To The Moon

Summary

• Sibanye Stillwater plans to raise $500 million through the issuance of convertible bonds to fund its growth strategy and acquisition of Reldan Group.
• Sibanye Stillwater's stock has been declining due to weak auto production and concerns about a global economic slowdown.
• The company's debt has been increasing while cash on hand has been decreasing, but the new capital will help maintain cash reserves above $1 billion.

Oat_Phawat/iStock via Getty Images

1: Introduction

The Johannesburg-based company Sibanye Stillwater Limited (SBSW) tumbled today after announcing that it would seek to raise $500 million by issuing "senior, unsecured, guaranteed convertible bonds" with a principal amount due in November 2028 with a coupon of between 4% and 4.5% per annum. The bonds are also convertible into new and/or existing Sibanye-Stillwater ordinary shares. The due date for the transaction is expected to be November 28, 2023.

The proceeds are expected to be applied to the advancement of the Group's growth strategy including funding the Reldan acquisition announced on 9 November 2023, whilst preserving the current balance sheet for funding existing operations and projects through a lower commodity price environment.

Sibanye-Stillwater CEO Neal Froneman said in the press release:

The Convertible Bond offering is one of various available financing options, which provides financial flexibility at a reasonable cost under current market conditions, and will enable further delivery on our strategic growth objectives at an opportune time in the commodity cycle, whilst maintaining balance sheet resilience and liquidity

The proceeds will be used in part for the acquisition of the US-based Reldan Group which was announced on November 9, 2023, for a total value estimated at $155.4 million, and to maintain the current balance sheet in order to finance the business's projects and continuing operations.

For instance, the company is involved with the Keliber and Rhyolite Ridge lithium projects.

SBSW Keliber and Rhyolite Ridge Lithium (SBSW Presentation)

The Pennsylvania-based Reldan Group acquisition will greatly enhance the company's recycling operations in the USA, extending them to Mexico and India (through Redan's joint ventures in India and Mexico) and producing other metals.

The group processed over 23 million pounds of garbage to yield 3.4 million pounds of copper, 1.9 million pounds of silver, 22 million pounds of palladium, 25 million pounds of platinum, and 145K gold ounces. In addition, the company owns the Columbus Metallurgical Complex, a recycling facility next to its Stillwater and Boulder palladium and platinum mines in Montana.

Sibanye Stillwater recycling production in H1 2023 was down 55%, as was the production of palladium and platinum at Stillwater and Boulder mines. Sibanye posted recycling volumes of 162,452 3Eoz and produced 205,513 2Eoz for H1 2023. As shown in my chart below:

SBSW US production Recycling and Mining(Fun Trading)

Globally, the recycling industry is weak and experiencing a temporary drop in delivery volume due to lower scrap rates and higher logistics costs, reducing profit margins and thereby increasing collector hoarding.

This unfavorable outcome may also be linked to a decrease in car use in 2021 and 2022, which was caused by COVID and will take additional time to correct.

However, the recycling business has solid foundations and has provided the company with a good adjusted EBITDA ($20 million in H1 2023).

Hence, growing the company's recycling business when the industry is experiencing weakness makes perfect sense. It has allowed Sibanye Stillwater to acquire Reldan at a discount due to market weaknesses and greatly enhance its recycling business, which will thrive starting in mid-2024.

Neal Froneman, CEO of Sibanye-Stillwater, stated that the acquisition offered Sibanye the opportunity to expand his current recycling business. He considered the transaction to be "pivotal".

2: Sibanye Stillwater stock shows a concerning trajectory

SBSW and its direct competitor, Impala Platinum Holdings (OTCQX:IMPUY), have been down significantly since early January 2023. According to Reuters on November 1, 2023,

Analysts and traders have lowered their price forecasts for platinum and palladium in 2024 due to weak auto production and concerns about a global economic slowdown

Because of the possibility of a recession in 2024 and thereby a slowdown in vehicle production, the biggest issue is the price weakening of platinum, palladium, and rhodium, which together account for the majority of SBSW's revenue. Below is the production per metal in 12/2022.

SBSW H2 2022 Revenue per Metal Produced. (Fun Trading)

A poll of 24 analysts and traders predicted (Reuters) that platinum would average $1,023 per troy ounce in 2024, down from $1,100 in a poll three months ago.

SBSW Platinum 24-hour spot (Zitco Chart)

Car demand will likely decrease in 2024, putting more pressure on PGM prices, such as platinum and palladium. According to Autoblog, car prices will likely continue to fall into 2024 if they follow recent trends.

One recent report estimates that global car production will exceed sales by 6% this year, creating a surplus of 5 million vehicles that will receive price cuts to facilitate their sale," Meniane said.

In addition, the electric vehicle (EV) business will likely increase in 2024, putting more pressure on PGM prices because those cars do not use platinum or palladium to reduce carbon emissions.

SBSW Gold Platinum Palladium 1-Year (Fun Trading StockCharts)

As a consequence, the stock prices of SBSW and IMPUY have plummeted, currently standing at roughly 59.3% and 64%, respectively.

3: A quick look at the debt situation

As of June 30, 2023, the gross debt, including current debt and excluding non-recourse debt, was $1,350 million, while cash and cash equivalents were $1,182 million.

SBSW 6 months Cash versus Debt History (Fun Trading)

The accompanying figure above shows that since 2021, the total amount of cash on hand has dropped while the debt has climbed. Thanks to this new capital, the company can keep cash above $1 billion (my estimate) despite the roughly 37% increase in debt.

The situation is not desperate, but if PGM prices cannot increase sufficiently in 2024, the company will have to reduce CapEx, which has reached $579 million in H2 2023.

Unfortunately, Capital Economics analyst Caroline Bain (Reuters) said:

Auto production has been softening recently, which has weighed on PGM (platinum group metals) prices and offset the positive impact on prices of falling output in South Africa,

The auto production decline is a concern

This explains why CEO Neal Froneman concluded that on October 4, 2023, the company was unlikely to pay a final dividend in 2023 at the current spot price of PGM metals, despite a bullish gold price, which will marginally offset the effect of the PGM price weakness.

4: Conclusion

Sibanye Stillwater is one of the world's leading platinum group metals (or "PGMs") producers. As such, the price of PGMs is directly correlated with the state of the automotive sector. Unfortunately, the auto industry is struggling and may worsen next year due to a potential global economic slowdown.

On the other hand, if the PGM prices continue to go down, PGM production will also go down, creating a bottleneck situation that could lift the PGM prices late in H1 2024. In addition, Sibanye is producing gold, and the price will rise well above $2,000 per ounce in 2024.

With an average price per ounce of gold of $1,921/Oz compared to $1,864/Oz in 2022, the H1 2023 production of gold increased significantly to 416,738 Au Oz from 191,683 Au Oz in June 2022.

SBSW H1 2023 Gold and 4E production in South Africa (Fun Trading)

In my opinion, it is still wise to continue accumulating in your SBSW position during this new period of weakness. Most of the drawbacks have already been considered, and it is doubtful that the company will declare bankruptcy.

SBSW TA Chart (Fun Trading StockCharts)

As a result, I am buying at $4.25 or less based on my TA analysis above, and I'll wait for the next turnaround.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.