2023-09-08 08:30:15 ET
Summary
- Sibanye Stillwater had a very rough H123, and SBSW stock is down about 40% from February, when I rated it a buy.
- South African PGM operations are preparing for a prolonged down cycle and managing load curtailment.
- US PGM operations are impacted by skill shortages and the need for higher spot prices.
- But the company has seized upon an "anti-fragility" theme that makes sense and bodes well for the future.
Sibanye Stillwater Limited (SBSW) has seen its stock price plummet by over 40% since I gave it a buy rating in February, largely due to the fact palladium and rhodium prices came crashing back to earth from insanely high Ukraine war premiums faster than expected. The company suffered through a rough first half of the year, and the near-term outlook does not look much prettier, with 2023 revenue targets revised downward by about 30%. Despite all of this, the market reaction to recent hard times has been out of proportion. The stock is certainly not worth $13 I thought it was in February, but a revised DCF analysis shows it is still undervalued. The company has a proven track record of successfully managing mining operations, profitably, in the most challenging environs imaginable - from social unrest to shaft incidents to the ongoing electricity crisis in South Africa. Hence, I rate it a buy.
Sibanye Stillwater H123 Results: Confluence of Negative Headwinds
About 65% of Sibanye Stillwater's $3.33 billion in revenue in H123 derived from platinum group metals (PGMs) - primarily platinum (Pt), palladium (Pd), and rhodium (Rh), 26% from gold, and the remainder primarily came from nickel, zinc, and chrome. 75% of sales came from operations based in South Africa, 21% from the U.S., 2% from the EU and 1 percent from Australia.
The company has a long-term "de-risk" strategy to spread sales across more products and geographic regions in light of the electricity crisis in South Africa. This includes a lithium project in Finland expected to ramp up production by around 2026.
Sibanye's sales have risen over the past five years by a CAGR of 20% while EBITDA grew at 28% and operating profit over 80%.
During the same 5-year period the company's stock price rose by about 125% with total returns of nearly 167%.
Sibanye's stock price, however, has taken a beating within the past year, dramatically underperforming the market and the sector median, although about in line with other PGM miners. The stock has fallen by nearly 40% in the past nine months and 33% in the past six months alone.
SBSW Price Momentum (Seeking Alpha)
The stock price is hovering around its 52-week low and is 34% under its 200 day SMA. The stock is also trading at a mere 5.4x earnings, 65% below the sector median P/E ratio of 14.6.
The primary reason for this is the collapse in the prices of rhodium (Rh) and palladium (Pd), although the latter not has severely. Rhodium fell a whopping 60% since March, significantly impacting company revenues and profitability. The metal reached as high as $22,200/oz in April of 2022 and is now trading at $4,100/oz, down over 80%.
To fully grasp the impact on Sibanye's bottom line, consider that rhodium and palladium made up 46% of revenue in H123, as illustrated in the company's most recent filing . The combination would have accounted for even more but for the bounce back in gold output and sales.
Overall, SBSW's revenue of $3.33 billion in H123 was down 14% versus H122 and EBITDA of $776 million was 37% lower than the company registered in the first half of 2022. That is, when you look at the figures in rand. When you convert to USD the declines are 27% and 47%, respectively. The company, by the way, said the 18% weaker rand relative to the US dollar, partially offset the impact of the lower PGM basket prices. The below portions of tables abstracted from the H123 report provide breakouts in both currencies.
Before drilling into each segment it is important to note what each PGM product basically consists of. The below ratios refer to production ounces and are based on the most recent prill split.
- US 2E: platinum (77%), palladium (23%)
- SA 4E: platinum (60%), palladium (30%), rhodium (9%), gold (2%)
- US 3E recycling segment: platinum, palladium, rhodium
In terms of cost based on H123 prices, Pd made up about 80% of the 2E basket's value versus 20% for Pt. The breakdown of the 4E basket based on value would be Rh 45%, Pt 32%, Pd 20%, and gold 2%.
The below table sums up the deltas between H122 and H123 for volume, price, and adjusted EBITDA for each segment.
SBSW H123 vs. H122 Results by Segment (Data: SBSW H123 report)
Consider that EBITDA was down nearly $689mln in H123 vs. H122. 4E EBITDA was down $725mln - an amount luckily, but only partially, offset by $130mln in EBITDA from the gold operations.
Falling commodity prices were not the only negative factor to hit Sibanye's bottom line in the first half of 2023 - several other micro headwinds confronted the company at locations the world over. In France, strikes and riots disrupted nickel operations while the U.S. PGM operations suffered from talent shortages and a shaft incident. In addition, the recycling market is facing headwinds expected to impact 2024 volumes. Although more effectively handled, the company continued to face load curtailment issues in South Africa while post-covid destocking remains a drag.
