Sibanye Stillwater Limited (NYSE:SBSW) Q2 2022 Earnings Conference Call August 25, 2022 6:00 AM ET
Company Participants
Neal Froneman – Chief Executive Officer & Executive Director
Richard Stewart – Chief Operating Officer
Charles Carter – Chief Regional Officer, Americas
Grant Stuart – Head, Recycling
Charl Keyter – Chief Financial Officer
James Wellsted – Senior Vice President, Investor Relations
Robert Niekerk – Chief Technical Officer
Conference Call Participants
Patrick Mann – Bank of America
Leroy Mnguni – HSBC
Adrian Hammond – SBG Securities
Neal Froneman
Good morning, ladies and gentlemen, and welcome to our H1 2022 Presentation. We have defined this period as a challenging period and I think as we go through the presentation you will see why. Obviously, there are forward-looking statements, so please take note of our Safe Harbor statement.
If I can then move on to the agenda, as always, we will start with safety and ESG, I’ll cover that. I would like to do a recap on our strategic positioning, combined with a complex global backdrop, we did introduce you to our gray elephants at our year-end results in February of this year and I think it’s a good time just to recap.
I will then hand over to the two Chief Regional Offices being Richard and Charles Carter, Richard Stewart and Charles Carter, Richard will cover the South African region. Charles will cover the US region and our new Head of Recycling, Grant Stuart will cover the Recycling segment.
Grant will hand over to Charl Keyter, our Chief Financial Officer; and Charl will cover the financial results. And then I’ll conclude with a brief conclusion. So, please sit back, enjoy, and relax if you can.
As I said, health and safety and ESG are our primary focus areas. They are our first, second, and third priorities. Our focus on the faecal elimination strategy is an imperative for 2022. We had a shocking 2021. I’m pleased to say we’ve made really good progress post all the sharp stoppages that we introduced ourselves towards the end of last year, and some of them even went in to the beginning of this year.
We brought in an independent safety expert to review our safety strategy. I’m very pleased to say that he ratified our safety strategy as consistent with global industry standards, and of course, we were quite relieved with that.
What we did find, though, is that perhaps the ownership of that strategy was not owned throughout the organization and certainly at some of the lower levels, we need to institutionalize and get ownership of our strategy and our safety commitments and we worked very hard on that and we have achieved some good results and have made good progress.
Of course, you will not probably safety unless you make a real risk reduction initiatives an imperative and we have had real risk reduction in our company and that we’ve achieved through critical controls. We call it our critical life-saving behaviors and critical management routines. And those are non-negotiable issues in our company.
So, let’s have a look at what we’ve achieved. So we’ve certainly maintained the improving safety trends that we were achieving towards the end of 2021. Unfortunately, we have lost two of our colleagues in both in accidents that certainly are accidents, you would find very unusual.
The one is we had a driver jump from a moving train due to a flash and electrical flash and then we had a very unfortunate surface rail accident regarding a hopper door in February. So that’s very disappointing. But very pleasing, we had zero fatal accidents in 2022.
And if you look at the direction or the trends of our injuries — on our fatal injury frequency rate and of the TRIFR, that’s all heading in the right direction. And we can see it on the ground as well. So I have a lot of confidence that this will be a much better year from a safety perspective.
If we just talk a little bit about ESG and there are many things to talk about when you talk ESG, but I thought it was appropriate and timely just to talk about what we call our Marikana renewal. It’s a tragic legacy that we have taken on. I don’t even want to use the word inherited. We have taken it on based on the acquisition of Lonmin. And last week, we had the 10th anniversary of that tragedy.
In 2020, we introduced what we call the renewal process, and it has three pillars on a Engage and Create. And we’ve made good progress with this.
First of all, we made commitments to all with us and families. And you may remember that initially there only 34 widows recognized before we became involved there, in fact, they were 44. There were people that lost their lives very tragically even before the actual Marikana tragedy.
Through the Sixteen-Eight Memorial Trust, we’ve educated the children of those with us. I’m not going to go through it in detail. It is set out very clearly in the table on the right-hand side. Very pleasing, we’ve had our first PhD come through that system. And I’m very pleased to say, we’ve employed that person, so Mandla now works with us.
This is a long journey, and it requires stakeholder collaboration. All stakeholders are invited to participate, but I can assure you those that are not going to slow us down. We’ve got good momentum.
The key stakeholders are working with us. The widows are working with us. It’s a journey of renewal and hope, it does require trust building between stakeholders. Our commitment to co-create the future for Marikana is sincere, but change will not happen overnight. So I would urge you not to look for big changes every year. This is a long, long journey.
The Letsema process is fostering regular and open engagement, if you want to understand more about that process, we have put a link at the bottom of the slide, where you can go and actually have a look at what it includes.
We have finally got all the families together and established the task team to deal with the legacy issues, including the memorial. And there was no point in us erecting a Memorial at that suited one stakeholder, the people that require closer those with us. They are the important beneficiaries of a memorial. And we now have alignment and we have a process further forward.
And I hope that in a year’s time, we will be able to show you absolute progress on site may not be complete because it’s going to be a substantial memorial. There’s one area of confusion that I do want to just clear up. We are — we have taken on the obligations of what we call SLP II. This was approved by the Competition Commission. And of course, we’ve got our own new SLP III, but we did not take on any obligations prior to SLP II. So we have no obligations on the SLP I. And there’s lots of confusion around that, and I really just wanted to clear that up.
So looking at strategy now, I want to just refresh your memory. And based on the Grey Elephants, which I’m going to come to after the slide, we developed what we call our 3-dimensional strategy, which is designed to harness opportunities and manage in this very complex environment. This very complex backdrop and I’m going to cover the backdrop and how it’s changed from 2021 to 2022.
Our strategic foundation is essentially the same foundation we’ve had. There’s been some minor revisions to wording, we’ve included one additional value to our case values. We now talk about eye case [ph], we’ve introduced innovation. We think it’s an important cross-cutting value that is required to achieve the strategic differentiators.
What has made us successful up until now is really encompassed in the foundation and in strategic essentials. And they are not things that we are going to forget. They are absolutely essential. So I would even suggest that the second half of this year, there will be much more focused on those essentials to ensure we deliver on our plans and achieve operating excellence.
The strategic differentiators continue to be worked on. We continue to set our processes to do the due diligence on various issues so that we can deliver on our strategic differentiators. But just to remind you what they are being recognized as a force for good, and that is part of our vision.
Building a unique portfolio of green metals, that’s PGM battery metals and others and being involved in energy solutions that reverse climate change that in itself feeds into being recognized as a forceful good.
Out of some of the Grey Elephants, which, again, I will cover shortly, we developed the differentiator of being inclusive, diverse and mining. And I honestly believe that diversity and inclusion and using technology in the right way will leave progress ahead of our competition.
And then of course, pandemics and being resilient to them. COVID was the first of many to come and pandemics are not just viral pandemic, the Russian invasion of the Ukraine is in our language a pandemic. So that’s the three dimensional strategy that we introduced to you at the beginning of the year, and it’s the strategy that we continue to build our company on.
So let’s now move on to the gray elephants. And a gray elephant is a highly probable and high-impact factor that will transform the 2020s. And we went through these in some detail, and there’s eight of them. Pandemics, I’ve already referred to the pandemic and from a viral point of view, we can expect more COVIDs, in fact, the World Health Organization has predicted another three pandemics this decade. But in our language, pandemics is also highly disruptive event such as the invasion of the Ukraine. The gray elephant of aging. The world is getting older. People are older. By 2030, there will be more older people than young people below the age of mine. Those are very important issues to be cognizant of in terms of ensuring that you have future-ready leaders and a workforce that can — that is going to be older.
And the Angry Planet is well understood, probably all the gray elephants, climate change, the need to deal with achieve carbon neutrality decarbonization. It’s a real challenge, but it’s a real opportunity as well. Inequality is well understood. In fact, 9 out of 10 people of the most unequal people in the world are in Africa, and we operate extensively in Africa. And therefore, we have to be very cognizant of that. The events of July last year is a very good example of inequality coming to the fall. But it’s not just an African issue. It’s an issue — it’s an international issue.
Big squeezes, they started to appear in COVID with supply chain disruptions. They continue to manifest themselves through the invasion of the Ukraine in terms of energy shortages and other disruptions to the supply chains that we are dependent on. It’s an ongoing issue. And in fact, our strategy to become part of the ecosystems in Europe and North America is designed to get around some of those issues. Every gray elephants here has an outcome that results in angry people. And again, if I refer to the outcomes or the riots in July that we experienced in South Africa, that’s angry people. And if you don’t take cognizance of it might say that you’re going to have a very volatile operating environment.
Multipolarity is another area that we have seen, we could not predict the invasion of the Ukraine by Russia. But we could predict due to what we saw in COVID that globalization was going to unravel. It’s actually accelerated, because of that particular pandemic that invasion of the Ukraine. We’ve seen the east and the west aligning, with Western allies and Eastern allies.
