Sibani (NYSE: SBSW) fell victim to mining stocks facing a systemic downturn due to falling metal prices and slowing economic activity in China. Additionally, Sibanye-Stillwater faced significant union pressure, which added an idiosyncrasy risk premium to its action. However, we added Sibanye shares this week to buy on the downside. Our view is that the stock’s recent decline is overdone on both systemic and idiosyncratic fronts. Mining stocks in South Africa have to contend with union and labor issues from time to time, and we believe investors’ propensity to overreact presents an opportunity.
Unions – Anecdotally
A while ago I said a critical risk to Sibanye’s actions is the perception that union issues have been ironed out after unions Solidarity and UASA agreed to a R700-a-month raise for his miners. However, understanding the local workforce, I could tell you that it would not be resolved until the miners reached their R1000 target, and this is evident when Sibanye platinum workers are also threatening to join the strike. Unions have a stranglehold on local mines as they demand worker membership at exorbitant costs.
The company’s gold production shortfall in Q-2 resulted in an ultimate earnings disappointment for Sibanye, in which the company’s EBITDA declined by 31% from a year ago.
Sibanye has now raised his wage offer to R850 per month, and things remain up in the air. I think Sibanye will eventually have to upgrade to the R1000 brand. I mean, they’ll get along eventually unless the company wants to file for bankruptcy because there’s a chance no one will show up for work soon.
This is where we see a significant investment opportunity. I’m thinking of Sibanye’s long-term potential rather than its short-term swings. And fundamentals suggest that the company’s performance will remain strong once wage issues subside.
What does the future hold?
I use the term normalized. It’s just me talking about “non-strike operations” and the longer-term trajectory of company earnings.
It should be remembered that Sibanye recorded a record annual profit of $2.23 billion not so long ago. The company’s PGM segment prospered, with production of 1,836,138 4Eoz above the upper limit of the 2021 guidance. In addition, the company’s gold segment production of 892,087 ounces was in line with guidance.
That was before the pay debacle caused serious problems. However, I see Sibanye being comfortable with the pay rises, considering they could fill a critical void in ex-Russia’s global trade. Essentially, I would think of a long-term regression with a temporary downward swing due to temporary internal issues.
Also, systemic issues could help Sibanye. Global supply chain issues may continue to suffer, keeping precious metal prices elevated. Metals and minerals prices are still trading at multi-year highs, leaving Sibanye with lucrative margins to cover rising input costs such as wages and continue to deliver residual value to its shareholders.
Sibanye operates with strong gross and operating margins, as shown in the chart below. This allows it to weather rising input costs with a soft landing. Moreover, the company recently said a dividend payout at the upper end of the payout range of 25% to 35% with a yield of 9.8%. Sibanye’s high payout ratio reflects management’s confidence in the company’s future financial performance.
Risk assessment and analysis
I used futures price multiples to account for earnings regressions. However, current book value was used because regressions on book value tend to be slightly inaccurate for asset-heavy companies.
First, on a normalized basis, Sibanye stock trades at a forward P/E discount of 48.33%, a forward P/S discount of 89.72% and a forward P/CF discount 33.56%; implying that the company’s stock is undervalued on both a cash and an accrual basis.
These measurements are still significantly below their normalized averages, suggesting that Sibanye is far from a cyclical peak.
|Forward P/E (non-GAAP)||5.15x|
|Futures price/cash flow||2.72x|
Source: Alpha Research
There is no denying that Sibanye is a risky asset with more asymmetric returns than the broader market. The stock’s CAPM and beta suggest that the stock is more volatile than most stocks. However, it could generate an excess return relative to the market (implied market risk premium = 3.47%).
In addition, Sibanye stock has weak Sharpe and Value-at-Risk indicators. The 1-month (5%) VaR of 26.33% means the stock is likely to see a decline of at least 26.33% in 5% of its trading months. Moreover, the Sharpe ratio should ideally exceed 1.00 to indicate that it is a solid risk-return asset.
However, consider that we have been in a bear market for the past five months due to a series of uncontrollable headwinds such as the Russian-Ukrainian war and a topsy-turvy monetary policy.
I see things changing in the second half of the year. The market seems biased towards high dividend, quality and value stocks, and Sibanye falls into this mold (chart below).
Yes, Sibanye has its risks and is too sensitive to the wider market. However, the stock’s recent sell-off is due to transitional issues. We believe production and profitability will pick up after its current union issues are resolved and it will realize its potential as a high-value stock. Finally, the market seems to be looking for value, quality and dividends, which matches the profile of Sibanye stock.