Another disappointing announcement was the company lowering guidance for 2023. 3E midpoint guidance now sits at 375koz vs. 475koz in previous guidance (a 20% drop). Gold is revised downward about 17% to a midpoint of 642koz while the nickel target has been lowered by 26% to 7,250 tons. Overall the new guidance based on most recent prices lowered the revenue target by 8%.
Metals Outlook
That the H123 results deck was sub-titled "Antifragility strategic differentiator creating advantage," was a sign that some tough news was coming. Signaling on the earnings call did not boost confidence when it came to the future of the rhodium and palladium markets. CEO Neal Froneman said the company is preparing for a "prolonged" possible PGM downcycle with South African operations "well positioned for the anticipated price weakness." However, Froneman stressed that the company believes the PGM pricing trends are cyclical occurrences as opposed to structural changes.
In the end, platinum could be the savior of all PGM market baskets, the only problem being it also encompasses cannibalization of palladium and rhodium. In 2023 platinum is expected to see a deficit of 1mln ounces due to strong auto and industrial demand, per the WPIC . Demand overall is predicted to increase by 27% while total supply remains flat. Automotive sector demand forecast is up 13% vs. 2022 and industrial outlook is up 14%. WPIC said it marks the largest deficit on record in terms of both absolute ounces and as a percentage of annual demand.
Substitution of palladium with platinum continues to be a factor dragging on prices. Palladium is expected to go into surplus of 300koz in 2024 from a deficit of 200koz, Nornickel said in May citing destocking. More troubling for the long-term is some analysts projecting that Pd demand could decline by 1.5mln oz due to increasing EV adoption. Meanwhile the substitution of Rh with Pt in glass manufacturing is one of the major factors driving down the metal's price. Gold has been an important countercyclical force in the 4E basket, which Froneman adeptly pointed out, although it only makes up 2% of the total.
Despite these troubling market trends, the most recent S&P long-term consensus price forecasts appear somewhat optimistic in the medium-term. However, it is worth noting that palladium fell 2.4% since June 30 - when the forecasts were provided - and nickel is down 3.6%. Zinc is up 4% while gold and platinum have been flat. However, I am not sure the extent to which this would impact the forecasts for 2024-2027.
S&P Consensus Price Forecast - Metals (Data: S&P Global as of June 30)
SBSW Stock Valuation
When all is laid bare, what is driving Sibanye's troubles appears quite clear. The only question remaining probably is: why the heck would anybody buy this stock? The answer is because the price is right. Sibanye has posted disappointing numbers but the market reaction does not add up.
The stock's intrinsic value is certainly not the same as it was in February, when I envisioned the stock rising to $13 within about a year. But I also thought there was a good chance SBSW would see nearly $9 billion in sales in 2023. As it stands now, the company is projected to deliver $6.34 billion, a downward revision of 30%.
The key variables of the DCF model included volume projections based on SBSW estimates, pricing forecasts based on S&P consensus, and SBSW capex estimates.
The PGM prices I took and plugged into our pricing model based on the prill splits. For rhodium I stuck with the current price of $4,100. The 3E prices are difficult to forecast but I just pegged them to 4E and added 20%.
Below table shows the volume and price forecasts. What is not shown is about 5% worth of revenue in the "other" basket that I eventually add in the end.
The discount rate is based on the CAPM with the equity risk premium representing the weighted average based on revenue by country. The discount rate moves from 15.3% to 14.7% with the geographic shift in sales.
As the DCF model summary shows, the top line grows by a modest 2% average per year. Meanwhile, however, SBSW lowers its capex commitments and is projecting cost reductions each year, so cash flows expand. Capex as % of sales goes from 18.2% in year 1 to 8% by year 10. The DCF calculation shows the stock is undervalued by about 28%, implying upside of almost 40%.
Risks
Rhodium - The obvious risk is whether rhodium's bottoms will continue having trap doors. However, even if rhodium crashed to $2,000/oz, the 4E basket would maintain at around $1,300/oz or so and the stock would still be 7% undervalued.
Palladium - The biggest existential threat facing palladium is EV adoption. SP Angel analyst John Meyer in June said that with global EV sales expected to hit 15mln vehicles this year, sales of palladium could be impaired by up to 2.25mln ounces.
Recycling - The near-term for the 3E business certainly looks bleak, although the company has a solid argument for the long-term upside.
Lithium - The lithium project has a lot riding on it, some significant investment that does not start producing returns for quite some time. However, even if that goes away the stock would be undervalued by 20%.
Bottom Line
Despite a brutally tough first half of the year, and a gloomy near-term outlook, I think this company - with its world class assets, solid de-risk and mitigation strategies, and ability to withstand storms - will deliver big returns in the long run. You have a solid company with a proven track record of successfully managing mining operations, profitably, in the most challenging environs imaginable. Hence, I rate it a buy.
For further details see:
Sibanye Stillwater: Stock Still A Buy Despite Disappointing H123 Results