Just how pre­cious is Neal Frone­man?

The CEO of Sibanye has shown an un­canny abil­ity to re­vive unloved mines, writes Char­lotte Mathews

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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

Top and above: Sibanye’s Beatrix mine in the Free State. It’s es­ti­mated the cur­rent min­eral re­serves of Beatrix will sus­tain the op­er­a­tion un­til 2029.

Sibanye Gold’s Drie­fontein mine, which started pro­duc­tion in 1952 and is officially its most pro­lific gold mine, hav­ing pro­duced more than 108m oz of gold over the past 63 years.


Sibanye Gold CEO Neal Frone­man

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