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.
Summary
• 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
