Sibanye growth strategy gets better of SA rivals

Sibanye, which has grown its gold asset base shortly after listing, snapping up operating gold mines, a gold mine in development and exploration prospects, has invested heavily in platinum, buying the whole of Aquarius Platinum and the neighbouring Rustenburg mines from Anglo American Platinum.

Source: Sibanye

Sibanye's most audacious deal is the $2,2bn cash purchase of Stillwater Mining, a US-based company mining palladium and platinum from shallow, mechanised, low-cost operations, which will, in time, offset declining revenue from the South African gold mines and act as a counterbalance to the volatile rand and regulatory uncertainty weighing on its local assets.

Since listing in February 2013, shares in Sibanye, SA's largest producer of domestic gold, have gained 62%, far outpacing its big peers, which have all declined in that period.

The share prices of AngloGold Ashanti, Gold Fields and Harmony Gold have all declined by between 41% and 53%.

For investors one of the attractions of Sibanye is its dividend policy, which entails the payment of 35% of earnings to shareholders, returning R1bn or more a year to them, not to mention the overall performance of the shares.

Sibanye CEO Neal Froneman said at the BMO mining conference in Florida in February, Sibanye's 5,1% dividend yield based on returns to investors in 2016 was an industry-leading figure for global mining firms.

The surprise move by the Treasury to increase the dividend withholding tax from 15% to 20% led Froneman to say that the board, which has regarded dividends as the first call on the company's cash, may have to reconsider its policy. Shareholders were "losing out" and it was "no use throwing money away paying dividends under those condition," he said.

The alternatives for the board to return value to shareholders have yet to be decided, but it could change the way investors view the firm. The $2,8bn bill to consolidate its position as a leading platinum group metals producer will come at a short- to medium-term cost to shareholders, but in the longer term the platinum strategy will compensate for the fall in gold output in SA and drop in earnings.

Of concern to shareholders is the rights placement of up to 1,3bn to fund the Stillwater transaction and keep as much debt as possible off Sibanye's balance sheet to secure favourable borrowing rates for the debt the company will raise towards paying for the palladium miner. Based on the prevailing exchange rate and excluding any discount Sibanye is likely to apply to ensure a full subscription to the issue, the rights placement is worth R17bn. The company's market capitalisation is R24bn.

"With our valuation of the share, we see little reason for shareholders not to follow their rights," said Rene Hochreiter of Noah Capital, putting a target price of R121 on the stock compared with its trading price of R26,5 on Wednesday.

The share placement will dilute earnings in the near term, said Sibanye spokesman James Wellsted. "What people are looking at in the short term is the dilution of earnings and cash flow and saying 'it's not great for us',"he said.

"Yes, upfront there is dilution of earnings because our gold earnings are spread over more shares but in the next three or four years, Stillwater starts to contribute strongly to our overall earnings. So in the longer term, on average, the deal is accretive on a cash-flow basis."