Sibanye-Stillwater: Its Value Drivers Are Aligned Again

Summary

• Sibanye could fill a critical void with its PGM segment.
• The macroeconomic environment could see metals and minerals trade at high values for the foreseeable future.
• The firm's FCF per share is attractive and spells dividend sustainability.
• The CAPM model suggests that Sibanye could outperform the market.
• Unions remain a concern despite recent agreements.

RHJ/iStock via Getty Images

In our previous article, we spoke of Sibanye Stillwater Limited's (NYSE:NYSE:SBSW) risk-return profile. Although a few of our concerns have manifested themselves, we've conceded that the sanctions on Russia and a variety of other factors have led to a changed outlook for Sibanye's stock.

This article covers the factors we believe can bring capital gains rewards to Sibanye's investors. Additionally, Sibanye-Stillwater's dividend prospects are analyzed to provide a holistic analysis of what investors can anticipate in the medium term.

Please take a look at one of our previous articles for an in-depth description of the company.

Macroeconomic Overview

Quite a lot has changed since we last covered Sibanye, and as with any mining stock analysis, geopolitical factors need to be incorporated into the analysis.

Most readers on Seeking Alpha will now be aware of the effects of Russian sanctions on the prices of metals and especially platinum group metals. However, we really need to take a holistic vantage point to assess the situation rather than a simple, discrete supply versus demand analogy.

We're likely to traverse into economic growth of 4.4% during 2022, which remains questionable. Nonetheless, the signs are that the slack of pandemic stimulus will proliferate consumer spending and will cause a drag on economic activity.

Data by YCharts

Supply-chain issues persist due to another covid-19 breakout in China, a war in Ukraine, and congestion of global shipping ports. In our opinion, this puts monetary policy execution in a tough spot as much of the inflation is coming from push factors and not just pull factors.

Metals and inflation have a close correlation, prompting us to conclude that we may see a multiyear bull run in the metals space if the geopolitical sphere remains on its current trajectory.

On the plus side, if you're a Sibanye investor, you'll probably be on the winning side of the current macroeconomic environment. Let's take a look at the firm's production statistics and see how they could feed into Sibanye's financial results.

Sibanye-Stillwater

Sibanye's PGM segment is set to thrive as it will be a proxy for many nations that will no longer rely on Russian exports, which according to J.P Morgan's research team, made up for 25%-30% of the world's palladium and 7%-10% of the globe's platinum.

Thus, it's very likely that we'll see Sibanye build on its EBITDA figures during 2022 and beyond.

Dividend Analysis

Many readers overemphasize net income when it comes to dividends, and, sure, it is essential because it's a measure of residual. However, it's always crucial for an investor to examine a company's free cash flow per share to gauge dividend payout capabilities.

Cash flows are where the dividends actually get distributed from, whereas income statements are accrual-based measurements of financial performance that are often inaccurate representations.

Sibanye hasn't only printed cash during a period of rising metals prices, but it's also repurchased a significant amount of its shares, which has drastically increased the stock's cash flow per share ratio.

Data by YCharts

It seems as though Sibanye's $0.4868 dividend per depositary receipt adds up to a forward yield of 6.27%. It seems as though this is sustainable when cash flows and the business' fundamentals are considered. In addition, the stock's dividend safety ratios are intact, with an interest coverage ratio of 30.31x and a dividend coverage ratio of 2.70x.

Stock Pricing

The Capital Asset Pricing Model (CAPM) is a linear regression that estimates a stock's return by testing a stock's sensitivity relative to the market risk-premia and the risk-free rate.

The CAPM can't be looked at in isolation and, in fact, doesn't apply at all when we're in a bear market. Nonetheless, it does provide an indication of the expected return of a stock during a bull market.

For economic reasons, we believe that we're about to enter a sustainable bull market after the recent sell-off we experienced. Additionally, the odds are that primary producers will outperform the market due to an inflation pass-through advantage. If we had to enter a bull market, we'll possibly see Sibanye's stock price increase by in and around 25%.

