Deutsche Bank (DB, Financial) recently downgraded precious metals miner Sibanye Stillwater (SBSW, Financial) from buy to hold, citing concerns over the continuous underperformance of the company's U.S. platinum group metals (PGM) division. In addition, Deutsche Bank sees Sibanye Stillwater's lackluster South African gold operations as a significant risk.
Investors might be confused about this downgrade because the overall pricing environment has been good for mining companies recently due to the Russia-Ukraine war. Additionally, several analysts such as those with Australia and New Zealand Banking Group (ASX:ANZ, Financial) are projecting that platinum prices will continue to rise through 2023, which would be great for the company. Here's why I agree with the bearish thesis on Sibanye Stillwater.
Operational risks explained
Sibanye Stillwater released its third-quarter results earlier this month, revealing shocking production numbers. The South African mining house experienced a 14% slump in U.S. PGM production in the past year due to subdued capacity. Furthermore, Sibanye's South African gold operations suffered a 30% year-over-year decline, and the company's total all-in-sustaining costs rose by 88% in the same period.
The miner's slump in production was due to uncontrollable influencing factors. Firstly, its U.S. PGM operations were dented by a flood that resulted in its Stillwater mine being idle for at least four weeks. Although regional costs have risen, they're predominantly due to national inflation instead of potential diseconomies of scale.
Sibanye Stillwater fought a multi-month wage dispute with its gold mine workers amid decade-high regional inflation. The company drew a hard line on wages, stating that it wouldn't raise base payments above the inflation rate; however, opportunity costs started mounting, eventually forcing the company to settle for an unfavorable wage deal, including an initial annual increase of approximately$700 per employee, which will be marked down in succeeding years.
Sibanye Stillwater's gold mining obstacles are a significant issue. The company attempted offloading its inefficient throughput Kloof and Beatrix mines during the past year; however, few buyers seem interested. Sibanye Stillwater clearly wants to pivot into a renewable metals pure-play, yet, selling its South African gold mines is no easy task.
Furthermore, Sibanye Stillwater faces tedious supply-side concerns in South Africa regarding its energy supply and faltering national infrastructure. The company's CEO, Neal Froneman, was recently quoted saying, "Severe load-shedding imposed by Eskom during September necessitated the curtailment of concentrator capacity across the South African PGM operations, impacting processed output and sales for the quarter."
Froneman's concerns about South Africa's national energy supplier, Eskom, shouldn't be ignored. Eskom's internal operations are in tatters with corruption charges, material theft and misallocation of funds posing severe threats. This company supplies 95% of the nation's electricity, meaning Sibanye Stillwater's reliance on it is unavoidable.
These energy concerns are coupled with infrastructure impairments. For example, South Africa's national railway provider, Transnet, recently declared its sixth force majeure in 18 months amid a series of strikes, fires, cyberattacks, looting and abolishment. Sibanye Stillwater relies on the export market, meaning further decay of South Africa's infrastructure could pose significant headwinds.
Lastly, Sibanye Stillwater might experience demand destruction. The company operates in a highly cyclical industry, meaning recession risk could dent the company's prospects due to commodity price slips and lower demand as a consequence of sluggish industrial production.
Market volatility analysis is an overlooked concept in investing. There's often a disparity between a company's performance and investors' appetite for its stock. Investors tend to prefer low-beta assets during risk-off financial market environments such as the one experienced during 2022's bear market. The theory behind it is that future income uncertainty translates into an unwillingness of investors to speculate on future growth; instead, market participants prefer securing sure returns from countercyclical bets such as health care stocks, bonds and general low-beta assets.
Sibanye Stillwater's beta coefficient of 1.27 is considered high, and the company operates in a cyclical industry. Thus, investors could avoid the stock if uncertain market circumstances resume.
Source: Yahoo Finance
A few positives
Despite its shortcomings, Sibanye Stillwater possesses some positives. For example, the company's stock is undervalued on a relative basis, with its price multiples trading at discounts compared to industry peers, providing investors with a potential value opportunity.
Furthermore, Sibanye Stillwater pays a "best-in-class" dividend yield of 7.83%. Factor analysis suggests dividend stocks have outperformed since the turn of the year, which could be due to investors' preference to invest in income-generating stocks during bear markets. As such, Sibanye could receive support from factor-based investors in the coming quarters.
Deutsche Bank's downgrade of Sibanye Stillwater is objective. Despite a potential production recovery, the company could face sustained challenges related to South African energy supply capacity and eroding export infrastructure. Furthermore, Sibanye Stillwater's stock is in the upper quantile of high-volatility assets, which could be a significant headwind if the market's current risk-off sentiment sustains.