The making of a South African mining champion

Even by Neal Froneman’s standards, the last 12 months have been a frenetic, barn-storming type of a year.

It started with the CEO of Sibanye-Stillwater suing the mines minister, Mosebenzi Zwane, and is likely to end with Froneman, who is also vice-president of the Chamber of Mines, facing Zwane in court again as the organisation has the High Court undertake a review of the controversial Mining Charter. 

Between these book-ends, Froneman has overseen the breathtaking $2.2bn takeover of Stillwater Mining, a US platinum group metal (PGM) producer that has divided analysts and investors at various points since the transaction was unveiled in December.
 
Perhaps the deal’s biggest challenge was in August when the full weight of the financing required, 30bn in rand terms, hit home.

Sibanye first raised $2.65bn through a bridging facility to pay for Stillwater since it was a cash acquisition. It then refinanced this facility using equity via a $1bn rights issue on 12 June and then a $1bn bond issue a week later.

Shares in the company, which had reached their all-time high in August 2016 at some R69.12/share, suddenly disintegrated in value, falling to R16.25 in September – only a whisker above the share price when Sibanye first listed in Johannesburg in 2013.
 
The Stillwater financial engineering was the largest equity raise in the Europe, Middle East and Africa (EMEA) region since Glencore bid for Xstrata in 2012, and the largest rights issue ever in South Africa to part-fund a transaction.

Yet it forced Sibanye-Stillwater to announce a suspension of the dividend following its half-year results presentation on 29?August, hence the apparent call to abandon ship by investors, especially after the bond issue which Sibanye-Stillwater fought hard to explain was not the dilution that it appeared to be. 

Yet, barely a month later, investors are piling back into the stock. Talk about fickle. 

Investor appetite

Van Eck Associates, the New York-based fund manager, lifted its stake in Sibanye-Stillwater to 10.19%.

Investec Asset Management took its position back up beyond 5% – a move described by its fund manager Hanré Rossouw in an interview with finweek as predicated on the outlook for palladium and the speedy commissioning (ahead of schedule by about three months) of Stillwater’s Blitz expansion, which is rich in palladium, a sister metal to platinum.

Christopher Nicholson, an analyst for RMB Morgan Stanley, said restructuring affecting some 7?500 jobs at Sibanye-Stillwater’s cash-leaking Cooke gold operations on the West Rand, and the Beatrix West section in the Free State, also helped attract investors back to the stock.

“Restructuring at South African gold, synergies ahead of expectation at South African PGMs, and Blitz production growth, coupled with a positive palladium outlook at Stillwater, all provide operational upside,” he explained.

That was a September report but in August, Adrian Hammond, an analyst at Standard Bank Group Securities, forecast the likelihood that Froneman’s ability to execute swift and transformative cost-savings following a new acquisition, spelt good news for the firm.

“Rustenburg demonstrated further operational improvements and the benefits of restructuring have become noticeable. We expect further improvements to costs in H2 [the second half of the financial year],” he said. These duly followed. 

Commenting on the takeover of Anglo American Platinum’s Rustenburg Mines, which had been first announced in 2016, Sibanye-Stillwater said operating cost savings would top R1bn, R200m better than the original target, and had been delivered two years ahead of schedule.

This was enough to save some 300 000 ounces in PGM production (and 15 000 jobs) that had been previously earmarked for potential restructuring. 

Said Hammond in August: “We believe the company is close to shifting a large portion of PGM production into profitability, which could have a significant impact to valuations at spot prices.” And so it materialised.

Saving profitable ounces 

There is a danger that those platinum ounces and jobs could be endangered again were the rand basket price for PGMs to move significantly lower, but Froneman’s belief is that output from Rustenburg Mines has been permanently saved; insofar as it’s possible to talk about permanency in the mining sector.

“There’s a very good message that comes out of this and it’s two things,” said Froneman in an interview with finweek.

“The one is that consolidation is very necessary, especially in an industry where there are mature operations. The second is the Competition Commission, which should get some credit.”

This is a reference to a decision by the commission to approve the takeover of Rustenburg Mines by Sibanye-Stillwater, knowing that the firm’s immediate intention was to release about 570 jobs at the top of the deal. “Business needs the support of the Competition Commission,” said Froneman of the body’s willingness to allow the restructuring.

Still, not everyone was applauding Sibanye-Stillwater for saving jobs, especially those not aligned with the national cause.

Goldman Sachs, for instance, believed maintaining some 300 000 PGM ounces is negative for the platinum market, which is not exactly over-supplied, but has significant above-surface inventories, and sluggish industrial demand.

“I know there’s a negative aspect to that and that is the platinum industry needs to take ounces out of the supply side,” said Froneman. “But that must be unprofitable ounces. These are not unprofitable ounces. We would have no hesitation were they to remain unprofitable to close it.” 

Ruthlessness of this ilk has been demonstrated at Cooke shafts and Beatrix West shaft No. 1.

It has led some to wonder if the reduction in operations at the gold mines coupled with the Stillwater deal suggests Sibanye-Stillwater is effectively quitting the country, albeit slowly, after first saying the intention was to become a national mining champion.

This view was compounded when Froneman said in April that the company would shelve new projects on the back of anti-business rhetoric from government. 

