Profit ratio

Sibanye Stillwater Stock: Why we think it’s a risk worth taking (NYSE: SBSW)

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In our previous article on Sibanye Stillwater Limited (NYSE:NYSE: SBSW), we argued that the asset had suffered an exaggerated decline and that we were buying the decline. Unfortunately, our call was inaccurate, as the stock lost nearly 15% of its value since.

Our latest analysis reveals that Sibanye shares could be oversold amid a series of company-specific headwinds. Additionally, the outlook for inflation remains uncertain, which could give rise to action as a diversification game.

SBSW card
Data by Y-Charts

Outlook in a bear market

As markets enter bearish territory and inflation remains resilient, many investors may choose to remain invested in the stock market as cash accounts become very obsolete to combat the erosion of their savings. However, there is an element of uncertainty in the stock market, which means we don’t know if the bear market will intensify, but we do know that potential returns are more likely to fight current inflation than savings in cash or bonds.

There is proven financial research (see chart below) that high-quality stocks and high-dividend stocks outperform other segments during tough economic times. High-quality stocks refer to publicly traded companies that have large market shares, provide strong performance metrics, have strong balance sheets, and operate efficiently. Sibanye fits the high quality bill as it is a primary producer operating in an industry with high barriers to entry. It achieved economies of scale with a gross profit margin of 36.52%, and its return on equity of 44.54% implies that it is an efficient business. It also has an interest coverage ratio of 29.78x, indicating that its balance sheet is safe as houses.

In addition, Sibanye also falls into the high dividend category with a cash dividend payout ratio of 48.22% and a forward dividend yield of 9.15%. I think quality and dividend factor investing will likely merge in these tough economic times, which could result in stocks of Sibanye’s profile.

Factor investing

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Operations may soon run more smoothly

When I say “operations may soon be smoother” I am basically trying to convey that Sibanye has been facing a difficult operational period lately. However, it’s a chance to reset with its share price down more than 40% in the past year amid overreaction to idiosyncratic issues.

Let’s look at it from a major regional perspective.

Regional overview

Sibanye – Stillwater

United States – Montana

There have been Montana floods, causing Sibanye operations to cease due to erosion of access roads. Although flooding could restrict access to the Stillwater mine, Sibanye expects its East Boulder mine to resume operations in the coming days. I view this as a transient issue for Sibanye, and its more than 6% drop in share price that day likely more than made up for the delay in trades.

PGM operations in Sibanye, Montana produced 540,000 ounces in its 2021 fiscal year, representing approximately 20% to 25% of the company’s total PGM revenue mix.

Investors view Sibanye’s operations in Montana as long-lived stocks, and the market is unlikely to value the floods as it does its short-lived operations (like its Kloof and Beatrix gold mines).

The Stillwater and East Boulder mines have cash flow durations of another 40 to 45 years. These mines are considered long-term strategic plays by the company as they could offset 27.3 million ounces of mineral reserves.

South African Gold

Sibanye’s South African gold operations have restarted after Sibanye agreed to a new three-year contract wage agreementwhich would see employees in grades 4 to 8 receive a one-time hardship allowance of R3,000 (about $188) and salary increases of R1,000 (about $63) in the first year, R900 (about $56 ) in the second year and R750 (about $47) in the third year, starting in July this year.

Things have also calmed down at the Randfontein gold mine after a looting spree by 150 illegal miners led to a shootingthen interrupting operations.

Sibanye suspended its gold production forecast amid the strikes. Nonetheless, the reopening could add to the company’s prospects.

South African PGM

Sibanye estimates that its MGP operations in South Africa will produce 1.76 to 1.85 million ounces in 2022. Although the range may suffer from an economic downturn and lower consumer demand, the situation between Russia and Ukraine will probably force Sibanye to export more platinum and palladium than her. originally intended to fill a critical void in global supply chains.

Many focus too much on Russian-sanctioned trade. However, it is trivial to assume that the western world is an ex-Russian trade at all levels at the moment. So maybe other key players will ramp up production.

Assessment Considerations

I’ve read many complaints on Seeking Alpha that Sibanye is some type of value trap or that he’s a sleeping giant. There’s a reason the stock’s relative valuation outlook hasn’t materialized.

Each time a stock pays dividends, there is a trade-off between the residual value in the company’s income statement and a reduction in its operating cash flow, the price of which is set by the market. This is why we sometimes see the strike prices of convertible bonds fall each time a stock increases its dividend payout policy.

Sibanye’s dividend payout ratio is at an excess of 2.31x over its historical average. Thus, it is likely that the market could generally price the asset on the outlook for total return rather than the price return. That being said, I’d like to bring the conversation back to the high-dividend market that was discussed earlier. It could be that the market eventually opts for high-dividend Sibanye properties, forcing the stock to close its relative value gap.

Introducing the Lean Supply Chain

Supply chains remain at six and seven. I didn’t want to mention it in an outright section of the thesis because I think it’s too covered a topic these days, and most know what’s going on right now. However, there is something that I think adds value to the narrative.

On the wrong side, the Black Sea trade could be zoned for a very long time. The conflict in the region has not only blocked trade routes, but shipping and freight companies are afraid to send their ships to the region as many insurance contracts would be canceled or face astronomical bonuses. So whether it’s a Russian trading ally or not, business activity in the region is likely to slow down. This could add to global inflation and the midline conjunction, subsequently eroding Sibanye’s selling potential.

On the positive side, the Chinese PMI is picking up, indicating that the region’s industrial production is recovering. Although Sibanye has significant exposure to the semiconductor industry, an uptick in Chinese industrial production may improve the outlook for many investors.

China PMI chart
Data by Y-Charts

Additional risks

The company attempted to structure a combined deal to acquire the Santa Rita nickel mine and the Serrote copper mine not too long ago. However, before the deal closed, Sibanye backed off due to fears over the portfolio’s effectiveness. The seller of the mines, Appian Capital Advisory, is now seeking $1.2 billion in compensation because it believes the termination was unlawful. Even if Sibanye pays nothing, it could be a long and expensive process, with media attention providing a headwind to his stock price.

From a quantitative risk perspective, Sibanye remains misaligned with what constitutes a solid risk/reward profile. Ideally, you would like to see the Sharpe ratio of a stock above 1.00and its 5% monthly VaR of 25.27% could fuel the risk aversion we see in the market, prompting investors to oversell the stock.

Quantitative risk

Alpha Search YCharts

Final Thoughts

Sibanye is a high risk asset; there is no denying it. From an idiosyncratic perspective, the company faces almost every possible operational headwind. However, with a market capitalization loss of more than 40% year-on-year, Sibanye could be a tremendous investment opportunity amid an upturn in operational activity. Additionally, the stock has high-quality, high-dividend properties that could bode well in today’s market, given the behavioral characteristics of investors in different economic cycles.