Sibanye Stillwater: Finding Value Amidst Noise And Haste (NYSE:SBSW)

Sibanye Stillwater Limited (NYSE:SBSW), a South African mining giant, delivered over 150% in total returns to shareholders over the past five years, yet is down 40 points from a year ago and has lost nearly 20% in the past month alone. It has struggled through a national emergency-inducing power crisis that has disrupted and negatively impacted production while platinum group metal (PGM) prices have steadily fallen from historic highs. That said, even when we consider the drop in output as well as account for country risk, Sibanye’s stock is still undervalued by about 30%. Given the company’s proven ability to generate significant cash flow despite growth constraints, combined with its strategic competitive advantage in PGMs, I rate SBSW a buy.

First of all, the focus of my analysis is on projecting from current operations while adding the well-documented lithium project that should come online in 2026. So, in this particular article I won’t have enough space or time to evaluate other potential projects – and there are many. The upside is the valuation is based on what is most defined, lowering the risk of overvaluation, but it must be kept in mind that the company is worth more than the projects near at hand contained within.

I faced three major challenges in conducting a discounted cash flow (DCF) analysis on SBSW, areas that should be scrutinized highly. For starters, long-term production targets are driven by geology more than market demand. One cannot assume constant growth in the model when faced with life of mine plans – concrete upside limits complicate the process and growth unavoidably seems erratic. The second problem was determining what metal prices to include in the forecast – in light of market uncertainties and the nature of cyclical companies. Finally, I was challenged to appropriately quantify country risk with the company’s geographic profile shifting over the next ten years. I will try to address these challenges before laying out the valuation results.

Growth Ambition Meets Geology

CEO Neal Froneman, in comments to the Daily Maverik earlier this month, warned investors that power shortages were negatively impacting Sibanye’s assets in South Africa. Even more interesting was Froneman explaining why his company has been able to deliver in the face of not only the energy crisis, but rampant crime, security issues, and political instability.

We have learnt how to prosper under these conditions. The reason we are able to do it is because there is no competition. If South Africa was open to business, we would not have been able to build our PGM business the way we did. We could not have done it if there was competition.

Sibanye has aggressively pursued a “de-risk” strategy on two levels: geographic and along product lines. The company wants to lower the percentage of revenue reliant on assets in South Africa by boosting revenue abroad while, at the same time, diversifying into so-called battery metals – including nickel, lithium, and copper to reduce dependence on PGMs (for more on investment risk and operational issues affecting SBSW see Pearl Grey Equity and Research’s take here).

It is important to underscore that, despite the complaints, Sibanye’s dominant position in the PGM industry is because they are located in South Africa. According to the U.S. Geological Survey, about 90% of the world’s PGM reserves (the economically mineable portion of a mineral resource) can be found in South Africa – and most of those in the Bushveld Complex where Sibanye’s PGM operations are based. Sibanye’s 1.8 million in PGM ounces produced in 2021 accounted for about 40% of South Africa’s total. When you combine all PGM and gold operations worldwide, Sibanye’s mineral resources (inclusive of reserves) total almost 400 million ounces (about 80 years’ worth of mining at current extraction and throughput rates).

This superior competitive advantage, however, could not prevent a workers’ strike or flooding which led to a huge drop in sales and profitability in 2022, although a long-term labor agreement hopefully prevents future industrial action. The plummet came after Sibanye saw revenue triple from 2017-2021.

Based on the first three quarters and the mid-point of year-end guidance, I think Sibanye should hit its 2022 revenue target of $8.07 billion when it reports year-end earnings on February 28 (which will be webcast here). Despite the 28% plunge in growth expected in 2022, analysts have the company bouncing back to $8.94 billion in sales in 2023.

In an investor presentation posted last week, Sibanye provided an indicative outline of potential volumes, capital spending, and operational costs for the next decade. Although not an official forecast, it illustrates the general direction of the de-risk strategy for PGMs, Gold, Nickel, and Lithium production. Before we dig into projections let’s first look at a snapshot of the current situation in terms of sales by metal type – clearly dominated by the PGMs.

