Sibanye-Stillwater: The Issues At Hand

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About: Sibanye-Stillwater (SBGL), Includes: LNMIF, LNMIY
by: Aitezaz Khan
Summary

Sibanye has received the approval to the proposed Lonmin deal.

Troubles at the South African gold operations act as major headwinds.

Metal prices act as a tailwind and are moving up the share prices.

SBGL could witness further upside if the management could negotiate a suitable wage agreement with AMCU.

Thesis:

Sibanye Stillwater (SBGL) is a South African producer of gold that also produces significant volumes of PGMs (read: Platinum Group Metals). The company recently got the approval of the authorities to proceed with the takeover of Lonmin (OTC:LNMIF)(OTCPK:LNMIY) and this is expected to make SBGL the world's second-largest producer of PGM assets. The positive impact of this deal is likely to magnify if the recent rally in PGM prices could continue.

Sibanye: An explanation of the factors responsible for the oscillations. Figure-1 (Source: Sibanye Website)

Despite the positive trend in PGM prices, SBGL's favourable outlook is shrouded by its South African gold operations, and we are unable to see the full impact of a bullish gold market on SBGL's price due to a prolonged strike at some of SBGL's mines. Nevertheless, the technical price chart and analysts' recommendation suggests that the stock could explore new heights, if the rally in metal prices continues.

Technical Price Chart:

SBGL's 52-week price range lies between ~$2 and $5.30 (Figure-2). Having witnessed significant oscillations in share price during the past 12 months, SBGL has declined significantly in value over the period.

Figure-2 (Source: SA)At the time of writing, SBGL last traded at ~$3.04 and we can see that currently, it's trading near the mid-point of its 52-week range. Nevertheless, a look at SBGL's technical price chart (Figure-3) indicates that if it weren't for a recent uptrend in gold prices, SBGL's price would lie somewhere between $2.4 and $2.6, (based on the trend lines). This is so because SBGL is subject to a combination of operational-side headwinds/ tailwinds (more on this later).

Figure-3 (Source: Finviz)

Nevertheless, analysts' recommendations indicate that SBGL is a buy with a target price of ~$6.5 (Figure-4). In my view, a target price of $6.5 is too optimistic and may only be expected if SBGL overcomes all its operational problems (that are detailed in the following sections). In its current situation, SBGL looks set to make a move towards the $3.5 mark if we could see a continued rally in the prices of PGMs, and gold.

Figure-4 (Source: Sharewise)

An update on the Lonmin acquisition:

In a previous article, I discussed the possibility of SBGL's acquisition of Lonmin, and the implications for the company if the deal was executed. SBGL is moving on with the deal and has obtained approval of the SACT (read: South Africa's Competition Tribunal) for the proposed merger of Lonmin. As part of the acquisition, SBGL envisaged controlling the costs of operating Lonmin's assets by laying off ~12,600 workers. This initiative was expected to result in a reduction of ~$112 MM in annual operating costs.

However, as part of the SACT's approval of the SBGL-Lonmin deal, they have imposed a condition that SBGL cannot go for the planned layoffs for a period of six months. Nevertheless, the merger would enable SBGL to become the world's second-largest producer of PGMs. Since we are witnessing an improvement in the prices of PGMs (Figure-5), I believe that this deal would bear fruit for the company in terms of increased revenues and earnings. The opportunity will be magnified if we could see a sustained increase in the prices of those metals.

Figure-5 (Source: Infomine)

Problems with the South African operations act as a headwind:

The favourable impact of metal prices is reflecting positively on SBGL's share price. Nevertheless, SBGL's SA (read: South Africa) mining operations continue to act as a major headwind. It should be considered that SBGL's SA operations have suffered since November 2018 on account of a ~1-month strike initiated by the AMCU (read: Association of Mineworkers and Construction Union) in SA. The strike was triggered after SBGL failed to successfully negotiate a wage agreement with AMCU that reportedly represents ~43% of the workforce at SBGL's SA mines (including Kloof, Beatrix, and Driefontein). Moreover, a verdict delivered by the SA court in favour of AMCU sent SBGL's share prices in the toilet (down ~6% on January 3rd, 2019). SBGL's gold operations in SA continue to suffer (Figure-6) on account of the labour strike by AMCU, which will act as a major headwind against any share price appreciation that could accrue from the recent positive uptrend in gold prices.

Figure-6 (Source: Sibanye website)

Nevertheless, despite having problems in managing its gold operations in SA, SBGL has significant mining potential in its PGM operations in both SA and the US (Figure-7). Moreover, as mentioned earlier, the approval of Lonmin takeover will also improve this production potential, going forward. In my view, the overall picture for SBGL is bound to improve considering the overall improvement in PGM prices (refer Figure-5).

Figure-7 (Source: Previous article on Seeking Alpha)

Gold prices act as a tailwind:

SBGL's gold operations are only based in SA, and we have seen how these operations are affected by the actions of mineworkers' unions. Figure-8 identifies the resources and reserves' estimate for each of SBGL's mining properties (including mines and projects).

Figure-8 (Source: Sibanye website)

Given the significant gold production potential, and the fact that gold accounted for ~41% of the contribution (according to the SBGL's annual report 2017), it's relevant to consider the gold prices. As shown in Figure-5, gold prices have begun recovery since mid-November and currently appear to make a move towards the $1,300/oz mark. It should be noted that gold prices have gained strength following a 90-day truce to the US-China trade war, and a weakened USD following a government shutdown that has been in effect for more than two weeks now.

The relationship between the dollar and the SA rand:

During the major part of FY 2018, the ZAR(read: South African Rand)-to-USD exchange rate has been deteriorating (Figure-9). At present, the exchange rate is ~R14/$. A deterioration in the ZAR/USD exchange rate would mean an increase in operating costs (including workers' wages) of SBGL that are paid in the ZAR.

Figure-9 (Source: XE)

Conclusion:

We have seen in the preceding discussion that SBGL's SA gold operations are troubled by the mineworkers union's demands that are now backed by the SA authorities. The negative impact of a declining Rand against the USD and (more importantly) the disagreement between the mineworkers' union and SBGL management, is partially offset by the approval of the Lonmin deal which presents a brighter outlook for SBGL, going forward. Given the recent improvement witnessed in PGM and gold prices, I believe SBGL's share price rally should continue. However, SBGL is likely to witness a significant upside if the metal prices continue to gain momentum and if management could resolve the conflicts with AMCU, without adversely affecting SBGL's interests.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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