Sibanye

“Wheaton streams in cash”

Share price: R7,38  

Net shares in issue:2,2 billion

Market cap: R16,0 billion

On a blended DCF and EV basis I value at Sibanye at R11,75 but this is contingent on a cash neutral Lonmin situation, realisation of $120 million in merger synergies should the Lonmin deal go through, and clarity on pending legal claims in the US. For the time being there is little to bring material uplift to the share price and so traders and investors should treat SGL with caution, notwithstanding this positive Wheaton news.

Sibanye’s streaming agreement with Wheaton Precious Metals will inject a much needed $500 million (R6,7 billion) with effect from July. Sibanye will deliver a percentage of gold and palladium produced from its Stillwater and East Boulder PGM operations in the US.

Wheaton, based in Canada, is the world’s largest streaming company and is listed on both the New York Stock Exchange and the Toronto Stock Exchange with a market capitalisation of almost $10 billion. To put the size of Wheaton in context the market cap of Sibanye is only $1,2 billion (R16 billion) whilst Wheaton’s estimated earnings of $250 million also exceeds that of Sibanye. Wheaton has 21 long-term agreements with 15 different mining companies across 11 countries for the purchase of silver and/or gold. The company acquires precious metals production from the counterparties for an initial upfront payment plus an additional cash payment for each ounce delivered that is fixed by contract, usually at or below the market price. This deal with Sibanye should be value accretive for Wheaton, which has adequate facilities to fund.  

Wheaton will pay Sibanye 18% of the spot palladium and gold prices for each ounce delivered until the $500 million is reduced to zero through delivery of metal. After that, Sibanye will receive 22% of spot $ palladium and gold prices for each ounce of palladium and gold delivered. 

Sibanye commits to 4,5% of Stillwater’s palladium production up to  375koz, then 2,25% of production up to 175koz, making for 550koz of palladium over twenty years or 3% of overall output. Once the total is reached then 1% of palladium production for life of mine. Wheaton also receives 100% of Stillwater’s gold. Platinum is not included because management expects prices to firm in the near term.

Sibanye net debt (excluding the Burnstone debt and including a $450 million convertible derivative instrument) was R23,2 billion as at 31 December 2017. Net debt to adjusted EBITDA was 2,6x, just below the long-term covenant ceiling of 2,5x. This streaming deal is thus worth almost 30% of the total debt and reduces net debt to EBITDA to 1,9x.

In trading Sibanye, investors should also note that the company is facing legal challenges in the US and should refer to my note “Legal shakedown looms” dated 29 June. My note dated 7 June entitled "Merger uncertainty weighs on value” also addresses the Lonmin all-share offer.

On a blended DCF and EV basis I continue to value Sibanye at R11,75 but stress that it is contingent on a cash neutral Lonmin situation, realisation of $120 million in merger synergies should the Lonmin deal go through, and clarity on the pending securities class action lawsuit relating to investment value losses as a result of accidents and deaths on the mines. For the time being there is little to bring material uplift to the share price and so traders and investors should treat SGL with caution, notwithstanding this positive Wheaton news. Sibanye reports interim results on 23 August.

In South Africa, Anglo American is my preferred choice now (see “Anglo American in a good space with respect to draft mining charter” dated 18 June). For international exposure, I prefer BHP Billiton (see “Iron ore ends year positively” dated 13 July) as it has less of the geographic and political risk in South African orientated stocks and the South Africa assets were previously unbundled in to South32.     

Mark N Ingham