Sibanye-Stillwater: huge profits, but risks have emerged

Sibanye isn’t a company for investors with weak stomachs. Moves of over 4% in a single day are common. Of course, the longer-term story is what really matters.

Timing is everything in mining stocks. Here’s a crazy statistic: Sibanye is down around 2% in the past year and is up more than 200% over the past 5 years. It gets even more silly over 3 years, with a share price jump of around 375%.

To give an idea of the importance of cycles, the South African Platinum Group Metals (PGM) operations generated adjusted EBITDA of R51.6 billion in 2021, four times higher than the total acquisition cost of the assets!

The reason for the immense volatility in the share price is that the underlying commodities are also volatile, especially the PGMs. Gold also does its fair share of jumping around. Due to the fixed costs involved in mining, a move in the commodity price is amplified into a larger move in profitability and hence the share price.

Sibanye is making moves in its so-called “green metals” strategy, with several transactions in metals like lithium and nickel. Sibanye also invested in a significant minority stake in an Australian tailings company, as part of its strategy to have mining and tailings operations.

In the six months to 31 December 2021, profit attributable to owners of Sibanye increased by 13% and headline earnings increased by 27%. There was a wonderful 88% increase in free cash flow, which has supported a full year dividend yield of 9.8%.

A decrease in average basket prices for PGMs drove a significant drop in adjusted EBITDA margin for this six months vs. the preceding six months. Adjusted EBITDA margin dropped from 66% to 54%, as all-in sustaining cost increased at a time when metal prices decreased. This is a comparison of consecutive periods, not latter half of 2021 vs. the latter half of 2020.

The gold operations saw the increase in the average price offset by the increase in all-in sustaining costs, so adjusted EBITDA margin was consistent at 18% throughout the 2020 calendar year.

The group ended 2021 with R11.5 billion in net cash. Seeing low levels of debt in such a cyclical business is always comforting for shareholders. It hasn’t always been that way for Sibanye, as the group took on substantial debt when it executed multiple risky deals earlier in the cycle. They worked out beautifully in the end.

The group has refinanced $1.2 billion of the debt raised at the time of the Stillwater acquisition, achieving significantly better terms in the process.

It certainly hasn’t all been a bed of roses this year. The company experienced an abnormally high fatality rate, which makes for very sad reading. The US PGM operations experienced a rail collision safety incident in June 2021, which impacted production.

Other issues have come to the fore in recent days. There are media reports that strike action could be coming at Sibanye’s gold operations. There’s also noise around the potential legal action from Appian Capital, linked to Sibanye walking away from a deal for Brazilian assets that experienced a geotechnical event while the deal was being finalised. Sibanye is confident that Appian doesn’t have a case.

Sibanye has declared a dividend of 187 cents per share. The total dividend for the 2021 calendar year was 479 cents, a payout ratio of 35% of normalised earnings.

Yesterday’s closing price was R72.03 per share.

Disclaimer: the author holds shares in Sibanye