We comment and focus on the platinum mining sector on the Johannesburg Stock Exchange and in particular on Sibanye Stillwater. Despite Sibanye transforming itself from a high cost marginal gold producer into the largest Platinum Group Metal (PGM) producer globally with some gold and lithium assets, it still trades at a massive discount to its peers and to SA equity indices in general. We delve into recent results, prospects and its strategic focus culminating in our expectation for decent returns over the next few years.
All the Platinum Group Metal companies have delivered stellar 2020 results and the updates for the half year/mid -2021 have also been strong. In the main it is the cash generating ability of these companies, particularly in a bull market, that should get investors’ attention! Free Cash Flow yields of 20% to 30% are the current normal. According to Bloomberg Consensus forecasts Amplats and Impala are trading at 73% and 63% respectively of their peak multiples in the last PGM bull market of 2005 to 2008. The market, as is the case with the diversified miners, is not rewarding mining companies with the equivalent/same last bull market ratings or multiples. The market is assuming that current prices are not sustainable and believes that the cycle will repeat itself. However, in general the management of miners are acting differently from the last commodity bull market, where they went on a massive merger and acquisition spree as well as new mine/Greenfield expansion. This time around they are paying debt down, increasing dividends and activating share buybacks as executives are looking to not repeat the mistakes of the past. The market is skeptical and is at this stage not rewarding these producers with higher multiples. It is worth taking note that the green /clean metals for a cleaner future are copper, aluminum, platinum and lithium.
We are of the opinion that the platinum market will, even under an accelerated BEV(electric vehicles) curve, move from deficit to balance from 2023 to 2025. The move to electric vehicles will affect light vehicles in the main with diesel heavy duty vehicles still requiring more PGM weightings as vehicle emission standards tighten. In addition, substitution towards platinum from palladium or rhodium will benefit the South African producers as they have higher platinum weightings in their PGM ore mix. The new and increased use of hydrogen is set to deliver a growing new market for platinum.
Specifically looking at Sibanye we believe that the company is doing all the right things. Firstly, the company is more diverse than its SA rivals, geographically diversifying with North American mining and recycling producing 26% of EBITDA. Operationally the mines are delivering increased production and despite costs increasing they are under control. The Stillwater expansion is ramping up after delays and management is positioning the company in the lithium battery market with two deals in Europe. In February 2021 it bought into European based Kilber, a leading lithium miner and battery producer, which will produce 15000 tons of lithium annually for 13 years from 2024.
At the moment platinum and other commodities are selling off on a host of worries including a Chinese slow down and stronger US Dollar. In particular the PGM space has been hit by a continued global shortage of chips which is impacting heavily on global car production. Recent announcements by Toyota, Ford, General Motors and VW all point to lower production in the immediate future. However, we believe that this will merely prolong the upswing into 2022/2023 as purchases of new vehicles are delayed not cancelled. In short Sibanye is positioned as a company that should benefit from the global move to green energy and yet its ratings are similar to old smoke stack industries where revenue and earnings are at massive risk in the future.
At the current price of R56 latest full year results for 2020 show a company at end of December 2020 which had:
- 1bn net cash
- net profits of R29bn
- a historic PE of 5.6
- a historic DY of 6.6%
- free cash flow of at least R18bn.
Sibanye reports its first half 2021 results on 26th August but has provided a trading update which points to HEPS increasing 138% year on year and HEPS of R8.55 for the half year compared to R10.33 for the full year of 2020. Notwithstanding the fact that first half of 2021 profits are comparable against an easier benchmark in 2020 and thus full year profits will not increase at the same pace, forward valuations are cheap. We continue to believe in the exciting prospects for Sibanye and see the current share price as under-priced.
Head of Equities
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