A MEMORABLE commentary by the ex-CFO of former miner Royal Bafokeng Platinum graphically described in 2021 how the platinum group metals (PGM) market felt like “the early stages of another bull market cocktail party”.
“And we’ve all been to such a party before, with alcohol — sorry, I mean cash — starting to flow freely and the DJ playing old-time favourites such as ‘Champagne Supercycle’ and ‘What Doesn’t Kill you Makes You Stronger … For Longer’,” said Hanré Rossouw, now CFO of Sasol. “At any party, there are those who need to drink excessively or take a puff on a growth pipeline to have a good time, while making bold claims and plans of what they still want to do in their intoxicated state.”
It wasn’t exactly Shakespeare, but Rossouw’s call for temperance turned out to be good advice, tragically ignored. From a record high of $28,755 an ounce at the end of April in 2021, the rhodium price crashed dramatically, shedding $10,000/oz in 12 months and another $10,000 the year after that. As of December 11, the metal was trading at $4,400/oz, according to data by UK semi-fabricator Johnson Matthey. The major metals in the PGM suite (rhodium is about 8% of South African production) followed similar trajectories.
Sibanye-Stillwater, South Africa’s largest PGM producer, has been especially hard hit. At last year’s price highs, between 80% and 85% of the group’s earnings came from PGM production. But by June, CEO Neal Froneman was telling investors to steer clear of the company’s shares if short-term returns were the goal. By October, it was clear why: third-quarter group earnings before interest, tax, depreciation and amortisation (ebitda) fell 62% year on year owing to a 22% decline in the average rand 4E PGM basket and a 28% fall in the dollar 2E basket price. Were current PGM prices to persist, Sibanye-Stillwater wouldn’t pay a final dividend, he said. The drinks have well and truly dried up.
Three factors make Sibanye-Stillwater particularly vulnerable in this PGM downcycle. First, the company’s South African PGM shafts are mature and consequently high cost. A proposed restructuring of PGM shafts, announced on October 24 and affecting about 4,000 employees, was partly in order to shut two exhausted orebodies.
Second, the company is heavily exposed to palladium, a PGM that perhaps has the greatest bearing on the fortunes of South Africa’s PGM companies. It hasn’t fallen the most in price — that’s rhodium — but it comprises 30% of total South African PGM production. Its 41% price slide this year is damaging. For Sibanye-Stillwater, palladium is especially important because it’s the main metal from its US-based Stillwater mine. Without a stronger palladium price, the mine will struggle.
Already, Sibanye-Stillwater has pushed out Stillwater mine’s 700,000 oz/year target to 2030 as operational mishaps have been compounded by market pressure. Further restructuring is likely, though the miner stops short of forecasting Stillwater’s closure. “It’s not a binary thing of either closing the mine or keeping it open,” says James Wellsted, head of corporate affairs. “Sections are mostly profitable, but some are not.”
Third, Froneman is taking his company through a new round of strategic transition. After switching the group’s focus from gold to include PGMs from about 2017, he now has his eye on battery minerals including lithium, nickel and copper. Two lithium projects, one in Finland (Keliber) and a less developed prospect in the US (Rhyolite Ridge), will cost his company $1bn to build. There have also been forays into the Australian tailings remining industry and a nickel refinery in France, both of which produced losses this year.
Doubling down on recycling
The capital expenditure bill concerns analysts, whose worries may be compounded by an announcement on November 9 that Sibanye-Stillwater had doubled down on its US-based recycling business with a $155m acquisition. Reldan will boost Sibanye-Stillwater’s PGM recycling to as much as 450,000oz/year, as well as establishing a presence in gold and silver recycling and potential joint ventures for more recycling in India and Mexico.
“Overextended” screams a note by RMB Morgan Stanley analysts of Sibanye-Stillwater in an October note to clients. “The fall in PGM prices, against an elevated investment programme and ambitious base/battery metal portfolio build-out, provides a wide range of valuation outcomes,” the bank says. “We believe this to be the wrong point in the cycle to own Sibanye given its idiosyncratic risk set.”
There’s even talk that Sibanye-Stillwater may need recapitalisation if current metal prices persist and the company fails to respond by slashing costs. “It’s unlikely either of those things will happen, but it’s a sign of where we are with the market, and with Sibanye-Stillwater,” an analyst tells IM.
We believe this to be the wrong point in the cycle to own Sibanye given its idiosyncratic risk set – RMB Morgan Stanley report.