The world has recognized that 90% of what’s required for antibiotics, comes out of China. The US has really recently introduced legislation to make them less dependent on the battery aspects of China and so on. Again, our positioning in Europe and North America has really become quite successful, because of our identification of this de-globalization issue.
And then, of course, artificial intelligence, you would remember me describing how the industrial revolutions have been hard on people and how the Fifth Industrial Revolution needs to be very different. It needs to consider people, that needs to make it easier for people, and not be hard on people, and how we have therefore from that developed the strategic essential to be inclusive, diverse and manic, and in fact, one of the first steps in that is becoming more digital in the way we work. So that’s the backdrop. And a lot of that backdrop is playing out and providing us with opportunities, because we are be prepared for that.
So let’s have a look at the next slide, which shows us how this environment, which we think is similar has changed between 2021 and 2022. And I’m not going to go through all the detail on this slide. But in 2021, we were just coming out of COVID. There was widespread economic stimulus to address the COVID distress. There were shuttering recovery in automotive production, because of the supply chain issues and different lockdowns across the globe, which of course, I just want to again say, has changed the view of many companies to regionalize their supply chains and we’ve positioned ourselves in those regions. There was the increased commitment to global de-carbonization, and the environment we found ourselves in was one that was partially in inflationary, but low interest rates to some extent, Europe was in a worse position than the US, but we could just start seeing a bit of inflation.
And then in 2022, early in 2022, we had Russia invading the Ukraine. And that really accelerated the inflationary issues. And of course, with Central Banks now moving to deal with inflation and rising interest rates where you had Europe already in a weak economic position. That has basically pushed Europe into a recession. And in fact, we are starting to see the same things happening in the US. So, where we had a pent-up demand in 2021, the spending power of consumers has changed dramatically in 2022. And again, instead of having chip shortages, we now have other supply chain issues such as wiring harnesses that were manufactured in the Ukraine affecting the nuance side of our business.
The acceleration to carbon neutrality has increased. And again, we are well positioned having restructured and repositioned our business to focus on green metals being battery metals, PGMs and so on. So a very different environment in 2022 compared to 2021. So let’s move on with that as background. So, as you’ve heard me say a few times now, the fact that we moved very early to position ourselves in regional supply chains rather than global supply chains has put the company in a very good position.
We have realized pandemic more than just COVID-19, and there’s going to be many more of that. The regional supply chains is really the multipolarity, and of course, the big squeezes, we want to be part of the solution in terms of what we produce. So, we are well-positioned.
I just want to really highlight one other thing. The multipolarity you now see playing out in the recently released US Inflation Reduction Act. And that’s good for us those companies that are positioned in the US. Our view is that it will slow battery electric vehicle penetration in the US, but it’s positive for us, but good for battery electric vehicles in the long run.
So that is just one aspect I wanted to cover. And the next one is our positioning in Europe. So we have moved to secure our position in Keliber. Keliber is a wonderful project. It’s an advanced lithium hydroxide project in Finland. It will produce some of the greenest lithium. And not only that, it’s close to the end user market. So, when you look at total carbon footprint, this is going to be the greenest lithium in Europe, and we will get a premium for it. And it underpins our need to reduce carbon footprint.
But the investment to date and the funding is set out in the bullet points below that heading. We do anticipate owning a little bit more than 80% and Keliber will effectively be fully funded through our equity investment and growth and an equally sized debt facility. And in our view, that gives us the most opportunity to take advantage of future lithium prices without having to contract into current structures.
The detailed feasibility study, the increase in ore reserves confirms the quality of this project, our entry point has been achieved at about 30% of net asset value at conservative lithium prices. So this is very, very accretive and will be a real underpin to our battery metals initiatives.
We do like what we see in terms of battery metal outlooks, and I’ll cover that in the next slide. But of course, the permits are also progressing nicely. So let’s just pick up on battery metals and the continued strong EV demand pool. Now, I have been the first one to say that penetration rates in my view are hugely overstated in many cases.
Having said that, I do believe that this is still going to be a very significant segment of the market and some interesting developments are coming to the fore. So, despite the impact of supply chain issues on internal combustion engines and high battery metal prices, battery electric vehicle sales in H1 of 2022 were up 75% year-on-year.
In contrast, Other sales are down just under 1% over the same period. So this is real outperformance. And I think if I said there is a group that pulls the inroads that battery electric vehicles are going to make. I’m not in the camp where there’s going to be huge penetration, but there is going to be very significant penetration and I think, quite significant outperformance.
The other thing that is becoming apparent is that that growth in — or that year-on-year growth shows that, to some extent, it’s an elastic to battery commodity prices, which are on stage. I don’t intend to go through the rest of the slide in detail. Just to say, I’m happy that we’re in this space. It doesn’t mean we’ve lost faith in PGMs at all. We’ve always been strong proponents of the internal combustion engine, but you can see some really significant companies like you’re now starting to invest in the upstream areas of the business. So, good for our business and I think, there’s good long-term prospects from this part of the market.
So let me just as a lead in to the operational update. Let me just talk you through this salient features. So — we — despite the challenges of underperformance on volume in South African PGMs, the floods in Montana, the industrial action in our gold business, we still delivered a solid financial performance. It’s our third highest attributable profit of R12.3 billion. So that’s not a bad result. Of course, it could have been better. Our net cash position was maintained. And if you look at our ratios, our debt ratios, we are on a 0.16 times net cash to adjusted EBITDA. So, that we have maintained and again, pleasing considering the challenges.
Our commitment to dividends is unchanged. We calculated the interim dividend at 35% of normalized earnings. And that’s at the top end of our dividend policy that amounts to R1.38 per share or US$32.46 per ADR. It’s a significant amount of money, at R3.9 billion, and its equivalent to a 7% annualized yield, very decent.
Looking at some other salient features, we held the line, we held our ground. We do not give in to unreasonable demands, and we achieved an inflationary three-year settlement. Unfortunately, that was with a lot of industrial action. But Richard will give you some of the other wins that have come out of that. And, hopefully, we don’t have to go through this industrial action every time. There’s wage negotiations.
Our lockout, which was unpopular with the unions, served its purpose, in that, there was no inter-union violence. There was no platform for that to take place. It came at a cost, but you cannot put cost to a person’s life. And if we have to do the same thing again, we will.
In terms of the South African PGMs, I’ve already alluded to the fact that there was some volume underperformance, which makes achievement of good costs even that much more difficult. And as one of the standouts of this business, especially compared to peers who continue to show well in excess of 7%, 8% increasing cost.
This segment has shown very small increases in all-in sustaining costs, and I have no doubt with higher volumes that, that will even come down. And we will position all of our businesses towards the lower quartile in the PGM segment.
The US was severely impacted by the flood. We presented that a few weeks back. We are looking through the palladium commodity cycle, and we’ve reengineered a very different plan, much lower cost structure, which will ensure the margins of this business when you look through the commodity cycle. So Charles will not spend a lot of time on the change in that plan, that we’ll provide an update.
I’ve already covered, as I say, as a very important positioning in Europe, the company extended its ownership of Keliber and I think in a very value-accretive way. And then, of course, Sandouville is being integrated. And we like what we see at Sandouville.
There’re still some challenges. We’ve got to up the volume, but that was all factored into our due diligence, the feasibility studies in terms of the production of nickel sulfate as opposed to other nickel products as a battery metal precursors currently taking place. And we are also progressing, our PGM recycling facility at that site with a view to capturing a significant part of the European recycling market.
So with that, those are the salient features. I will now hand over to Richard Stewart, to cover the South African regions. Thank you. Go ahead, Richard.
Richard Stewart
Thank you very much, Neal, and good morning, ladies and gentlemen. I think in terms of the Southern African region’s operating update, the first half of the year was really characterized by the industrial action we experienced on our gold operations that commenced in March of the first quarter. And really, we only got back to production in July, started production again in July.
In addition to that, we undertook remediation at our Beatrix tailings storage facility that commenced in December. And as a result, Beatrix did not have any production output for the first half of this year.
As a result of those two things combined, production was significantly lower year-on-year than compared to the comparative period at just over 190,000 ounces for the first half. On this DRDGOLD it was not impacted by the industrial actions, contributed to just over 91,000 ounces of that total output.
I think with production having commenced again in July, we certainly are looking forward to a significant improvement in the second half of the year, where we are forecasting in the region of 350,000 ounces from our operations, excluding DRDGOLD with the ramp-up post the strike period.
I think it would be good just to touch a little bit on the wage negotiations. As you know, industrial action commenced on the 9th of March and that was after 10 months of extensive negotiations, many of which were facilitated by the CCMA.
I think at the same time, as the strike issue was notified. We exercised our right to implement a lockout of employees, and they were likely do two reasons for doing this. The first one was, of course, to exercise our right to manage our cost in our business during the industrial action, but also to limit or to provide safety to employees in an attempt to limit the violence and intimidation which was a significant aspect of the previous industrial action we experienced in 2018. I dare say this was successful, with very little levels of violence or intimidation experience.
