Sibanye Gold: Undervalued Against Its Closest Peer

Aug. 9.13 | About: Sibanye Gold (SBGL)

Sibanye Gold (NYSE:SBGL) started trading on February 11 as a spin-off from Gold Fields (NYSE:GFI). The stock started the first day of trading at $6.19 and is currently trading at $3.25 or 47.5% below the debut. Market Vectors Gold Miners ETF (NYSEARCA:GDX) traded at $41.94 on February 11 and is currently trading at $26.00 or 38.0% below the February 11 price level.

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Sibanye Gold has a market cap of $594 million and an enterprise value of $898 million. The stock is currently trading at a P/E ratio of 1.63 and a forward P/E ratio of 2.87. The company operates the KDC mine and the Beatrix mine.

KDC Mine

The KDC mine is located in the Gauteng Province of South Africa in the Far West Rand mining district, some 60 kilometers southwest of Johannesburg. It is South Africa's largest mine by gold production, with KDC West having produced more than 100 million ounces of gold during its 75 year history. KDC is comprised of the Driefontein and Kloof mines, which were consolidated during the fiscal year ended June 30, 2010 under a single management team as part of the BPR program.

KDC is a large, well-established shallow to ultra-deep level gold mine with workings that are accessed through 12 shaft systems that mine various gold-bearing reefs from open ground and pillars that occur at depths between 600 meters and 3,347 meters below surface.

In the fiscal year ended December 2012, KDC produced 0.94 million ounces of gold. As of December 31, 2012, KDC had approximately 26,200 employees and approximately 4,100 outside contractors.

Beatrix operation

The Beatrix operation is located in the Free State Province of South Africa, some 240 kilometers southwest of Johannesburg, near Welkom and Virginia, and comprises the Beatrix mine. Beatrix operates under mining rights covering a total area of approximately 16,800 hectares.

Beatrix has four shaft systems, with five ventilation shafts to provide additional up-cast and down-cast ventilation capacity and is serviced by two metallurgical plants. It is a shallow to intermediate-depth mining operation, at depths between 700 meters and 2,200 meters below surface.

In the fiscal year ended December 2012, Beatrix produced 0.29 million ounces of gold. As of December 31, 2012, Beatrix had approximately 9,200 employees and approximately 1,100 outside contractors.

Financials

The company reported the first-quarter financial results on May 8 with the following highlights:

Operating profit $171 million
Free cash generation $66 million
Net debt as of April 30 $304 million
Gold production 299,400 ounces
Total cash cost $1,073 per ounce
Notional cash expenditure [NCE] $1,334 per ounce
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Outlook

Gold production for the June 2013 quarter is forecasted to increase by 14% to approximately 340,000 ounces. As a result of the increase in production and ongoing cost reduction initiatives, total cash cost and NCE are expected to be 5% lower than the March 2013 quarter, at approximately $975 per ounce and $1,220 per ounce respectively.

Annual gold production for 2013 is forecasted at approximately 1.29 million ounces with average NCE for the period of approximately $1,288 per ounce.

News

The company reported on July 22 that headline earning per share for the six-month period ended June 30 will be between $1.10 per share and $1.30 per share.

The company has impaired the mining assets of Beatrix West Section by approximately $59.1 million (post tax), which together with other non-recurring restructuring costs, has contributed to earnings per share for the period of between $0.35 per share and $0.45 per share.

Insider buying

  • Richard Menell purchased 20,000 shares on May 28. Richard Menell was appointed a non-executive director effective on January 1, 2013.
  • Keith Rayner purchased 70,000 shares on May 20. Keith Rayner was appointed a non-executive director effective on January 1, 2013.
  • Allan Gray filed a 10.13% ownership in Sibanye Gold on May 23. Allan Gray is a South African investment management company.

Competition

There are 35 large-scale gold mines currently operating in South Africa, the majority of which are underground mines. Most of the gold deposits currently being mined in South Africa are narrow-vein, deep underground deposits that lend themselves to labor intensive, manual forms of extraction.

The key gold producers in South Africa have historically been Gold Fields, AngloGold Ashanti (NYSE:AU) and Harmony Gold Mining Company (NYSE:HMY), which produced 1.7, 1.6 and 1.1 million ounces, respectively, in South Africa in 2011 and together accounted for approximately 68% of the total gold production in South Africa for the year, according to the information provided by the companies and the United States Geological Survey. Sibanye Gold expects to be the second largest producer of gold in South Africa based on an annual production in 2012 of 1.22 million ounces of gold.

I believe the closest peer for Sibanye Gold is Harmony Gold, which has its operations in South Africa and Papua New Guinea. Harmony gold has a market cap of $1.56 billion and trades at a P/E ratio of 17.10. Harmony expects to produce 1.2 million gold ounces in 2013.

Conclusion

The two biggest risks for the stock are the country risk and the commodity price risk. All of Sibanye's operations are located in South Africa, which has a relatively high country risk. The company does not have any gold hedges currently.

Sibanye's annual gold production for 2013 is forecasted to be approximately 1.29 million ounces with an average NCE for the period of approximately $1,288 per ounce.

The company's total gold reserves are 21.6 million ounces and the total gold resources are 74.2 million ounces. The company's current mines have at least 16 years of reserves left.

There are currently zero analyst buy ratings, one neutral rating and one sell rating with an average target price of $3.40. During the month of May there were three different insiders buying the shares. Sibanye Gold appears to be undervalued compared to its direct peer Harmony Gold.

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SBGL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.