Sibanye Stillwater Limited

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

A global precious metals mining company, primarily focused on producing platinum group metals (PGMs), as well as gold. They also have smaller operations in other metals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Sibanye Stillwater is a multinational mining and metals processing group headquartered in South Africa with operations spanning the globe, including the US. Its primary focus lies in producing platinum group metals (PGMs) such as platinum, palladium, rhodium, iridium, ruthenium and gold, with a smaller presence in other metals.

The company’s revenue is driven by global demand for these metals, which have various applications in the automotive industry (catalytic converters), electronics, jewelry, and investment.

Revenue Distribution:

  • PGMs: The dominant source of revenue. PGM’s are used in catalytic converters (an area where there is increasing demand), jewelry and as an investment.
  • Gold: A secondary revenue driver.
  • Other metals: Smaller, less significant contribution to revenues.

Industry Trends:

  • Demand for PGMs is tied to the automotive industry (catalytic converters), which has increased their demand due to the increasing number of hybrids and electric vehicles.
  • The gold industry also tends to see more demand during turbulent economic times. This is a positive tailwind that will see more money in the company’s pockets if uncertainty increases.
  • ESG (Environmental, Social, and Governance) considerations are increasingly important, as investors and consumers place more value on sustainable and ethical mining practices.
  • Supply of metals is uncertain.

Margins:

  • Margins in the mining industry depend heavily on metal prices. During periods of high prices, margins tend to be great and vice-versa.
  • Operating costs such as labor costs, energy prices, and input costs can also have a big impact on the profit margins.
  • The current environment is difficult with an inflationary period, the rising input costs can be difficult to manage if prices fall.

Competitive Landscape:

  • The mining industry is characterized by a small number of big global players in PGM and gold production.
  • Key competitors include Anglo American Platinum, Impala Platinum, and other major mining companies.
  • Competitive advantages arise from control over high-quality reserves, lower cost base, technological innovation, or unique processing skills.
  • They operate in different markets which can make them susceptible to market volatility.

What Makes the Company Different:

  • Diversified Portfolio: Sibanye Stillwater has a diversified portfolio of assets which allows it to operate across the supply chain- from mining to refining.
  • Geographic Diversification: Operations in both South Africa and the U.S.
  • Strong Position in PGMs: The company is among the top producers of PGMs in the world.
  • Efforts in recycling and sustainability: The company has plans to increase its use of recycled metals in the future which will allow it to lower its carbon footprint and improve brand perception.

Financial Deep Dive

Important Note: The company’s reporting and financial statements can be a bit complex. The company reports in both rand and US dollars, which could be confusing for investors in the United States that are looking into the company. The company’s financials also include results from both continuing operations and discontinued operations, as well as many “adjustments” to those numbers that can obscure underlying profitability.

Revenues:

  • Revenues are primarily determined by metal prices and are therefore volatile.
  • The price of metals is very heavily dependent on the market, and since there are a lot of large players in these markets, a single company doesn’t have as much control over the price.
  • Revenues can also be impacted by the production volume as the company operates in a high-fixed cost industry. Therefore, in order to increase revenue, the company must increase production or sell its metals at higher prices.

Margins and Profitability:

  • Gross margins can be good when commodity prices are high, and they tend to shrink when commodity prices drop.
  • Management needs to be good at controlling expenses since many input costs are volatile and therefore, a good management team will be able to keep its expenses down to maximize profits.
  • Profitability is volatile and closely linked to metal prices, but also to the company’s ability to control their costs and operational efficiency.
  • The most recent earnings report mentions that the operating profit margin for continuing operations came down to 4% compared to 24% from last year. This shows the volatile nature of the business and its margins.

Cash Flow:

  • Cash flow fluctuates with metal prices and can be volatile.
  • In times of high metal prices, the company can experience very positive operating cash flows, but low metal prices mean that the company can even have negative cash flow.
  • Investment in maintaining the mines, equipment, processing plants and acquisitions can consume a lot of cash-making capital expenditures a major component of cash flows.
  • Recently, cash flow from operations has been extremely negative and the company was even forced to go to its credit lines to borrow to keep funding its operations.

Balance Sheet:

  • Has substantial assets including mines, property, plant and equipment, but can also have liabilities in terms of debt.
  • A large portion of the assets is fixed, not as easily liquidated into cash as needed.
  • The company’s debt levels have been rising recently, which can pose a risk to its balance sheet. For example, the company now has negative equity.
  • In order for a metals company to thrive, it must have high liquidity and not too much debt in order to be able to survive any fluctuations in prices of their product. In a bad economic cycle, banks tend to increase interest rates as well, making debt even more expensive.

Moat Analysis

Key Concept: The concept of an “economic moat” is crucial in determining a company’s ability to sustain profits over an extended period. This can come from factors like proprietary technology, scale, customer switching costs, or a unique geographic position.

