Sibanye Stillwater: Buying Into The Dip (NYSE:SBSW)

Sibanye Stillwater Limited‘s (SBSW) stock has lost nearly 20% of its market value in the past month, underperforming the broader basic materials sector by a staggering amount. Although the firm has not released an updated production report since our previous coverage of SBSW stock, we have consolidated a few interim influencing variables, which could add value to investors’ analysis of the asset.

Furthermore, our absolute valuation and market-based analysis of Sibanye exhibits noteworthy results, leading us to believe that Sibanye Stillwater’s stock is a “buy the dip” opportunity.

Let us traverse into a more detailed discussion about Sibanye and its stock.

Operational Update

Keliber & Potential Projects Considered

Sibanye Stillwater’s lithium endeavors are garnering momentum via its Keliber project. The company recently had an environmental license approved, allowing it to its development of Rapasaari mine and Päiväneva concentrator.

A recent statement by the company’s CEO, Neal Froneman, read:

“We are pleased to have received this key environmental permit soon after being granted approval for the Keliber lithium refinery in Kokkola, which is preparing for the construction phase to start within the following weeks. Our aim is to advance the project within schedule while ensuring our environmental impact is as low as possible while we follow the required processes to ensure all permitting conditions are reasonable, unambiguous, and will be practical to implement and adhere to.”

The market participants could soon price Sibanye’s Keliber progress. Once operational, Keliber will form a small part of Sibanye’s revenue mix. Nevertheless, it provides a leading indicator of the company’s prospective corporate strategy, which is aligned with servicing the renewable metals space.

Furthermore, Sibanye Stillwater has plans to acquire Mopani Copper Mines in Zambia. Sibanye has long been in the market for copper assets, and Mopani is seen as a replacement for its failed deal with Appian Capital Advisory, which saw Sibanye miss out on securing two valuable copper mines in South America.

Although a bid has not been confirmed, Sibanye has openly stated its desire to acquire Mopani Copper Mines. Glencore (OTCPK:GLCNF) sold Mopani to Zambian state-owned investment fund ZCCM approximately two years ago, and in a drastic turn of events, ZCCM is looking to offload the project. If Sibanye were to secure an acquisition, it would provide it with access to the second-largest copper producer in Africa, which might lend the company significant synergies.

Decoupling from SA PGM

As explained in our recent article about Anglo American Platinum (OTCPK:ANGPY), South Africa is experiencing significant structural issues, which are limiting local PGM (platinum group metals) miners’ ability to scale production. However, as also mentioned in the article, South Africa has a stronghold over global PGM production, which means that systemic concerns will likely be offset by higher material prices. In addition, the pandemic reopening in China and improved economic outlooks in the Eurozone and the United States will probably result in higher overall demand for platinum group metals.

Sibanye Stillwater is fortunate enough to bypass some of the structural concerns embedded in the modern South African economy by mining nearly a third of its platinum group metals in the United States. We believe investors seeking exposure to PGM miners might divest some of their capital from South African pure-plays and invest a portion of their capital in miners with a global footprint.

Market-Based Catalysts for Change

Even though Sibanye is an emerging market company, its American Depository Receipts are inextricably linked to the U.S. stock market’s beta. As displayed by the market’s year-to-date returns, investors have re-engaged with risky assets.

Although the sustainability of the market’s year-to-date surge remains questionable, high beta stocks such as Sibanye Stillwater might discover momentum if investors’ risk attribution continues to contrast with the zeitgeist experienced in 2022.

Furthermore, Sibanye’s stock is trading below its long and short-term moving averages. The asset’s month-over-month slump was primarily driven by systemic risk relating to South Africa’s energy crisis. However, mean reversion is highly possible as investors tend to overreact to bad news.

Valuation

At a cyclical price-to-book discount of more than 92% and a P/E ratio of merely 5.66x, it is easy to conclude that Sibanye’s stock is undervalued. However, a deeper look is necessary to consolidate any claims.

Absolute Valuation – Model Output

We used a single-stage free cash flow to equity valuation model to value the stock. According to our model, Sibanye Stillwater possesses a fair value of $15.05 per share, which is significantly lower than the firm’s current stock price of approximately $10 per unit.

Model Inputs

The link provided in the previous section explains the model’s design, and variables such as net income, net borrowings, and shares outstanding were extracted from the company’s financial statements. However, to assist our computational framework, features like change in working capital, capital expenditures, and the CAPM were extracted from YCharts. Lastly, a sustainable growth rate was computed by multiplying the company’s cash dividend retention ratio (1-payout ratio) by its average ROE.

The single-stage free cash flow to equity valuation method does not provide 100% certainty that the stock is undervalued. However, it is a well-respected indicator.

Dividend Analysis

Sibanye Stillwater has provided a solid dividend yield on cost in the past few years, partially stimulated by multiyear high PGM prices. Moreover, the firm’s acquisition of Lonmin sent its operating cash flow into stardom, allowing for substantial dividend pay-outs.

Sibanye’s current dividend yield of 8.29% illustrates its existing dividend-paying capacity. Investors need to remember that the company recently suffered below-par results due to unfortunate events such as the flooding of its PGM operations in the U.S. and wage strikes from its South African employees. Thus, it is likely that we could see higher dividends from Sibanye in the coming quarters amid an operational recovery.

Primary Risks

Our regular readers must be getting tired of hearing us speak of South Africa’s energy crisis and infrastructure decay. However, I need to reiterate the risks today, as many of our new readers might be unaware of the situation.

South Africa’s state-owned energy producer, Eskom, is in tatters after years of corruption and mismanagement has finally sent the company into the abyss. Most South Africans have access to electricity for merely two-thirds of the day, which is a serious concern to the miners as it is difficult to ramp up operations (especially midstream operations) when energy delays are present.

Contrary to what the newspapers might lead you to believe, Eskom’s scenario will probably not get better, and self-generation is the most likely pathway ahead. Self-generation will take time to implement, and Eskom’s constant decay is a severe headwind to Sibanye and its PGM peers. As such, systemic risk could get the better of Sibanye’s stock, resulting in an investors flight to safety.

Final Word

In our opinion, Sibanye Stillwater Limited’s latest drawdown presents a lucrative “buy the dip” opportunity. Although the company is faced with continued systemic risks in South Africa, it has signaled its intent to expand abroad, which the market could interpret favorably.

Furthermore, Sibanye Stillwater Limited’s stock is significantly undervalued on a free cash flow to equity basis, and technical indicators could coalesce to send the stock surging.

• With a tactical play in mind, we assign a buy rating with a three-month horizon.