Sibanye Stillwater: Not A Simple Case

Summary

• Total US Production and recycling were excellent in the first quarter.
• The company reported a record adjusted EBITDA of $724 million, a significant improvement compared with the prior-year period of $57.7 million.
• SBSW is an excellent long-term company. However, it is better to trade the stock short term due to potential disruptions.
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Stillwater mine, near Nye, Montana. (Image courtesy of Stillwater Mining)

Investment Thesis

The Johannesburg-based company Sibanye Stillwater (NYSE:SBSW) provided its production update for the first quarter of 2020. Like many other gold and precious metals producers, Sibanye did very well this quarter.

The South African mines were on their way to normal after experiencing mining restrictions last month due to the COVID-19. On April 14, 2020, the company indicated that it had restarted its precious metals operations which were put on care & maintenance the previous month:

received approval for limited mining and processing at its South Africa operations from April 14, "subject to the implementation of agreed protocols to address COVID-19 related health and safety risks".

Ramaphosa had imposed a 21-day nationwide lockdown which was due to end at midnight on April 16.

Sibanye Stillwater acquired the East Boulder and Stillwater mines in the USA and has been an excellent boost to the company. The US operations have experienced some disruptions.

The platinum group metal and gold producer said in a statement today that it had also taken a wider decision to reduce the number of people working at all its US sites whilst maintaining output from current operations.

However, despite those inconveniences, the company provided an excellent operating update for the quarter ending March 31, 2020. As we all know, the financial results are indicated every six months, which means we will have to wait until the next quarter to get the full picture.

The investment thesis is quite simple. The company is an excellent long-term investment, and I recommend adding SBSW to your premium portfolio, especially after the company decided to diversify and add valuable producing assets in the US. However, it is also essential to trade short term about 30% to 40% of your portfolio to take advantage of the metal prices volatility.

Below is the chart comparison YTD between the VanEck Vectors Gold Miners ETF (GDX) and the Aberdeen Standard Physical Palladium Shares ETF (PALL) and Sibanye Stillwater.

Data by YCharts

CEO Neal Froneman said in the recent press release that US PGM operations witnessed 8.2% growth from the same quarter a year ago.

The company mined 2E PGM output of 141,585 oz, after the return to planned production rates at the East Boulder and Stillwater mines, despite disturbances at the Blitz project.

Sibanye-Stillwater ADR - 1Q 2020 - Balance Sheet And Trend - The Raw Numbers (Financial results are only provided on a six-month basis).

Note: The numbers below are indicated in US$.

Sibanye Stillwater ADR	Q1'19	Q2'19	6/2019 (6 months basis)	Q3'19	Q4'19	12/2019 (6 months basis)	Q1'20
$US vs. ZAR	14.01	14.39	14.20	14.67	14.72	14.69	15.38
Total Revenues in $ Million			1,657.4			3,385.9
Basic Net Income in $ Million			-12.2			42.3
Adjusted EBITDA $ million	57.7	87.7	141.9	377.4	502.8	892.4	723.8
EPS in $/share			-0.02			0.06
Operating Cash flow in $ Million			93.6			560.8
Capital Expenditure in $ Million			181.9			351.0
Free Cash Flow in $ Million			-88.3			209.80
Cash and cash equivalent $ Million			423.0			401.4
Borrowings including current in $ Million			1,905.5			1,615.8
Net Debt (excluding Burnstone debt) in $ million			1,470.4			1,427.1
Shares outstanding (diluted) in Million			585.4			685.4
Production Au Oz	Q1'19	Q2'19	6/2019	Q3'19	Q4'19	12/2020	Q1'20
US 2E PGM Production	130,899	153,874	284,773	143,353	161,849	305,202	141,585
US recycling Oz	201,289	220,161	421,450	202,141	229,540	431,681	221,798
US AISC 2E/Oz Stillwater	833	720	772	791	798	795	894
SA 4E PGM	263,508	364,483	627,991	518,623	461,719	980,342	418,072
SA AISC 4E/Oz	845	987	932	1,104	1,040	1,074	1,089
Gold Production Au Oz	143,278	201,456	344,734	287,330	300,578	587,908	238,076
Average gold price $/oz	1,306	1,307	1,308	1,451	1,415	1,432	1,608
AISC Gold	2,030	1,803	1,904	1,386	1,314	1,347	1,500

Click to enlarge

Source: Company quarterly release analysis

Note: More historical data are available to subscribers only.

