2023-03-09 07:30:00 ET
Summary
- I believe that Sibanye Stillwater stock has already priced in the negative effects of the recent financial statements, the Eskom news, and the decline in PGM metal prices.
- SBSW's valuation now suggests that the stock has literally fallen into oblivion in terms of Mr. Market's perception. Forwarding EV/EBITDA stands at 1.8x [49% off the 3-year median].
- There should be an uptick in demand from the automotive industry and improved power generation in South Africa once coal prices become more affordable in 2023. Clear tailwinds for Sibanye.
- From current levels, I expect a strong rebound by the end of 2023 - it's not too late to buy SBSW stock for dividends.
Instead of an investment thesis
Sibanye Stillwater Limited ( SBSW ) is a Johannesburg-based mining company specializing in the extraction of precious metals such as gold, platinum, and palladium. Founded in 2012, it operates mines in South Africa and the United States, with a diverse range of underground and surface assets that include gold, platinum group metals [PGM], and uranium.
The first time I wrote about the company was at the end of May 2021 , and since then there have been a total of 3 articles under my coverage - now you are reading the 4th.
Unfortunately, I have not had time to update my rating since August 2021 - I turned to other industries that seemed more interesting at the time. Since my first bullish article, SBSW stock managed to fall by >47% [total return].
A significant portion of this loss is due to the decline since the beginning of 2023 - the stock is down 26% YTD thanks to the poor earnings report and lower-than-expected man agement guidance:
From what I see in the stock price chart and user comments on various platforms, most people are bearish on SBSW - as the old investor adage goes, now might be the time to load up amid the crowd's fear. Let me tell you why.
Sibanye's income drop
I'll start with the banal - recent financials:
In U.S. dollar terms, the company's FY2022 revenue decreased 27.44% year-over-year due to a decline in production across all major segments. In addition, the realized price has also fallen sharply - gold being the only exception in these circumstances:
Sibanye Stillwater's financials [February 28, 2023]
Adjusted EBITDA decreased 45.89% year-over-year as the 15.45% decrease in the cost of sales did not offset the increase in operating expenses and the fall of the top line. The bottom line - basic earnings per share - dropped from 77 cents in FY2021 to 40 cents in FY2022 (48% YoY).
The actual results we saw in the company's report could have been predicted as early as early-mid-2022. At that time - in May - Johnson Matthey analysts published their outlook [for 2022] in which they wrote of a decline in South African shipments as plant maintenance and operational challenges hit production.
After an exceptionally strong year in 2021, South African supplies are forecast to contract this year, in line with a lower contribution from the release of pipeline (work-in-progress) stocks, along with planned maintenance at processing operations, and ongoing operational challenges at many mines. With wage negotiations due to take place this year at several major producers, there is also a heightened risk of industrial action, especially during the second half. Our forecast assumes that the operating environment will remain difficult but does not allow for any prolonged strike action.
Source: Johnson Matthey's report
In my opinion, the company's operational risks are still present. Eskom - Africa's largest electricity company, responsible for generating, transmitting, and distributing electricity to customers in South Africa - continues to struggle to provide South Africans with enough electricity to meet demand, according to TechCentral [ Jan. 4, 2023 ].
SA mining sector consumes ~14% of electricity - if smelters and refineries are added = ~30% of Eskom's production, based on Sibanye's IR materials . Therefore, the record number of days [1949 hours, +69% YoY] of nationwide load shedding that South Africa experienced in 2022 if repeated or increased in 2023, will bring even higher costs to Sibanye and its competitors. For this reason, I favored Brazil's Vale S.A. ( VALE ) in my recent article on the subject.
On the other hand, Sibanye will be looking for ways to break free from its dependence on Eskom in the coming years. According to the company's presentation, the private sector in SA has a pipeline of 9GW of energy projects in solar, wind and gas, and battery storage. In addition, it is estimated that 3GW of the 9GW of private sector power generation will be completed by the end of 2024.
What I definitely like after 2022 is that management has achieved a three-year wage agreement in the gold business and a five-year agreement in Rustenburg and Marikana. Yes, all-in-sustaining costs are up 14%, but the company's cost performance has been excellent - SBSW has maintained an adjusted EBITDA margin of 50% and is confident of moving the cost curve down in the future.
Net debt on the balance sheet is still near its multi-year lows and is negative - Sibanye Stillwater's credit risks, with a leverage ratio of ~0.17 and the times-interest-earned ratio of >27x, appear quite low:
It is clear that the poor business cycle - the slowdown of the economy in 2022 - has created a perfect storm, overlaid with the bad weather and power supply problems in South Africa. But it's also clear to me that the company has taken the right long-term course by trying to minimize its risks and shifting its model to "green energy" while maintaining a fairly generous dividend policy [returning 25% to 35% of normalized earnings to shareholders] and monitoring EBITDA margin resilience.
