2023-07-13 13:33:00 ET
Summary
- Statistics South Africa released new mining data on Thursday morning, revealing a trying time for most South African miners.
- However, despite the poor data, Sibanye Stillwater Limited stock and ADRs surged shortly after the release.
- Noteworthy developments have occurred since our latest coverage, namely headway linked to the Mopani Copper Mines bid and a human capital agreement with a university.
- Our valuation model for Sibanye Stillwater remains unchanged. However, our analysis highlights the risk of year-end impairments.
Statistics South Africa released the nation's latest mining data for May on Thursday morning. The data provides cause for concern, as both the output and sales values of the basic materials sector dropped once more, suggesting that the nation's leading miners might be in a hint of trouble.
Although salient, the data provides an isolated observation. Thus, today's article takes matters a step further and assesses the latest data's potential impact on Sibanye Stillwater Limited ( SBSW ) stock.
Without further delay, let us traverse into the body of today's analysis.
New Data and Sibanye's Production Mix
The aforementioned report showed mixed results across materials, which isn't surprising given the volatile nature of today's economic environment. However, unfortunately for Sibanye, its primary material, namely Platinum Group Metals (PGMs), suffered significant declines in both value-based sales and production volumes.
According to the preliminary data, PGM production slipped by 7.2% year-over-year and suffered from a value-based sales decrease of 20.1%. Of course, and as discussed later, these statistics are backward-looking; moreover, the numbers reflect cyclicality instead of long-term trend growth. Nonetheless, the figures might yet have a significant impact.
Output by Material (Statistics South Africa)
Before continuing our analysis of the outlook on production, let's discuss Sibanye's production mix in more detail.
As shown in Figure 2, most of Sibanye's production mix stems from South Africa (its other PGMs are mined in the U.S.), with regional prices typically higher than its U.S. operations due to bulk mining access in Merensky and the UG2 Reef. Keep in mind that Sibanye suffered from flooding in the U.S. (during 2022 H2), which naturally compressed its regional production; as such, U.S. PGM production will probably tick up in the future, spanning approximately 30% (give or take) of the segment's mix.
Furthermore, Sibanye benefits from gold via its deep mines and through a majority ownership in DRDGold Limited ( DRD ). Additionally, the firm has a PGM recycling business and is set to exploit the Lithium arena via its Keliber project, which is set to start production in early to mid-2024.
Considering the above, it's clear that Sibanye's South African PGM operations probably have the most material effect on its stock price. Thus, we'll focus on the outlook for PGM for now.
2022 Full-Year Production - Figure 2 (Sibanye-Stillwater)
As mentioned before, we think May's PGM is a result of cyclicality more than anything else. Consumer sentiment worldwide has entered a bottom amid high-interest rates and continued inflation. However, long-term trend growth remains intact for PGMs as we traverse into the green economy. Moreover, we think factors such as the possibility of global interest rate pivots in early-2024, rising consumer sentiment in the U.S. , and fewer load-shedding hours in South Africa will stimulate PGM production and prices.
PGM Price Forecasts (Edison Research; Refinitiv)
Stock Price Reaction
I grabbed a screenshot of Sibanye stock's reaction on the Johannesburg Stock Exchange about 30 minutes after the country's mining data was released. I witnessed an uptick in the stock, suggesting that investors aren't too bothered by the May data.
Although other variables must be considered, investors' initial reaction suggests that the market is looking past the May mining data, possibly due to the time lag in-between the data sample and the release.
I also looked at Sibanye's American Depositary Receipts shortly after the data release. As visible below, the stock traded favorably in the pre-market shortly after the release.
Again, and as mentioned before, we believe investors' initial reaction is a positive sign and suggests market participants are looking ahead instead of in arrears. Nevertheless, we reiterate the fact that past data can influence trend growth, especially given the velocity of the May results.
