Backing out at the right time
Sibanye-Stillwater’s ditching of a recent deal raised eyebrows and the spectre of legal action. But its CEO isn’t fazed
On Christmas Day in 1999, the late Roger Kebble — then chair of Durban Roodepoort Deep — got some bad news.
The Browns Creek gold mine in Australia was being flooded after blasting hit an aquifer. The mine could not be saved; in fact, it would be inaccessible within days, such was the pace of the flooding. Barely six weeks after completing the purchase of the mine’s holding company, Hargraves Resources NL for $15m, all the “Roodepoort Rocket” had to show for its endeavours was a very deep, watery hole.
That is a worst version of what is called a “material adverse change”. A clause referring to this is used by lawyers to protect clients against a stroke of ill fortune, such as the one SibanyeStillwater says occurred at the Santa Rita nickel mine in Brazil when a pit wall collapsed. Because of that, Sibanye-Stillwater last week pulled out of a $1bn package transaction that included the Serrote copper mine, also in Brazil.
But Appian Capital Advisory, the UK private equity company selling the mines, disagrees.
It claims the pit wall failure was merely one of those things that happens in mining, and could be remedied with only minor disruption and operating delay. It is threatening legal action, though nothing has materialised to date.
Clearly, no mine is risk free. A more severe event, albeit with lower economic fallout than the Browns Creek disaster, occurred at Vedanta Zinc International’s Gamsberg mine, in the Northern Cape, in November 2020. In that event a landslide buried two employees under hundreds of tons of rock. However, the mine reopened after a two-month hiatus.
Some analysts have taken a critical view of
Sibanye-Stillwater.
They think the company was looking for reasons to bail on an investment shareholders didn’t love from the get-go.
“I think it’s an excuse,” says René
Hochreiter, an analyst for Noah Capital. “They overspent, in my view. I think they discovered they’d got hold of something that wasn’t worth it in the end.”
Other questions are whether Covid travel restrictions prevented Sibanye-Stillwater from doing proper on-site due diligence, and whether, if it got Santa Rita so wrong, it can be trusted to get other deals right. An adjoining concern is that the group’s quick-fire approach to expansion may be too hasty.
Certainly, the Santa Rita and Serrote transactions capped 12 months of breakneck merger & acquisition activity for Sibanye-Stillwater. When the deal was announced in October, Sibanye-Stillwater had already racked up $1bn in spending, having splashed out on lithium projects in Finland and the US and a nickel processing plant in France.
“I’m not sure if Sibanye overpaid, as people have been saying, but I think the larger issue is that the market isn’t that enthusiastic about the whole metals diversification strategy,” says Arnold van Graan of Nedbank Securities.
“Even people who completely bought into the idea of battery metals taking over the world were a bit unenthusiastic about Sibanye’s strategy,” he says.
Van Graan says Sibanye-Stillwater could yet benefit from abandoning the Brazil deal by pointing its balance sheet towards gold. “That’s the asset class I think the market might have liked more from it as a precious metals producer,” he says.
In March last year, CEO Neal Froneman expressed an interest in gold sector consolidation, but he tells the FM that he now thinks there’s no value in it. “It’s a commodity we like, and we will be opportunistic. But we would ideally like to build our battery metals portfolio.”
Battery metals are a broad church, an examworthy sweep of the periodic table that includes vanadium, manganese, lithium, nickel and copper. They are primary elements in the manufacture of electric vehicle batteries and for longduration battery storage in renewable energy.
For Froneman, moving into the sector makes absolute sense, and he’s therefore unconcerned
They overspent, in my view. I think they discovered they’d got hold of something that wasn’t worth it in the end
René Hochreiter
that shareholders will take a dim view of future deals.
“We are very choosy when it comes to acquisitions. The battery metals strategy is not a [platinum group metals] strategy of going from zero to No 1 [producer]. It is a four- to five-year strategy [with] different arrangements: joint ventures, partnerships, outright acquisitions, toeholds — it’s a journey,” he says.
“We move on and continue looking,” he says of pulling the Santa Rita deal. “Our view is there’s still substantial upside on the commodity prices. We are only just seeing recognition of severe shortages of nickel and lithium. We … will be very selective.”
Froneman thinks calling off the Brazil deals was a demonstration of “super discipline”. Nor is he concerned should the firm be drawn into a protracted legal tangle with Appian. “There was a material event; our lawyers have examined it in every which way and we are not going to battle on with things like that.
“We didn’t take the decision lightly. We have substantial opencast expertise in the group which we brought in because of our move into these areas. It’s an event that will affect that operation for two or three years, and it has a six-year life. There has been some speculation, but that is rubbish.”