Glittering bottom line and a hunt for assets

This company analysis comes with a warning. The writer possesses, for the most part, a reverse Midas touch when it comes to investing — so much so that colleagues have referred to a HRI (Hasenfuss Reverse Index, patent pending) as a contra-indicator for commodity share investment.

That said, it is difficult not to be impressed by the dogged determination of Sibanye Gold’s CEO Neal Froneman in building a diversified mining house.

One can be sure that once Froneman assembles the broader commodity portfolio, the enlarged entity will operate sans the usual old-style mining house frills and will not have a soft corporate underbelly. Fundamentally, though, it is difficult to back Sibanye. The trailing earnings multiple is rich, and even the commitment to pay dividends won’t offer too much compensation for the demanding share price. As a standalone gold producer, the increase in the bullion price should allow Sibanye to pump R5bn-R6bn in additional revenue in financial 2016.

Froneman has also forecast gold production for the financial year ahead to increase to around 50,000 kg, while the waning of the rand/dollar exchange rate means costs in dollar terms will be markedly lower. Using an average exchange rate of R15/$ for the financial year ahead, he pencils in an “all-in cost” of R440,000/kg.

In short, the weaker rand and the recovery in the bullion price means the gold price in rand is roughly R100,000/kg higher than it was in 2015. If the gold price holds at current levels for most of the new financial year, Sibanye’s total cash cost margin will fatten to 38% and the all-in sustaining cost to 25%.

But a glittering bottom line (and a generous dividend) is not the sole reason to consider buying Sibanye. The big question is how smartly Froneman can line up deals to diversify Sibanye’s commodity basket. While there has been a mini-spike in resource sentiment in the past two months, there are still plenty of well-priced opportunities for Froneman to consider.

Froneman wrote in the company’s report for the year to end December 2015 that it was pleasing to note the overwhelming support from shareholders for the proposed acquisitions of the Rustenburg operations from Anglo American Platinum and Aquarius Platinum at the respective general meetings held in January this year. One senses that Froneman has carte blanche to scour the commodity wasteland for opportunities he believes could yield compelling long-term value.

It is well known that Sibanye is also hunting for coal assets, despite walking away from talks with troubled Waterberg Coal.

The big shareholders at Sibanye include the Bank of New York, the Government Employees Pension Fund and Allan Gray. It also includes Titan Nominees, which is the corporate moniker of retail tycoon and serial risk taker Christo Wiese, who previously