To The Moon

$Sibanye(SBSW)$

In today’s Article, we’ll explore SBSW, a producer of platinum, palladium, and other metals, while delving into the art of investing in cyclical industries. These sectors can lead to significant losses for many investors, but they also offer tremendous opportunities for those who navigate them wisely.

In the past I’ve shared insights like buying oil in September 2020, just before the pandemic, or investing in copper stocks during their favorable cycles. Those who followed these cycles saw great results. Today, we’ll discuss whether commodities might outperform in the future, focusing specifically on PGMs (platinum group metals) produced by SBSW.

This Article is meant to provide an overview of SBSW potential and offer educational insights on commodities. As the company’s stock is currently down by 80%, this may be a good time to examine its potential for a rebound. With cyclicals, such declines often signal opportunities, as cycles tend to revert, offering the potential for 10x returns if timed correctly.

Understanding SBSW

SBSW is a diversified producer of metals, including platinum, palladium, rhodium, gold, battery metals, and uranium. However, the stock’s performance has suffered significantly in recent years. Cyclical stocks like SI tend to follow broader market trends, and when demand returns, these stocks can see remarkable recoveries.

For SBSW, the key question lies in the future of internal combustion engines (which dominate demand for PGMs) versus the rise of electric vehicles (EVs). As EV adoption grows—led by markets like China—it directly impacts the demand for platinum and palladium. SBSW markets face oversupply challenges, and while adjustments are expected by 2027-2028, the short term looks uncertain.

Fundamental Analysis

Revenue Streams: SBSW derives a significant portion of its revenue from PGMs, primarily used in the automotive industry for catalytic converters. The company also generates income from gold mining, and more recently, from investments in battery metals like lithium.

Revenue Growth: Historically, SBSW’s revenue growth has been linked to commodity prices. When prices for metals like palladium and rhodium rise, the company benefits from increased revenue.However, recent market conditions, including global economic uncertainty and a slowdown in the automotive sector, have weighed on PGM prices, affecting revenue growth in the short term.

Profitability: The company's profitability is highly sensitive to PGM price fluctuations. In periods of high metal prices, SBSW has generated strong margins, but during downturns, as seen recently with falling palladium and rhodium prices, profit margins shrink.Operational costs, including mining and labor costs in South Africa, are significant and can impact profitability, particularly when metal prices are low.

Technical Analysis

Support/Resistance Levels

Current Price: The stock is trading around $3.50 (as of December 23, 2024), following a period of volatility.

Recent Price Action: SBSW has faced downward pressure in the past few years, primarily driven by weak commodity prices (e.g., platinum and palladium) and operational challenges. However, the stock has recently seen a modest rebound, reflecting investor interest as the company moves through restructuring phases.

Support Levels:$3.50: This level is acting as near-term support, as it has held multiple times over the past few months.$3.00: A secondary support level exists around $3.00, with this region historically marking a low point during bearish periods.

Resistance Levels:$4.00: The $4.00 level is a key resistance point, as it has capped upward movements on several occasions.$4.50: A stronger resistance exists around the $4.50 mark, which represents a more significant level for a potential breakout to higher levels.

Guidance

Fitch Ratings has affirmed SBSW's credit rating at 'BB' with a negative outlook, anticipating that Free Cash Flow will remain negative over the next three years.

Metals Streaming Agreement: On December 19, 2024, SBSW secured a $500 million metals streaming deal with Franco-Nevada Corp. This agreement involves selling future metal production for an upfront cash payment, aiming to strengthen the company's financial position amid declining platinum group metal (PGM) prices. Gold Prepayment Deal: In August 2024, SBSW finalized a $101 million gold prepayment agreement to generate cash for debt repayment, following a significant income drop due to lower PGM prices.

U.S. Operations Restructuring: In September 2024, SBSW announced plans to reduce U.S. production of platinum and palladium by approximately 45% in the following year, resulting in about 800 job losses. This decision aims to address low metal prices and includes placing the Stillwater West mine on care and maintenance, as well as deferring expansion at the East Boulder mine.

Free Cash Flow

As of December 2024, Sibanye Stillwater (SBSW) is experiencing negative Free Cash Flow (FCF), primarily due to:

Declining Commodity Prices: A downturn in the prices of platinum group metals (PGMs) and gold has reduced operating cash flow.

High Capital Expenditures (Capex): Significant investments in growth projects, including ventures into battery metals like lithium, have increased capital expenditures.

For the trailing twelve months (TTM) ending June 2024, SBSW reported a Free Cash Flow of approximately -$900 million. This negative FCF indicates that the company is currently spending more on capital projects than it is generating from operations.