Data by YCharts

Risks - Unions

Many may be surprised that we're listing union strikes as a continued risk for Sibanye-Stillwater after the firm agreed to a wage deal with two labor unions last month.

But here's what needs to be understood. Solidarity, which is one of the unions that agreed to a R700 (approximately $48) monthly wage increase rather than a R1000 (approximately $68) wage increase, is vastly different from most other unions in South Africa; thus, it carries little weight in this tussle.

There's a history of conflicting interests between Solidarity and the other unions (AMCU, NUM, UASA) due to the different subsets of the South African society that they represent. Thus, we're concluding that we're still looking at a situation that can drag on for quite some time and substantially hurt the firm's gold mining operations.

The Bottom Line

The influencing variables on Sibanye's stock price have changed abruptly. Geopolitical matters could alter Sibanye's fate in the medium term, carrying its stock price to new heights and sustaining its dividend payouts. Finally, the stock's CAPM suggests that it may outperform the broader market if we were to enter a broad-based bull market.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SBSW either through stock ownership, options, or other derivatives. 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.

Comments

[papaloapan]

$48/68 per month for total company wide employees is between $18/25mm. Disruption from labor unrest is an issue, but the increased costs are easily managed. Gold production and margins are in decline, and likely will maintain the trend. Their PGM operations are excellent, and underlying prices will likely rise when auto production increases. A great base business, and management vision to be investing in battery metals, and dividends.

[charliezap]

Russia supplied about 37% of the world's palladium in 2021. Before Russia marched into Ukraine, the price of palladium was around $2,300 per oz. After Russia marched into Ukraine, the price shot up and was briefly over $3,000 per oz. It has now settled back to around $2,300.

The fact is that there are no direct sanctions on palladium from Russia by NATO countries. Some disruption, maybe, from the financial sanctions imposed on Russia, but no sanctions on the metal. Some feared Russia might withhold the supply as a threat to the West, but Russia is now in such bad shape that they could not afford to do that. If NATO did impose sanctions, there are Asian countries, specifically China and India that would be happy to take the supplies.

[Andy D.]

@charliezap
"but Russia is now in such bad shape"
Could you please quantify this comment.
It appears to me that as long as Russia has what the World needs then there is a market.
If the US wanted to destroy Russia's cash flow they would immediately stop the war on fossil fuels which is rife in all parts of the this Administration.
Even a hint of a change in direction would knock $20 off of the price of a bbl of oil.

[charliezap]

@Andy D.
On TV they are saying Russian GDP will be down 12-18% this year, setting them back 10 years economically.

Then there are the headlines:

A) "Russia says it received $3.6 billion less [38% less] than it forecast from March oil and gas sales, suggesting the Ukraine war and Western sanctions hit exports"

news.yahoo.com/...

B) "Additional cracks showing in Russian energy complex - refineries cutting runs"

seekingalpha.com/...

And my friend Paul Krugman says in the NYT: "Vladimir Putin’s invasion of Ukraine was, first and foremost, a crime — indeed, the war crimes continue as you read this. But it was also a blunder. In less than five weeks Putin has destroyed Russia’s military reputation, battered his nation’s economy and strengthened the democratic alliances he hoped to undermine."

www.nytimes.com/...

[Andy D.]

@charliezap
First and foremost I am not PRO Russia or Putin!.
I am ANTI WAR and the destruction and death which it brings.
I am cynical about news reports from our monolithic MSM.
For example, Lithuania is inconsequential and imports very little of its energy requirements from Russia. Indeed, Lithuania actually exports power to the outlying Russian "province" of Kalingrad from its imports from Sweden.
I think the current situation could have been avoided and the long term impact will be a greater polarization between East and West to the detriment of the US.
BTW, Biden took great pleasure a few weeks ago at the devaluation of Rouble but it has subsequently recovered its value to pre- invasion levels.
The whole thing makes me sad.