Sibanye Stillwater Limited (SSW) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Sibanye-Stillwater investor call. [Operator Instructions] Please note that this call is being recorded. I'd now like to turn the conference over to Neal Froneman. Please go ahead, sir.

Thank you, operator, and good morning, ladies and gentlemen. We appreciate the time you've taken to attend this investor call. We did have a presentation this morning at 10:00 a.m. in South Africa. The presentation has been -- the documents have been posted on our website and there are links to the actual YouTube presentation. It was a long presentation. There was a lot of, I believe, good information, and I certainly don't intend to go over it in detail this morning again. What I will do though is provide you with a very brief update, assuming that you've had access to the delivery and, of course, the documents. Once I've concluded that brief summary, we'll open up the lines for Q&A. And the rest of my team is on the call should there be questions for them as well. So let me just outline and we call it the key strategic highlights of the year-end results, and they were essentially the structure of the presentation that you can view on YouTube. We spent some time on the ESG aspects of the company. We hopefully demonstrated our commitment to ESG excellence as one of our primary strategic focus areas. We also linked it to aspects of how we will be beneficiaries of the hydrogen economy. Essentially, the message was we're making a difference one PGM ounce at a time with significant social, economic and environmental impact in the areas that we operate in. We also spent some time on another one of our strategic focus areas, which is really about building a values-based culture. We believe this is critical for company performance but probably more importantly for safe production. And we spoke about COVID and our protocols. We spoke about the new small office, home office working arrangements and how they've been able to create more engagement through our organization. And we also presented the organizational structure that we are transitioning to. And we refer to concepts such as holacracy, stratified systems theory and the fact that we can now, through our new working arrangements, really build up global competence. I spent some time on operational delivery going through all the key operating segments. Interestingly, you will note for the first time we've provided full year forecasts and it's the first time we've really been able to do that. As you all know, we've been in -- we've just completed what has been a very aggressive acquisition strategy. And because we are literally adding assets almost on a continuous basis, it's been hard to give long-term forecast. But today, we've been able to do that and we've generally provided full year forecasts. And there's a detailed section on our record financial performance. And interestingly, we generated very significant returns for our shareholders. I'll go through and just summarize those. We did declare an industry-leading dividend of just over $700 million, and hopefully, our shareholders are happy with that. We did announce a number of new projects with very substantial value creation based on our recently released increase in reserve and resources. I'll summarize those projects just very briefly, but there's a lot of information in the presentation that you can refer to if you want to look at build-ups and capital profiles and so on. We completed the presentation with 2 things. The one was talking a little bit about our growth strategy in the future, predominantly focused on battery metals. But of course, we can start seeing our sigmoid curve being our exposure and participation in the hydrogen economy. I also made reference to the fact that we still remain interested in gold, and we continue to look for value-accretive growth opportunities in the gold sector. I will conclude this presentation with a little bit of a recap on the final part of this morning's delivery, which was really about the fact that despite the very significant re-rating that we've seen in our share price, we are still relatively cheap and we still provide good value for investors. So that was covered in detail in this morning's presentation, and you can access that as I've already described. I did want to, for the purposes of this call, just summarize a few points. I think it's important to note that the record financial results were underpinned by very solid operational delivery. And COVID had an impact both in South Africa and in the U.S. And despite that, we have delivered good operational results. The good news is that if you look forward, we've normalized production in both regions, and we can actually look forward to an improved production base in 2021. Our basic earnings were $1.781 billion. That was up from $4.5 million in 2019. We achieved a record free cash flow of $1.2 billion. That's a 55-fold increase from the $22 million in 2019. We declared, as I said, $649 million of dividends, and that was, of course, for the 2020 year. And that is an average dividend yield of 8.7% if you use the share price over the year. Clearly, our share price, as I've said, has re-rated and at the re-rated price or the stock price, it's about 5% so it's still a good dividend yield. And of course, the dividend declaration was at the top end of our policy. Very pleasingly, we have deleveraged successfully and we can now talk about net cash to EBITDA ratios. The net cash position at the end of 2020 was $210 million, and of course, we look forward to that growing. The strategic focus area of deleveraging the company has very pleasingly shifted to looking at capital allocation and returns to stakeholders and sustainability and growth, and I'll cover that in just a little bit of detail. I think capital allocation is an area we've had lots of input from our shareholders. We've had lots of questions from our shareholders. We've done quite a lot of analysis and research, and I'm sure we won't make everybody 100% happy but we have a structure and it's prudent, and I think it incorporates all suggestions from shareholders. So I think, first of all, just to summarize what that capital allocation structure looks like. Of course, we need to ensure the sustainability of the business first. So project capital is really a first allocation of, let's say, excess cash. Of course, we've got high hurdle rates so I don't want anyone to think that we're going to spend all the excess cash on projects. We did announce 2 but they are relatively small investments in the big scheme of things but really going to add very significant value to shareholders. The second allocation of cash is really about building up cash reserves to ensure that in this very volatile environment, we at least cover our debt. Of course, it provides cash as an opportunity, should we see the opportunities to buy back shares in the right environment. Of course, having some cash on your balance sheet results in much better credit metrics. And of course, that should eventually lead to lower cost of debt. The third priority for excess cash is dividends. And without going into all the details, we understand that dividends must be predictable and repeatable. We've taken a 5-year view of our business and certainly at the sort of 35% of normalized earnings, the top end of our policy, we feel is sustainable with all the other allocations that I've referred to in