Also I think credit needs to go to our management teams to implement their strike plans and very proactively manage the overhead costs of the gold business, which significantly reduced the financial impact during this period. After two months into the strike, we specifically requested the assistance of the CCMA, through a formal Section 150 remediation process.
I think we have to give full credit to the CCMA, who under a lot of political and public pressure, ran a very independent process with a lot of integrity and that resulted in an outcome of a three-year wage agreement that was largely in line with inflation at 6.3% average increase per annum over the three years.
I think in addition to settling wages at in line with inflation increase, some other notable outcomes that we managed to achieve was a wage averaging agreement. This is really a legacy item, particularly in the gold industry that has been in dispute for several years, and we were finally able to conclude that with organized labor.
In addition, there’s a full and final settlement, so it does provide three years of stability to these operations, and we were able to reclaim some debt by employees that was incurred during the strike, which we agreed to partially offset through an ex-gratia payment that was part of the ultimate settlement.
I think it’s important to recognize though that why we undertook this was really to be consistent not only with our values. This was very necessary to protect the long-term sustainability of our operations. And I dare say this is an approach that is required by the entire industry to protect our sustainability and competitiveness going forward.
Moving forward, wage negotiations and wage increases have to be linked to inflation. Without doing this, we will negatively impact all stakeholders in the long-term, and that includes our employees. I think the other important aspect is we were able to firmly get on to the table, the discussion around a more variable linked wage package aligning all stakeholders, and I’ll touch on that.
But I truly hope that out of this action, there has been some learnings by all stakeholders that we can use going forward to more constructive and sustainable wage negotiations in the future. When we look at our wages, I think we ask ourselves three questions. The first question that is critical is, are our wages fair? Looking at this graph that goes back to 2013, which is when Sibanye Stillwater started, and when we look at that over the last eight to nine years up to 2021, what we can see is that our entry-level employees have seen wages increase by about 84% over the period. Over the same time, inflation has gone up about 46%. So what this really means is entry-level employees have seen a real wage increase in the region of 40%. And we recognize that this was very necessary in order to make those wages fair and to create parity with those — with entry-level employees.
But the second question we have to ask ourselves is going forward, are our increases linked to inflation? And this is a critical question, because if our wages are fair, and we did a lot of benchmarking against not only other industries, but our own industry, if our wages are fair and we continue with the trend that we are currently seeing, all we are doing when we have a cost base that’s a 50% to 60% comprising of salaries and wages. All we are doing is significantly eating into our margins. And through cycles, this will impact the sustainability of our operations; it will also make us less globally competitive and ultimately be to the detriment of all stakeholders.
I think when we’re sitting in an environment like we’re sitting in now, where there are inflationary pressures across the board, again, continuing to pay above inflation increases, simply perpetuate those inflationary pressures and results in them last longer than they should. And that is not in the national interest or anybody’s interest. So ultimately, moving forward, we have to align these to inflation if we want to remain sustainable and competitive as a company and as an industry.
The third question that we ask ourselves then is how does our wage increase impact on the overall sustainability of the operations? And of course, that is a question around the margins and the profitability of those operations, not just today, but through mining cycles. And this is where the introduction of a variable wage component becomes so critical, because it truly does align all stakeholders, all of us, including employees benefit during the up cycles and all type of belts during the down cycles to ensure that we can be sustainable for the inevitable upcycle game. This is a conversation that needs to be progressed within our operations and again, as they say, across the industry as a whole.
Moving on to our PGM operations. The first half of this year saw an 8% reduction relative to the comparison period of last year. The portion of that reduction was planned and expected, particularly at our Kroondal operations where we do have some shafts that are winding down and in fact, due for closure later this year and early next year.
Other challenges that we faced on production was we did have some technical issues. We’re mining through a significant cost structure at Bathopele and some seismicity at our deeper conventional operations. Other than that, I think many of the challenges common to our industry peers, including power disruptions, community disruptions and of course, extensive cable theft, which has become a real challenge over the last few months, and one we are certainly getting to grips with.
Despite this reduction in output, however, I think it’s extremely pleasing that we managed to maintain our costs. Our total unit costs with the lower production output increased by 7%, which is largely in line with inflation, but significantly below mining inflation, which is closer to 12% for the year-to-date. Those two combined, we have an EBITDA of just over R21 billion, which is still despite reduced PGM prices, the second highest EBITDA that we have achieved from these operations.
Very pleasing is our K4 project has also progressed according to plan. And we wasted our first tonnes in May from that project with significant underground and on redevelopment currently taking place. Our wage negotiations at Rustenburg and Marikana commenced at the beginning of this month, and we continue to engage with organized labor.
Finally, we also paid a significant payment of the 35% cash flows from Rustenburg to Anglo Platinum, which is in line with the original acquisition agreement. And that last payment is due to conclude this year and we certainly look forward to those additional cash flows reported to Rustenburg from next year onwards.
I think the continued focus on costs has been very pleasing. When we acquired Rustenburg and Marikana, these operations that sat at the top end of the cost curve squarely within the fourth quartile and the sustained focus on these costs and the benefits that we’ve seen from integrating these assets into the broader Sibanye Stillwater Group has meant that they have now comfortably moved down into the third quartile and certainly, we are on track to ultimately get them in the second quartile, which was always our original objective.
I think Kroondal remains comfortable at the bottom end of the cost curve as does Mimosa, but a very pleasing output during some very challenging operational times.
In terms of the PGM market outlook, it’s been a volatile first half to the year, I think, both from a supply and from a demand perspective. On the supply side, we’ve obviously had the Ukraine, Russian conflict, which I think put several shocks into the system. But as you’ve seen of late, has probably had a very limited impact on total Russian supply finding its way into global supply chains.
I think probably more important is that due to the sanctions in Russia, we are seeing a limitation and unavailability of capital equipment within the country. And we certainly think that could result in a constrained certainly in growth and possible production out of Russia in the medium-term.
I think we’ve also had extensive engagements and with the market in the last couple of weeks at our US PGM operations. There, we’ve seen a supply disruption due to the flooding events that we experienced a few months ago. And also, we are repositioning that asset in line with our outlook for the market, which will have another impact, PGM ounces on an annual basis on supply going forward.
In South Africa, several disruptions to supply, including wage negotiation and power –wage negotiations and power constraints. And then on the secondary supply side, we also expect that to be lower by about 10% over the course of this year, largely driven by two reasons. We are seeing fewer cars being scrapped. A lot of that, again, have to do with inflationary pressures, as well as significant logistics constraints in that secondary supply chain, which remained.
On the demand side, we have seen a revision down of the forecast for light duty vehicles, seeing demands down to — or forecast down to about 80 million units for this year. That’s just under a 10% reduction from original forecast, and that’s been driven by a myriad of factors.
Certainly, earlier in the year, the semiconductor chip shortages are still a big issue, although that does seem to be easing now, but wiring harness constraints that came out of Ukraine, lockdowns in China associated with COVID, and of course, the economic pressures in terms of inflation in car prices and availability at all-time highs.
Jewelry demand remains under pressure as well, particularly in China due to the continued current difficult macro conditions. So net-net, looking at it for the year, both the negative supply in both — or negative impact on both the supply and on the demand side.
How that impacts on our outlook, we still see 2022 a slight deficit in terms of palladium demand and a slight surplus on the platinum side. Important to highlight, this is before any potential investment demand on either of the metals. Rhodium we see being in balance. And as we move forward into next year, platinum being in a slight surplus and rhodium and palladium being more in balance.
In terms of our operational guidance for the year, I think there was extensive engagement, as I mentioned, on the US — on the new US PGM operations and the plans that they have put forward. So their guidance for this year is about 450,000 ounces and US recycling about $700,000 for the reasons I’ve mentioned.
Our PGM operation guidance remains the same. We are largely in line with that and comfortable that, that will — that remains the same for the balance of the year. And our gold operations, we are forecasting around 450,000 ounces for the year, excluding DRD, given the ramp-up in production we started seeing since July.
That does come as well with the reduction in our capital guidance down to R3.9 billion, of which about R1.1 billion will be on the Burnstone project and about R270 billion on the Kloof project.
Given the significant ramp up, it does negatively impact costs where for most of the third quarter, we will be incurring full costs, but still ramping up production and overall cost guidance in the region of about R1.4 million per kilogram.
Thank you very much, and I’ll now hand over to Charles for the U.S. region.
Charles Carter
Thank you, Richard, and good morning, everyone. You’ll be familiar by now with the impact of the flood event in Montana on the second quarter results. For those of you who did not see the specific presentation on that on August 11, you’ll find it on the company website. It’s very detailed, and I would encourage you to go there to give more context on the highlights that I’m going to cover now.
So the Montana flood event hit just at the end of the second week of June. So it really impacted the last two weeks of the quarter. While East Boulder and the met plant were largely unaffected, it was really the Stillwater mine that was taken out for seven weeks due to no access and river infrastructure that needed addressing on the mine site.
