Deal leaves Sibanye with a lot of work
But miner upbeat that Blitz project will meet deadline
● Sibanye-Stillwater may have put itself between a rock and a hard place with the $500million (about R6.7-billion) cash injection from Wheaton Precious Metals International, which is meant to help it cut debt by a quarter to R16.5-billion.
The diversified miner, which has been under immense pressure to reduce its debt, has signed a streaming deal in terms of which it will sell a percentage of palladium and all its gold production over the life of its US-based Stillwater operation in exchange for the upfront payment.
For every ounce of metal delivered until the $500-million advance is repaid, Wheaton will pay Sibanye-Stillwater 18% below the spot price. Thereafter, until the end of the life of the mine, the discount for Wheaton increases to 22%.
Some analysts are not convinced of the benefits of the complex deal. They say that while it does reduce debt and keep the banks happy, it is a cost to shareholders.
René Carlo Hochreiter, an analyst at Noah Capital Markets, said the deal would work out to be more expensive than bank debt.
“To them [Sibanye] it’s worth it because the streaming deal is not debt . . . [But] they definitely lose on cash flow.”
By Hochreiter’s calculations, Sibanye will lose $11 an ounce of the value of future production due to the discount offered to Wheaton over the life of the mine, which could be another 14 years.
Therefore, Sibanye was trading future cashflow for temporary debt relief, so shareholders would be sharing their potential future earnings with Wheaton.
Hochreiter said the deal made some sense because of widespread concern at the company’s net debt to earnings before interest, taxes, depreciation and amortisation (ebitda) ratio.
Sibanye said at the end of the financial year its debt covenant steps down from 3.5 times to 2.5 times. Without the streaming deal, Sibanye would risk breaching some of its debt covenant levels in 2019.
Cashflow is king
Hochreiter said for Sibanye to impress shareholders again, the company needed to improve operational cashflows and continue to bring down its debt.
But to get cashflows, commodity prices needed to be on its side and right now only the palladium price was strong, while platinum prices were still weak.
Less than 20% of South Africa’s gold mines are profitable, according to the Minerals Council South Africa.
Streaming deals is seen as a liability as it needs to deliver on production
Sibonginkosi Nyanga, an analyst at Momentum, said although there were positives to the deal given the fact that it would reduce debt, streaming deals were seen as a liability because the company still needed to deliver on production.
Sibanye would have upfront cash to bring down its short- and long-term debt, which meant it reduced the interest payments.
“If prices remain where they are, I’m not sure whether they would maintain that breathing space. It’s breathing space provided that Sibanye will be profitable. Imagine a situation whereby their profits drop — that net debt-to-ebitda goes up,” Nyanga said.
On the other hand . . .
But Leon Esterhuizen, an analyst at Nedbank, said the deal was not expensive, although it appeared to show a degree of desperation on the part of Sibanye, in the belief that banks and shareholders would not lend it more money.
Wheaton got a deal with an 8% return, Esterhuizen said. Sibanye would need to produce enough metal to make sure that Wheaton got its capital back within 10 years.
“Getting money at 8% is what it’s costing the company — if they issued stock or went to the bank to get distressed debt, in both cases they would have paid significantly more than the 8%,” he said.
“So in that sense it’s not a bad deal. They needed money and [to obtain it] in any other way it would have cost them a lot more.”
The deal comes with the requirement that Stillwater’s Blitz project gets completed. The company has six years to finish developing the project, but if it fails to do so penalties payable to Wheaton of up to $147-million will kick in.
The Blitz project, a component of Stillwater, was always part of Sibanye’s strategy, but now the miner must complete certain underground work within a set time frame.
The Blitz project will produce 300 000 ounces of platinum and palladium annually. It includes a concentrator, which separates PGMs from the ore, that should be running at 80% capacity in six years’ time.
Pro rata penalties
Richard Stewart, executive vice-president at Sibanye, said that if the company failed to complete the Blitz project on time, or at all, the penalties would have to be paid on a pro rata basis depending on progress.
“Say Blitz produces 200 000 ounces for that period instead of 300 000, that gives us two-thirds and one-third missing, and we have the penalty of the one-third of the $147million that will need to be repaid.”
The maximum exposure if the project is not built is the full $147-million. Blitz was currently producing about 40 000 to 50 000 ounces a year, which meant the likelihood of that risk was limited, Stewart said.
Esterhuizen said if Sibanye did not do the streaming deal and the South African assets continued to suffer, Sibanye would not have had enough money in Stillwater to pay for the capital development of the Blitz project and to pay down group debt.
But with the Wheaton deal, Sibanye could finance the project over a two-year period and even if metal prices declined the company still had the money.
“The chances of the project to not come through are zero,” Esterhuizen said.