$SBSW: Crafting a Metal Mosaic Amidst H123 Results – Is the Stock Still a Buy?
It was another week of volatility but little directional progress as investors look ahead to this week’s Federal Reserve meeting and rate decision. The best-performing concepts are precious metals & minerals, tesla concept and coal & consumable fuels.
Considering the different perceptions of the stock, this time TigerPicks choose $Sibanye(SBSW)$ to have a fundamental highlight to help users understand it better.
Sibanye Stillwater is a South African metals company with hopes of significant expansion in the next 5 years. Through investment in both recycling and production initiatives globally, SBSW hopes to become a linchpin in the global metals market.
Given its rising demand, significant investments in battery metals, especially Lithium, are critical for future growth. While electric vehicles are gaining popularity, a mix, including hybrids, will dominate the next decade, still providing tailwinds to PGM recycling and PGM mining businesses. SBSW will spend an estimated $500 million in FY23 on these expansion initiatives.
PGMs are typically grouped into 3 classifications: 2E PGM, containing Pt (Platinum) and Pd (Palladium), 3PGM contains Pt (Platinum) Pd (Palladium) and Rhodium (Rd). 3E is 2E plus gold. 4E is 3PGM plus gold.
PGMs are not rare-earth metals, but are critical in numerous industrial components, particularly in the hydrogen and emissions management space. While fully-electric battery EVs receive the most attention, a mix of EVs, including hybrids, are needed to fulfil demand within the next decade. Light vehicle production climbs to 82.5 million units per year in FY23. The PGM market is expected to see significant demand recovery linked with the Chinese auto sales rebound expected in FY23.
28% of global PGMs still originate from Russia, and there is still some uncertainty about Russia's place in the global economy. While much of Russia's PGM capacity remains unsanctioned, that could change and further affect the supply and demand dynamics of the market.
American PGM operations are still ramping up, with SBSW ramping production to 700koz of 2E PGM by 2027. Short-term sustaining costs have surged amid regional flooding and a shaft collapse which caused a work stoppage, which will resume in 2H23. SBSW states this is temporary and expects leveling off of AISC by FY26 of under $990/oz. SBSW expects the American PGM segment to return to full profitability in late FY23 or in FY24 when all in sustaining costs return to normalized levels.
The South African PGM operation is the largest segment by revenue and is considered mature. Currently, the segment has 4 active mines and 3 exploration operations. Expansion in this segment includes the K4 expansion to Marikana, South Africa facility. This will add 50 years of output, at an estimated 250koz per year, once full capacity is reached in FY29.
SBSW PGM cost relative to peers. SBSW is highlighted in Blue.
Before the acquisition of Stillwater, Sibanye was an exclusive gold producer. SBSW still seeks to streamline its operations in this area, acquiring a controlling stake in DRDGOLD – a tailings management company. SBSW will close underperforming mines to reduce capital costs and make room for new greenfield expansion. After FY23, SBSW expects the capital requirements to significantly decrease for the Gold segment, amounting to $54.7 million annually in savings due to these streamlining actions.
Gold production for FY23 is expected to produce 756-788koz at an all-in sustaining cost of $1826/oz. The average realized price for 2Q23 for gold was $1864/oz.
Expansion in this area is the Burnstone project, believed to be able to output 141koz per year at full capacity in FY25. Existing local infrastructure significantly reduces startup costs, with the first production output expected in 2H23. DRDGOLD is a tailings management company recovering residue metals from waste from the mine. It has a far lower sustaining cost of $1,528/oz with an annual output of 179koz. This portfolio addition could increase cash flow by $55 million per year at full production capacity in FY25.
The battery metals segment encompasses Nickel, Copper, and Lithium operations. SBSW seeks to create a raw materials presence closest to regional United States and Europe ecosystems.
In Finland, a concentrated 7 mine facility has been approved for mining and broke ground in March of FY23. SBSW has a 79% controlling interest in the operation and hopes to achieve 15,000 metric tons annually in FY25. The facility is concentrated on a deposit of Lithium Hydroxide which demands a price premium compared to Lithium Carbonate. The reason is extracting and refining Lithium Hydroxide is much more expensive. The current price assumption for the 15-year life of the mine is $26,034 per metric ton, with an average operating cost of $7,423 per metric ton in all in sustaining costs. Total capital expenditure, less sustaining capital, is expected to be $650 million. This has the chance to be a highly profitable venture in a strategic area close to numerous battery factories in Europe.
The Sandouville Nickel Refinery was acquired with 100% controlling interest in FY22. The facility is designed to refine 16,000 tons of nickel and 600 tons of Cobalt. This location is strategically close to a site set to be France's first gigafactory, built and operated by Verkor in a partnership with Renault. SBSW invested $27.5 million in the gigafactory as well.
