Mining’s ‘Mr Fix-It’ worries investors

MAY HAVE TO SELL ASSETS, SHARES

Investors might be running out of patience with Sibanye Gold CEO Neal Froneman. Its stock plunged a record 16% on Thursday after it warned it may consider selling assets, metals streams and – as a last resort – new shares if the recent rand strength persists.

Sibanye’s under pressure to reduce debt after a rapid series of deals that transformed it from a staid gold producer to a diversified precious-metals miner with southern African and US assets. Its net debt is 2.6 times underlying earnings and almost as high as its market value.

So far, investors have given Froneman the benefit of the doubt. But Thursday’s plunge suggests that might not continue forever.

“The biggest issue here is there is too much debt,” said Nedcor Securities’ Arnold van Graan. “We are seeing a lot of balance sheet risk building up if the rand-gold price stays where it is.” The rand has gained about 20% on the dollar in the past three months, as investor optimism builds following ANC and government leadership changes. Gold priced in rand has declined about 14%.

Gold and platinum-group metals (PGMs) are sold in US dollars, and while the majority of Sibanye’s gold and a substantial amount of its costs are denominated in rand, its results and financial condition are affected if there’s a material change in the rand’s value.

The plunge in Sibanye’s share price was overdone and it’s still generating free cash flow, Morgan Stanley analysts said. But its debt level could present a challenge if the rand keeps strengthening.

Sibanye will look at selling its Cooke gold mine and another loss-making operation, Beatrix West, in SA. It may also raise as much as $500 million (about R5.8 billion) through precious-metals streaming, Froneman said.

An equity sale would be an easy way for Sibanye to gain some breathing room, said Nedcor’s Van Graan. However, the company says it’s confident it won’t need to go that route.

Sibanye is aware investors are concerned about debt levels and the ability to repay as the rand strengthens, said spokesman James Wellsted. “Equity, we certainly are not going to do that. We have sufficient flexibility to restructure our debt.”

Since its creation in 2013, Froneman has expanded with acquisitions in PGMs and added operations outside the region with the $2.2 billion Stillwater Mining purchase. The dividend was halted last year so the company can focus on repaying debt.

Froneman announced in December that he’d agreed to buy struggling platinum producer Lonmin in an all-share transaction. While that deal remains on the cards, he said on Thursday that he won’t seek to take on Lonmin if it’s going to be a millstone around Sibanye’s neck. – Bloomberg