Sibanye Gold dives headlong into platinum

In less than a month, South African miner Sibanye Gold (NYSE: SBGL) has announced two acquisitions that will make it a big player in the platinum market, and the fifth-largest PGM producer in the world.

In September, Sibanye agreed to pay R4.5 billion (US$330 million) for the Rustenburg operations of Anglo American Platinum, a subsidiary of Anglo American (US-OTC: AAUKY; LSE: AAL).

Sibanye’s CEO Neal Froneman said the asset provided “an attractively priced entry at an advantageous moment in the price sector,” and noted that the company had made it known for some time that it was interested in extending its reach into platinum group metals (PGMs).

The Rustenburg operations in the western limb of the Bushveld complex exploit the PGM-bearing Merensky and UG2 reefs, and could produce 800,000 oz. a year of platinum, palladium, rhodium and gold (4EPGMs) over the next five years. Of that annual production amount, 500,000 oz. will be platinum.

Under the agreement, Sibanye will pay R1.5 billion upfront in cash or shares, and 35% of the mine’s free cash flow over six years, with a minimum amount set at R3 billion.

The net asset value of the Rustenburg operations according to Anglo was R7.7 billion at the end of June. For the six months ended June 30, the mine lost R500 million.

News of the Rustenburg acquisition was followed by an announcement on Oct. 6 that Sibanye is offering US$294 million for Aquarius Platinum (LSE: AQP), which owns two platinum mines: Kroondal, which is also in South Africa’s Bushveld Complex, and 140 km northwest of Johannesburg, and the Mimosa mine in Zimbabwe, which is 150 km east of Bulawayo. 

Kroondal, its primary asset, is managed in a fifty-fifty pool and share agreement with Anglo American Platinum, and is up-dip from the Rustenburg mine. Mimosa is a joint venture between Aquarius Platinum (50%) and Impala Platinum Holdings, or Implats (50%).

Aquarius Platinum also owns Platinum Mile, a tailings operation next to Kroondale on land leased from the Rustenburg operations. Aquarius owns 91.7% of Platinum Mile, which recovers PGMs from the tailing streams of various platinum and chrome mining operations nearby.

Aquarius Platinum’s attributable production from all three operations during the fiscal year that ended on June 30 reached 394,000 oz. platinum, palladium, rhodium and gold, of which 193,000 oz. were platinum.

Sibanye’s all-cash offer of US$0.195 per share is a 56% premium to Aquarius’ closing share price on Oct. 5, and a 62% premium to its volume-weighted average share price over the last 30 days.

Both Kroondal and Mimosa are shallow PGM deposits that are mined via declines that are cheaper than more conventional vertical shafts, it says. Kroondal’s orebody is accessed via five decline shafts up to 700 metres deep, while Mimosa runs to 200 metres below surface, and is accessed by a single decline shaft.

The company is conducting a feasibility study to expand Mimosa’s mining and processing capacity by 25–30%, and undertaking another feasibility study for a tailings retreatment project at Kroondal.

The Aquarius operations produce PGMs in concentrate, which has to be smelted and refined. The operations have life-of-mine concentrate off-take agreements in place for the additional processing. In Kroondal’s case, the concentrate produced is processed by Rustenburg Platinum Mines. Mimosa has an off-take agreement with Centametal AG of Switzerland, but also delivers its concentrate to Impala Platinum’s smelter for toll processing and refining.

Platinum’s premium over palladium (US$229 per oz.) is at the lowest in 13 years, analysts at Investec Securities said in an Oct. 2 research note, adding that the platinum price has fallen 8% since September news of the emissions scandal at Volkswagen. (The EPA accused the German carmaker of violating U.S. emission regulations.)

The scandal has industry watchers forecasting that demand for diesel cars, and the platinum used in their catalytic converters, may wane in favour of gasoline vehicles.

A catalytic converter, also known as an autocatalyst, is a pollution control device fitted to cars and trucks, and is the largest application of PGMs.

“Given that diesel after-treatment systems tend to be platinum-intensive, this has raised concerns that demand for the metal may decline,” Bank of America Merrill Lynch analysts wrote in an Oct. 2 research report. “While we agree that the Volkswagen issues have increased headwinds to the metal, it is worth remembering that diesel cars have only a 3% market share in the U.S., so a switch to more palladium-intensive gasoline vehicles may be negligible.”

But the report continues that “diesel engines have been popular in Europe, accounting for more than 50% of new registrations in recent years, so a switch towards petrol may reduce platinum demand by 200 koz, or 3% of global demand over the next three years.” For its part, Sibanye isn’t sweating it. “Despite widespread diesel market concerns, we believe the global autos underpin remains firmly in place.”

The gold producer also said that, in general, PGM fundamentals “remain positive, robust and sound,” with “substantial industry-wide capex and production cuts.” It also said that the supply of PGMS produced in South Africa is “unlikely to return to pre-crisis levels.”

But it acknowledged that PGM pricing headwinds may “persist over the near-term,” and said “the impact of limited trading liquidity, Volkswagen fallout and excess above-ground PGM stocks remain difficult to quantify.”

Sibanye spun off from South African gold producer Gold Fields in 2013.


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