Rhyolite Ridge in the United States is a lithium-boron project in Nevada. The project has a nameplate capacity of 22,000 metric tons annually, assuming an average price of $13,000 per metric ton for Lithium and $710 per metric ton for Boron. SBSW has pledged to contribute funding in exchange for 50% interest conditional to permitting approval. The permitting environment for lithium exploration has become more favorable in the wake of the Inflation Reduction Act, with the Department of Energy offering a loan of $700 million. The project has attracted large names, including the Toyota and Panasonic JV, Ford, and South Korean battery maker Eco Pro. Ford has committed to take 35% of production from FY25-FY30.
Sibanye Stillwater H123 Results: Confluence of Negative Headwinds
About 65% of Sibanye Stillwater's $3.33 billion in revenue in H123 derived from platinum group metals (PGMs) - primarily platinum (Pt), palladium (Pd), and rhodium (Rh), 26% from gold, and the remainder primarily came from nickel, zinc, and chrome. 75% of sales came from operations based in South Africa, 21% from the U.S., 2% from the EU and 1 percent from Australia.
The company has a long-term "de-risk" strategy to spread sales across more products and geographic regions in light of the electricity crisis in South Africa. This includes a lithium project in Finland expected to ramp up production by around 2026.
Sibanye's sales have risen over the past five years by a CAGR of 20% while EBITDA grew at 28% and operating profit over 80%.
During the same 5-year period the company's stock price rose by about 125% with total returns of nearly 167%.
Sibanye's stock price, however, has taken a beating within the past year, dramatically underperforming the market and the sector median, although about in line with other PGM miners. The stock has fallen by nearly 40% in the past nine months and 33% in the past six months alone.
The stock price is hovering around its 52-week low and is 34% under its 200 day SMA. The stock is also trading at a mere 5.4x earnings, 65% below the sector median P/E ratio of 14.6.
The primary reason for this is the collapse in the prices of rhodium (Rh) and palladium (Pd), although the latter not has severely. Rhodium fell a whopping 60% since March, significantly impacting company revenues and profitability. The metal reached as high as $22,200/oz in April of 2022 and is now trading at $4,100/oz, down over 80%.
SBSW vs. PGM Prices (Seeking Alpha)
To fully grasp the impact on Sibanye's bottom line, consider that rhodium and palladium made up 46% of revenue in H123, as illustrated in the company's most recent filing. The combination would have accounted for even more but for the bounce back in gold output and sales.
Overall, SBSW's revenue of $3.33 billion in H123 was down 14% versus H122 and EBITDA of $776 million was 37% lower than the company registered in the first half of 2022. That is, when you look at the figures in rand. When you convert to USD the declines are 27% and 47%, respectively. The company, by the way, said the 18% weaker rand relative to the US dollar, partially offset the impact of the lower PGM basket prices. The below portions of tables abstracted from the H123 report provide breakouts in both currencies.
SBSW Sales by Segment (SBSW H123 Report)
Before drilling into each segment it is important to note what each PGM product basically consists of. The below ratios refer to production ounces and are based on the most recent prill split.
US 2E: platinum (77%), palladium (23%)
SA 4E: platinum (60%), palladium (30%), rhodium (9%), gold (2%)
US 3E recycling segment: platinum, palladium, rhodium
In terms of cost based on H123 prices, Pd made up about 80% of the 2E basket's value versus 20% for Pt. The breakdown of the 4E basket based on value would be Rh 45%, Pt 32%, Pd 20%, and gold 2%.
The below table sums up the deltas between H122 and H123 for volume, price, and adjusted EBITDA for each segment.
SBSW H123 vs. H122 Results by Segment (Data: SBSW H123 report)
Consider that EBITDA was down nearly $689mln in H123 vs. H122. 4E EBITDA was down $725mln - an amount luckily, but only partially, offset by $130mln in EBITDA from the gold operations.
PGM Performance Analysis (Data: SBSW H123 Report)
Falling commodity prices were not the only negative factor to hit Sibanye's bottom line in the first half of 2023 - several other micro headwinds confronted the company at locations the world over. In France, strikes and riots disrupted nickel operations while the U.S. PGM operations suffered from talent shortages and a shaft incident. In addition, the recycling market is facing headwinds expected to impact 2024 volumes. Although more effectively handled, the company continued to face load curtailment issues in South Africa while post-covid destocking remains a drag.
Another disappointing announcement was the company lowering guidance for 2023. 3E midpoint guidance now sits at 375koz vs. 475koz in previous guidance (a 20% drop). Gold is revised downward about 17% to a midpoint of 642koz while the nickel target has been lowered by 26% to 7,250 tons. Overall the new guidance based on most recent prices lowered the revenue target by 8%.
SBSW 2023 Guidance (H123 Investor Deck)
Stock Price Forecast:
Here are the target price forecasts for the next 12 months from analysts on CNN.
The 10 analysts offering 12-month price forecasts for Sibanye Stillwater Ltd have a median target of 8.51, with a high estimate of 13.41 and a low estimate of 4.16. The median estimate represents a +27.96% increase from the last price of 6.65.
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