Current Challenges and Opportunities

Global Economic Slowdown: Economic challenges in major markets, including reduced consumer spending on vehicles, have intensified the overcapacity issue. Overcapacity has driven PGM prices below production costs for some operations, eroding profit margins.

Debt and Financial Health: During profitable periods, SBSW invested heavily in projects without significantly reducing debt. Now, with negative cash flows, the company is struggling to manage debt covenants and maintain financial flexibility.

Future Growth Projects: SBSW is diversifying into lithium and other growth areas, such as the Caliber project in Finland. However, these investments weigh on the balance sheet, and profitability from these ventures may take years to materialize.

While overcapacity poses a significant challenge for SBSW in the near term, cyclical recovery in PGM markets could present upside potential. Historically, downturns have been followed by supply corrections and price recoveries, offering opportunities for investors who time the market effectively.

Commodity Price Volatility:SBSW’s performance is highly correlated with commodity prices, which can fluctuate dramatically due to global economic conditions, technological shifts (e.g., EV adoption), and geopolitical events.

Monitoring inventory levels, market trends, and SBSW’s diversification efforts will be crucial for navigating this period of overcapacity.

Market sentiment

SBSW is grappling with declining automotive industry demand, oversupply, and increasing competition. Market downturns are reflected in its stock price, which may continue to face pressure for another year or two.

Investor sentiment remains cautious due to the challenging market dynamics, with SBSW's stock price reflecting concerns over its exposure to PGMs.

Sector Weakness: The broader mining industry, particularly the PGM sector, is experiencing a downturn. Moreover, the transition to electric vehicles (EVs) has reduced demand for traditional automotive metals like platinum and palladium, adding further challenges for SBSW’s key markets.

External Market Risks: Additionally, global economic slowdowns, regulatory changes, and geopolitical risks (such as those related to mining in South Africa and other markets where SBSW operates) can add uncertainty to its ability to maintain profitability.

Cyclical Lessons from the Market

Cyclical stocks like SBSW often experience prolonged downturns before rebounding. Timing is critical—investing during market troughs can yield significant returns when the cycle turns. Many investors make the mistake of chasing these stocks during peaks, leading to poor outcomes.

For those willing to monitor the market and wait, opportunities can emerge. As inventories tighten and oversupply eases, the potential for 5x or 10x returns becomes realistic. However, patience and a clear understanding of cyclical patterns are crucial.

Bankruptcy Probability Assessment

While Sibanye Stillwater is currently facing financial challenges, it is not on the verge of bankruptcy for the following reasons:

Access to Financing: SBSW still has access to credit markets, and it can leverage its existing assets to secure additional financing if needed. However, this depends on commodity prices and the overall economic environment. If financial conditions improve (with a recovery in PGM and lithium prices), the risk of bankruptcy would significantly diminish.

Resilient Business Model: SBSW has a diversified portfolio of assets across precious metals, PGMs, and battery metals. If the demand for lithium and other electric vehicle-related materials grows, this could drive future profitability.

Short-Term Liquidity Concerns: Although SBSW is facing challenges with cash flow and debt management, it is unlikely to face immediate bankruptcy unless commodity prices remain depressed for an extended period, or if debt obligations exceed its capacity to manage.

Valuation

Current P/E Ratio: As of late December 2024, SBSW's P/E ratio is around 5 (based on trailing earnings), which is relatively low compared to the mining sector average. This suggests the stock may be undervalued, assuming that earnings are expected to recover when commodity prices rise again.

Current P/B Ratio: SBSW's P/B ratio is approximately 0.8, meaning the market is valuing the company below its book value. This could indicate that the market is undervaluing the company, particularly if its long-term projects and acquisitions (such as the lithium ventures) prove successful.

The DCF model for SBSW would need to factor in the volatility of commodity prices, as well as the timelines for its lithium and PGM projects to become profitable. Given the challenges with free cash flow and current market conditions, the intrinsic value might be lower than its current market price.

Conclusion

The current weak free cash flow and high debt levels, combined with the uncertainty surrounding the automotive industry's shift to electric vehicles, suggest that Sibanye Stillwater remains a high-risk, high-reward investment. SBSW need to weigh the short-term risks of negative cash flow and debt management against the long-term potential of its growth projects.

Understanding cyclical and timing them correctly is the key to success. Stay informed, and let’s navigate this journey together. BSW’s diversification into lithium and other battery metals provides a potential growth catalyst, and with the right strategic moves, it can recover from its current challenges. Investors should closely monitor commodity prices, debt management, and cash flow to assess ongoing risks.

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