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Ingham’s Incisive Insights, Sibanye Gold, 24 April

Posted by Mark Ingham on April 24, 2017 at 3:38 PM

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“What’s cooking?”

On 25 April 2017, Sibanye shareholders vote in general meeting on ordinary and special resolutions relating to the proposed Stillwater Mining transaction. This is potentially a game changer for Sibanye, assuming shareholder approval is obtained, with platinum increasing to around 40% of group profits. Given the importance of the vote I have constructed an overview of what the pro forma situation could look like. Pro forma group EBITDA could potentially double between 2016 and 2019 on the assumptions made whilst pro forma headline earnings would increase from R2,5 billion in 2016 to R6,3 billion in 2019. Whilst there is EPS dilution, given the 68% increase in share in issue I have modelled, the impact is partially mitigated given the absolute rise in earnings.                 

 

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Mining          

Sibanye   

“Game Changer Potential”

Share price: R27,90

Net shares in issue: 924 million

Market cap: R25,8 billion

Fair value DCF: R39 per share

Trading Buy and Portfolio Buy

 

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What you need to know:

On 25 April 2017, Sibanye shareholders vote in general meeting on ordinary and special resolutions relating to the proposed Stillwater Mining transaction. A circular has outlined the background and rationale for the proposed transaction. Sibanye has received unconditional approval from the Committee on Foreign Investment into the United States with respect to the proposed acquisition.

Should shareholder approval be obtained, Stillwater could be a game changer for Sibanye. Given the importance of the vote I have constructed an overview of what the pro forma situation could look like.  

Not only would more than 30% of group production be in America but the lower cost per ounce and higher productivity, due to mechanised mining, would improve the total group cost and cash flow profile. Sibanye would be fourth largest in the world in PGM production and third in palladium. The upside for total profits is significant on a pro forma basis.

The equity value of the deal $2,2 billion based on 121 million shares in issue and an offer price of $18 per share. Stillwater has a net $274 million of convertible debentures and so the total cost, after the make-whole provisions on the convertibles ($400 million) and corporate action costs, will be $2,7 billion. Stillwater has cash and cash equivalents of $123,2 million as at December 2016 with total cash and cash equivalents and highly liquid investments of $450,1 million.

As this is a category 1 transaction that includes a substantial rights issue, the increased share capital requires a 75% shareholder vote. For Stillwater, a simple majority of 50% plus 1 is needed and the Board of Stillwater has unanimously supported the transaction.

In my pro forma assumptions, I have assumed raising equity of up to $1,3 billion at a USD/ZAR foreign exchange rate of R13,00 and at a share price of R27. This would entail 630 million new shares being issued, taking total shares from 930 million to 1560 million, a 68% increase.

Whilst there is an apparent dilutive effect, based on my financial assumptions the intrinsic profitability of the acquired asset is such that earnings will jump considerably on a pro forma basis.

Profitability is helped by the fact that cash costs per ounce of PGM mined, net of by-product and

recycling credits, was $438/oz for the year to December 2016 and was $454/oz in Q4. All-in sustaining costs per PGM mined ounce was $622/oz for the year. By comparison, cash costs and all-in-sustaining costs for the gold division of Sibanye were $829/oz and $1000/oz respectively in F2016.    

Based on the financials modelled below, EPS on a higher number of shares would be 368 cents in F2018 and 404 cents in F2019. Even if I assumed that the full number of shares of 1,56 billion were in issue for a full twelve months of F2017, which is not the case, EPS would still be a reasonable 117 cents.

Group EBITDA increases from R8,2 billion in the year ended December 2016 to a pro forma R10 billion in F2017 and then to a pro forma R15,5 billion in F2018 and then a pro forma R16,7 billion in F2019. By F2019, platinum could be approximately 40% of group EBITDA.   

Headline earnings would increase from R2,5 billion in F2016 to a pro forma R5,7 billion in F2018 and then R6,3 billion in F2019.

The assumptions on exchange rate, gold price and platinum price are indicated in the table below. The outcomes are of course sensitive to these variables but even at lower commodity prices the profit potential is attractive. 

Whilst the net debt to equity ratio would increase to 50% following a deal, gearing would subside quickly afterwards given the cash flows and dent to equity could be 20% or less by F2019. Sibanye net debt to EBITDA would go from 0,7x to approximately 1,5x but would be back to 0,7x or less by F2019.   

There is an argument for shareholders to follow their rights given the depressed price of the stock in relation to future value. Even if those investors who hold the stock choose not to follow their rights there is upside optionality, which would be the same for new buyers looking to get in for the first time.

Gold One, the Chinese investor, has 20% of Sibanye and despite that US has given approval.

 

Conclusion

The transaction lifts Sibanye PGM production from 1,1 million oz. to 1,6 million oz. with the addition achieved at a more than 40% lower cash cost of production relative to the gold division of Sibanye. Once Blitz is at steady state, total production will be 2 million oz. and rank Sibanye among the top three or four internationally in PGMs.

A range of fair values are doing the rounds, ranging from bullish to bearish. Some caution is called for given the magnitude of the deal, the capital raise and the commodity outlook. I am on record as having a fair value of R39 for a while and I maintain that.

 

Table 1:

Pro forma forecast P&L

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Wishing you profitable investing, until next time

Mark N Ingham    

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