So the impact on the quarter is really 15,000 2E ounces, and for the half year has been estimated to be 60,000 2E ounces for 2022. At the detailed presentation on August 11, we went into the revised mine plan at length. And we also highlighted the fact that we’re dealing with significant current events, both macro and the US and specific to Montana and the operations.
And we looked at the mine plan also in the context of potential future price retracement in the context of a potential recession. And the market is well aware of the elevated inflation impacts we’re currently dealing with.
And then nationally in the states right now, all businesses are impacted by various skills shortages, mining specifically and in Montana reserve somewhat compounded by the nature of our operations, distance for travel, lack of housing, proximate to mine and so on. So we are dealing with a significant skill shortage at all operations right now and significant turnover.
And the plan is seeking to address that over the medium term with a big focus on recruitment, retention and training given that we are already seeing a younger workforce into these operations. But the impact of the skill shortage and then the over relied short term on contractors which is also impacting cost structures is something we’re looking to address in the medium-term plan.
And so the plan that we put forward on August 11 that over five years really gets these operations to start to deliver to their potential, opens upgrade operating flexibility, specifically at Stillwater Mine where we’ve got to push hard on the developed state, which is both primary and secondary development, everything impacting production readiness at each of the production stopes [ph] is going to take a bit of time because we’re building off a developed state that’s really four to six months currently. We want to get it to 12 to 18 months, more in line with the East Boulder operation.
And so that plan really starts to get us there over the next few years. Obviously, we have higher cost structures in the interim. And we have productivity that we’re working hard to improve. And both linked to the macro and economic environment is the specific ore body context that Wayne Robinson offered in detail at the August 11 presentation, which you can review on the website. And he spoke to the fact that at Stillwater Mine, we’re working through depression zone and a number of fault structures, which means minimal recoveries through the mining cycle that’s impacting, obviously, grades, and it’s impacting associated mining costs.
But as we get through that, we start to open up ore body flexibility and we start to open up good grades and good recoveries and that will have a knock-on effect to improve cost structures. And you’ll see in that presentation that we step up over the next several years, and we’re looking forward to that. Wherever possible, we’ll bring that forward. But it’s not a quick fix at Stillwater.
But what the presentation on August 11, also did in great detail, which Neal spoke through on the day was the fact that this has been a very good acquisition over the last five years since acquisition. It’s more than paid back the original investment cost. And you’ll see on the graph that the current NPV, which is done at reserve pricing $12.50 an ounce on Palladium and on Platinum gives us a significant return going forward. And I would argue that as we get this mine plant right and the deliveries right that NPV obviously, depending on price and other assumptions improves, so strategically, a very good move at a difficult time in the market on the day when they did it. But it’s a world-class ore body with good optionality going forward and Amos [ph] management is to start today like that.
So the payback is already in hand. And I think in the plan that we’ve put forward, although investors and analysts will be disappointed on short-term quick fixes. Over the three to five years, we really start to open that up and we start to get to a steady state of 700,000 or above 2 ounces, a very competitive cost structure below $1,000 an ounce and I think you have flexibility on that once you start to get there.
So for these results, significant flood impact now dealt with, and Stillwater is back in production and performing as we speak. We still have some access limitations to the mine site, but we’ve got temporary workarounds on, specifically the main access load, which is a county road. The county is working with FINA to try and address it, and we are in daily discussions on how to expedite that. But we have all three operations back performing right they should. And I think you’ll start to see that in the results going forward.
Thank you. With that, let me hand you over to Grant to talk to the recycling business. Thank you.
Grant Stuart
Thanks, Charles. And yes, let’s not forget those 700,000 ounces also not only coming at a good all-in sustaining cost, but also a good carbon footprint as well. But thank you, and good day to all of those listening in. The decline of the Fed recycled ounces by 10% when compared to the first half of 2021 was not only impacted by the flooding incident and reduced underground concentrate, but also due to the planned shutdowns and the collapsing scrap steel prices.
Scrap steel prices have declined by some 25% in US dollar terms in Europe, China and the US in the last three months, reducing the incentives to scrap vehicles. Despite the poor outlook, however, we have plans to secure operational sustainability by one, securing and growing our customer base received rates through proactive engagement strategic partnerships and smart contract management; and two, real margin accretion and increasing inventory turnover.
The drop in adjusted EBITDA for the second half of 2021 from $50 million to $39 million in the first half of this year, despite similar feed rates is largely due to price. In the second half of 2022, we sold a similar number of ounces at a quarter of the price per arm realized in the second half of 2021.
We also sit with a higher working capital balance of some $511 million at the end of June, largely due to a higher basket price with rhodium, the front runner. We are expecting a reduction in inventory and working capital when these ounces turn out in the coming months, especially with rhodium, which takes slightly longer. We should also see a lower balance following the lower quantities we are currently receiving.
Our recycled business is largely self-funded from internally generated cash flows, and so advances are funded from current cash holdings. The advances were secured in assay inventory on site, with predetermined settlement rates for the advances. Consequently, these funds are largely risk by an attractive very favorable interest yield.
Interest income from prepayments through the half was $10 million. One of the key market advantages in our existing – is our existing expertise in the recycling of PGMs and our longevity in the space. Our feeder network extends across the globe despite our North American connector bias. Our skill in smelting – in the smelting space, particularly when it comes to the smelting and carbon ridge catalysts is also a competitive advantage. And so we are progressing studies and test work to expand our recycling operations in Europe.
In addition, we plan to leverage our established relationships to enter new markets and close the loop on battery metal recycling and the hydrogen economy. The growth strategy supports our green metal focus. And with our recycled ounces coming in at less than 0.2 tonnes of carbon dioxide equivalent per ounce, some six and a half times less than the primary mount ounce, we stand in – stand to attract a real and marketable green premium.
With that, I’ll leave it there and hand over to Charl. Thanks.
Charl Keyter
Thank you, Grant, and good morning to all participants. We continue our disciplined capital allocation. Work on the Burnstone project and the K4 project is progressing well, with K4 hosting its first ore during half one 2022. The estimated capital expenditure on these two projects for 2022 is in line with plan at R2.1 billion. Our cash reserves at R27 billion exceeded our target of R20 billion, and supports our flexibility and optionality.
If we turn to stakeholder shared value, we have declared an interim dividend of R1.38 per share or R3.9 billion, which remains at the top end of our dividend policy. In terms of the 1.5% of equivalent dividend value for social upliftment projects, we are in the process of setting up the mechanism and the governance structures to manage these funds. We maintained our net cash at EBITDA at 0.16 times, and we remain in a robust financial position.
Three projects have been funded from the BioniCCubE. They are the investments in Verkor of €25 million, EnHywhere of €5 million, and Glint of $6 million. The ongoing disciplined capital allocation has resulted in a strengthened balance sheet, which was achieved through a combination of debt reduction and cash generation. This slide illustrates the evolution of our debt compared to EBITDA, which peaked a high of 2.6 times in half one 2018, and flipped over to a net cash position from half to 2020. A position, we have maintained for two years, despite significant returns to shareholders.
The graph on the right highlights the dividends paid to shareholders, since the resumption of dividends in half two 2019. And if we include the half one 2022 interim dividend that the Board has approved, this number is over R29 billion or approximately three times our market capitalization at listing in 2013.
Despite the operational challenges highlighted, we still managed to produce a solid set of results. If we start with the revenue, revenue is down 22% to R70 billion, compared to the same period in 2021. The main impact was the three-month industrial action at our SA gold operations, but also lower commodity prices across all our operations. Good cost control and cost containment during the industrial action has resulted in cost of sales being down 2% period-on-period. Amortization and depreciation was down R500 million, and this was in line with the lower production at both our SA gold and SA PGM operations.
Profit before royalties on tax was just under R19 billion. Royalties and taxes for the period were R6.6 billion compared to the R10.7 billion in half one 2021. Royalties and taxes were both lower due to lower overall profitability for the period. Profit for the period was R12.3 billion, the third highest profit for a half year, since inception and normalized earnings was R11.2 billion. This translated into earnings per share of R0.0426 per share.
Thank you, ladies and gentlemen. I will now hand you back to Neal to take us through the conclusion. Thank you, Neal.
Neal Froneman
Right. Thank you, Charl. And I really only have one slide left to conclude. So let’s have a look at that. The challenging H1 period is behind us. I’ve explained why it was challenging. And what we expect in the second half of the year is that both the South African gold and the US PGM production will normalize, certainly by the fourth quarter. The South African PGM business will continue moving down the cost curve and generating strong cash flow. And certainly, getting back to the right volumes will help that. So the operational outlook for the second half of 2022 is significantly better and we’re well positioned for that.
In terms of other positioning, our regionalized management structures are in place. They were a refinement of our previous structure and necessary to ensure that we have capacity for growth and of course, they will focus on the strategic essentials during this period. Our strong balance sheet provides resilience against an anticipated macroeconomic downturn. We have maintained discipline when it comes to capital allocation, as you’ve seen with the dividend declaration. But what we haven’t spoken about a lot today is we’ve been very deliberate and very patient regarding our approach to M&A. And you’ve probably heard me say a few times, in the public domain that we don’t see value yet in areas that we’re interested in. And we will sit on our hands until we can find value opportunities.