One crucial element that influences earnings is the exchange rate ZAR/$US:

1 - Quarterly production analysis

Sibanye Stillwater is producing Gold and PGM in South Africa and the USA.

In the US, the company operates the East Boulder and Stillwater mines, which produce platinum and palladium. Also, the company is recycling platinum/palladium/rhodium.

A - US PGM Production 2E PGM Oz and Recycling 3E PGM Oz. (USA)

The chart indicates the quarterly production and six months production as well.

Total US Production and recycling were excellent in the first quarter, as we can see above. Recycling delivered a substantial number of 221,698 3E Oz, up 10.2% for the same quarter a year earlier.

Also, East Boulder delivered 58,140 Oz or 17% than a year ago, and Stillwater, including the Blitz, provided 83,445 Oz.

PGM sales in March 2020 were affected by a delay in refined metal released, resulting in sales for Q1 2020 of 91,975 2Eoz. This refined production was subsequently released and sold during April 2020.

B - South African PGM Production 4E PGM Oz and Gold Production.

Gold production was 238,076 Au Oz this quarter, up 66.2% from the same quarter a year ago. With the successful integration of the Marikana operations. The precedent year, production was impacted by the AMCU Strike.

2 - AISC discussion

The company indicates three different AISC.

1. AISC 2E PGM: $894 per ounce was higher this quarter due to lower production from Blitz and higher royalties and taxes as a result of an inflated realized PGM basket price.
2. AISC 4E PGM: $1,089 per ounce was higher AISC reflecting the change to toll processing at Rustenburg, higher royalties, and the inclusion of production from the Marikana operation with a higher average AISC, which was absent in Q1 2019.
3. AISC Gold: $1,500 per ounce from $2,030 per ounce last year.

3 - Guidance

Due to the uncertain future impact of COVID-19, guidance will be provided once the company has greater certainty about the operating outlook.

4 - EBITDA and Debt

The company reported a record Adjusted EBITDA of $724 million, a significant improvement compared with the prior-year period of $57.7 million. Also, the company indicated that its leverage was reduced by 40% this quarter with a net debt-to-adjusted EBITDA of 0.75x.

Conclusion And Technical analysis

Sibanye Stillwater is a great precious metals producer with a solid balance sheet and a growing cash position. But the present situation in South Africa is quite unsettling and could negatively affect the stock price shortly.

We learn on May 28 that Sibanye Stillwater confirmed positive cases of COVID-19 (51 cases) following screening and testing at its Thembelani Mine, Rustenburg. The situation creates some production disruptions for the second quarter of 2020 and potentially beyond. In this case, it is too early to estimate future production with a high degree of confidence.

What we know for sure is that, on the one hand, the company will struggle to produce a decent amount of precious metals from its mines in South Africa (potentially working at 50%).

On the other hand, the miner will show some substantial revenues due to bullish PGM prices, now at a multi-year record high.

This situation is excellent for traders who want trading the short-term volatility while keeping a small long-term position.

Technical Analysis

SBSW is trading within an ascending channel pattern with line resistance at $9.45 and line support at $7.30.

So far, we can't guess the next breakout with enough certainty, but it is more likely that the worsening situation in South Africa will potentially push the stock to break out its support and test its lower support that I see around $5.50.

However, any rally in the gold price now will support SBSW and, eventually, boost the stock back to $9.45.

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Analyst’s 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.