2023 should be brighter than 2022
The actual financial results are always shocking, even if they could be predicted in advance and the market has somehow priced them in a few months before the announcement. However, investment success depends primarily on the correct forecast for the future and not on how the company reported for the past quarter/year.
I think 2023 will be much more favorable for Sibanye than 2022.
First , I do not expect a repeat of Eskom's anti-record in terms of hours of nationwide load shedding. Yes, the first quarter of 2023, which is about to end, promised to be complicated. But already now the price of coal , which provides 80% of all power generation in South Africa, is well below the 2022 weighted average price - I expect this to ease the situation for Eskom and power generation to be better than last year.
Second - platinum and palladium prices are expected to be higher in 2023 than last year. Ross Norman, CEO of Metals Daily, concludes that in his early February 2023 LinkedIn post . And with regard to platinum, Ross sees the return of supplies from South Africa as a mitigating factor for this commodity's price rise - that's a bullish call on Sibanye if you ask me:
We think expectations of a recession are overplayed and the surprise to the economy will be to the upside. As optimists for the macro, it follows that platinum as an industrial metal should also fare well. A mitigating factor may be a large rise in primary supply as South African smelters come back on-stream and given the large pipeline stock build of 2022.
Source: Ross Norman's post, emphasis added by the author
He expects platinum to have a supply deficit of 250,000 to 300,000 ounces in 2023, which will help the best-performing precious metal continue its run after the weakness YTD [ -13% ]. Palladium - being mainly used for ICE engines production - should also see its price rise in 2023 amid China's reopening and auto demand return:
The positive outlook for auto demand, which accounts for 80% of offtake, is forecasted to rise by 5%, as car production is recovering well and is at near pre-pandemic levels at last, with the semi-conductor crisis especially now much eased. Indeed, the reopening of China should have a significant impact on palladium despite some substitution from sister-metal platinum.
Third - SBSW's valuation now suggests that the stock has literally fallen into oblivion in terms of Mr. Market's perception. The company is now trading at a forwarding EV/EBITDA multiple of 1.8x, which is about the same as we saw at the last year's low and about 49% off the 3-year median:
I believe today's valuation puts a floor to SBSW's stock price. Once we see the first improvements or announcement of a planned improvement in the region's energy supply, Sibanye Stillwater will likely see the relief its investors needed so much for so long.
Risks to consider
Before investing in Sibanye Stillwater, be sure to consider the risks involved. The mining company specializes in the extraction of precious metals such as gold, platinum, and palladium, which are subject to commodity price volatility. The prices of these metals can fluctuate rapidly due to factors such as global supply and demand, geopolitical events, inflation, and interest rates. Any decline in prices could adversely affect the company's financial performance.
Sibanye Stillwater's operations are primarily located in South Africa, a country with a history of labor disputes, social unrest , and regulatory uncertainty. Mining operations are inherently risky, and accidents, equipment failures, and other operational disruptions could result in production delays, increased costs, and reputational damage.
Sibanye Stillwater reports its financial results in the South African rand, which can be volatile relative to other currencies. A sudden devaluation of the rand could adversely affect the company's profitability and cash flows.
The mining industry is subject to extensive regulation, and changes in government policy or regulation could have a significant impact on Sibanye Stillwater's operations and financial performance. Political instability or social unrest in South Africa could create further uncertainty for SBSW.
Mining can have significant environmental and social impacts, and Sibanye Stillwater could face reputational and regulatory risks if the company is unable to effectively manage these impacts. SBSW could also face increasing pressure from investors and other stakeholders to adopt sustainable practices and reduce its carbon footprint. Therefore, it is important to thoroughly investigate and carefully weigh these risks before making an investment decision.
Conclusion
Despite the many risks of buying SBSW even at its current price levels, I still tend to think that the stock has absorbed most of the negative impact of the recent financial statements, the Eskom news, and the drop in PGM metals prices. The year 2023 should, in my opinion, be better for Sibanye overall than 2022 - this will translate into both increased demand in the automotive industry and improved power generation in South Africa once coal becomes more affordable again. The SBSW valuation provides something of a margin of safety in my opinion - there is no guarantee that the stock will not fall further, but it is now becoming increasingly difficult for it to do so. From current levels, I expect a strong rebound by the end of 2023 - it's not too late to buy SBSW for dividends.
For further details see:
Sibanye Stillwater Got Obliterated