terms of our excess cash. Further cash will be deployed to reduce debt. We've worked very hard to build up a mature balance sheet which includes, obviously, long-term bonds. We could pay those off now. That would not be appropriate. We would like some gearing on the balance sheet as well, but that would be a fourth priority in terms of the use of our cash. And of course, that really happens only at certain times when those things mature. Share buybacks are already in place. We've converted our long-term incentive scheme, which was equity settled into a cash-settled scheme. And over a 5-year cycle, that's a continuous 3% to 5% dilution. We also made odd-lot offers to shareholders and that was 0.5% shares in the issue that we bought back. And we will be opportunistic in this area as well. Of course, despite all those allocations, current projections are there will still be excess cash. I would be disappointed if we could not utilize that cash in a value-accretive manner. But if we can't, we will certainly return that in the form of special dividends to shareholders. In terms of dividends, the absolute amount is important to us. I think you've seen a number of companies releasing results today. Certainly, the dividend, the absolute amount of our dividend compares very favorably with regard to some bigger companies. We will look to maintain an industry-leading dividend yield. And I would suggest it's going to be sustainable into the future. So that's an important aspect that I know is important to shareholders. Just some key points on sustainability and growth that we discussed this morning in South Africa was that we've committed to make a $470 million investment in high-return PGM and gold projects in South Africa. That was approved by the Board. The combined value that is created based on very conservative gold prices is about $1.9 billion at current spot prices, so these are very valuable or very value-accretive projects. Importantly, in terms of our social focus, they do create 7,000 jobs in areas that are quite impoverished and, of course, that should lead to stability within our business. And of course, it's just the right thing to do. In terms of the outlook, as I've said, we expect improved performance from all our operating segments in 2021 as the COVID disruptions, I think, are largely behind us although I'm not suggesting we're post COVID at all. I think COVID is here to stay in the long run. But we are also entering a phase where there are really good fundamentals for the precious metals prices, and I just want to really briefly go through those and hopefully, it preempts some questions. So in terms of the different PGMs, platinum, we believe, is moving into deficits in the not-too-distant future. And I am on record as saying, in a few years, we should see platinum at $2,000 an ounce. We've driven the tri-metal catalyst research, which is delivered. Substitution of palladium with platinum is happening in China. It is happening in the U.S., and I think it will become very visible with the launch of the 2022 models where we can actually refer to specific models in North America that now will have platinum instead of palladium in their auto cats. In the longer term, platinum is underpinned by the growth in fuel cells and the hydrogen economy and we expect it to move into a deficit by 2024. Palladium, on the other hand, there is additional production coming out of the U.S. and Russia. We see some additional ounces from recycling. And of course, there is some reduction through substitution. And the deficit will reduce and it will probably move into a surplus in the middle of this decade. Of course, we're not just going to accept that palladium moves into a deficit. We see it as necessary to substitute rhodium with palladium and, of course, that will be our next focus area. We believe that the basket of these metals, the fundamentals for all of them are really, really good. Rhodium, talking just a bit about rhodium. It's a tight market. They're very substantial deficits. It's an increasing deficit. It's probably not sustainable but there are no alternatives. At this stage, the only alternative in the longer term is really substitution by palladium. So although the current fundamentals for palladium appear not to be as robust as these other metals, I think as we move into a better balance by substitution or through substitution, I think all 3 of these metals have got good long-term fundamentals. In terms of the minor PGMs, ruthenium and iridium, we've seen iridium's price running up, and they have excellent properties for the new hydrogen economy. We are the biggest producers of ruthenium, iridium, rhodium and platinum. So our company is very well positioned to benefit from the auto cat market and from the growing green economy, especially in hydrogen. Just briefly in terms of gold, gold represents 19% of our earnings so it is important. Low interest rates, which we think will predominate in the short to medium term will stimulate or underpin gold. We also see consumer recovery and some small central bank purchases, which will also underpin demand. And of course, there is a question about supply of gold in the longer term. Just finally, I wanted to, as I concluded with the presentation in South Africa this morning, just say again that the company is well positioned and offering significant value upside. Despite the increase in share price, and we use a number of metrics to determine what the value opportunity or the upside in our share price is, whether you look at enterprise value per EBITDA or you look at price per -- on a cash flow per share basis, our earnings and our cash flow per share are increasing at a larger rate than what our price is going up. And therefore, we still trade at multiples below 4, whereas our peers are trading at much higher multiples. Our market cap has moved up. We now are well north of a $13 billion company, which is probably double where -- compared to where we were when we spoke last time at a results presentation. That is good news. There's more to come. But of course, in terms of the larger markets, $13.6 billion is still not relevant. And therefore, we look forward to creating further value for our shareholders through the re-rating, the fundamental re-rating and further external growth. So with that as a summary and as a basis for probably Q&A, let me stop there. And operator, if we can open the lines for question and answers.

[Operator Instructions] The first question comes from [ Robert Mellon ] from [ Marathon ].

Neal, congratulations on a really good operating performance and kudos to you and the team.

Thank you.

So certainly, I think that what we've seen this quarter or this half is a really robust validation of your acquisition strategy over the last 4, 5 years, which I think was viewed with some skepticism at the time. As you said, you generated about $1.2 billion in free cash over the last 6 months, roughly 10% of your market cap. And clearly, the 4E and even if you extend out to the 6E baskets, they're up a bunch since then. So cash flow is going to be rather prodigious. As you look across the spectrum of M&A, certainly using cash is relatively easy to make that accretive, but to the extent that you might use some additional debt or possibly even for something large enough shares, can you walk us through how you view the metrics that you believe are important to make sure what you're doing is value-accretive to the group?