Sibanye Stillwater Stock: Leveraging Her Skills (NYSE: SBSW)
The following True Vine Letter is an excerpt from a Prime True Vine Letter which was originally published on March 23, 2022. Assessment metrics have been updated.
Last year I listened to the audiobooks of Winston Churchill’s 4-part series on World War II (Milestones to Disaster, Alone, The Grand Alliance, Triumph and Tragedy) which was possibly the best audiobook I’ve ever listened to as well as Niall Ferguson’s, Empire: how Britain created the modern world. One thing that stood out was how important the British Empire was to winning both world wars. I didn’t realize he provided such a great source of troops from all over the world. With that in mind, I figured that if the West is going to win the war on critical metals, it will be thanks to the remnants of the British Empire (Australia, Canada and South Africa).
In a recent Premium letter, I mentioned that Nornickel’s (OTCPK: NILSY) production of 2.7 million ounces of palladium represents about 28% of the global supply. Sibanye Stillwater (SBSW) produces around 10% of the world’s palladium from its Stillwater mine in Montana – the richest palladium mine in the world (by far) – and its South African operations Platinum Group Metal (“PGM”) ). Most of the world’s platinum and palladium is produced in South Africa. Sibanye Stillwater is the largest platinum producer in the world.
In addition to its PGM operations in Montana and South Africa (“SA”), Sibanye Stillwater also owns South African gold operations that produce approximately 1 million ounces per year, which alone is enough to make it a large gold mining company.
Sibanye Stillwater management did something that other mining companies should have done but didn’t—leverage its mining and processing know-how to expand into other metals with more promising fundamental prospects than gold. Given the need for domestic supply of various critical metals in the West, this is an opportunity that is being missed by every other gold major (to my knowledge).
Sibanye Gold entered PGMs in 2016 through the acquisition of Aquarius Platinum, followed by the acquisition of Anglo American Platinum’s Rustenberg operations later that year. In 2017, Sibanye acquired Stillwater Mining for $2.2 billion and later updated the company name. This acquisition also brought the company to North America in a major way. The company then acquired half of DRDGold and Lonmin Mining, enabling it to become an integrated mine-to-market PGM producer in South Africa.
The effectiveness of Sibanye Stillwater’s strategic move towards PGMs is demonstrated by the fact that the $3.3 billion of capital spent on these acquisitions has so far yielded $5.9 billion as follows 2021 Investor Day Slide revealed:
More recently, Sibanye Stillwater has begun to venture into battery metals with the acquisition of a significant (30%) stake in Finnish lithium developer Keliber and a 50/50 joint venture with Ioneer (GSCCF) which is developing the Rhyolite lithium-boron project in Nevada.
Too often in mining we see companies sticking to one primary metal, like gold or copper, when they could leverage their mining expertise elsewhere. If Ioneer is successful in Nevada, then Sibanye Stillwater will become one of the top US producers of green tech metals, given that it will have 2 major operations under its belt.
Break the business
Sibanye Stillwater’s Rustenberg and Marikana PGM mines in South Africa and its Stillwater mine in Montana are its main earnings drivers. In the typical pricing environment of recent years, each of these transactions represents approximately 25% of operating income (75% in total). This was geared more towards SA last year as SA PGM’s realized basket price soared almost 50%, mainly due to spikes in rhodium and ruthenium which its SA PGM operations are also producing alongside platinum. and palladium.
In terms of reserve mine life for these 3 key assets, Rustenberg is still 32 years old, Marikana is over 40 years old and Stillwater is still 25-39 years old (3 separate deposits: Stillwater West, Stillwater East and East Boulder). The long life of these core assets should support cash flow for decades to come.
The following chart shows the 6-month production figures for SA and US PGM operations:
As you can see from this graph, the overall production from Sibanye Stillwater’s PGM assets is approximately 51% platinum, 40% palladium and 7% rhodium. SA operations also produce ruthenium and iridium, as well as certain chromium, cobalt, copper and nickel by-products.
The company predicts that palladium, which has significantly outpaced platinum in recent years, will find itself in a surplus market in the second half of the decade while, at the same time, platinum will find itself in deficit. the substitution from lower priced platinum to higher priced palladium is expected to be the primary driver of this shift. Notably, impeding Russian exports could accelerate this shift as Nornickel is a huge source of global palladium supply.
Sibanye Stillwater’s good balance of platinum and palladium production protects the company from significant price swings between the two metals, as a loss on one is a gain on the other. Even better, the miner is the largest platinum producer in the world.
About 80% of palladium demand and 90% of rhodium demand comes from the automotive sector, while only 40% of platinum demand comes from the automotive sector. Automotive demand has been constrained post-COVID due to shortage of semiconductor chips. The alleviation of this shortage would likely be bullish for palladium.
Bearing in mind that each share of the US-listed ADR of Sibanye Stillwater (code: SBSW) represents 4 shares of the underlying parent company listed on the Johannesburg Stock Exchange, the stock currently trades for just 2.4x 2021 free cash flow and boasts a strong dividend yield of around 12%. Given that Sibanye Stillwater produces 10% of the world’s palladium and Nornickel’s exports to the West could be hampered, will you tell me if the market is optimistic about the situation? That said, I model a decline in free cash flow per share in 2022 based on rising costs and falling SA PGM prices as rhodium and ruthenium prices fell. That puts the stock at around 4.5x 2022 free cash flow, which I think is 50% undervalued given my moderately bearish outlook on the business. I’d tick it up to Moderate as I’m not really bearish on metal prices, but I play this company more conservatively as they tend to have more difficulty with organized labor and I’m new to this.
There is now less balance sheet risk for the stock as its debt to EBITDA ratio is only 0.3 and its debt is only 12% of its equity. Additionally, he came out of 2021 with $1.9 billion in cash (giving him negative net debt). With the level of cash generation I expect this year, the company can pay the 10% dividend and still have $2 billion available for acquisitions without borrowing.
The rest of the package
The remaining 25% of Sibanye Stillwater offers investors exposure to an out-of-the-money call option on gold – the miner’s gold operations are barely profitable (not counting his stake in DRDGOLD) – and a growing portfolio of holdings in new technology metal projects, mainly lithium. The first is a hedge against bad results while the second is an important engine of growth for the future. That’s quite the combination, but not quite as much as AMC buying a stake in a junior gold miner.
And now I’m tying the knot on my investment thesis that I laid out earlier. Here we have a metals producer who is (1) a high dividend payer, (2) a hedge against severe consequences in Eastern Europe (or elsewhere), (3) an increasingly formidable US producer of new technology critical metals, and (4) most importantly, a strategic and forward-thinking company that will most likely continue to drive this strategy forward and eventually become something quite different and far more valuable 10 years from now. We should expect more acquisitions from excess capital that does not turn into dividends. The company just withdrew a billion dollars acquisition of a nickel and copper mine in Brazil due to a geotechnical event. While this one didn’t work out, we should expect more of the same in the future.
I hope to be ahead of the crowd as large institutional investors are miserably or not at all invested in this tech metals industry and the value is even more compelling with Russian supplies under fire.
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