- Sibanye-Stillwater is buying the Santa Rita nickel mine and the Serrote copper mine.
- The deal looks compelling at first glance as the Sibanye-Stillwater is paying 0.87x NAV.
- However, the nickel and copper prices used to calculate that NAV have rarely been seen over the past decade.
- In addition, nickel has been losing its place as a battery metal as many electric vehicle producers have been switching to LFP batteries, including Tesla.
On October 26, South Africa-focused platinum group metals (PGM) producer Sibanye-Stillwater (NYSE:NYSE:SBSW) announced that it inked a $1 billion deal for the purchase of the Santa Rita nickel mine and the Serrote copper mine in Brazil. The deal also includes a 5% net smelter return royalty on the underground portion of Santa Rita and it marks an important step for the company's diversification into electric vehicle metals.
Unfortunately, my view is that Sibanye-Stillwater is paying too much for these mines. Also, I don't expect nickel to play an important part in the future of electric vehicles as the major players such as Tesla (NASDAQ:TSLA) have been switching to lithium iron phosphate (LFP) batteries. Let's review.
Overview Of Santa Rita And Serrote
As you can see from the map, Santa Rita is located in Brazil's north-eastern state of Bahia. The mine achieved commercial operation in January 2010 and was initially expected to produce 16,500-18,000 tons of nickel sulphide in concentrate. However, the mine's owner back then (Mirabela Nickel) committed one of the most common mistakes in mining - putting a high-cost operation into production with the expectation that nickel prices would stay high.
(Source: Trading Economics)
As nickel prices crashed to below $10,000/t, Santa Rita was placed on care and maintenance with $1 billion spent on it. Mirabela Nickel entered bankruptcy and couldn't find a buyer for the mine for a very long time.
The sale process started in the fall of 2015 and Appian Capital Advisory ended up buying it in 2018. The most common strategy when you have a high-cost mine and commodity prices are low is to refocus the mine plan on the best parts of the project in a bid to slash costs. This is pretty much what Appian did. The company also bet on smaller trucks, shorter benches, and tighter blasting patterns. This allowed Appian to mine less waste and also gave it much better control of the grade of the material that goes into the crusher. As a result, C1 costs net of by-products stood at $3.17/lb ($6,989/t) in Q1 2020, compared with $6.19/lb in Q3 2013.
The C1 cash costs are just below $2.00/lb based on the life of mine metrics for the open pit from 2022 onwards, placing Santa Rita among the lowest cost nickel operations in the world.
Overall, it's a good turnaround story. In H1 2021, the mine produced around 6kt of nickel at C1 costs of $2.59/Ib, thus generating EBITDA of $53 million. The remaining life of mine is low - just seven years. However, the underground portion of the mine could extend the life of mine by another 27 years and the costs per unit seem similar.
Let's turn out attention to Serrote now. The latter is a copper-gold project in the state of Alagoas state which Appian bought for $40 million in Q1 2018. It was supposed to be a large tonnage, low-grade project but the company followed the same playbook as Santa Rita and is developing it as a low-cost mine. Appian poured $195 million into Serrote, and the first concentrate is expected to be delivered this month. It will produce high-grade bornite-chalcopyrite copper concentrate, with gold and silver by-product credits. The mine will churn out 22,000 t/y of copper equivalent over an initial 14-year mine life.
Overall, if the ramp-up at Serrote goes smoothly, Sibanye is paying 4.3x 2022 EBITDA and 0.87x net present value (NAV) for the two mines.
Sounds pretty good but I have an issue with the fine print, specifically note 1, which says the estimates are based on 2022 nickel prices of $7.11/lb and a long-term price of $7.71/lb as well as 2022 copper prices of $3.47/lb and a long-term price of $3.25/lb. Now, $7.71/lb is $16,997/t and we've seen nickel trading below that price for the majority of the past decade. Looking at copper prices, the situation is similar, with the metal being below $3.25/lb over the past eight years with a just a few exceptions.
(Source: Trading Economics)
Yet, Sibanye-Stillwater is optimistic nickel and copper prices will remain high due to electric vehicles. Here are the issues though.
Copper is projected to enter a deficit, but this is set to happen in 2025, meaning prices between 2022 and 2024 should be low due to surpluses.
Nickel demand for batteries from the automotive sector is expected to soar in the next two decades.
The issue is that long-term forecasts are almost always wrong, especially when you look more than a decade into the future. And nickel is already losing its place in the electric vehicle space as the main automakers are switching to LFP batteries since they are much cheaper than nickel-cobalt-manganese (NCM) batteries. According to data from SNE Research, the global market share of LFP batteries in H1 2021 soared to 24.1% from 14.8% a year earlier. As the majority of the electric vehicle battery price comes from the raw materials in it, the only way for a higher market share is a switch to different chemistry that uses cheaper materials.
The issue with LFP batteries is that their energy density is difficult to improve, so they don't have much of a future either. If the world wants cheap electric vehicles, new and revolutionary battery technology needs to be developed.
Sibanye-Stillwater is making a large bet on electric vehicle metals with the $1 billion purchase of Santa Rita and Serrote. It looks like a compelling deal at first glance as the company is paying 0.87x NAV. However, the latter is based on high copper and nickel prices that are unlikely to materialize.
The copper market is expected to be in a surplus over the next three years, which is usually a bad sign for prices. Nickel, in turn, is mainly used in stainless steel and this means that its price will be heavily influenced by China's construction sector over the next few years. The latter has been in disarray for months and it doesn't look like it will end soon. Looking at electric vehicle usage, nickel's future here is unclear as automakers have been switching to LFP batteries in 2021.
Overall, I think that Santa Rita and Serrote are good mines, but Sibanye-Stillwater is paying too much for them and is buying them at the wrong time.
This article was written by
Gold Panda has been working as an M&A analyst for over 11 years. He's been investing since 2007. Preferring value to growth, he tends to take a relatively conservative approach in his investing. His focus is on small and micro-cap stocks, which he believes is the area which offers the greatest opportunity to exploit market mis-pricings.Gold Panda is part of the team that runs the investing group Microcap Review. He provides a real-time portfolio to the group. Microcap Review focuses on three areas of opportunity in the micro-cap space: arbitrage and special situations, net-nets and undervalued stocks. Learn more.
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