Expect only a slow recovery from Sibanye-Stillwater

Sibanye-Stillwater’s results for the six months to June 2022, prove the damage caused by the three-month long strike at the group’s SA gold operations, as well as management’s repeated refrain that a strike benefits no one. Flooding at its platinum operations in the US took its toll too.

Neal Froneman, Sibanye-Stillwater CEO, says the half year to June was a challenging period for the group due to significant disruptions experienced at the SA gold and US platinum operations, and also a deterioration in the global economic and political environment.

“Production from the SA gold operations was 63% lower year-on-year, primarily due to industrial action which extended for more than three months,” says Froneman.

“US platinum operations reported a 23% decline in platinum group metals [PGM] production in the first half of 2022 compared with 2021 as a result of ongoing operational constraints and the temporary suspension of operations at the Stillwater mine following severe regional flooding that occurred in Montana from mid-June 2022.”

PGM production from the platinum mines in SA was also lower, declining by 8% compared with a year ago.

Froneman blames various operational challenges, including seismic activity, mining through a big fault at one of the mines, and power constraints associated with load shedding and theft of electrical cables.

Three-month long strike

No gold was produced at the Sibanye gold mines during the strike.

It started on 9 March and officially ended on 13 June, but underground mining operations only resumed from 28 June, at a reduced scale.

“We needed time to conduct medical screening, training and acclimatisation of returning employees to ensure that underground mining [could] restart safely.

“Production will increase in a manageable way. Underground operations will only reach full production in October 2022,” says Froneman.

Surface mining operations were also curtailed during the strike with only one of the plants processing material from old mine dumps on a toll refining basis. It is expected that the surface operations will only be fully operational by the end of August.

A separate event at the Beatrix gold mine also impacted gold output. Mining was stopped before the strike started due to a safety concern, while milling of ore was halted from end December 2022, to allow maintenance to a tailings dam.

The net result of these disruptions was that Sibanye-Stillwater lost out on gold sales during a few months when the gold price was quite strong.

Supplementary statistics to the group’s results show that the gold price averaged nearly R923 000 per kilogram in the six months to end June 2022, compared with R860 000 in the preceding six months and around R840 000 in the half year to June 2022.

Unfortunately, a huge operation such as a gold mine has high fixed costs – and that translates into high unit costs when production falters.

All-in sustainable costs at the gold operations increased to an average of more than R1.5 million per kilogram during the six months under review.

Adjusted earnings before interest, tax, depreciation and amortisation from gold mining activities took a hit, declining from more than R2.7 billion to a loss of R3.1 billion.

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Platinum

Things did not go smoothly at the SA and US platinum mining operations either. Production at the SA operations declined due to difficult geological conditions resulting in output declining nearly 14%.

Luckily, higher PGM prices made up for the loss in production and the SA PGM division banked around R3 billion more.

Production at the US Stillwater platinum mine came to a standstill for several weeks due to flooding in the area which prevented access to the mine and plants. This happened at a very inopportune time as Stillwater has been struggling to improve operational efficiencies at the mine and open up ore bodies with higher grades.

Charles Carter, chief regional officer leading the US operations, warns that the initiatives to improve operations to their full potential will take 12 to 18 months.

This mine is also struggling with labour.

“There is a general skills shortages in the US and we struggle to find staff in Montana due to a shortage of housing and long travel distances. We are looking at solutions to reduce the over-reliance on short term contractors,” says Carter.

“In the interim, we are stuck with a high cost structure until we access higher grade ore – over the next few years.”

Outlook

The result of the strike at the gold mining operations and lower platinum production is that group headline earnings were nearly $1 billion lower in the six months to end June compared with the first half of the previous financial year.

In rand terms, headline earnings fell from R24.8 billion a year ago to barely R12 billion.

Earnings per share at R4.26 were nearly 50% lower than the R8.43 of a year ago, but prospects going forward seem good enough that the directors decided to stick with their dividend policy of distributing between 25% and 35% of normalised earnings by way of dividends.

The interim dividend equals 35%, with management saying the board is confident about the company’s solvency and liquidity.

The dividend will hopefully support the share price, which – at just above R41 – has been languishing closer to its annual low of R36 than the high of R80.

Undervalued?

Steve Booysen, analyst at Pearl Gray Equity and Research, says the share is fundamentally undervalued, but notes there are a few uncertainties that are making investors cautious.

“Sibanye’s operational disruptions are material, but that is publicly known. The company was unlucky with the flood in Montana. In addition, it is normal for metal prices and input costs to converge at the economy’s cyclical peak.

“However, it’s clear that Sibanye is struggling on the governance front. We see this in their persistent labour union frictions and other events such as the litigation with Appian Capital Advisory regarding the transaction in Brazil,” he adds.

“Although Sibanye’s stock remains undervalued on a relative basis, it’s clear that the market maintains its short interest in the stock and in its American Depositary Receipts.

“Even though we maintain our long-term position, we don’t think Sibanye is a ‘best-in-class’ precious metals stock play for the time being,” says Booysen.

This article first appeared on Moneyweb and was republished with permission. Read the original article here.