NYSE Pre-Market Stock Reaction (Seeking Alpha)
Other Developments
Wits–Sibanye Data Partnership
Since our latest article on Sibanye , the company announced advancements in its strategic partnership with the University of the Witwatersrand (WITS for short), including a refurbishment of its Wits-Sibanye Innovation Bridge and a carbon storage research deal with a subset of the University's research faculty.
Wits is a feeder University to Sibanye Stillwater, and the enhanced partnership allows for further access to top graduates. Moreover, the carbon storage deal is pivotal as we traverse into a 'green mining' landscape.
For further details on the refurbishment, click on this link .
For additional information on the carbon storage partnership, click on this link .
Gold Returns To Profitability
Unlike PGMs, the May report showed that South Africa's value-based gold sales increased by more than 71.8% year-over-year, naturally providing a bullish argument for Sibanye's gold endeavors.
As reported in the company's first-quarter results, its gold operations returned to profitability. The segment delivered an EBITDA number of R774 million (approximately $42.8 million) from an R680 million (approximately $37.6) loss a year before.
As we have stated repeatedly, we do not think Sibanye's deep mining gold operations are sustainable; instead, we believe price support has handed its Kloof and Beatrix assets a lifeline. The feasibility of deep mining for gold in South Africa has diminished over the years. However, as also mentioned before , the firm's majority ownership of DRDGold might yield significant results as DRDGold primarily focuses on surface recoveries, which is a lucrative high-margin business.
Pending Mopani Copper Bid
Zambia's state-owned ZCCM Investment Holdings recently affirmed Sibanye's reported interest in its Moppani Copper Mines.
If completed, the acquisition would make Sibanye one of Africa's largest primary copper producers. The brownfield project would require $1 billion in funding over 5 to 6 years, with $200 to $300 million in short-term funding. According to public sources, the project could deliver about 225 000 tonnes of copper annually , which could diversify Sibanye's production mix significantly. Moreover, synergies could come into play, as Sibanye could use a crossover of intellectual property and corporate transactions among its various businesses.
At face value, we believe Sibanye could snap up the project at a reasonable price, as M&A activity is currently low due to capital scarcity (elevated interest rates) and depleted commodity prices. However, the project has already attracted four potential bidders , meaning a delayed offer from Sibanye might result in a bidding war and an acquisition completed at a premium to fair value.
Valuation & Dividends
Valuation
We recently placed a valuation of $9.1 per share on Sibanye. No new material data has surfaced ever since; however, we have identified a few additional valuation risk factors to consider.
Firstly, the declining production in May signals that a threat of impairments exists due to potentially lower-than-anticipated free cash flows. Moreover, elevated interest rates and a high-than-expected country risk premium might add to impairments, ultimately depleting the firm's book value and its stock's intrinsic value alike.
Pearl Gray Equity and Research
The data below illustrates the market's belief that impairments will soon come into play—for instance, the stock's forward price-to-book ratio of 3.54x presents a serious talking point as it somewhat affirms our previously mentioned statements.
Dividends
Our opinion about the firm's dividends remains the same as in our previous article. Sibanye has a dividend policy that commits to a 25% to 35% distribution of its normalized earnings, meaning investors can expect a consistent payout.
The stock's more than 30% year-to-date drawdown means investors have an opportunity to lock in a lucrative dividend yield. Moreover, as displayed below, Sibanye provides a best-in-class dividend yield on cost.
Final Word
Statistics South Africa's latest mining data revealed that the PGM industry is suffering from production setbacks and lower sales prices. However, despite the negative results, Sibanye's stock and ADR surged on Thursday morning, suggesting that most investors believe the data is lagged.
Furthermore, recent developments present interesting qualitative input variables as a human capital partnership with the University of Witwatersrand has been agreed to. In addition, it is nearing D-Day for a decision about Sibanye's Mopani Copper Mines bid.
Our valuation model's output remains unchanged; however, key data suggests impairment losses might be en route. Although we think Sibanye's outlook has improved since the turn of the year, we remain neutral on the stock and affirm our Hold rating.
For further details see:
Sibanye Stillwater: Newly Released Mining Data To Shock The Market