2023-06-22 15:45:17 ET
Summary
- Sibanye Stillwater Limited has experienced a few noteworthy developments of late.
- An acquisition of South Africa's largest solar wind farm project lends debate to whether Sibanye will follow Gold Fields and self-sustain its operations' energy demands.
- DRDGold's compelling progress might soon have a material effect on Sibanye's stock price.
- Are more labor union problems inbound after additional quarrels about CEO Neal Froneman's remuneration package?
- The stock is theoretically undervalued and possesses a non-cyclical dividend policy. Nevertheless, ever-rising risk premiums might send Sibanye's valuation into the abyss.
Sibanye Stillwater Limited ( SBSW ) always provides a hot topic of conversation due to its stock's volatility and its hard pivot into PGM (platinum group metals) mining in recent years. Whether you like the stock or despise it is probably down to your personal risk-return preference, as Seeking Alpha's reader base seems to have no common outlook on the asset. Nevertheless, one thing is for sure, Sibanye never leaves us with a dull moment due to its eventful nature as an entity.
In today's analysis, I provide you with an update on recent developments. Moreover, I included a valuation segment with an overlay regarding the notion that Sibanye's investor base is giving up on its stock after a tumultuous few quarters.
Let's traverse into our main discussion.
Recent Developments
Solar Wind Farm Acquisition
In a fairly recent event, Sibanye announced that it had agreed to acquire South Africa's largest solar wind farm project, situated in the Northern Cape. The farm is yet to be fully financed and built; however, it is anticipated that 89 MWs will be available for use.
The project is anticipated to initiate construction in 2025, with the agreement stipulating a 15-year energy off-take agreement for Sibanye.
Sibanye's spokesperson, James Wellstead, provided details on the project, stating that:
The project consortium consists of African Infrastructure Investment Managers (AIIM), through its renewable energy project development and delivery platform African Clean Energy Developments (ACED), and Reatile Renewables. AIIM is a division of Old Mutual Alternative Investments (OMAI) and has invested in the project through its IDEAS Fund, one of South Africa’s largest domestic infrastructure equity funds.
Wellstead also added that
“the project will not only play a pivotal role in reducing carbon emissions and mitigating climate change but also results in cost savings on electricity and provides energy security benefits for Sibanye-Stillwater’s SA operations. Additionally, it will also contribute to addressing the electricity challenges in South Africa.”
In our view, Sibanye's move to act quickly against the headwinds imposed by South Africa's Eskom crisis is an encouraging sign. Trivially speaking, self-generation will not be realized overnight. However, as shown by sector peer Gold Fields Limited ( GFI ), self-generation and cost-saving are possible within the South African precious metals arena.
- Note: Details are available here ( this link , and this link ) about Gold Fields' current pivot into self-generation.
DRDGold's Hidden Value
For those unaware, Sibanye Stillwater is the majority shareholder in DRDGold Limited ( DRD ), which is an exceptionally well-placed retreatment company dealing with tailings and dumps.
Seeking Alpha co-author Gold Panda often covers DRDGold, if readers would like to know more about the company; nevertheless, let's run through a few of its salient features.
DRDGold has grown at an annualized compound rate of 10.41% in the past ten years. We believe DRDGold's diligent growth will proliferate as it has pivoted out of deep gold mining and into a leaner business model with its tailings and dumps endeavors. South African deep gold mining is no longer as lucrative as it used to be because of the growing costs involved and lack of exploration; nevertheless, gold mining activity remains high, leaving DRD with plenty of business.
In 2022, DRD delivered approximately $280 million in revenue (in today's FX) deriving from two segments, namely Far West Gold Recoveries ("FWGR") and Ergo Mining Proprietary Limited ("Ergo"). The prior specializes in gold recoveries to the west of the Wits Basin, with tailings reclamation, slurry classification, cyclone processing, CIL circuit processing, and tailings deposition at the core of its business. Meanwhile, the latter (Ergo) is focused on surface tailings retreatment in central Johannesburg, which stretches out to Ekhuruleni.
The company reported an operating profit margin of nearly 30% in its latest half-year results, which is impressive considering the high wage inflation and bizarre electricity costs it faced in 2022. As mentioned before, tailings can be a high-margin business, lending Sibanye a solid asset to help enhance its financial efficiency.
Continued Quarrels About Froneman's Paycheck
Neal Froneman's remuneration has been a topic of discussion for quite some time now. The CEO has once again defended his 2022 remuneration of approximately $10.2 million , stating that most of his recent remuneration was performance and stock-based.
Although Froneman's argument might hold true, the general populous might not see it that way, as few are familiar with how performance-based remuneration is set up. Therefore, Froneman's remuneration provides labor unions with ammunition to encourage additional wage strikes.
Valuation and Dividends
Residual Income Model
Model Output
I decided to reveal our residual income model for today's article. I believe Sibanye's stock is best valued with a continuous residual income model as it's a mining stock, meaning its book value is paramount. Moreover, Sibanye has an inconsistent equity charge and cyclical dividends, which is well interpreted with a multistage residual income model.
According to our model, Sibanye's stock remains undervalued by approximately 34%, theoretically presenting investors with a value gap. As a market-based model, the residual income model does not guarantee future returns; however, it does provide investors with a noteworthy indication of a stock's current value.
Model Inputs
The following input variables were used to cultivate our residual income model.
- The company's stock price was divided by its current price-to-book value.
- Sibanye Stillwater's earnings-per-share and dividend forecasts were obtained from seeking alpha's database, which samples analysts' forecasts.
- The equity charge was obtained from YCharts, as displayed below.
Peer-Based Analysis
Based on our observations within Seeking Alpha's comments sections, there is a notion that Sibanye's investor base has left its stock in the cold after a few trying quarters for the company. However, we argue that it is untrue as a peer-based analysis shows that South African PGM stocks have all shed value in the past year, meaning the company probably suffered from systemic risk instead of idiosyncratic risk.
Dividend Analysis
Sibanye's policy is to return at least 25% to 35% of its normalized earnings to its shareholders in dividends. This means that as an investor, you can expect to earn a dividend payout of approximately 25% to 35% of the company's cyclical midpoint earnings on most occasions.
In our view, Sibanye's future dividends are fairly certain and lucrative. Lucrative because it has a 5-year yield on cost of 20.67% , and certain because of its set dividend policy.
Conclusion
Recent events illustrate that Sibanye's attempts to achieve self-generation and net-zero are gathering steam. Furthermore, hidden value is present in DRDGold, which is starting to emerge as a critical asset for Sibanye.
More disputes about the company's CEO remuneration have surfaced, lending labor unions with scope to intensify their campaigns for higher worker wages.
Sibanye Stillwater Limited stock is theoretically undervalued and presents a sustainable dividend. However, questions remain about whether realizing the stock's intrinsic value will be barred by rising risk premiums.
- Note: Instead of focusing on stock price discovery, today's article serves the purpose of updating readers about a few of Sibanye's latest endeavors. In addition, we wanted to update our valuation of the stock. Our outlook remains unchanged since our previous coverage of the stock.
For further details see:
Sibanye Stillwater: Recent Developments And Valuation Update