DRDGF - Sibanye: Restructuring Kloof PGM Tailings Synergies A Possibility

2023-09-15 12:11:32 ET

Summary

• Sibanye Stillwater Limited's Kloof Gold Mine is undergoing restructuring amid implications at Shaft 4.
• Public comments suggest the firm's subsidiary is examining the possibility of PGM tailings.
• In our opinion, Sibanye might pivot out of gold mining and rely on tailings.
• Short interest and Put/Call ratios remain in mid-territory. Thus suggesting investors are tentative.

Sibanye Stillwater Limited ( SBSW ) has made headlines once again as key developments within its gold mining segment have caused a stir. In addition, talks of a potential platinum group metals ("PGM") tailings partnership are up in the air, which makes for an interesting discussion.

Without further ado, let's get stuck into a deeper discussion on the aforementioned events and assess Sibanye's recent stock price movement.

Kloof Gold Mine Restructuring

The Event

Sibanye Stillwater announced earlier this week that it will restructure its Kloof Shaft 4, which might lead to nearly 3,000 job losses. The firm's stated rationale pertains to a lack of profitability from the shaft, stemming from operational constraints imposed by conveyances (during the production stage) and a recent incident (unclarified) at the shaft.

The firm's statement read as follows,

The initiation of S189 consultations follows numerous unsuccessful attempts to address productivity issues and other operational constraints at the Kloof 4 shaft, including seismicity and cooling constraints, which together have contributed to sustained losses, even at recent high gold prices.

Of course, before any miner can retrench en masse in South Africa, it must consult the labor unions, which are ancillary to the business and often cause corporate strategy issues. Sibanye will follow the S189 consultation process, which leads us to believe that the Kloof 4 Shaft's restructuring is contingent on outside events.

In short, the actual developmental plan is pending.

Commentary: Our Take

I plotted Sibanye's gold EBITDA below for exposition. Keep in mind that it possesses a 50.1% stake in DRDGold's ( DRD ) tailings business, meaning its Kloof and Beatrix mines aren't the only gold functions. Moreover, I would encourage you to cross-check the numbers, as the 2022 & 2023 EBITDA margins were calculated by myself instead of being plotted from front-end data.

We have mentioned for quite some time that South African gold mining profits are waning due to the lack of greenfield exploration projects. As existing gold mines grow deeper, their all-in-sustaining costs grow while their mine lives shrink. Thus, the current trajectory for SA Gold mining, which includes Kloof Shaft 4, is compressing profit margins and dissipating terminal values.

In our view, Sibanye will soon offload much of its underground gold operations or reduce the segment's CapEx roadmap as it forms part of its pivot into a "green economy miner" via PGMs, Lithium, and Nickel. In fact, we think the company wants to rely on gold via its partial ownership in DRDGold instead of mining itself.

As for the interim disruptions, we believe the restructuring can be considered a non-core event. However, the diminishing scale of SA Gold is a secular threat.

Side note: The following article by S&P Global presents a basis for my claims about South Africa's diminishing gold landscape – Link Here .

Potential PGM Tailings Synergies

Despite headwinds from its gold segment, Sibanye's PGM division might have a new synergy en route.

Although it remains speculation for now, rumors have emerged that Sibanye's subsidiary, DRDGold, might enter the PGM tailings business.

When recently asked about the topic , DRDGold's CEO, Niel Pretorius, said, "The layout is complex, and there is a complex legal structure. It's not easy to just wander in," however, he added, "But it's certainly do-able, and we're keen given half the chance."

A PGM tailings partnership would onboard significant cost synergies to Sibanye and allow it to consolidate the earnings onto its financial statements. As far as my knowledge extends, DRDGold's operational independence requires proportional consolidation instead of full consolidation; nevertheless, a 50% recognition would be highly beneficial to Sibanye.

Sibanye-Stillwater is building out numerous ancillary businesses linked to its core operations. The firm's existing ancillary businesses in tailings via DRDGold and PGM recycling could add a cutting edge in years to come.

To conclude this section, I added an illustration of the significance of Sibanye's recycling business, which might be considered a hidden asset to some.

Recent Stock Behavior

Before delving into Sibanye's price behavior, I want to clarify that I am providing an overview instead of a buy/sell opinion.

Sibanye's stock has ticked up by nearly 5% since our latest coverage of the asset on August 17th. As things stand, the stock has formed a cross trend, with its 10-day simple moving average sitting above its longer-duration moving averages.

Considering its cyclical attributes, it is unlikely that Sibanye will remain on trend. Instead, we believe regular oscillation around its SMA is a more likely outcome.

Furthermore, investors remain net short on Sibanye. Short interest is often countercyclical to the stock's expected return due to the cyclicality embedded into stocks; however, it is worth noting that Sibanye has held much higher short interest (than its current 1.68%) in the past.

Lastly, let's observe Sibanye's Put/Call ratio.

Based on recent results, Sibanye's options activity illustrates that it is in neutral territory. As with short interest, a Put/Call activity is often countercyclical. However, there is no clear conviction in the current positions, providing me with a lack of latitude to conclude whether the stock is overbought or oversold.

Final Word

Additional material events have unfolded at Sibanye Stillwater. According to publicly shared information, the company is set to restructure one of its gold assets, while rumors suggest a PGM tailings endeavor might be in store.

With regards to Sibanye's stock, the asset has ticked up since our latest coverage. However, key market-based ratios suggest activity might flatline for the time being.

For further details see: