THEGIFT777/iStock via Getty Images
Sibanye Stillwater Limited (NYSE:SBSW ) is one of the world's major producers of platinum, palladium, and rhodium. On a gold equivalent basis, it is also a top-tier gold producer, ranking third worldwide. The company is also a prominent global recycler and processor of wasted PGM catalytic converter materials, as well as a producer of iridium, ruthenium, chrome, copper, and nickel as by-products. Sibanye operates a diversified portfolio in terms of products and geographical location. The company has engaged in various collaborations and acquisitions over the years, allowing it to expand from a sole gold producer to a globally competitive, diversified precious metals producer of gold and platinum group metals ("PGMs"). The company, which is primarily based in South Africa, also has operations in the United States and recently joined the battery metal market by investing in a lithium hydroxide facility in Finland.
Most of the company's revenue comes from PGM mining, however gold mining and recycling still account for 22.09 percent and 20.05 percent of total revenue, respectively. The contribution of gold mining activities to Sibanye's revenue is likely to drop under current conditions, as the business aims to close three of its gold mines over the next ten years or so. At the same time, recycling activities are predicted to grow in importance as a source of revenue because they do not require capital investment and provide a high-profit margin.
The platinum group metals, or PGMs, consist of six metals including platinum, palladium, rhodium, iridium, ruthenium, and osmium. PGMs are chemically similar elements that are valued for their flexibility in their wide range of industrial, medical, and electronic applications. PGM is primarily used in catalysts, electronics, fuel cells, glass, ceramics, and pigments, as well as medical/dental and pharmaceutical applications.
Source: Johnson Matthey Technological Review
Source: Sibanye Stillwater, mining.com
Palladium demand is mostly driven by stricter restrictions aimed at reducing car pollution, particularly in China and Europe, where consumers prefer petrol-powered vehicles that employ palladium. This pushes manufacturers to use more palladium in the production of catalytic converters in car exhaust, which convert dangerous pollutants into less damaging gases.
Source: Sibanye Stillwater, mining.com
Auto catalysts, which can successfully accelerate the conversion of hydrocarbons and carbon monoxide to innocuous chemicals, are the most common end-use for platinum, thanks to stricter emissions legislation around the world. The second most important demand segment is jewelry, which accounts for a third of global platinum consumption. China currently dominates the platinum jewelry business, particularly in terms of the expansion of the bridal jewelry market. The demand for Platinum has been relatively stable across the years due to its diverse demand.
Source: Sibanye Stillwater, mining.com
It is significantly more valuable than gold or platinum as the world's rarest and most valuable precious metal. Rhodium is primarily used in automotive catalytic converters, which minimize the number of nitrogen oxides (NOx) discharged into the atmosphere. The auto-catalyst sector accounted for over 90% of rhodium demand in 2019. In terms of converting NOx into innocuous gases, rhodium is a highly exceptional metal, and it will continue to be the metal of choice for NOx control.
The strong demand has been largely attributed to rising NOx levels legislation globally, particularly in China. The Chinese auto market is the largest gasoline market in the world, with China's light-vehicle sales accounting for around 90% of gasoline engines.
Source: Sibanye Stillwater, mining.com
Ruthenium, like iridium, is mostly employed in the electrical and electrochemical industries. The production of ammonia, which is driven by the requirement for nitrogen fertilizers in food production, is a significant catalyst market for ruthenium. One of the key drivers of ruthenium demand is the hard disc drive for data storage. Ruthenium-containing compounds are required for the manufacture of chip resistors, while the metal itself is used in a variety of semiconductor materials.
Source: Sibanye Stillwater, mining.com
The electrical and electrochemical sectors are the primary users of iridium. It's one of the materials used in light-emitting diodes (LEDs) for energy-efficient lighting, as well as materials for surface acoustic wave (SAW) filters, which are increasingly common in smartphones and other gadgets. Its high-performance spark plug tips for light automobiles and industrial gas engines were in high demand. It is beginning to play a key role in the development of the hydrogen economy as part of the catalyst package in proton-exchange membrane (PEM) electrolyzers for hydrogen production.
