PICK OF THE MONTH

Financial Mail - Investors Monthly - - Contents - Petri Redel­inghuys

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. ●

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