Sunday, October 1, 2017

A Current AIM International Fund Holding: Sibanye Gold Ltd. (SBGL) by Andrew Crossman. "It's there if we need it!"

Sibanye Gold Ltd. (SBGL, $4.68): “A Golden Hedge ”
By: Andrew Crossman, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Sibanye Gold Ltd. (NYSE:SBGL) owns and operates gold and platinum mines in Southern Africa, North America, and South America. It is headquartered in Westonaria, South Africa.

• Management intends to cut down $1.7 billion in debt as a result of the Stillwater Mining Co. acquisition.

• Realization of Stillwater acquisition benefits will increase production, lower costs in platinum metal group segment through 2019.

• Gold futures and Rand/USD forward exchange rates outlook remains positive and would provide needed revenue growth.

• Reacting to top line challenges and shrinking margins, management forgoes semi-annual dividend payment for the first time since listed in 2013.

Key points: Sibanye Gold completed the acquisition of Stillwater Mining Co. in May 2017 looking to expand Sibanye’s influence in the platinum metal group industry. Debt raised totaling $2.7B to complete the deal stretched Sibanye’s balance sheet, raising net debt/EBITDA to 4.9 (FY16 0.9). Management recently refinanced a remaining $361MM using convertible bonds yielding between 1.625% and 2.375%.

The acquisition of Stillwater Mining was not without benefits, the realization of production and margin benefits from platinum mines in the US southwest will balance Sibanye’s materials portfolio between gold and platinum metals group. Operating income is currently dominated by the gold segment (82% 1H17); the introduction additional production at higher margins from Stillwater US mines will shift towards a balance Sibanye’s operating income between gold and platinum.

Future outlook indicates that USD/Rand and gold price trends will reverse, partially offsetting the negative effects realized during 1H17. Sibanye recognizes revenues primarily in USD and costs in the rand; meaning any appreciation of the rand against the dollar negatively affects margins.  Forward rates show a market expectation of the dollar strengthening by 19.5% relative to the South African currency. A USD appreciation would expand operating margins and set Sibanye up to capitalize on projected future increases in gold prices.

Top line decline combined with lower operating margins lead management to forgo a 1H17 dividend. In spite of similar gold prices per ounce in H2 FY16 and FY17 ($1,220/oz and $1,233/oz respectively), a 14% appreciation of the rand relative to the USD lowered price realized by 13%. Additionally, decreasing production (746,800oz vs 688,600oz, 1H16 and 1H17) combined with 25% increasing of all-in sustaining cost over the past year resulted in a 363MM loss in 1H17.

What has the stock done lately?

Sibanye’s stock has decreased 11% since management refinanced using convertible bonds. Investors fear dilution compounded with difficulties integrating Stillwater Mining Co. could negatively affect share price going forward. Gold price decline over the past two weeks has also negatively affected share price.

Past Year Performance: Sibanye is down 68.27% in the past year, as investors have avoided buying Sibanye as uncertainty about slowing production, gold prices, and currency remain. The book value per share ($3.49) remains below the share price of $4.68. The current prices reflect the 52 week low, and a historical low since August 2015.

Source: FactSet

My Takeaway

Gold prices will ultimately dictate the success of Sibanye going forward. Any economic slowing could result in investors turning to safe haven assets, one of the most popular of which is gold. An increase of investor demand for gold would nicely complement managements actions to increase the revenue segment generated by the platinum metal group. Historically high net debt to EBITDA ratios provide few options to management until net debt is reduced. Despite recent underperformance, Sibanye Gold provides the AIM international portfolio with protection against overall market collapse, should investor confidence fall. With limited downside and hedging benefit, I believe that Sibanye Gold should continue to be held in the AIM international portfolio.

Source: FactSet