Sibanye Stillwater is one of South Africa's biggest miners. It is the world's third-largest producer of platinum (1,074,585 oz) and palladium (938,519oz) in 2020, as well as the second-largest rhodium producer, with 141,118 oz produced in 2019.
South Africa is a major supplier of global rhodium, producing over 85%, with most supply coming from the mining companies listed as follows (rhodium production listed as a percentage of overall mining production). Anglo American Platinum Limited (OTCPK:AGPPF) is the largest rhodium producer, producing 7.5% of overall rhodium production, contributing to 34% of its revenue. Sibanye Stillwater and Impala Platinum Holdings Limited (OTCQX:IMPUY) produced 7% and 6.5%, contributing to 22% and 25% of their revenues, respectively.
Rhodium's contribution to revenue as seen has increased significantly over the past 5 years, as seen in its SA PGM segment. While the price of all PGM metals has climbed over the last five years (excluding platinum, which has remained relatively steady), the price of Rhodium has increased by more than 2700 percent.
While we acknowledge that Sibanye's recent success has been aided by the rise of the prices of PGM metals, we will refrain from predicting future prices of these metals for several reasons:
Prices of these metals have been volatile, and they are difficult to accurately predict.
The company is switching its production to different metals such as battery and nuclear metals which would alter the metal revenue contribution (we have reflected higher capital expenditure to account for the switch to other metals production).
We are focusing on analyzing and investing in the company due to its fundamental strengths and valuation instead of the commodities the company produces.
Nevertheless, we have accounted for drastic price changes in the metals by incorporating 3 different scenarios in our valuation. We project the company's revenue growth based on 5% production growth which is based on 3-year average production growth from 2018-2020. For prices, we forecast the change in prices based on 3 different scenarios, a bull case in which we assume a 50% price increase over ten years from 2022-2031, and a bear case in which we assume a 50% price decline over ten years from 2022-2031, and a base case with no price change over the next 10 years.
Palladium and Rhodium are heavily used in the automobile industry as autocatalysts which facilitates the conversion of harmful pollutants into less-harmful carbon dioxide and water vapor. It is in high demand as automakers seek ways to cut emissions before electric cars become the only option for them. Palladium's application in decreasing emissions from gasoline-powered and hybrid-electric vehicles will keep it relevant in the short term.
Toyota Motor Corp. (TM) recently revealed plans to slash global output by 40% from its previous plan, potentially lowering demand for palladium and rhodium, which are used as vehicle catalysts. Volkswagen (OTCPK:VWAGY) has also hinted at another output cut, while Ford (F) has announced the closure of a Kansas City assembly facility owing to a parts shortfall caused by the semiconductor crisis.
In addition, as the world's automakers gradually switch from combustion to charging, the demand for palladium and rhodium will soon face a downturn. Electric cars don't burn fuel, don't have exhaust pipes, and don't use palladium and rhodium. Automakers like Volkswagen are planning to phase out the internal combustion engines gradually, promising to sell off the last piece of its internal combustion engine in Europe by the end of 2035.
Source: BloombergNEF, U.S.Global Investors
Company management themselves acknowledge the risk surrounding palladium in their latest earnings briefing, addressing palladium-rich projects as high-risk projects. We agree with management's assessment on Palladium given 81% of demand is from the traditional automobile market. However, we also believe Rhodium is a high-risk metal given 85% demand from the traditional automobile market. In total, these two metals contribute 68% of Sibanye's total revenue.
While combustion engines still exist and will take time to shift to Batteries, Sibanye has implemented a strategy to shift its production to more environmentally friendly metals including Battery Metals and Nuclear Metals. The Green Metals market is seen by the company as a better long-term revenue source than gold production. The Green Energy Metals market is seen by the company as a better long-term revenue source than gold production. As it becomes more difficult to operate these older assets, the business thinks it may wind down its three South African gold mines within the next decade or so. The management has been discouraged from investing in the three mines to extend their lifespan due to regulatory uncertainty, expensive electricity, and labor expenses, as well as community protests and violence. The company has started to shift to Green Energy Metals such as Uranium, Lithium, and Nickel.
We're not focusing on gold at all. Gold is not at a place where we are going to make a gold acquisition. Our focus is on battery metals. - Neal Froneman, CEO and Executive Director
Sibanye Stillwater had entered into the battery metal space in February 2021, when it announced the purchase of a 30% stake in Keliber Oy ("Keliber"), a Finnish mining and chemical company to produce battery-grade lithium hydroxide for the growing international lithium market.
Furthermore, on 19 March 2021, the company formed a strategic partnership with Johnson Matthey (OTCPK:JMPLF), a global leader in sustainable technologies to secure critical metals such as PGMs and metals used in battery technology as well as accelerate the development of new battery technologies to drive decarbonization. The partnership will help the company reduce carbon footprints in essential metal supply chains for customers in a variety of industries around the world.
The increased need for hybrids, rechargeable hybrids, and electric vehicles is boosting lithium consumption. Rechargeable lithium-ion batteries are 75% lighter than lead-acid batteries with comparable capacity, making them a good alternative for electric automobiles or bikes. Lithium consumption is expected to grow from 270,000 to 900,000 tonnes of lithium carbonate equivalent (LCE) by 2027, and to over 2.8 million tonnes by 2040. Keliber, in which the company has a 30% stake, will offer lithium hydroxide, which is the dominant lithium chemical consumer in battery applications, to meet the needs of the growing lithium battery market, which will be used to power increasingly electrified transportation and the production of energy storage batteries. Based on the demand for Lithium, it should gradually replace Palladium's revenue contribution to the company. (31% as of 2020)
The company has taken the next step in its battery metals strategy by acquiring the Sandouville nickel hydrometallurgical processing facility from French mining group Eramet (OTCPK:ERMAF), for €65 million. Based in France's second-largest industrial port, Europe at Le Havre, the Sandouville facility can access extensive logistical infrastructure, including shipping, rail, and motorways. This ensures continued supply to European end-user markets. Furthermore, the plant is zoned for heavy industrial use and can scale up to produce nickel, cobalt, and lithium battery-grade goods.
In its green metals' portfolio, Sibanye Stillwater included uranium as a prominent component, identifying uranium-based nuclear energy as a zero-carbon baseload power alternative. The business is exploring restarting uranium production from its Cooke tailings resources west of Johannesburg, as well as turning its aging Beatrix West mine to uranium production.
We believe the company will be able to successfully shift to Green Energy Metals through strategic partnerships and acquisitions due to its strong cash flow generating capabilities.
Source: Sibanye Stillwater, Khaveen Investments
As seen above, the company's cash position has risen considerably since 2017. Despite recent strategic acquisitions, we expect the company to be net cash positive in 2022, upon which its Cash to Debt ratio will start to rise considerably. The reason for this is due to the company's strong free cash flow margins.
Source: Sibanye Stillwater, Khaveen Investments
Sibanye's 3-year average free cash flow margin is 9.03%. The dip in 2017 cash flow due to the acquisition of Stillwater Mining Company, situated in Montana, for US$2.2 billion, resulted in a sharp increase in capital expenditure in 2017. Going forward, the free cash flow margin of the company is expected to increase due to the higher increase in operating cash flow relative to capital expenditure.
Sibanye acquired the world's largest PG recycling company, Stillwater Mining in 2016. The Columbus Metallurgical Complex, a smelting factory and base metal refinery in Montana, is operated by Sibanye. It is one of the largest recyclers of PGMs from wasted car catalytic converters and other industrial sources in the world. A third-party precious metal refiner refines the recycled material to palladium and platinum metal.
Platinum group metals have high technical recyclability, which indicates that once scrap containing PGMs reaches a state-of-the-art refining facility, over 95% of the metal may be recovered. PGM recycling is appealing because of its finite nature, as recycling helps extend the life cycle of metals and lessens the environmental impact of metal supply. PGM is also cost-effective because it allows the company to produce metal without the expensive, lengthy mining process through the collection of wasted auto catalysts from the purchasing side.
Sibanye has a competitive edge over other recycling plants that do not have access to mined production because it can combine materials from two different sources. It also improves processing efficiency because the concentrates from the company's Montana mines contain significant amounts of nickel and copper, making PGM extraction from recycled material easier.
There is a requirement for the development of cutting-edge refining facilities to recycle PGM metals. After mined or recycled materials are harvested, they are handled similarly: they must be crushed, tested, smelted, and chemically separated to produce pure metal that can be sold in the marketplace. The most significant obstacles to recycling PGMs are assuring scrap collection and the capacity and technological capabilities of recycling networks around the world.
Sibanye owns a state-of-the-art facility including two smelters and a base metal refinery where recycling materials are processed at the Columbus Metallurgical Complex. In addition, it also uses an automated X-ray technique which is more accurate and can process faster than traditional fire assay methods, which can only be used to determine gold. In 2020, the total recycled volume of the company was 840,170 3E PGMs.
Effective recycling also necessitates a well-tuned recycling chain involving various specialized stakeholders, beginning with the collecting of old items, sorting/dismantling, and preprocessing of relevant fractions, and eventually metal recovery. The latter necessitates complex, large-scale metallurgical processes.
Sibanye has a well-tuned recycling process where it either purchases directly or pays a toll processing fee to obtain the recycled materials from third-party vendors who are usually car repair shops and scrap yards which handle vehicle debris. Catalysts used in petroleum refineries and other PGM-bearing materials are also some of the material sources. After the smelting and case metal refining process, the filter cakes produced are further refined by a third-party refiner. Refined metals buyers include Johnson Matthey and Tiffany & Co.
I dare say that the cost of producing palladium from recycling is a hell of a lot lower from primary sources. So, in terms of your position on the cost curve, we will be at a distinct advantage there. - Neal Froneman, CEO and Executive Director
While we recognize that the company's EBITDA margins for the recycling segment are increasing, we disagree with management on the cost curve given the recycling segment's EBITDA margin is still a measly 4%. Where we view the advantage is in the capital expenditure requirements of the recycling segment.
Source: Sibanye Stillwater, Khaveen Investments
Source: Sibanye Stillwater, Khaveen Investments
We obtained financial data for each of the company's segments and identified the EBITDA/Revenue, EBT/Revenue, and Capex/Revenue margins. As seen in the table above, the recycling EBITDA and EBT margins are lower than every other segment the company operates in. However, there is zero cost in Capex which is where we see the value of the recycling segment.
Although the recycling segment contributes a significantly lower margin compared to the other segments, it doesn't require any capital expenditure. The recycling process starts with mining, where the Capex has already been spent. Hence, the company can sustainably grow its free cash flow as zero Capex is required.
Source: Sibanye Stillwater, Khaveen Investments
Sibanye sources its recycling materials such as industrial catalysts and automotive materials from third parties. To secure the sources of recycling materials, Sibanye enters sourcing agreements with the suppliers and offers advance cash payments to the suppliers.
In South Africa, the electricity costs are running far too high to keep essential infrastructure up and running. In 2021, Eskom was approved a 15.63% electricity tariff increase by the National Energy Regulator of South AFRICA (NERSA), representing the highest increase of the past decade.
Insecure power supply and expensive electricity is a top constraint of the mining industry, as operations are forced to be reduced when power is rationed. The performance of Eskom has worsened over the years, with blackouts through the first six months of 2021 reaching 70% of 2020's power outages.
As Eskom remains a significant hindrance to production, Sibanye aims to build renewable energy facilities to overcome power shortages and minimize its carbon footprint because there are no near-term substitutes for Eskom's power supply. To reduce dependency on Eskom, the firm aims to expand solar and wind farms. Eskom's older coal-fired plants have been unable to keep up with demand. The business had approved plans to build a 50-megawatt solar power plant to supply electricity to its gold mines. Simultaneously, it is examining the feasibility of constructing a 175-megawatt plant at its Rustenburg platinum mines, with additional power coming from a 250-megawatt wind farm.
