Sibanye Stillwater Ltd. (SBSW, Financial) recently hit another obstacle as it is set to defend itself against legal claims filed by Appian Capital Advisory.
In October 2021, the company agreed to a $1.2 billion deal with Appian to acquire two mines in Brazil. However, Sibanye made a last-minute call in January to void the transaction as it saw cost structure implications.
Appian now seeks to battle Sibanye as it believes the fallout of the deal breached legal barriers. Sibanye's currently facing a two-ended fight as it is also stuck with labor wage demand strikes in South Africa.
Due to these developments, the stock will likely struggle for the foreseeable future as its risk versus return profile is not aligned for future growth.
UBS downgrades Sibanye
UBS analyst Tyler Broda recently downgraded Sibanye Stillwater's stock to a price target of $13 from $25 previously. According to Broda, Sibanye "remains an attractive investment in the medium term, operational uncertainties, weaker PGM markets and the impact of cost inflation leave the outlook more balanced in the short term."
Broda's analysis follows a top-down approach, which argues that a slowdown in real economic growth could stagnate sales of durable goods, negatively affecting the company. Furthermore, his platinum group metals argument is well articulated. Sibanye held much pricing power in the PGM market during the earlier stages of the Covid-19 pandemic, but high non-core inflation in South Africa has led to higher operating costs, subsequently eroding its pricing power.
Commodity price cycle
There is also potential for stagnating commodity prices. First, the 10-year to two-year spread on the yield curve is near breakeven, suggesting that short-term contractionary economic policies could dampen the return prospects on precious metals.
While we could see a drop in precious metal prices, we are likely to experience continued high energy prices due to an ex-Russia energy trade world. This adds up to a dangerous divergence for Sibanye stock as it essentially means its top line could be suppressed while its operating costs remain high.
Valuation concerns
Sibanye has been undervalued for a long time from a relative valuation vantage point. However, the stock has not fulfilled its implied value potential. This raises the question of whether we might be looking at a value trap.
I would say the company's high dividend payments have caused a residual trade-off with the stock price, causing its value prospects to wane. Thus, I do not believe it is a value trap, but just deem relative valuation metrics to be of no use.
The miner distributes its dividends at a payout ratio of 25% to 35%. I think short-term challenges could dampen the company's financial performance, which, in turn, may reduce the absolute dividend amount and the stock's absolute value.
Concluding thoughts
Sibanye Stillwater is facing significant short-term challenges. The stock is not very investable at the moment as it is poorly aligned for future growth. Even if idiosyncratic matters wane, its investors will still be confronted with tremendous systemic risks.
