2023-08-17 17:50:09 ET
Summary
- Updated 13-F filings communicate that Dr. Michael Burry's Scion Capital disposed of its Sibanye Stillwater Limited stake in Q2.
- Santaco's taxi strike and ancillary unrest might spark another systemic event in South Africa ahead of its 2024 elections.
- A PGM price recovery is possible. However, commodity price risk remains amid an uncertain interest rate outlook.
- We lower our valuation of Sibanye's ADRs to $6.29 per share and maintain our neutral outlook.
Sibanye Stillwater Limited ( SBSW ) never shies away from volatility, does it?
Since our latest contribution , additional noteworthy events have emerged, with some presenting a glimmer of hope while others suggesting a divestment is warranted. Therefore, in today's analysis of Sibanye, we communicate our updated consensus to provide our readers with a "boots on the ground" vantage point.
Without further ado, let's get stuck in!
Michael Burry's Latest 13-F Filings: Sibanye Disposition
Michael Burry's Scion capital disposed of its Sibanye-Stillwater stake (800 000 shares) during the fund's second quarter , leading to a capital loss of approximately 19.4%. The legendary "big short" investor's fund entered into its Sibanye position merely three months ago, suggesting it either overlooked certain risk factors or panicked and sold.
Whatever the rationale behind the sale may be, the bottom line is that Burry and his fund have lost faith in the stock.
A Few Of Michael Burry's 13-F Trades (The Factor Investing Hub; Gurufocus)
Although an isolated observation, I think Michael Burry's sentiment is a point worth considering, as his active investment approach often provides valuable insight into cyclical environments.
New Strikes Have Emerged
South African strikes have been rife since the looting event in 2021 South African unrest . In fact, a renewed strike emerged a few weeks ago, which saw the taxi industry (led by Santaco) object to the City of Cape Town's vehicle (taxis) impoundments.
The strike led to a week's shutdown of taxi services in the region and resulted in serious public safety issues as acts of violence soon followed. Although an agreement between the City of Cape Town and Santaco settled last week, new rumbles have emerged from Santaco, suggesting new strikes have emerged.
But why do I mention this? What does a taxi strike have to do with Sibanye's PGM mines up in Rustenburg or its gold mines in the Wits basin?
The reason I outlined the taxi strike is because of the contagion such events might cause. Since the initial taxi strike, looting and sabotage have emerged in areas such as Swellendam and Kleinmond (underserved settlements), where residents have complained about the government's service delivery.
I hope you believe me when I say that South Africa's taxi industry has substantial political influence and can easily spur on the masses. Therefore, I would not be surprised if another nationwide riot occurred due to Santaco's rumbles, especially considering national elections are around the corner.
Thus, potential labor disruptions in Johannesburg and Rustenburg cannot be ignored. Moreover, involvement from labor unions (which host many mineworkers) is highly possible leading up to the 2024 national election.
PGM Price Struggles and Valuation Downgrade
Pull Factors, Supply, and PGM Prices
Platinum Group Metals ("PGM") prices have experienced a rather sluggish year. Although commodity prices typically taper when the economy is faced with high interest rates and a soft credit market, we thought (in March) PGMs would benefit from supply shortages and higher input costs . However, demand-side factors have prevailed as an underwhelming China reopening and lackluster economic performance in the European Union had a significant influence.
Platinum and Palladium Prices (Johnson Matthey)
For the time being, most commodity prices are being beaten down by China's deflation and low manufacturing numbers across the globe. However, an interest rate cycle pivot seems near, and although interest rates alone probably won't stimulate real economic growth, they often act countercyclical to commodity prices, providing a glimmer of hope to PGMs. As such, I would not be surprised if PGM prices improve toward the end of the year.
Keep in mind that Sibanye mines other commodities; however, PGMs have a significant impact on its top line revenue.
2022 FY Production Mix (Sibanye-Stillwater)
Operational Outlook Remains Unchanged
We covered Sibanye a little over a month ago and, since then, haven't spotted any company-specific changes apart from the closure at its Kloof 4 shaft in Driefontein, which we do not think will significantly affect Sibanye's full-year earnings results. As such, we keep our operational outlook unchanged while merely factoring the aforementioned systemic risks into the analysis.
- The link for our latest operating analysis update is available here .
Valuation
Residual Income Model Updated
I updated our previously published residual income model, which communicated a fair stock value of $9.1 per share. The new model adjusted the output lower to $6.29 based on our belief that systemic influences such as sluggish PGM prices coupled with potential strikes warrant a lower valuation. Moreover, vendor data from YCharts (illustrated later in the article) shows that Sibanye's stock risk premium also rose since our latest publication, assigning additional valuation risk to the asset.
As such, our latest model deems Sibanye Stillwater's American depositary Receipts overvalued (the ADR traded at around $7.18) at the time of writing this article.
Herewith are the model's input variables.
- I divided the stock price by the price-to-book ratio to establish a baseline book value per share.
- Seeking Alpha's database was used to derive earnings and dividend estimates from Wall Street analyst-sampled consensus figures. We believe the aforementioned risk factors warrant lower guidance, which is why I opted for the platform's "low guidance" numbers to construct my model. Both of the line items were averaged out in the terminal year.
- The equity charge was assumed to be Sibanye's CAPM, which I then multiplied with earnings per share to arrive at an absolute number.
Lastly, let's look at Sibanye's dividend prospects.
Although the stock possesses valuation risk, its dividends are likely to remain lucrative due to the company's 35% of normalized earnings distribution policy. It's forecasted that Sibanye's dividend yield (relative to its current price) will settle between 4.57% and 10.94% in the next three years, which most investors might find alluring.
Final Word
Even though no company-specific structural events have occurred since our latest coverage, Sibanye Stillwater faces renewed systemic risks as we think another wave of South African unrest looms. Furthermore, although PGM prices might recover toward the back end of the year, recent price depletion might influence the firm's interim earnings.
Lastly, despite backing Sibanye's dividend outlook, our valuation outlook on Sibanye Stillwater Limited American Depositary Receipts is bearish. As such, and by considering the aforementioned, we maintain our neutral stance on Sibanye Stillwater.
For further details see:
Sibanye: Dr. Burry's Divestment, Additional Social Unrest, And More