We’re well prepared for this very complex global backdrop and future Samaria’s, the global geopolitical and macro environment is very volatile and uncertain, but I think you should have confidence in our assessment of these issues based on the eight gray elephants that we discussed at the beginning of the presentation.
Our PGM business is very well placed for an extended internal combustion engine cycle. We’ve never been proponents of the demise of the internal combustion engine in the short-term. And of course, even if we’re wrong in terms of the internal combustion engine, you’ve got very significant demand underpin being built up from the hydrogen economy. So we remain confident in the long-term demand for PGMs.
In terms of the supply of critical metals into those chosen regional supply chains, which includes PGMs, by the way, but our battery metals positioning into really high quality projects, into high quality countries is actually turning out to position us well. And I can see very significant revenue generation in the not-too-distant future from these investments. On a macro scale, again, our diversification, both from a commodity and a geographical point of view has addressed risk and ensures a balance in our portfolio.
So with that, I would hand over to James, and we would be very happy to take your questions. Thank you, James.
Question-and-Answer Session
A – James Wellsted
Thanks, Neal. I’ll start with — there’s quite a few questions on the PGM wage negotiations. So I’ll ask all of them at once, if you don’t mind. When do we expect to conclude the SA PGM wage negotiations? Are we targeting a five or a three-year term for ongoing PGM wage talks? Where are we with regards to wage negotiations? Are we close to reaching a deal? And then just a question on the wage negotiation risk on SA supply, considering that the other two major miners negotiated this year or negotiated this year have already settled on a five-year period?
Neal Froneman
Thanks, James. I think Richard is best place to answer all those questions. So let me hand over to Richard.
Richard Stewart
Thanks very much, Neal, and good morning, again, ladies and gentlemen. So I think in terms of the wage negotiations, we formally commenced our negotiations or engagements towards the end of July and into early August. Over the period of Marikana, we did step down those engagements for a couple of weeks during the commemoration. So that’s where we are in terms of the process.
When would we like to conclude? I think we’ve publicly heard from AMCU that they would like to conclude these negotiations in four meetings. And I think that is certainly something we would agree with and think is possible. So from our perspective, I think we would certainly like to see these concluded by the end of the third quarter.
In terms of the three versus the five years, I think, there are several aspects that we need to consider there. Obviously, the longer wage negotiation agreement is four. That does provide an element of stability. But of course, it’s very important, again, to recognize that you cannot pay a premium just for a longer agreement.
I think as we also recognize we are in a very volatile inflationary environment. And I think to be fair to all stakeholders, including employees, and if you are considering a longer-term agreement, that needs to be able to be flexible to cater for what the inflationary environment is going to be like in the future. And of course, that works both ways.
If you ask me in an ideal world, we’ll actually get to a point where we have wage increases that are linked to inflation, and we sit annually for a couple of days and settle any differences. But I think we’ve still got a way to go before we can get there. In terms of the risks, I think quite right, a lot of the major companies have already settled. So that risk is probably more skewed towards ourselves at the moment.
But there is no doubt and as we’ve seen that there have been some industrial action on a smaller scale, by smaller unions. That remains in the political climate we’re currently in. And when wage negotiations are on the go, those aren’t easy times and do impact on production and output. So I agree that risk is probably largely lower today than it may have been six months ago, but it is still an area that has impacted the overall output of — from the country year-to-date. Thank you.
Neal Froneman
And Richard, it’s probably safe to say that we know that our employees would really like to see a five -year wage agreement and we hope that the unions will take note of what their members also want Thanks, James.
James Wellsted
Thank you. The next question is linked to the costs, all-in sustaining costs have only risen by 7%, while mining year-to-date, you say is at 12%. How did management achieve this, what were the levers specifics, please, if you can share, was it labor reductions, procurement, et cetera that were pulled? And how much more can these levers be pulled going into the 2023. And then also, given your small increases in all-in sustaining costs versus peers at your PGM business, do you believe that you’re putting adequate sustaining CapEx into the business to ensure the future sustainability of your operations?
Neal Froneman
Yes. Those are all good questions. And certainly, we understand our cost structure as well. Let me say at a high level, we don’t skimp on same business capital. But Rich, why don’t you — why don’t you pick up on the details
Richard Stewart
Thanks, Neal. And I guess just to kick off, as Neal mentioned, let me say, answer the last part of that question. First, yes, we are very comfortable with the sustaining capital that is going into the operations — both in terms of sustaining for equipments and fleets as well as development to sustain ore body. So absolutely, we are comfortable with that, and that gets a lot of focus. I think when looking at an all-in sustaining unit cost, there are obviously several aspects that go into that.
On the absolute cost side, so we have seen above above-inflation increases on particular items, steel, fuel, lubricants, certain chemicals we use. So there we have seen above inflation increases. So I think coupled with that, though, we have had a very proactive project and management strategy of our supply chains to try and limit those increases where we can. Of course, the operational efficiencies that come into that as well.
So it’s a combination of managing supply chains, managing efficiencies and usage, while still experience higher than inflation unit costs on those individual items. I think in addition into the all-in sustaining cost, what we also get going in there, we’ve seen a benefit this year, of course, it have been royalty. So just relative to the period before royalties have been lower on the back of prices.
And then the final aspect that I think is important is we do consider byproduct credits in our all-in sustaining unit costs. Of course, in the total cost basket is the cost of processing those byproducts and it’s an area that we’ve paid particular attention to optimize revenue from those byproducts. So during the current half, we’ve seen a decrease in the relative credits from the minor PGMs with drops in prices there, the ruthenium and iridium but we’ve seen a significant increase, particularly in chrome, where we’ve had a large focus over the last half of the year, and it’s been a period where prices have been high. So we did see a benefit on our unit costs from chrome in particular.
I think in terms of the levers we can pull, but obviously, our production has been below where we would like to see it. So that is one of the obvious levers. We have extensive work going on at how we can continually optimize our overhead costs, which includes optimizing and minimizing our footprint. And then as I mentioned, the supply chain projects that we have.
So those are all levers that we can continue to pull going forward. But I dare say, getting our production back to where we’d like to see it will probably be the single biggest lever that we still have to manage these costs going forward.
James Wellsted
Thanks, Richard. The next set of questions is linked to CapEx and projects. I’ll ask them all together. Real stated gold CapEx guidance of R3.9 billion is lower than the R5.2 billion guided previously. How much of this difference do you expect to carry over into 2023? Then a question on Burnstone, the industrial action at the gold, SA gold division impact development at Burnstone? Is it still on time and on budget? And then finally, on K4 and Klipfontein at the PGM operations, can we give color on the contribution of the Klipfontein project on production, as well as the progress on the K4 project?
Neal Froneman
Thanks, James. And again, I think, Richard, you could handle the bulk of that, but perhaps you may also want to loop in Rob.
Richard Stewart
Perfect. Thanks. Thanks, Neal. And yeah, that’s great. Let me start off with the question on the carryover of CapEx and gold. So I think importantly, as I indicated, one of the key aspects to managing our cost during the industrial action was being able to put a hold on all of our costs, including significant overheads.
So practically, what that means is that capital, including all the production and the capital essentially just get shifted out. So is there a carryover? Yes, there is, but it’s not like there’s a significant hump that comes. The ORD that we didn’t spend in these three months, we will spend going forward. And likewise, that will just maintain through.
So I think it’s more a question of just considering that all of the CapEx has been moved out, and that will be a constant move out. It’s not like there will be a hump next year to catch up, no, and similarly for the project capital.
Burnstone was impacted by the industrial action. And perhaps Rob can provide us with a little bit more detail and thought specifically around Burnstone and the progress at K4, which has been very good. At Klipfontein for that question during the first half of the year, Klipfontein produced marginally over 25,000 ounces, which contributed towards the Ukraine oil production.
Thank you. Rob, would you like to make any additional comments just on K4 and Burnstone?
Robert Niekerk
Okay, Rich, I hope you can all see me and I’ll do that quickly. Sorry, one moment. Can I confirm that you can hear me?
Okay. With respect to Burnstone, Richard, as you said, Burnstone has been impacted by the strike of the gold operations and it’s impacted very similar to that as we experienced on the operations itself.
But in addition to that, I would like to add that, it has also been impacted by the slower than planned buildup of labor at the Burnstone project. This is largely due to us trying to recruit predominantly from local areas.
Insofar as are we going to be able to catch-up? Are we going to be able to pullback, I don’t think I don’t think we’re going to pullback lost ground due to the strike and the slow buildup of labor.
What I am confident alike is that once we are a full complement, we are not going to further behind. In addition to that, what is the impact on the overall project status we’re obviously reviewing that now post the strike and I’ll know exactly, what the impact is, in the short-time from that.
