We respect Neal Froneman and we respect his bold bets. His strategy is not a complex one: buy countercyclically. The Rustenburg, Acquarius and Stillwater deals were good ones, and well-timed. The proposed acquisition of Lonmin is pushing the envelope, but we agree it is a special situation of which Froneman must take advantage.
We are long-time platinum traders and investors and many of the mines flying under Sibanye-Stillwater’s flag have a special place in our hearts. A new era is dawning for platinum mining in South Africa: the industry is graduating to UG2 ore. Consequently, upon sealing the Lonmin deal, Sibanye-Stillwater will need to act decisively in order to transform operations from ones fraught with incalculable risk, to ones that redefine safety in the sector.
Firstly, Froneman needs to commit to swift change at Lonmin’s Marikana, phasing out the following Generation 1 Shafts: Hossy, Newman, Pandora E3 Joint Venture and W1, East 1 and East 2. K4 needs to be closed permanently. Generation 2 Shafts — K3, Rowland, 4B and Saffy — need to be nurtured.
We would like to see Impala Platinum buy out Sibanye’s 50% interest in Mimosa. JV or no JV, we think Wedza Shaft should be placed on care and maintenance and all energy devoted to further development of Mtshingwe Shaft.
We also think there is a case to be made for placing Driefontein on care and maintenance, while concentrating on yield and safety at the Beatrix and Kloof gold operations.
We think Altar, an exploration-stage project in the Andes, should be spun out to shareholders immediately.
On the Valuation of Sibanye-Stillwater
We value things conservatively at Fahy Capital Management and Sibanye-Stillwater is no exception. Its resource base is large, but we believe only a fraction of it is economical at any price and that is the portion we value. Also, we don’t incorporate prospective additions to reserves from the proposed Lonmin acquisition into our calculations.
Resources Subject to Valuation
PGM = 44,261,000 oz
Au = 30,971,000 oz
Results
We believe Sibanye-Stillwater is trading at a 46% discount from intrinsic value. In a word, on any day that Sibanye-Stillwater trades below US $5.14, it is a bargain. But what about tomorrow? What kind of return can one expect at higher Au and Pt prices? We believe that a return of ~200% is probable in an environment that is not hostile to Au and Pt. Our own long-term target for Sibanye-Stillwater at much higher Au and Pt prices is US $8.50.
