilution, but has also seen the company developing an asymmetrical risk/reward profile. We believe this strategy has essentially made Sibanye-Stillwater overly reliant on higher metal prices to get back to cash flow per share levels that are still, at current prices, well below what the company did before embarking on the Stillwater deal.

“If the hope of higher metal prices fails to materialise, or if there are more or continued operational setbacks (particularly at the gold operations that are currently engaged in wage negotiations), Sibanye-Stillwater’s debt position could push it into a forced equity issue that would be extremely bad for minority shareholders,” they said in report written on June 14.

I would go as far to say we are a company that is ahead of the game. Everyone now is talking about M&A

Froneman disagrees there’s a fundamental problem with the group’s strategy, arguing that the company was always constructed with a view to growing beyond gold. The company’s management structure was “fatter than most” to account for growth, he said. What couldn’t be anticipated, however, was the timing of opportunities.

“The timing was such that we believed we had to take advantage of two things: the one being a depressed PGM environment, and secondly, the fact that no other platinum company, or in fact, any other company saw the benefits of consolidation. Before the rug was pulled from under our feet, we needed to make those moves,” said Froneman.

“Those are not things you can delay without putting yourself at risk.”

Froneman said creating returns for investors remains a core value, but he added that there was “a conscious decision” to incur debt and compromise the cash dividend for a period of time with a view to restarting an improved dividend backed by a business that it would make it more sustainable “than just based on a price tag in a gold sector”.

“The core gold business is still very much as we saw it. It’s far less important. If we hadn’t done what we have done, we would just be a break-even gold company unless we’d put some fancy hedge in place, or something. I don’t think we would be a very exciting company at all.”

He acknowledged risk was taken on acquiring PGM assets. “It was not a decision that was misunderstood or the risks weren’t understood. The rand strengthening as much as it did has been a surprise which has created most of the concerns, but we have said that we will deleverage in the short term.

“I would go as far to say we are a company that is ahead of the game. Everyone now is talking about M&A.

We’ve done our M&A. They [other companies] will go through a phase of incurring debt, incurring dilution if they use shares. We’ve done that and our next phase is just to deleverage. So when everyone was talking about strengthening a balance sheet, we had a strong balance sheet.

“Our South African PGM business is operating better than it did under its previous owners. Our safety record there is good. They are generating cash. Our US PGM business is really the star performer. It’s hitting all its marks and, as I say, it covers its capital and it covers the interest on the debt we’ve incurred. So the company, fundamentally, is well positioned in the gold sector and the PGM sector, but we have got to get safety back under control,” he says.

S peaking during an investor call, Froneman expressed his personal dismay at having lost so many employees to fatal accidents this year. “In my entire 40-year career, I have never experienced anything like this. I am deeply saddened and traumatised to have lost so many Sibanye-Stillwater family members in this way,” he said.

Criticism rained in from all angles. There is the well-publicised note from Citi analyst Johann Steyn, now on public record, which claimed Sibanye-Stillwater had been mining the high-grade pillars at the West Rand mines in order to boost the operations’ flagging fortunes. Another analyst at the National Bank of Canada commented: “In a world where the entire buy-side is now being governed and directed by their ESG groups, I cannot see how you can possibly own this stock in any portfolio”.

The interruptions that invariably follow a fatal accident, as well as remedial measures being taken to the complex following a seismic event in May in which seven miners lost their lives, has hit production. Sibanye-Stillwater now expects to produce 6% less gold from its South African gold operations – somewhere between 1.17 to 1.21 million ounces this year. All-in sustaining costs have also been revised higher although production would revive in 2019, the company said.

“While a weakening rand has provided some relief, the South African gold business remains around break-even and we remain concerned that structural issues will continue to affect longer-term performance,” said Andrew Breichmanas and Sanam Nourbakhsh, analysts for BMO Capital Markets.

“The gold division is not broken,” says Froneman.

“What has changed is we’ve gone through a strong rand. The output has decreased from peak levels primarily because of Cooke which was producing about 200,000oz. Kloof has been performing well other than the safety incident. Driefontein is not performing to plan, but we understand why and we’ll get it back on track.”

There is, though, more to Sibanye-Stillwater’s safety problems than just the financial angle. There have been comments that the government may dictate future mining methods, which could be less profitable. The view from the Association of Mineworkers & Construction Union (AMCU), in typically pugnacious mood ahead of wage negotiations, is that shift bosses may have intimidated mineworkers to operate in areas they deemed unsafe. Another – yet more extreme view – is that the company ought to be put in curatorship: a suggestion that flummoxes Froneman. “I’m not sure how you’d go about that one,” he says.

The official view of the South African government, however, is that it’ll be directed by the provisions in the Mine Health & Safety Act, which in terms of its amendment does allow for the prosecution of individuals. Gwede Mantashe, South African mines minister, said the government had a responsibility to enforce the law. “This right must be enforced,” he says.

“What Gwede refers to is: let the investigation [into the fatalities] proceed and where people, including myself in that structure or chain of command have been negligent or responsible, there have to be consequences,” said Froneman.

The gold division is not broken.

While Sibanye-Stillwater hit back at AMCU claims of mine manager abuse, Froneman acknowledges that personal misdeeds must be investigated and rooted out. There have been no reports on the firm’s anonymous tip-off line of workers being forced into unsafe areas in order to meet production targets, but the possibility exists. “I am not naïve to think that it’s not happening because there is noise, and where there is noise, these things are happening,” he said.

“But we need to change the behaviour or the attitudes of supervisors. I would argue that if you took out the leadership of this company, it wouldn’t make any difference to what happens going forward or backwards. These issues [of safety] are much deeper; they are related to behaviour; they are cultural issues. We understand what has to change; it requires not just management to change its behaviour, it requires all stakeholders to change,” he says.

Since Sibanye-Stillwater has become a more complex company than the one that started out in 2012, it’s safe to say there are a number of moving parts to look out for.

One is wage negotiations, currently underway; the other is Lonmin. Not all the conditions precedent have been met and while Lonmin shareholders are likely to give the merger their vote, the same can’t be definitively said of investors in Sibanye-Stillwater. Lonmin also has to see through the restructuring it said it would put in place. Might it have been better to just let Lonmin collapse first, however callous that may sound?

“We’ve seen so many companies go into business rescue and you end up inheriting a mess. It’s not a smart or cheap way in; there’s lots of value destruction in that process so a vanilla transaction where we can control the process is in the long-term interests of shareholders and South Africa, in our view,” he says.

And a year from now? Given the helter-skelter Sibanye-Stillwater has been through lately, how might the company look in 2019?  “Twelve months from now, we are significantly deleveraged. A picture I can envisage is something like our net debt to EBITDA sitting at 1.5x. The cash flow from our operations are solid enough to reintroduce the dividend and we are then embarking upon the next part of our strategy while we are integrating Lonmin and realising the benefits from that.”

Next part of the strategy?“I do think we need to grow our gold business, and that will be the primary focus.”

2 COMMENTS

  1. Hi Miles

    Yes. It was written sometime in June I think.
    It’s actually the digital version of a printed book Miningmx publishes – a kind of brand extension – distributed with Finweek.
    Always challenging when you’re combining “yearbook” with a “real time” platform, but the approach is that this is the Yearbook as we saw it at the time, so that’s what we render.

    Best

    David

  2. Great article. I believe in Froneman’s vision for the company. Good investment going forward. Stock is fantastically cheap at the moment. Shareholders will reap massive benefits in 2020. Projected stock price should be between $8-10 (currently $2.30).

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