And so far as K4 is concerned at our platinum operations, I actually went underground yesterday our surface shift with the team there, and we actually went the underground yesterday, and I was pleasantly surprised with the progress, I’ve seen underground.
I’ve also reviewed that project in detail. And we are tracking the schedule very closely in terms of both development, infrastructure as well as capital spend. So let me leave it here. Thank you very much.
James Wellsted
Thanks, Rob. I’ll give Richard a bit of a break now. I’ll ask Charles some questions. How do you expect working capital movements to evolve during the second half of the year? That’s the first one. Second one is, restructuring costs of R36 million in the current year. What are those related to? Is it a line item we can expect to continue seeing going forward?
And then finally, given the outlook for operations and PGM prices, why did the company mention that after due consideration of future requirements, the dividend may be increased beyond these levels i.e. the 25% to 35% range.
Neal Froneman
Sure. Thank you, James. And yeah, if we started the working capital, it’s not a — I cannot give you a definitive answer. But what I can say is that, obviously, working capital is impacted by one, the recycling volumes and the recycling prices that we receive, and as these go up and down, working capital response correspondingly.
And then similarly, at our South African operations, it’s all driven by volumes and cost performance. But assuming that volumes stay constant and we’ve seen a slight downturn in prices, you would expect the working capital to release over the balance or some release over the balance of the year. But as I said, it’s impacted by a whole host of factors.
In so far, the restructuring costs are concerned, they are predominantly voluntary separation costs and then medical separation costs which is paid at the time when these employees leave the employee of the company. If you look back over our history, this is a line item, and we can expect that to be there going forward.
In terms of your question on dividends, we’ve always said in terms of the capital allocation framework, if we satisfy all of our priorities which, has been clearly defined in the capital allocation framework, and there’s no other uses for cash, that we will return back to shareholders.
So that’s what that comment relates to. And there’s no indication that we will increase the dividend payout. But as I said, once we’ve satisfied all of those priorities and we do have access. We have the ability to increase beyond that level. So it’s not a cost in a low number.
James Wellsted
Thanks, Charl. And a couple of questions on M&A. Can we please provide an update on the Rhyolite Ridge lithium boron project? Is it still on track for the H2 2024 production schedule? That’s the first one. Second one is about the case regarding the Brazilian transaction, the Appian transaction. When can we expect a resolution? Does that process imply that you will not engage in M&A until that is settled? And then finally, what is the expected size of the attributable investment over three years to develop electrolyzer catalysts alongside arrays.
Neal Froneman
Thanks, James. And again, I’m going to defer some of these questions to Rob and Charles. Rob and Charles have just been to actually a site — they’ve just conducted a site visit in the US at the Rhyolite Ridge project. So I’ll refer that one to them. Let me just pick up on some of the other ones.
In terms of Appian, we are in the middle of a legal process. We have responded to their claim and filed our papers. I expect it’s still a long process. Absolutely — well, let me say, in no ways does Appian’s legal action stop us from doing any other M&A. The issue around M&A is, as I said in the presentation, that it’s all about value.
And as you know, we’ve been through a very frothy period in terms of commodity prices. Our expectation is an economic downturn. The maintaining of a strong balance sheet puts us in a position where we can be quite opportunistic. So these sitting on our hands, not because of the Appian legal process at all. Let me just stop there and ask both Charles and Rob, just to comment on Rhyolite Ridge. Charles, you go ahead first
Charles Carter
Thanks, Neal. I think it’s a very interesting project that we partnering on. I was really impressed with what I saw and with the engagement with the team. They do have an ambitious set of objectives. We’re very supportive of the intent. I think it remains to be seen exactly how those timelines evolve. But I was impressed with what I saw. And I was very impressed with the engagement within the framework of the evolving US legislation that is supportive of local production, local sourcing, and that’s been touched on in your earlier question, and it was touched on in Neal’s presentation.
I think they have been very innovative in how they are seeking to tap US federal funds and engagement around that. And I think they are well ahead of the curve in relation to other mining companies on that ambition. It’s quite an onerous set of obstacles to tap federal funding. They are on route with that. And I was really impressed with how they’re going about doing that and the collaboration with regulators on that. It remains to be seen how that evolves. It’s none of that is easy or quick. So, I think, from my side, impressed with the approach, cautious on what the obstacle course remains for them, not just from the regulatory side, but challenges to that. But Rob, I would pass to you and take your thoughts on that as well.
Robert Niekerk
Thank you, Charles. And like yourself, I was very comfortable with what I saw in Nevada. And when we visited the site itself and interacted with Bernard as well as his team. Possibly just to add on to what Charles has said, the Ioneer and other team have now submitted a revised plan of operations for the Rhyolite Ridge project, which does not impact the teams back [ph] submitted this to the Nevada Bureau of Land Management, they’ve actually heard back.
And Bureau of Land Management has requested some more information as they always do and Ioneer is working on providing them with that information. The Ioneer team, must really be — very optimistic that they will receive a positive record of decision within the next 12 months to 18 months or so regarding striking up that project after which they can take out the feasibility study, updated and get cracked. So they are now in the final throws of the permitting process for that operation and are optimistic that the result will be good in the next 18 months or so. Thank you.
James Wellsted
Thanks, Rob.
Neal Froneman
Yes, James, we’ve still got the….
James Wellsted
Heraeus..
Neal Froneman
The Heraeus question. I just — I’m going to ask Richard to answer that. But I wanted to — before Richard does that, just say that the new regional structure has provided very substantial additional capacity within regions. And as I’m sure you are probably seeing from today has improved our focus and effectiveness in the way we operate.
But in terms of that regional structure, we have individuals within the C-suite that are appointed as commodity champion. So Richard is our PGM Commodity Champion and any market development on the PGM side is managed by Richard and the team, which is why I’m going to ask him to comment on the Heraeus question.
But just to complete the picture, Miko, who is unfortunately not able to join us today is our lithium and nickel commodity champion. So we expect him to be very knowledgeable when it comes to lithium and nickel, and Charles will be our gold commodity champion and specialists when it comes to gold. So Rich, why don’t you please pick up the question in terms of Heraeus and the funding and so on. Thank you.
Richard Stewart
Thanks, Neil. Yes, it’s actually not a number that we have publicly disclosed, and it’s still something that we’re working quite closely on. But I guess, to try and provide a bit of a steer for understanding purposes, we would expect the first phase of that project to be somewhere in the region of about €1.5 million, which would be a cost that would be shared by ourselves and Heraeus. So, that’s a sort of a ballpark number, but that continues to be worked on and developed.
James Wellsted
Three last questions before we go to the phone lines — the conference call lines. Can you share your reason for expecting a lower palladium price in the second half of the current decade in view of your statement that EV penetration rates are hugely overstated? That’s the first one.
Second one, could you please comment on the sustainable cost profile of the SA gold operations going forward? We’ve seen continued deterioration in AISC over the last few years. what is the new normal once production is back at steady state? What is the new steady state production level?
And then finally, a question on how much on a US inflation reduction Act? How much of a boost does the IRA give to your green metal strategy in the US? And would we be looking for more green metal acquisitions in the US? Thanks
Neal Froneman
Good. Thanks and all very good questions. I think let me put into context my comments on battery penetration rates there. There are analysts and there are sectors that believe the internal combustion engine is something that is complete or is history by the middle of this decade. We are not on that page.
Our view is that battery metal or battery electric vehicle penetration rates are significant, but they’re not that significant that see the demise of the internal combustion engine by the middle of the decade.
Our modeling shows that there are significant impacts on internal combustion engine vehicles towards the latter half of this decade. So, it’s not an extreme view. I think it’s a very balanced view, it acknowledges that the internal combustion engine still has a way to go, but battery electric vehicles will make very significant inroads. And again, I just want to say that does not undermine our view in terms of the ongoing demand for PGMs.
There will be a transition from the uses of PGMs in catalysts that will transition into the hydrogen economy. But the one PGM that is going to be impacted unless we find other uses for it is palladium. So, I would argue that we have a balanced view, a more balanced view in terms of the penetration rates of battery electric vehicles, which is going to be significant, but not as significant as some people say. And also we are comfortable in terms of the future role of the internal combustion engine. It will get less, and we have to acknowledge that. And certainly, our repositioning of the US operations, which are predominantly palladium is looking through that commodity cycle.
Rich, in terms of the South African gold operations, I think you should answer the all-in sustaining costs, and we’ll come to that now. In terms of the new inflation act in the US is something we welcome. We are well positioned in the US. We have very significant operations in terms of Stillwater. It’s a destination we chose a long time back, because it’s a destination where you’ve got good legal tenure in terms of your business.
We recognize this multi-polarity changing to, to suit providers of these metals in these regions. So, it was a very conscious decision to be in the North American region. Acquiring the Rhyolite Ridge project was a very conscious decision of becoming part of the solution in the US. We could see the dependence the US had on countries that were not friendly to the US.
