Sibanye-Stillwater's Purchase Of The Remaining 50% Of Kroondal Looks Compelling And I'm No Longer Bearish https://seekingalpha.com/article/...ompelling?source=copyToPasteboard
Introduction
In October, South Africa-focused platinum group metals (NYSEARCA: PGM) producer Sibanye-Stillwater (NYSE: SBSW) signed a $1 billion deal for the purchase of the Santa Rita nickel mine and the Serrote copper mine in Brazil. I wrote a bearish article about this transaction as I thought the company was paying too much for these mines.
The deal was subsequently called off and Sibanye-Stillwater just announced it's buying the remaining 50% in the Kroondal PGM operation in South Africa from Anglo American Platinum (OTCPK:AGPPF) in exchange for 1 South African rand and the assumption of mine closure and rehabilitation liabilities and costs of 415 million rands ($26.7 million). I think it's a good deal that is a win-win for both companies. Let's review.
Overview of Kroondal and the deal
Kroondal is located on the Western Limb of the Bushveld Complex and is adjacent to, and up-dip of Sibanye-Stillwater's Rustenburg operation and the shallow Klipfontein open pit operation.
Sibanye-Stillwater operations map
Sibanye-Stillwater
The company got a 50% interest in Kroondal in 2016 through a deal for Aquarius Platinum. Aquarius and Anglo American Platinum had agreements under which Aquarius used the infrastructure of the mine to essentially mine the reserves of Anglo American Platinum at Rustenburg and the two companies shared the profits.
According to Anglo American Platinum, Kroondal had reserves of 0.7 million platinum, palladium, rhodium, and gold (4E) ounces as of December 2020 and its mine life was set to run out in 2025.
Sibanye-Stillwater production by operation
Sibanye-Stillwater
Kroondal finished Q4 2021 with a production of 126,800 ounces 4E ounces, with platinum and palladium accounting for 60,600 ounces and 31,600 ounces, respectively. Looking at the margins, this is the lowest cost PGM operation of Sibanye-Stillwater at the moment with all-in costs of $843/4E ounce as of Q3 2021.
Cost curve of South African PGM operations
Sibanye-Stillwater
According to Anglo American Platinum, its 50% interest in Kroondal delivered EBITDA of around 8 billion rands ($513.7 million) between 2017 and 2020.
So, why is Anglo American Platinum giving up its 50% in this profitable mine to Sibanye-Stillwater for just 1 rand plus closure costs? Well, the answer is that it's not. Under the terms of the deal, Sibanye-Stillwater has to deliver 1.35 million 4E ounces to the Rustenberg smelting operations of Anglo American Platinum and the pool-and-share agreement is still in effect until this mark. Still, this means that Anglo American Platinum will be able to generate profits from processing the concentrate, and these ounces are likely to be cheaper than before as some of them will come from the orebodies at the Rustenburg operation. Some shafts at Kroondal reached the end of the lease area at the end of 2020 and they have so far been operating under a contractor mining agreement.
For Sibanye-Stillwater, this new deal will allow it to access remote parts of the Rustenburg operation's orebody years earlier and thus boost the mine life of Kroondal to 2029. Also, the deal will save 2,500 jobs until 2029, so I don't expect South Africa's notoriously militant unions to oppose it. The deal between Anglo American Platinum and Sibanye-Stillwater also includes the transfer of a 50% interest in the Marikana PGM operation, which has been on care and maintenance since 2012. The latter has a mineral resource of 4.7 million 4E ounces attributable to Anglo American Platinum.
Overall, you can look at this transaction like this - Sibanye-Stillwater gets to drive down the costs and increase the mine life of Kroondal by mining some remote parts of Rustenburg, while Anglo American Platinum will get some additional profits from smelting and won't have to pay the closing costs for the project. It's all about getting rid of the mine boundaries and boosting production and both companies stand to gain from this deal. Based on the June 2021 TTM financial results of Sibanye-Stillwater, Kroondal contributed over $370 million in net profits. Considering the mine life is being extended by four years, this could potentially result in hundreds of millions of dollars in additional profits in a few years. Still, these potential profits are dependent on high PGM prices over the next several years.
Speaking of PGM prices, I said in my August 2021 article on Sibanye-Stillwater that I expected palladium and rhodium prices to decrease significantly due to the worldwide chip shortage and rising battery electric vehicle (BEV) sales. This has so far failed to materialize.
PGM price graph
Johnson Matthey
In view of this, I no longer feel comfortable being bearish on Sibanye-Stillwater. Yet, I also think being bullish on the company's shares could be dangerous at the moment as a strike at its South African gold mining operations seems imminent following failed wage talks. I think risk-averse investors could be better off avoiding Sibanye-Stillwater for the time being.
Investor takeaway
Sibanye-Stillwater isn't paying 1 rand for 50% of Kroondal, it's a bit more complex. Essentially, this deal gives the company the opportunity to mine into the Rustenburg resources from its Kroondal operations which is set to deliver value for it and Anglo American Platinum. It's a win-win situation that allows Sibanye-Stillwater to boost the mine life of Kroondal by an additional four years which could translate into hundreds of millions of dollars in net profits in a few years, provided PGM prices stay high.
I view this as a compelling deal and I no longer feel comfortable being bearish on Sibanye considering palladium and rhodium prices have been strong for months since my bearish call. However, I'm also not comfortable being bullish at the moment as it seems there is likely a strike coming at the South African gold mining operations of Sibanye-Stillwater. I'll continue to watch this company carefully from the sidelines for now. |
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