“To preserve cash we’ve cut back on some of our capital projects,” said Froneman at the time. “A secondary issue is that we don’t know what the cost of doing business is here or if there will be business to be done here. Until this country gets its house in order, I don’t see any company being able to make further investments.”

South African champion 

Froneman doesn’t think there’s an anti-investment narrative in the Stillwater acquisition.

In fact, his view is that Sibanye-Stillwater’s national mining champion ambitions – born of former mines minister Ngoako Ramatlhodi’s view that a company was needed in SA with an interest in buying up assets no longer wanted by the mining majors – are very much the strategy for the future.

“What is clear to me is we’ve established ourselves as a South African champion and we could do more of that, and we will do more of it in due course. But if we really want to be a real South African champion, we have to be globally competitive on the international arena as well,” he said.

In effect, Froneman is saying that by internationalising the business, it is able to lessen the discount placed on Sibanye-Stillwater shares, a discount that is largely driven by SA’s uncertain regulatory and political environment.

“Our focus for growth is going to be international so that we can compete on an equal basis with internationally listed companies.

“That doesn’t mean that we’re leaving South Africa; it doesn’t mean that at all. There are still some things to be done here, but what we can’t do is allocate capital where there are long-term paybacks and we’re not sure of the cost of doing business here. We don’t know what’s going to be regulated.”

Froneman was re-elected vice president of the Chamber of Mines at the organisation’s annual general meeting earlier this year.

His no-nonsense approach to issues (controversially, in July Froneman suspended female miners who would not comply with strip searches as the firm attempted to stamp out rampant illegal mining) is partly behind the chamber’s more stridently outspoken relationship with government.

And there’s been ample opportunity to become more combative with government following the department of mineral resource’s (DMR’s) redrafted Mining Charter on 15 June, which contained resolutions that had not been discussed with the mining industry before, and that look decidedly unconstitutional.

For instance, one clause in the Mining Charter demands that empowerment partners are paid dividends before other shareholders, even before lenders are repaid.

Froneman doesn’t think there will be any certainty in the South African mining industry from a regulatory perspective for two years or more as the chamber fights the DMR’s Mining Charter in the courts, beginning with a High Court review on 13 and 14 December.

“You can’t defend these sorts of investments to shareholders and use public money speculatively. That is just not on,” he commented.

Counter-cyclical moves 

According to one analyst, who works for a bank that does not permit employees to speak to the press, it’s the platinum division that will drive Sibanye’s earnings in the foreseeable future; what’s more, the PGMs were accumulated at a cyclical low. When Sibanye was created, it consisted of the demerger of Gold Fields’ South African assets.

The mines were unloved, with depleting reserves and crying out for reinvention. It was contrarian of Froneman to seek to breathe fresh life back into them. There’s a similar counter-cyclicality behind the move into PGMs. Froneman thinks it is a question of calling the market correctly. 

Said the analyst: “Delivery on the integration of its PGMs division, built at a cyclical low, is set to drive a step change in operational performance and deleveraging of the balance sheet near term.

“While contribution from the PGMs division is constrained during 2017, we see Sibanye-Stillwater’s business dominated by PGMs within the next five years as gearing to a rising PGM basket price and quality volume growth from Blitz drives performance.”

Said Froneman: “We clearly called the market and, in fact, we structured Rustenburg on the basis of a three-year depressed platinum price. The approach to Stillwater was initially driven by getting more exposure to palladium because of the view we had that palladium was in a deficit.

“But then we started understanding the assets much better. The fact is that Blitz was not in the market from a valuation point of view because these guys [the Stillwater team] did it as an extension of their business. We realised that we could actually make a good offer, acquire the assets and still show value accretion, which is the vision,” he said.

There’s now a much better understanding of the Stillwater business and the Blitz project among SA analysts, said James Wellsted, Sibanye-Stillwater’s head of corporate affairs. Blitz will double Stillwater’s PGM production to 600 000oz/year.

The expectation is that with Blitz coming on line three months ahead of schedule during a period when the price of palladium has exceeded that of platinum – a historic rarity – Sibanye-Stillwater will be able to take net debt down to one times pre-tax earnings in about 12 to 18 months – a level at which the company can comfortably resume dividend payments and/or fund more growth.

Froneman bristles at the notion that the company broke a promise by stopping the dividend, once described by him as sacrosanct. 

As of the half-year mark, ended 30 June, Sibanye-Stillwater was in negative earnings territory due to a number of exceptional items and since the dividend policy is 35% of earnings, you couldn’t say it stopped making a payout; there just weren’t earnings against which to apply the dividend policy.

The company also offered a capitalisation issue, which Froneman said looks and talks like a dividend although strictly speaking, is not.

He also believes Sibanye-Stillwater is at the vanguard of the next phase of its mining cycle after dividends, and the move into PGMs, which is growth – a phrase still whispered in certain mining circles given the huge debt and lack of return provided by mining firms during the commodities super cycle.

“We have surprised the market from 2013 when everyone stopped paying dividends because they were busy deleveraging and so on.

“It then became almost common wisdom that everyone was working towards paying dividends. We’ve moved into a new phase where the market was not quite there, and that is growth,” said Froneman.

This article originally appeared in the 2 November edition of finweek. Buy and download the magazine here.