Again, we’ve engaged with the state — the relevant state departments. We’ve made it very clear that we are supportive and would want to be part of ensuring supply for that region. And therefore, we welcome the new act. We think it’s appropriate. We do see, as I said, a short-term negative impact on battery electric vehicles in the US as we will scramble to — it’s difficult to bring on some of these projects, but we will scramble to do that as fast as we can. And of course, that will make the US a lot less dependent on unfriendly nation.
So, we welcome it, and we see a lot of benefits. And the answer is would we like to grow in the US? Absolutely. But I want to reinforce what I’ve said a few times now that growth will really only be if it’s value accretive. And we will look for those solutions, and we expect them as we see this current downturn intensifying in the not-too-distant future.
So, let me just to complete the answer to those questions, I hand over to Rich to deal with the South African gold all-in sustaining cost and production profile.
Richard Stewart
Thanks, Neal. So, I think if we look at our — and let me maybe answer that, firstly, referring to Kloof, Driefontein and Beatrix. If we look at where we are seeing the steady state production output in the short-term that would be in the region of about 850,000 to 900,000 ounces per annum.
So, when you combine that with DRD and the ramp up in Burnstone, as a group our overall gold production at the moment would still be around 1 million ounces, just above 1 million ounces, but on those core assets in the medium-term, sort of 850,000 to 900,000.
Looking at the all-in sustaining costs, based on where we are today, I think we can still see an all-in sustaining cost profile of between R850,000, R875,000 per kilogram is where we’re forecasting to get back to now post the ramp up.
I think critically importantly, moving forward, as mentioned, we do have several extensive initiatives looking at our overhead costs and how we can realize synergies across the entire operating region, which we’d look to get into there.
And then we do have some older higher cost shafts, which over the next couple of years are going to need to be critically evaluated. And while that could have a negative impact on some of the production, I think it will have a positive impact on overall margins, and costs, but that is more of a medium-term view. So short term, $850 million out of those core assets, and roughly 1 million out of the group, at an all-in sustaining cost of around about 850.
Neal Froneman
Thanks, Richard. I think we’ll go to the phone lines now, please. So there are a couple of calls waiting or questions on the line.
Operator
Yes, they are. [Operator Instructions] The first question comes from Patrick Mann from Bank of America. Please proceed, Patrick.
Patrick Mann
Thank you very much for the call. Three questions, please. Maybe one for Neal. Just on your strategy slide, you spoke about green metals and energy solutions that reverse climate change. I just wanted to, to dig a little bit more into that. Are you saying possibly looking at renewable energy, or is that specifically the sort of projects that you’ve announced around your longer life shafts in PGMs, or we have seen other mining companies and other resource companies globally start to, I suppose try to secure their energy by building out renewables. Is that kind of where you’re going with that, or am I reading too much into that statement?
And then the second question is maybe for Charl. Just around – you spoke about cash reserves of 27 billion and then a target of 20 million. Can you just remind us, is that your sort of operational level of cash that you expect in the business that you’d want to maintain a sort of float?
And then the third question, I’m just looking at Sandouville. I mean, it was a very strong period for nickel prices in the first half of this year and the business is just about profitable. Just thinking about with energy costs rising and with the nickel price coming down, I mean, it doesn’t feel like this is going to be profitable in the near-term. Is that a fair assessment? Thank you.
Neal Froneman
Thanks, Patrick. Charl, let me do the – the first and the last question, and then you can pick up on our view in terms of reserves. Patrick, in terms of green metals and energy solutions, you would remember that at the beginning of the year, we actually introduced already the concept of energy solutions. So we do expect over a long period to become more involved in energy solutions. But this is not, let’s call it, the type of energy solutions you’ve seen – most companies moving towards, which is really renewables, up. We are primarily a mining company, and our focus remains on producing metals. We do believe over an extended period that having some exposure to the downstream side of certain businesses is valuable and appropriate. It’s been a very different approach to most other PGM producers.
So when we talk of energy solutions, we are probably more focused on – let’s call it, grid storage solutions. Yes, solar panels use silver. Silver is a good commodity. Should we come across a good project could well take us into the commodity of silver. But things like Redox batteries, vanadium. There’s other molten salt grid storage solutions that use antimony. Those are all things that are currently under investigation, and therefore, I anticipate that you will see an evolution of the portfolio of metals that we are, let’s say, focused on growing to include some of those.
In 10 or 15-year’s time, well, there could be an energy division, but that’s not our primary focus now. So, we — I want to, again, just say we’re primarily a mining company, we’re focusing on the metals that provide energy solutions and we may become involved in the downstream and upstream sides to the energy solutions business. So, I hope that gives you some clarity in terms of what we mean by energy solutions.
In terms of your question on Sandouville, the Sandouville contracts really or the main contracts work on a margin. So yes, there are swings in working capital. But just because nickel prices go up or down, in a way, doesn’t really change profitability. But again, I would draw your attention to the original announcements on Sandouville. We did not really buy Sandouville for what it is today.
Having said that, we are — we do need to make it profitable and making it profitable is about increasing volume. That was part of the due diligence. It’s a three-year process of getting the volumes up, keeping consistent margins, recoveries and so on. And that will ensure that it doesn’t require a lot of funding.
The real reason for buying Sandouville is currently the work that is taking place to ultimately convert Sandouville from a refinery that produces nickel salts and nickel products to a refinery that produces nickel sulfate as a battery precursor. So that is currently under review, and again, it was also identified as a base or a platform for growing our recycling business.
And again, I hope that clarifies your question. Charl, will you pick up on the reserves?
Charl Keyter
Yes. So Patrick, the way we think about it in terms of the capital allocation framework is we’ve always said that we wanted a buffer of about an equivalent amount of the bond. And if you think about the bond $1.2 billion if you use an exchange rate 16, 17, I mean pick a number. That’s how we get to the $20 billion. So that’s the way we think about it. And as far as possible, we’d like to preserve that position. That is, obviously, subject to the way we manage the business and ongoing working capital that we may need in the business.
But in terms of liquidity that we’d like to have in the business, we generally target about two months of operating costs, if you think about last year, where we spent about R100 billion in terms of operating cost, two months of that would be about R16 billion. And currently, we have that, excluding the cash buffer that we have in available facilities. So we’ve got the $600 million facility, which is roughly about R10 billion. And then we’ve got the R5.5 billion facility.
So from a liquidity perspective and from a cash buffer perspective, we try and keep them separate. But as you would know, they may intermingle, but so think about the 20 as a buffer for the bond. And then if you think about our available facilities, we need about two months of operating costs Thanks, Patrick.
Patrick Mann
Thank you for the answers guys. Very clear. Thank you.
Operator
Thank you. The next question comes from Leroy Mnguni from HSBC. Please proceed with your question Leroy.
Leroy Mnguni
Good morning, guys. Neal, you mentioned earlier that you see battery electric vehicles gaining significant momentum in terms of penetration but not quite as rapidly as what most people think they would. Could you maybe share with us what you think some of the headwinds could be, or what is the market missing with their bullish adoption forecast?
Neal Froneman
Sure, Leroy. Is that your only question?
Leroy Mnguni
I mean my other question, Charles touched on partly, but you’ve said before when you gave the strategy update that if you don’t find acquisitions and your balance sheet is in good shape. You would look at doing special dividends and buybacks again. We do seem to be getting into that territory now. You’re seeing, you’re not finding value-accretive deals, your balance sheet is looking pretty good. You’ve got the sort of buses that you need. Would it be unreasonable to assume that you’d resume either special dividends or buybacks at the end of the year?
Neal Froneman
Yes. Okay. No, good. Let me have a go on both and Charl. I’ll start the buybacks, if you want to add, please feel free. But look, a year is very short in the life of a strategy or a company. It’s — so yes, we do have additional reserves. And we haven’t seen value accretive opportunities, let’s say, over the last year or so. But we do think that’s going to change. So we would prefer to retain the current balance sheet so that we can be opportunistic as we move into what we believe will be a bit of a recession.
Having said that, we remain committed to our dividend, absolutely. That’s not even negotiable. Buybacks, we’ve always said are something that we can use when we also see value opportunities. But you would also note that we have moved to cash settled a share option scheme or share scheme, which over a period normally amounts to about 5% of dilution.
So buybacks really continues, I want to say in a very subtle way. Whether we will step up and actually use that excess cash for buybacks at this stage is unlikely, because we see opportunities on the horizon. But that doesn’t mean we’ve walked away from buybacks. We moved to a cash settled scheme effectively to ensure there’s continuous buyback of our shares. Charl, is there anything you want to add to?
Charl Keyter
No, Neal, what I will add is — to your point, there’s nothing on the horizon in so far as M&A is concerned. But definitely, we’ve made some further acquisitions on the Keliber project, which we believe in time will be a fantastic project. And I think we’ve got commitments subject to the permitting requirements on Rhyolite-Ridge that will flow probably into 2023, 2024. So we’re just keeping an eye on those as well, because we may have some commitments coming up in terms of those two projects.