As 81% of the revenue coming from South African operations, there is also a risk of inflation in Africa. The inflation in South Africa is high, where the ten-year government bond yield is 8.88%. Nonetheless, we have accounted for the risk of inflation in our financial model, recorded in the weighted average cost of capital (WACC) of the company.
Sibanye's 5-year average revenue growth is 45.5%. The average 5-year gross and net margins are 16.3% and 3.92% respectively. As seen below, the margins had increased intensively in 2020 due to the spiking precious metal prices.
Source: Sibanye Stillwater, Khaveen Investments
In terms of cash flow, the company's average FCF margin in the past five years is -8.02%. The 55.68% dip in 2017 was due to $2.2 billion spent on the acquisition of Stillwater Mining Company. The free cash flow margin of the company is expected to rise moving forward due to the higher increase in operating cash flow relative to capital expenditure.
Source: Sibanye Stillwater, Khaveen Investments
To value the company, we used a DCF model as the company due to its strong FCF margins despite the 2017 acquisition. Comparing to its competitors in the precious metals and minerals industry, we obtained an industry average EV/EBITDA of 5.22x.
Impala Platinum Holdings Limited (OTCQX:IMPUY)
Anglo American Platinum Limited (OTCPK:AGPPF)
Newcrest Mining Limited (OTCPK:NCMGF)
Agnico Eagle Mines Ltd (AEM)
Polymetal International Plc (OTCPK:POYYF)
For the revenue projections, we project the company's revenue growth based on 5% production growth which is based on 3-year average production growth from 2018-2020. We also account for the drastic price changes in metals by including 3 different scenarios in our valuation: a bull case in which we assume a 50% price increase over ten years from 2022-2031, and a bear case in which we assume a 50% price decline over ten years from 2022-2031, and a base case with no price change over the next 10 years.
Based on a discount rate of 7.8% (company's WACC), our model shows an upside of 288.53%, indicating that the company is significantly undervalued.
In a nutshell, Sibanye continues to lead the platinum, palladium, and rhodium markets. Due to stricter emissions restrictions, the company will continue to experience exponential demand for palladium and rhodium in the short term, which currently contributes 68% of revenue to the company. As part of the catalyst package in proton-exchange membrane (PEM) electrolyzers for hydrogen production, lithium is also beginning to play a crucial role in the development of the hydrogen economy.
Predicting a drop in palladium and rhodium demand in the long term, the corporation has increased manufacturing of more environmentally benign metals such as Battery Metals and Nuclear Metals. With its strong cash position, the company was able to enter the recycling and battery metal industries through a series of strategic acquisitions and collaborations, including the purchase of a 30% stake in Keliber Oy (Keliber), a Finnish mining and chemical company that produces battery-grade lithium hydroxide, and the Sandouville nickel hydrometallurgical processing facility from Eramet, a French mining group. In addition, the company plans to convert its aging gold mines to uranium production.
As one of the largest PGM recyclers globally, Sibanye is equipped with state-of-the-art facilities to extract PGMS and owns a well-tuned supply chain ensuring smooth collection of recycling materials and further refinery. We view the absence of capital expenditure as the main advantage of the recycling segment.
With most of its operations based in South Africa, unreliability and unaffordability of electricity remain the top concern of the company. To minimize its reliance on Eskom as its main power supply, the business had approved plans to run its operations using renewable energy sources such as solar and wind.
Nonetheless, the company has a prominent cash flow which we expect free cash flow margins as well as net margins to increase moving into the future. Regardless of the volatility of the metal prices, the company remains undervalued. Overall, we rate the company as a Buy with a price target of $63.72.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in SBSW over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: No information in this publication is intended as investment, tax, accounting, or legal advice, or as an offer/solicitation to sell or buy. Material provided in this publication is for educational purposes only, and was prepared from sources and data believed to be reliable, but we do not guarantee its accuracy or completeness.