PGM breaks into three sub-categories: 2E, 3E, and 4E based on different mixes of palladium ((Pd)), platinum ((Pt)), rhodium ((Rh)) and gold. The mined PGMs usually have the following prill splits (below is based on Q3 actuals):

• 2E PGM = Pd (77%), Pt (23%)
• 4E PGM = Pt (59%), Pd (30%), Rh (9%) and gold (2%).

The 3E PGM recycling business includes palladium, platinum, and rhodium, but the breakdown is not provided because I assume it’s too unpredictable.

4E PGM mining production is based in South Africa while 2E mining production and 3E PGM recycling operations are in Montana. Sibanye’s gold operations are based in South Africa while the nickel production which is just getting ramped up is located in France. The below table provides a glimpse of product mix and location and the “basket price” per ounce for each in Q3.

Let’s look at the PGM volume production before we add pricing “noise” and assumptions that can distort the trends. The gold segment will have some mines facing end life dates and the reduction in 4E PGM is preliminary as the company is looking into initiatives to boost output as well as margins. But the trend is clear both by design and circumstance.

When you consider the lithium production from Finland coming online in 2026, by 2032 the sales geographic mix will shift remarkably, although gradually. Currently almost 70% of Sibanye’s revenue derives from South Africa. Based on the indicative production plan, by 2032 or 2033, South Africa will comprise only 45 percent. Hence, the company’s geographic de-risk strategy long-term looks promising. (The revenue forecast is based on my own metal pricing assumptions that I will explain later.)

Here are sales projections also in USD by metal to show lithium ramp up.

This mix is likely to shift even more when many of the other projects come to fruition. This company slide outlines all the locations they are targeting in addition to current operations, reserves and resources.

Valuation Challenges: Market and Country Risk

From a relative valuation standpoint, SBSW looks quite appealing, with several ratios implying the stock is significantly undervalued when compared to the materials sector median.

In terms of DCF, plummeting PGM prices have proven problematic. Yes, these are cyclical commodities but who knows if there has been a “structural” break in the market with the pivot to EVs and palladium hence going out of style. Has the “corrective” action already taken place? Hard to tell. Experts are rosier than the supply and demand picture seems to indicate. Many – including Sibanye – are projecting palladium surpluses, partly due to the aforesaid pivot in addition to platinum being used as a cheaper substitute. Although this should be balanced by estimated deficits on the platinum side. Below chart shows the commodity prices for the past year.

A closer look at the trend is quite astounding exactly because these are cyclical commodities. God forbid, for Sibanye’s sake, rhodium should cycle back to $3,605 per ounce from where it is trading today – which is over $12,000/oz.

The solution I arrived at was to use a combination of the most recent commodity prices along with analyst forecasts as a basis for year one, and then gradually lower to historical averages (anywhere from five to ten years, done selectively so there is a major subjective factor involved). I took these prices and plugged them into a pricing model based on the breakdown we discussed earlier. Here is a look at projected volume, price, and EBIDTA% by operation. Lower prices squeezed margins but the company’s cost reduction initiatives also boost margins. Growth efficiencies from existing assets provide opportunity to add value even when top-line growth is limited. The 3E margins could be boosted most likely as well but I need more insights into the operation.

From these inputs I then generated free cash flow projections. This incorporates capex data provided in the company presentation as a basis. I scaled it based on their own initial assumptions (at the time for example they used $1,700/oz for 2E basket price. So I established that % of sales for the year in question. The rates varied). And you can notice the capex as percentage of sales rises in years 4 and 5 because the lithium project ramp up requires major investment infusion.

I also disaggregated the analysis based on country of origin in order to assess risk appropriately – discounting cash flows from South African operations by 15% and from U.S./European locations by roughly 10%, sourcing the country risk premium from Damodaran. I did this by sales because I was unable to generate cash flows by operation. Revenue was the best worst option. Anyway, notice how the weighted average discount rate changes each year, which is based on the country origin sales blend.

Conclusion

The risks are quite high indeed when it comes to Sibanye Stillwater Limited’s stock as it struggles to continue operations amid a nationwide power crisis that has reached a fever pitch in South Africa. Reduction in volume is foreseeable in the near term, but the company has proven resilient and I expect it to bounce back, grow more profitable, and the Sibanye Stillwater Limited stock price to eventually converge with its intrinsic value over the course of the next year.