Deal wizard of South African gold mining is scaring investors

Investors might be running out of patience with Sibanye Gold Ltd.’s colorful chief executive, Neal Froneman.

The South African miner’s stock plunged by a record 16% on Thursday after the company warned it may consider selling assets, metals streams and - only as a last resort - new shares, if the recent strength in the rand persists.

Sibanye is under pressure to reduce debt after a rapid-fire series of deals that transformed the company from a staid and steady gold producer to a diversified precious-metals miner with both southern African and US assets.

The company’s net debt is 2.6 times underlying earnings and almost as high as its current market value.

So far, investors have given Froneman, an industry veteran who earned himself the the nickname ‘Mr Fix-It’ for turnaround successes in the 1990s, the benefit of the doubt. But Thursday’s plunge suggests that might not continue forever.

"The biggest issue here is there is too much debt,” said Arnold van Graan, an analyst at Nedcor Securities. “We are seeing a lot of balance sheet risk building up if the rand-gold price stays where it is.”

Rand Gained

South Africa’s rand has gained about 20% versus the dollar in the past three months, as investor optimism builds following leadership changes in the ruling party and President Cyril Ramaphosa’s appointment.

Gold priced in rand has declined by about 14% in the same period.

Gold and platinum-group metals are sold in US dollars, and while the majority of Sibanye’s gold and a substantial amount of the group’s costs are denominated in rand, its results and financial condition are affected if there is a material change in the value of the rand.

Sibanye gained 1% in Johannesburg Friday.

The plunge in the company’s share price was overdone and it is still generating free cash flow, Morgan Stanley analysts said in a note. But the company’s debt level could present a challenge if the rand keeps strengthening.

Sibanye will look at selling its Cooke gold mine and another loss making operation, Beatrix West, in South Africa. It may also raise as much as $500mthrough precious-metals streaming, Froneman said Thursday.

Finding buyers for Sibanye’s unwanted gold assets may be a challenge, said Rene Hochreiter, an analyst at Noah Capital Ltd. 

An equity sale would be an easy way for Sibanye to gain some breathing room, said Nedcor’s Van Graan. However, the company says it’s confident it won’t need to go that route.

Sibanye is aware investors are concerned about debt levels and the ability to repay as the rand strengthens, said spokesman James Wellsted.

“Equity, we certainly are not going to do that,” Wellsted said. “We have sufficient flexibility to restructure our debt.”

Sibanye was created in 2013 as a dividend-paying operator of three aging but profitable South African gold mines. Since then, Froneman has expanded with acquisitions in platinum-group metals and added operations outside the region for the first time with the $2.2bn Stillwater Mining Co. purchase.

The dividend was halted last year so the company can focus on repaying debt.

And just when investors might have expected Sibanye to take a breather from dealmaking, Froneman announced in December that he’d agreed to buy struggling platinum producer Lonmin Plc in an all-share transaction. 

While that deal remains on the cards, the CEO said Thursday that he won’t seek to take on Lonmin if it’s going to be a millstone around Sibanye’s neck. 

“We cannot ask our shareholders to take on more debt,” he said. “Our view is that by the time we get to close the transaction they will be net cash positive.”

* Sign up to Fin24's top news in your inbox: SUBSCRIBE TO FIN24 NEWSLETTER

ZAR/USD
17.42
(+0.10)
ZAR/GBP
22.77
(+0.02)
ZAR/EUR
20.59
(-0.00)
ZAR/AUD
12.46
(+0.38)
ZAR/JPY
0.16
(+0.28)
Gold
1952.30
(+1.67)
Silver
27.44
(+7.13)
Platinum
960.00
(+3.27)
Brent Crude
45.32
(+2.09)
Palladium
2175.50
(+1.97)
All Share
57419.46
(+0.00)
Top 40
53082.08
(-0.08)
Financial 15
10227.06
(+0.86)
Industrial 25
75743.15
(-0.61)
Resource 10
59161.88
(+0.29)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Do you think it was a good idea for the government to approach the IMF for a $4.3 billion loan to fight Covid-19?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes. We need the money.
11% - 989 votes
It depends on how the funds are used.
74% - 6590 votes
No. We should have gotten the loan elsewhere.
15% - 1382 votes
Vote