Sibanye's Neal Froneman risking his reputation on Stillwater

Sibanye's deal to buy Stillwater Mining is the first time investors and shareholders have stopped to think twice about CEO Neal Froneman's strategy for the company since its listing in 2013.

Froneman has led Sibanye since its unbundling from Gold Fields in 2012, and was lauded as the man who was going to turn around South Africa's "sunset" mining industry, with commentators describing him as a good negotiator and able to get the best price for good assets.

Rightly so, as he turned around Gold Fields' dying gold mines and, with the acquisition of Aquarius and later Anglo American's Rustenburg mines, he boosted Sibanye's portfolio.

The Stillwater deal, once finalised, will elevate Sibanye to third place in the global ranking of palladium producers and make it the fourth-largest platinum group metals producer. Stillwater will produce around 20% of the precious metals that Sibanye is producing now.

The North American company produces about 550,000 ounces of PGM and mines a reef that contains about 78% palladium, compared to some South African PGM mines that produce about 55% to 60% platinum and about 40% palladium.

However, red flags were raised over Sibanye's plans to buy Stillwater for $2.2-billion (about R29-billion) and the stock dropped 15% on the day of the announcement in December. The share price has dropped 18% since last week, partly due to the announcement of a rights issue to fund the Stillwater deal, and also due to a weaker gold price.

Miners have been urged to be cautious in the next commodities upturn, so as not to repeat mistakes of the past, such as buying poor assets at high prices.

Mergence Investments Managers analyst Thobela Bixa said in reference to the Stillwater deal: "I'd say there's definitely question marks about capital allocation. Prior deals [by Sibanye] were pretty much straightforward, bought cheaply at the bottom of the cycle, huge potential cost cuts via synergies, and pretty much anyone would've been able to extract value out of them."

The Stillwater deal hinged on a much higher PGM basket price in order for Sibanye to generate cash, so the deal had the attributes of poor capital allocation, he said.

The concern is that Sibanye is buying a mine that will cost it the equivalent of almost its entire market cap, which is R25-billion, yet will yield only 20% more production.

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Sibanye will secure another $1-billion in debt, probably via a bond to help repay the loan. The rights issue and the debt will be secured by the end of June. The company is also considering streaming as an option to repay debt, which is when a funder agrees with a mining company to purchase all or part of its precious-metals production at a low, fixed, predetermined price.

"The price tag for the deal is too demanding, buying Stillwater at almost three-year highs with demanding multiples," Bixa said. "The deal also introduces Sibanye to high debt levels in an environment of rising US interest rates."

There was no doubt that the shareholders would approve the $1-billion rights issue to buy Stillwater because most investors who were against the deal had sold their shares, Bixa said. Stillwater did not make sense in terms of the strategy laid out by Sibanye in its strategic update released in August, he said.

Nedbank analyst Leon Esterhuizen said that when investors in South Africa did not like a deal, they simply sold the stock, which meant remaining shareholders believed it was a good deal.

Even so, about 12% of shareholders voted against the deal this week, but about 88% approved it.

An analyst who did not want to be named said the $1-billion given to Sibanye by shareholders would still not be enough to purchase Stillwater, but Froneman knew he could not ask for more. "He knew how far he could stretch them."

Bixa said given that shareholders approved the deal, it was hard to say whether people were losing faith in Froneman. "There's definitely more questions than there are answers," he said.

Esterhuizen said some people still gave Froneman the benefit of the doubt.

"There's a lot more risk in the Sibanye share price," he said, adding that if the PGM price or gold price dropped even by 10%, Sibanye would be in deep trouble. "They are going to have to issue more equity to raise money again. So that amount of risk is not something that a lot of people are comfortable with, so they'd rather wait and see if [Sibanye] can deliver."

Esterhuizen said Sibanye had experienced almost perpetual growth. "He [Froneman] likes putting up a chart which says: 'This the line where Gold Fields was going. It was dying. Now look at what we have done.'"

Esterhuizen said none of the growth Froneman had spoken of had come through yet, so people hoped Stillwater would change that. Stillwater had a project that would add between 270,000 and 330,000 ounces by 2021.

"People are looking at that and saying you have made a lot of promises and you haven't really delivered a lot of that growth," he said.

Analysts said dividends were also at risk of being cut. This was because factors such as local politics, the mining charter, the gold price and PGM basket price needed to improve. "All of these things have other underlying factors that they depend on. If any of these don't work in Sibanye's favour, dividends will be put at risk," Bixa said.

Esterhuizen said the real risk was that palladium prices would start dropping and platinum prices would increase. He said the two could both rally, but not in the long term. "The risk is that palladium is already very high compared to platinum. Because these metals are substitutable, we could see the market moving back to platinum rather than palladium, and that could make the Stillwater acquisition look not so great," he said.

Platinum has gained 6.5% this year and was trading at $949 an ounce on Friday. Palladium, which rallied 21% last year, has gained22% this year, was trading at $825 an ounce on Friday.

Froneman, who had said Sibanye still had one more platinum deal to do in South Africa, said this week, after the approval of the rights issue, that the company would not invest in new projects in the country because of the policies and radical transformation rhetoric the government was advancing, which he said was against big businesses and scared off investors. This is contrary to the company's initial strategy, when it unbundled from Gold Fields. Sibanye advocated itself as a national mining champion while Gold Fields was going to be the international player.

Sibonginkosi Nyanga, an analyst at Momentum SP Reid Securities, said that looking at the Stillwater deal, which did not come cheaply, "I'm not sure if he [Froneman] has got any leeway to involve himself in any other deal".    

He added: "I don't think anyone would be comfortable if he would come to the market and say: 'I want to raise R2-billion for such and such a project.'"

The West Rand Tailings Retreatment Project, which Sibanye announced last year and which would have cost the company R9.6-billion, was halted this year.

Esterhuizen said Sibanye would be sitting with debt after the Stillwater deal, and if the rand was strong or the gold price dropped it would be very difficult to make another acquisition, especially with cash.

The terms of the rights issue will be sent to shareholders within two weeks. However, Bixa said that given Sibanye's stock performance, the shares on the rights issue could probably be discounted by up to 30%.

Nyanga said the rights issue would probably be significantly discounted and if someone did not participate, their shares would be significantly diluted.

So a lot is riding on the Stillwater deal, not only Froneman's reputation but the faith investors have in Sibanye.

mtonganal@sundaytimes.co.za