According to Standard Bank Group Securities analyst Adrian Hammond, debt could exceed lender covenants in 2025 in the event that prices remain depressed, and as production from Sibanye-Stillwater declines. It’s not just PGMs that are under pressure. Despite the buoyant gold price, the ageing nature of Sibanye-Stillwater’s West Rand assets means cutbacks are inevitable. In September, the group gave notice of restructuring at its mainstay Kloof gold mine, affecting 2,970 jobs. Parts of Beatrix, a mine in the Free State, have also been closed.
“If spot prices continue into 2025, we foresee net debt to ebitda rising to 2.9 times above covenant levels of 2.5 times,” says Hammond. In fairness, however, this is doomsaying well beyond the prescience of Rossouw’s cocktail party scenario. Assuming a more benign price environment, however, Sibanye-Stillwater would continue to generate cash, says the bank.
Nonetheless, there’s a sense that Sibanye-Stillwater’s best days may be behind it. The group traced a meteoric rise since bursting on to the South African mining scene 10 years ago as Sibanye Gold. But the string of PGM and gold deals between 2014 and 2023 — in which the company spent a cumulative R58bn, realising an estimated R113bn in cash returns — may never be repeated.
“We have limited conviction that Sibanye will be able to repeat this level of success in terms of acquisitions in the PGM sector in battery/base metals, given elevated activity across the space,” says RMB Morgan Stanley. It, too, worries that Sibanye-Stillwater’s deal pipeline — which still includes hopes for the takeover of Zambia’s Mopani Copper Mines despite the apparent success of a rival bid, is “crammed full”.
Froneman isn’t blinking though. “This is not the time to start cutting indiscriminately,” says Wellsted. “That’s a mistake a lot of companies make.” Rather, Sibanye-Stillwater intends to trade out of the current market slump. But the question is when the PGM market will start to stabilise and aid the recovery of Sibanye-Stillwater cash flows.
PGM prices at the bottom?
UBS analyst Steve Friedman argues in an October 10 note to clients that on the basis of cost support for metal prices, the market may have bottomed out. Of the three previous downcycles in PGMs — the global financial crisis in 2008, the end of the supercycle in 2012, and fears of China’s hard landing in 2015 — arguably strong fundamental support in the long term would mean a correction most like 2012, he says.
That implied a further 10%-15% price retraction based on the mid-October basket price. Given that palladium, platinum and rhodium have lost 12.2%, 4.8% and 12% since then, the market should be at its nadir, assuming UBS is right.
Anglo American Platinum CEO Craig Miller tells IM the market has corrected sufficiently. He foresaw a 15%-20% price recovery in the new year, but has since withdrawn that precise level of optimism as poor prices persist. “We have probably got to some of the floor in the short term, but there will be more volatility, absolutely.”
“Prices seem to have fallen too fast, too soon,” says UBS commodity strategist Joni Teves. “Though the negative long-term demand picture remains unchanged, we think there is scope for upside from recent lows. Supply risks could also trigger short-covering squeezes in palladium in the interim.”
We have probably got to some of the floor in the short term, but there will be more volatility, absolutely – Craig Miller
Other factors also signal some sort of support for PGMs. Electric vehicle absorption in the automotive market is slowing, recycled or secondary PGM supply has fallen and, third, there’s potential for other minor metals in the PGM suite, such as iridium or ruthenium, providing the same kind of price impetus to the price basket that rhodium performed in 2019. RMB Morgan Stanley describes these forces as “the counter-consensus case”; it remains fundamentally sceptical of PGMs but thinks the bearish investment case could change “over the medium term”.
What does this mean for Sibanye-Stillwater? In the short term, earnings pressure. Froneman told analysts in August that the company wouldn’t tolerate loss-making assets so a tightening of the screws is mission critical. Meanwhile, a $2,000/oz gold price is a positive for the group, especially if it can successfully complete its restructuring at Kloof. Its case is also helped by its 50.01% stake in DRDGold, which was the group’s main cash contributor on the gold side in the six months ended June. There’s also evidence its previously loss-making Australian tailings mining asset has turned the corner.
Shares in the company are 53% lower in the past 12 months but at R21.70 a share, they ought to be in buy territory. As Froneman suggested, the share is not a short-term punt, but another round of high-value mergers & acquisitions could make it an interesting medium- to long-term buy.
Says Standard Bank: “Our assessment suggests that Sibanye presents option value on a myriad commodities including PGMs, gold, lithium, nickel, copper, zinc and uranium.”
This article was first published in Investors’ Monthly distributed with the Financial Mail.
