Sibanye Stillwater Update $SBSW
Sibanye shares tumble on the news of raising capital – 11/21/23
Dear subscribers,
A few weeks ago, we presented our research on Sibanye Stillwater as a highly undervalued company for the coming upswing in precious metals. Today the company announced that it will be raising more capital via a convertible bond that can be converted into equity, effectively diluting shareholders.
In their H1 2023 filing they wrote:
“Continued capital allocation discipline has maintained the Group’s robust financial position. Cash and cash equivalents of R22.2 billion (US$1.2 billion) remain above the capital allocation framework reserve target of R20 billion, despite increased investment in our battery metals portfolio and a R3.6 billion (US$198 million) final payment to Anglo American Platinum for the Rustenburg operations (the absence of which will benefit future Rustenburg cash flow) during the period.”
Sibanye has no need for so much liquidity. One can speculate that they have ambitions to do more mergers and acquisitions at these attractive valuations in the sector. Today's press release states:
“The proceeds are expected to be applied to the advancement of the Group’s growth strategy including funding the Reldan acquisition announced on 9 November 2023, whilst preserving the current balance sheet for funding existing operations and projects through a lower commodity price environment. “The Convertible Bond offering is one of various available financing options, which provides financial flexibility at a reasonable cost under current market conditions, and will enable further delivery on our strategic growth objectives at an opportune time in the commodity cycle, whilst maintaining balance sheet resilience and liquidity” Sibanye-Stillwater CEO, Neal Froneman commented.”
A few weeks ago, Sibanye announced that it wanted to strengthen its recycling business by purchasing the US metal recycling company Reldan for USD 212 million. The company has issued USD 500 million in the form of convertible bonds, which leaves more scope for further mergers and acquisitions. Raising capital at these low valuations to buy up less exposed positions (metals recycling is a less cyclical business than mining) is not exactly what we want to see as dilution. It remains to be seen what they plan to do with the remaining liquidity.
Is Sibanye a buy now?
In mid October we wrote in our substack post:
“The chart is massively clouded. It is more conservative to wait for more momentum in the paper until it sets higher highs and higher lows. Here we are happy to provide an update for a chart entry that makes sense. However, for long-term investing, we also accumulate into falling knives when the assets are in the right macro cycle (that's the case here, we assume a commodity super cycle), valuations are extremely attractive, and the stock is running into a strong support zone. The stock is almost trading back at the levels the stock reached in the Corona crash in 2020. At the same time, the stock is now on a very strong support zone (red arrow). Without any problems, however, the stock can take another 20-30% in price losses here.” Cycle Investment Strategy
The scenario that the stock would be hit much harder has certainly come true. What has changed? Not much. The company itself is now liquid at the expense of its shareholders and therefore in a better position. So there is no reason to worry about the company itself, despite a management decision that has questionable timing.
If you don't have a position yet, it's attractive to open one here, if you already have an entry position, I wouldn't buy more here. Wait for the chart picture to brighten up.
If you are actively investing and trading beyond passive funds (ETFs), it is important that you also combine your mean reversion strategy (buying cheap assets and waiting for them to revert to their mean valuation and beyond) with momentum. We do this via momentum trades (some of which we share with you) and we only buy the full position in a stock when the charts show early signs of momentum.
All the best
Yours
Cycle Investment Strategy Team