Neal Froneman
Good stuff. So Leroy, the question you asked on headwinds regarding battery electric vehicle penetration rates. I think as a mining company, we are acutely aware of how difficult it is to bring new projects to account. And predominantly, I think that the markets, whether they are OEMs that are going to build battery electric vehicles and even analysts and investors that perhaps don’t have a mining background, underestimate that difficulty. And therefore, there is going to be a shortage of specifically lithium and nickel of the right form.
When you couple the complexity of in an environment that we used to work in, where there was, I would say, very little consideration given to carbon emissions when you overlay the carbon emission complexity related with these products, it becomes even more difficult. So that’s why probably the primary reason, I believe the penetration rates are somewhat overstated.
Are battery electric vehicles a good concept? Absolutely. And they will feature, especially in certain regions and in certain circumstances. The electric powertrain is here to stay with the aisle of petrol hit like it or not, that is a fact the primary drivers will, of course, not just be batteries, but will also be fuel cells and hybrids.
And then, of course, when you talk to anyone that’s about to buy a battery electric vehicle, most of them are still concerned about range. Most of them are still concerned about being able to do long trips. And therefore, they really only appeal to at this stage to quite a unique group of users. So I think the primary issue is the difficulty of bringing enough battery material on stream to fuller demand, and therefore, there is going to be constrained. So that’s my reason.
Leroy Mnguni
Thanks. Thanks for the response. It’s very helpful.
Operator
The next question comes from Adrian Hammond from SBG Securities. Please proceed, Adrian.
Adrian Hammond
Good morning, Neal and your team. I have two questions. Firstly, could you give us some longer-term CapEx guidance for the group into 2023, 2024? Being aware of, obviously, your plans around Sandouville, Keliber, Lonmin. That’s the first question.
Secondly, the — just thinking about M&A and your liquidity. You — sitting on net cash, R8 billion, you still got to pay off the Keliber transaction, which assuming that goes through, brings you back down to Net Zero. So you’re obviously relying on building the cash balances up again. So I’d just like to know what you’re prepared to consider terms of funding or future deals, whether it would be equity or debt? And what sort of leverage ratios you’re prepared to go up to? Thank you.
Neal Froneman
Thanks, Patrick. Good questions. Let me start with the M&A question and Charl may want to add on to that. And then, Charl, if you can give Adrian some idea of the group’s CapEx profile.
So, Adrian, I think every acquisition is an acquisition or is a point in time where you consider the best way of funding it. I think what is clear, is we have a very rigid capital allocation framework, which Charl went through. It’s been the same for a few years now.
We won’t compromise our dividend, but we can access a variety of sources for funding. There’s the cash flows that currently come from the business. We can access the debt market. And, of course, we can access the capital markets.
But we are reluctant to use equity, because we believe it’s undervalued. Of course, it’s always a relative game. So that’s why it’s very hard to give you an exact answer, but what we won’t do is, bet the farm on debt. We won’t use undervalued equity. And we will maintain our dividend. And I think that’s what shareholders expect of us.
We also won’t do anything that’s not value accretive. As you know, we do hold a view that we can create very significant value, which is also, I think, it was Leroy that asked the question, which is why we would also probably want to keep money on our balance sheet. We’ve got a good track record of creating value through M&A and growth. Charl, please feel free to add on to that and then deal with the CapEx question.
Charl Keyter
Neal, I think you’ve answered the question adequately. I don’t think it’s an issue currently of sourcing funding, it’s just we are in a high interest rate environment. So the cost of funding might be a challenge. But, I guess, access to funding is not going to be a challenge for us. To your point, we’ve got adequate cash and we’ve got adequate facilities currently. So yes, I think, we’re in a very healthy position.
Adrian, in so far as long-term CapEx, it’s not something I want to kick down the road. But what I can say is that, we are in the process of preparing our business plans. And then shortly after that, we do our life of mine plans.
But I think conceptually, the way to think about our longer-term CapEx is to basically look at what we’ve put out for 2022. Obviously, you have to shave off the project CapEx like, for Burnstone, et cetera. And that’s sort of a sustainable number going forward, assuming a fairly constant profile.
But I think what I can say is that, as soon as we’ve got our life of mine plans fully bedded down, because we’ve had some changes in the business be it Stillwater, we’ve seen a delay in CapEx at our gold operations, the inclusion of Sandouville, and then we have to start thinking about the two other projects, Keliber and Dry Light Reach, we can probably share that with you once we’ve got those plans updated. But as I said, conceptually, the numbers we’ve got now, excluding CapEx is a very good sustainable number — sorry, excluding projects is a very good sustainable number going forward.
Adrian Hammond
Thanks guys.
Operator
Thank you. At this time, there are no further questions on the phone lines.
James Wellsted
Thank you. We’ve got two more questions on the — from the webcast. Just before that, I asked the questions, I’d just like to point out that we did have some Investor Days last year, where we gave 10-year profiles for all of the operations including CapEx. So, if you do want to find the CapEx for each of the segments, it is available on our website. And Charl’s right, I mean, for the next few years, it’s fairly consistent. But thereafter, the gold CapEx starts dropping as production starts declining. So, by about 2025 and 2026, CapEx is halved almost from the gold operations.
Okay. Last two questions from the webcast. The deferred payment — acquisition payment of 35% of cash flow from the Rustenburg operations to Anglo Platinum will conclude during Q4 2022, further enhancing cash flow from the SAPGM operations. How much of this future additional cash flows will be applied towards dividends or M&A? Can we expect similar R4.4 billion odd quantum in the deferred payment in Q4 2022?
And then the final one is about zama-zamas. We’ve seen the risks of zama-zamas increasing in the mine operations. What role will Sibanye-Stillwater play with other stakeholders to voice its concerns or advice?
Neal Froneman
Yes. So, let’s start with the zama-zamas question. As you know, we have highlighted this issue for many years. We’ve incurred a considerable amount of money dealing with the problem. And I dare say that has even led to sharp closures, perhaps earlier than they should have been.
So, it’s a tremendous problem, it is to me very unfortunate that it only gets recognized as a problem for the reasons of some angles being right. And that’s a tragic incident in its own right. But the fact that Zamas — that illegal mining is now very visible is, in my mind, a good outcome that we should declare a state of emergency.
We should involve the military, it’s something we have requested special assistance with from the police. It’s not going to be solved by dealing with the obvious issue of the illegal miners. We’ve got to address the syndicates. We’ve got to deal with this internationally and stop just focusing on the individuals that are abused at the lower end of illegal mining. What role will we play? We will continue to engage with the international organizations, we’ll continue to engage with the Minerals Council and local institutions that should be dealing with it, and we’ll continue to do what we can do as a company to get rid of the courage and issue.
I have to be the first one also to point out that it happens because of the lack of unemployed, because of a lack of jobs. It’s a poverty issue. So this is the manifestation of low economic growth as well. So it’s a big issue and it’s much more complex than the poor legal miner that we continuously arrest. We really need to get to the issue of the people that sit behind us and drive this very undesirable practice. Rich, you may want to add something on to that?
Richard Stewart
I think that’s well covered, Neal. I think that absolutely the terms zama-zamas obviously often makes us think of the individual at the face. But as you say, this is really a much bigger issue that needs to tackle the syndicates. I think in addition, we are of course, working with our peers across the industry. And in the short term, in our own sort of strategic operations is how we can mitigate risk and one of our immediate priorities is obviously addressing this to make sure that our employees who are going to work on a daily basis, do feel safe to work in that environment. So that is one of our short-term objectives, but it is a much bigger challenge that needs to be addressed and multifaceted.
Neal Froneman
Yeah. Thanks, Rich. And then just coming back to the question, James, on the cash flow from the Rustenburg operations. Clearly, it’s dependent on commodity prices, PGM prices. We do expect a better second half to the year. So it should be a similar amount if prices hold up clearly, once those payments are completed, it’s going to enhance our cash flow significantly. Remember that normalized earnings will also grow. So the portion that gets allocated to dividends will increase in the same proportion. So shareholders will get a benefit to it as well. Obviously, as I’ve said, M&A is dependent on many things, but one way of funding M&A is through cash flow and if our cash flow gets better, that will make the funding easier. It doesn’t mean we’ll do more M&A, but certainly, the pool of resources that we have to do that should be larger. Charl, is there anything you want to add?
Charl Keyter
Neal, I can finally remember 2018 and 2019 were either seat at every credit committee of our lenders, so almost selfishly I would like to hold on to that cash. But no, I think you are right, we will put it through our capital allocation framework, and we’ll evaluate it based on that framework that we’ve set for ourselves. Just in terms of quantum, as Neal has said, it is commodity price dependent. Order of magnitude, if you look at last year versus this year, prices are down by, give or take, 20%. So at this stage, the estimation is probably in the order of about R3.5 billion potentially that outflow will be. That is payable before April next year and then thereafter those cash flows will accumulate to ourselves.
James Wellsted
Thanks, everyone. I think that’s the end of the questions. I’d like to thank everybody for joining us on this — for this presentation. And if you’ve got any further questions, please send us an e-mail or give us a call, and we’ll be happy to respond as soon as we can. Thank you very much.
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