Financial Mail - Investors Monthly
Just how precious is Neal Froneman?
The CEO of Sibanye has shown an uncanny ability to revive unloved mines, writes Charlotte Mathews
Sibanye Gold has been a phenomenal investment since it listed three and a half years ago at R13 a share, as a vehicle for the ageing South African mines (Kloof, Driefontein and Beatrix) that Gold Fields no longer wanted.
Its shares were the JSE’s second-biggest gainers in July, with a 28% rise to R66.20, as excitement has been returning to the gold market and investors are pinning their hopes on Sibanye CEO Neal Froneman’s promises of growth.
When Sibanye listed, gold was trading at about R480,000/kg. Since then gold has added about 27% to R611,000/kg, while Sibanye has increased fivefold. Since listing, Sibanye has also paid R3.24 a share in dividends.
Analysts said when Sibanye listed that its appeal would lie in a strategy of paying generous dividends for a few years as Froneman, respected for his expertise as a mine manager, would be able to cut costs and squeeze the maximum returns out of these short-life ore bodies. Most gold companies divert the bulk of the cash they generate into finding growth — not necessarily with much success.
But Froneman has managed to maintain dividends while laying down a future of growth in gold, platinum and potentially coal and uranium. At the group’s strategic update seminar in July, he said Sibanye’s diversification strategy was not commodity-based, but value-based.
“Sibanye management talks a good story, which has been backed by operational delivery over the past three years,” says Mandi Dungwa, investment analyst at Kagiso Asset Management. “They have decreased costs, increased the life of their mines with very little capital expenditure and maintained their dividend in a difficult operating environment.”
Since listing, Sibanye has expanded its gold reserves and resources organically and through acquisition.
It has undertaken further work on depth extension projects at Driefontein 5 shaft, Kloof 4 shaft and Beatrix South. It has added to Beatrix through a land swap with Harmony Gold and the purchase of Wits Gold, which had advanced projects in the Free State near Beatrix as well as the almost-completed Burnstone mine and plant near Evander, which was in business rescue.
Under previous owners Great Basin Gold, Burnstone had become a cliché of a gold mine: a hole in the ground into which investors pour money. It had been several years in development and despite $500m (R7.5bn) being spent, it had produced little gold. It was rumoured that the main
Sibanye management talks a good story, which has been backed by operational delivery over the past three years
shaft was put in the wrong place.
Sibanye paid only R70m for Burnstone and the debt was ring-fenced. Sibanye’s executive vice-president of business development, Richard Stewart, says Sibanye has re-evaluated the mine, where the geology is extremely complex. Sibanye started to implement a plan in January to mine about 60% of the resource in a 3 km radius around the shaft, using conventional stoping. Great Basin planned Burnstone as a mechanised mine but the amount of waste rendered that method uneconomical. Sibanye will spend R1.8bn, mostly between 2016 and 2022, to mine 1.7m oz at a total cost of R357,434/kg, using conventional stoping with mechanised footwall development.
Asked if he would have located the shaft elsewhere, Stewart says he would probably have put it closer to the high-grade portion of the ore body, but it has been placed at the shallowest point and is an equal distance in any direction from the main ore body.
Sibanye also bought the Cooke shafts and tailings from Gold One, paid for in shares which made Gold One Sibanye’s largest single shareholder, at 20%. Though Cooke 4 is in the process of closing as it is unprofitable, the Cooke tailings help to underpin Sibanye’s West Rand tailings retreatment project, a plan to extract about 11m oz of gold and 170m lb of uranium from the dumps in the area over the next few decades.
Froneman’s next significant acquisition was to agree to buy the Rustenburg platinum shafts and infrastructure from Anglo American Platinum a year ago. The transaction is still waiting for approval from the department of mineral resources. Hard on the heels of that deal, Sibanye made a cash bid for Aquarius Platinum, which has 50% of the Kroondal mine close to Anglo Platinum’s Rustenburg, and Mimosa mine in Zimbabwe. The new platinum division is headed by Aquarius’s highly regarded CEO, Jean Nel.
Between Rustenburg and Kroondal, Sibanye now employs about 23,000 people at 10 shafts, which gives it greater weight in negotiations with government, communities and labour, and it can share the costs of logistics and central services between the two mines.
Sibanye’s third leg is its energy strategy, based on finding alternatives to Eskom energy supply. It is planning to generate up to 600 MW of its own power, starting with a R3bn, 150 MW solar photovoltaic plant due to come on line at the end of next year. The rest will come from gas and coal-fired power stations.
An agreement to buy into
Froneman has managed to maintain dividends while laying down a future of growth in gold, platinum and potentially coal and uranium
Waterberg Coal fell through last year. But John Wallington, CEO of the energy and coal division, says other opportunities are under consideration, including the Anglo Coal assets, if the price is right.
Acquisitions and consolidation have been the talk of the commodities sector for at least eight years, yet most deals founder on unrealistic asking prices or the inability to raise funding. Though some of Sibanye’s deals have fallen through, or taken longer than expected, Froneman has managed to conclude several. Market excitement over mergers and acquisitions has helped Sibanye’s share price outperformance.
Investors with memories stretching back more than a decade will recall that Froneman’s strategy was similar in slicing, dicing and bulking up Aflease Gold and Uranium One.
Froneman took a South African gold and uranium company, Aflease, into a merger with Canadian-listed Southern Cross Resources in 2005 to create SXR Uranium One, which spun off the gold assets into a separately listed subsidiary that had combined with the Sub Nigel assets.
Uranium One developed the Dominion gold and uranium mine in SA and made a series of global acquisitions, including UrAsia Energy, which owned low-cost mines in Kazakhstan. Russia’s state-owned nuclear group Rosatom, which knows a thing or two about uranium, was clearly targeting the Kazakh mines rather than Dominion when its subsidiary ARMZ bought into Uranium One in 2010. ARMZ eventually took control of Uranium One and delisted it in October 2013 with a buyout offer equivalent to R27.36. Dominion is now owned by Oakbay Resources.
Froneman left Uranium One in February 2008. The shares, which had touched a peak of R127 eight months earlier on a combination of uranium prices and corporate activity, dropped 27% on the news and continued to drop as Dominion fell well short of its production targets.
After leaving Uranium One, Froneman applied his blending skills to Aflease Gold, which combined with BMA Gold to form Gold One. Gold One built the Modder East gold mine and then gobbled up Rand Uranium and some of the Grootvlei resources.
It spun off its deeper gold assets into a separate listing, Goliath Gold.
Froneman introduced a Chinese consortium, BCX Gold, which subsequently delisted Gold One with a buyout offer of A$0.30 a share in December 2013 (at the time, worth about R2.72, against a share price peak of R4.60 in December 2011). Froneman had left Gold One in November 2012 to join Sibanye Gold.
Uranium One and Gold One have delivered a lesson: follow Froneman. As long as he is in charge of the groups that he has put together, market euphoria drives their share prices. When he leaves, the share prices never do as well. It may be a mixture of reasons: the assets not living up to expectations, commodity price weakening or that the subsequent Russian and Chinese owners lacked Froneman’s flair for investor relations.
Sibanye has some great assets, in particular highly experienced mine managers and the ability to extract value from ageing mines through combinations. It also has some doubtful assets, like Burnstone.
“The investment case (for Sibanye) is premised on a normalised platinum group metals price environment, which is reflective of fundamentals,” Dungwa says. “The platinum assets Sibanye has acquired are located in a favourable area and they will be able to extract synergies through collaboration or consolidation with neighbouring peers as the production profile of their existing gold assets starts to decline.”
Acquisitions and consolidation have been the talk of the commodities sector for at least eight years