PICK OF THE MONTH
Afew months ago IM profiled SibanyeStillwater, detailing the company’s history and its morphing into the world’s largest primary producer of platinum, the secondlargest primary producer of palladium and a top-tier gold producer.
Sibanye’s achievements are no small feat considering that the company started as a humble spin-off of unwanted assets in Gold One International.
No stranger to making bold moves, Sibanye-Stillwater has recently announced a restructuring to place all its gold mining assets in one holding company and all its platinum mining assets in another. Both of these will, of course, be held inside Sibanye-Stillwater. The proposed restructuring should ensure that some corporate and operational efficiencies are unlocked and that governance of the entire group becomes a little more streamlined.
IM could be wrong here, but we don’t foresee that this will have much of an impact on shareholders, unless the goldmining assets are spun off (or separately listed). If that were the case, it would probably unlock some value trapped in the platinum mining assets. This would be an interesting approach, if taken, and is worth keeping an eye out for.
Since about April in 2017, the share price seems to have been making a large rounding bottom formation. In the years prior to 2017 the price was under a lot of pressure as the company grew by means of debt-funded acquisitions and because precious metals prices were coming down. Right now, though, the opposite is true. Sibanye-Stillwater is tasting the fruits of its labour and precious metals prices are moving up.
It is worth noting that platinum group metals are rallying for various reasons. Gold is rising due to uncertainties relating to the trade war between the US and China. There is also a belief that if the inevitable recession comes — in a year or two, or five — gold will be an inflation hedge. In fact, there is now a record-high value in long gold futures positions, which in theory should keep driving gold prices higher until we see speculators start to take off some of these long positions. China has also been an aggressive buyer of gold bullion to bolster its reserves — read into that what you will.
Palladium and platinum prices are higher on the back of industrial demand, primarily for the automotive sector (the two metals account for something like 69% of total global demand), as the metals are used in catalytic converters in motor vehicle exhaust systems, in a market where emissions standards keep getting stricter.
There is also the backdrop of renewable energy and the use of platinum and palladium in the manufacturing of large industrial-scale batteries (as well as more efficient batteries in general).
These two factors have led to a boom period in the metals, of which Sibanye-Stillwater is one of the major global producers. It points to long-term sustainable growth.
Also, let’s look at the worstcase scenario. If the rand keeps losing value (which is perhaps less likely than we think), Sibanye-Stillwater will practically be printing money as its profit margins rocket. But even if the rand gets stronger, it will probably not strengthen so much that it completely nullifies the impact of higher metals prices on miners’ bottom lines. Perhaps the bolstered confidence could lead to an increase in mining production.
Looking at the chart, though, we can see that rounding bottom between April 2017 and August 2019, which projects a target price of about R34 a share. We would probably not need the rand to devalue drastically to get it there, either. In fact, IM reckons that if there is sustained strong demand for precious metals — albeit in a flight to safety in a global or a US-China recession scenario or even a expansionary global growth and motor vehicle manufacturing scenario, this share price probably has a long way to go before it tops out.
Therefore, IM would not consider Sibanye to be a trade, but rather a longer-term investment — something to buy and keep under the mattress for many years.
Investors are being given a great opportunity to get the share while it is cheap. ●