Moat Rating: 2/5

  • Intangible assets (1/5): The brand is not very relevant in this industry. They can have some patents over new methods of extraction, but those are unlikely to create long lasting competitive advantages.
  • Switching costs (1/5): There are no meaningful switching costs for the customers. Many customers are very big players and will be looking for the cheapest provider of their raw materials.
  • Network effect (1/5): Network effect does not apply to this business.
  • Cost advantages (4/5): The company does have access to unique deposits and resources, allowing it to produce some metals at lower cost. For example, their operations in South Africa provide access to relatively high grade deposits, which they claim to produce at a low cost per ounce compared to other mines. The company is also focusing more and more on recycling, a trend which will probably increase margins over time. However, it is unlikely these will act as a permanent competitive advantage, since new technology can always reduce those costs.

  • Size advantage (2/5): It’s a large company in its industry, allowing it to have a large economies of scale. However, since the company doesn’t produce anything that is differentiated (metals), a price war will easily destroy these advantages over the competition.

    Justification for Rating: The company has a limited moat since it does have some geographical and cost advantages, which help it in profitability and to some extent in preventing competition. However, there is little that would prevent any other player from entering the market if they can find a cheaper place to mine for the same metals. The company does have efforts in sustainability and recycling, a trend that many other companies have not been keeping up with, but is also not enough to be a durable competitive advantage since other companies can simply implement similar strategies.

Risks to the Moat and Business Resilience

Key Concept: It’s essential to identify the risks that can erode a moat and also see how well a company will perform during times of difficulty.

Legitimate Risks:

  • Commodity Price Volatility: As mentioned, the value of this company depends heavily on the prices of metals, as it is a commodity-based business. These prices are prone to large and unpredictable fluctuations based on demand and supply. In times when prices decrease, the company’s margins can be severely affected.
  • Operational Risks: Mining operations are complex and can encounter many issues, including geological uncertainty, production problems, accidents, and labor unrest. Any issues that reduce production volume can cause significant losses to the company.
  • Regulatory and Legal Risks: Changes in environmental regulations, labor laws, tax policies, or the countries’ legal system can significantly affect the company’s operations and profits, and could increase the amount of uncertainty around its future performance.
  • Geopolitical Risks: The company has a lot of its mining operations in countries that have political and social issues, making the company vulnerable to conflicts, instability, and changes in government policies.
  • Competition: While there are not many large players in the industry, many small companies operate within this space, and there is the constant threat of smaller companies taking market share due to better practices or lower operating expenses. A sudden discovery of a cheap and easy to reach deposit of their product could make their assets less valuable.
  • Macroeconomics risks: High inflation will increase input costs (such as energy, labor, etc..) and make debt harder to service. High interest rates will also directly impact operations since it’s a highly leveraged industry.

Business Resilience:

  • The company’s resilience during hard times is somewhat debatable. While companies with strong brands or large amounts of retained earnings can easily bounce back from difficult situations, Sibanye’s lack of pricing power due to its commodity based product makes its future uncertain.
  • The company has high liquidity in terms of assets, but low liquidity in terms of cash holdings. As such, it can be difficult to take advantage of opportunistic investments when the time arises.
  • Companies with moats can usually rely on them to maintain profitability when other companies are having problems, Sibanye, which lacks a significant moat, has less of a safety net, and makes their business much more vulnerable to any shifts.

Understandability

Understandability Rating: 4 / 5

  • The basics of the business are quite easy to understand (it mines metals), but the complexity arises with the sheer scale and geographic distribution of the business.
  • The financial statements tend to be quite complex, and require a high degree of knowledge to fully understand.
  • The influence of many macroeconomic forces, especially around the prices of its products makes it harder to predict, understand and evaluate the business.

Balance Sheet Health

Balance Sheet Health: 3 / 5

  • The business has significant assets in mines and equipment.
  • However, it also has a lot of liabilities on its books in the form of long and short-term debt.
  • The company’s equity is negative, but the company has been focusing on decreasing debt.
  • The company has high operational costs which can greatly affect profitability if prices of the metals it produces fall.
  • Overall, the company’s balance sheet is showing signs of weakness and is slightly risky.

Recent Concerns and Management’s Take

  • Share Price Decline: The share price has declined considerably in the last few years due to poor performance and the volatile nature of the commodities markets.
  • Operational Problems: The company has had several issues around power outages, equipment malfunction and floods.
  • Increased Debt: Debt is rising and may add on to financial risk if commodity prices drop and the company has a hard time to cover it.
  • Management Stance: The management has been trying to focus on fixing operational inefficiencies, lowering debt, and improving margins by focusing on high-margin production. They are also investing in future growth by trying to grow their business outside of Africa.