Stillwater palladium feast no silver bullet

Thorny US acquisition may not solve miner’s platinum famine

SIBANYE’S acquisition of palladium mine Stillwater may be the mining house’s saving grace as its platinum assets in South Africa remain under pressure.

Sibanye CEO Neal Froneman said on Monday that he would have to shut down some of the unprofitable Rustenburg mines should low platinum group metals prices persist.

He said production would be cut at the Rustenburg mines by between 200 000 and 300 000 platinum ounces, equivalent to two or three shafts, which will be placed on care and maintenance by September or October.

The Rustenburg mines employ about 15 000 workers.

Platinum prices have only increased by 5.3% this year while sister metal palladium has rallied by 23.2%.

This makes the Stillwater deal — which some investors had reservations about given that the price was equivalent to Sibanye’s market capitalisation — well placed for at least the next two years to help create a buffer for Sibanye’s South African platinum assets.

Froneman, who defended the price of the deal, said Stillwater was highly regarded by the market at the time because of the rallying palladium price and because the market was starting to recognise the turnaround that had taken place at Stillwater.

“The timing of a transaction is not always within your control, it is an extended process.

“We engaged with Stillwater for nearly a year — but if there are favourable things happening in a company, such as a good operational performance or turnaround, it will begin to reflect in the market price and it will become unaffordable,” Froneman said.

The US-based palladium mine is going through a major turnaround and produces about 550 000 ounces of PGM a year. Based on the new developments at the mine — which will come into effect next year — it is projected to produce between 270 000 and 330 000 ounces extra by 2021.

The mine produces 78% palladium and 22% platinum.

There has been a drop in 2017 palladium production supply to 6.6 million ounces, due to lower Russian and North American volumes, according to a recent report from Johnson Matthey.

The company expects net palladium demand to climb by 7% to 7.4 million ounces this year. Platinum, which is also in a deficit, is battling with an oversupply in stock due to the aboveground stockpile.

An analyst, who did not want to be named, said Sibanye was vulnerable to the rand and the gold and platinum prices, but with Stillwater incorporated there was an evenly split pressure from the three variables, because Stillwater was largely a palladium mine and also a dollar-based asset.

“In a weaker rand environment Sibanye would have done very well — but it’s less geared to that now; if the rand weakened, it [Stillwater] would become less competitive relative to the South African platinum assets,” he said.

He added that Stillwater would attract more gains at the moment — given rand strength and a better-placed palladium price in comparison with the platinum price.

René Carlo Hochreiter, an analyst at Noah Capital Markets, said the Rustenburg operations were high-cost mines.

Merensky reef, which had the good ore grades, was depleted, and the mines were left with the only UG2 reef, so it was not economically viable at the moment to mine some of the operations.

The rand has strengthened 6.7% so far this year and Hochreiter said it would have to be around R14 at current PGM prices for the operations to continue with production.

He added that it was hard to keep all parties happy in this environment.

It’s either “you fire people and keep the shareholders happy — but, if they keep the people and make labour happy, then you make shareholders unhappy”.

For Sibanye’s platinum mines in Rustenburg to do better than Stillwater, the rand would have to weaken or the platinum price would have to increase, he said.

Makwe Masilela, an analyst at BP Bernstein, said Stillwater could temporarily offset some of the loss made in Sibanye’s Rustenburg mines.

“The palladium mine will help temporarily, but it will be wasted money if [Froneman] intends to completely depend on it.

“All it does is help them diversify their earnings. You cannot cross-subsidise forever,” Masilela said.

Froneman, who had a fourplan PGM strategy and had completed three platinum acquisitions already, with the last one meant to be in South Africa, said he still saw opportunities in the country, although they would have to be carefully assessed.

Some analysts have said another acquisition would put the company in more debt after the Stillwater acquisition and that shareholders would not take well to that idea.

Froneman disagreed, saying any good investment can be financed as the company had a lot of support from international banks to fund any growth strategy thanks to the Stillwater deal.

He said the fourth acquisition depended on timing and not whether the company would be able to fund it.

“We need to create an environment where there is regulatory certainty, where we know what the cost of doing business in South Africa is.

“At the moment there is a heightened level of political, policy and regulatory uncertainty,” Froneman said.

When the timing was right for a fourth acquisition, he added, it was most likely going to be in South Africa — but there was no rush and it was “going to have to stack up against all the options that are out there. So time will tell.”

Platinum prices are forecast to remain weak, while palladium prices are projected to continue the positive rally.

Sibanye said the platinum price would have to be $1 200 an ounce for the industry to continue without loss, while the palladium price would have to be at $800 to $900 an ounce.

All it does is help them diversify their earnings

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