Sibanye Stillwater Limited (SSW) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen [indiscernible] and a new addition of our online [indiscernible]. We want to get an update from Sibanye Stillwater, world's largest platinum, palladium producer and #3 gold producer in the world. And James Wellsted is here with us, the Executive Vice President, Investor Relations and Corporate Affairs of the company. Good morning, James, to South Africa. How are you?

Morning, [ Johan ]. Very well. Thank you, and yourself?

Yes. Thank you. All fine. So far, all good. Yes, I'm a shareholder of the company, long-term shareholder, I have to disclose that upfront, of course, and also the company is part of the SRC Mining & Special Situations certificate. Yes, well, Sibanye Stillwater, a great company. You just celebrated, I think, your 10th anniversary, if I'm correct?

Yes, this year.

Yes. And what you have achieved in 10 years is really outstanding. So let's talk a little bit about first on 2022, because I think it was another year which was, in some parts, not so easy for you. You had that big flooding in Montana. I think you had again some strike actions. So please comment a bit on 2022?

Yes. Thank you, Johan. Yes, it was a challenging year in some aspects. I mean, there were some external factors which presented quite significant challenges, not only for ourselves, but for the entire mining industry. And obviously, as you know, those are macroeconomic issues, concerns about a slowdown -- further slowdown in the global economy, rising interest rates and inflation pressures that are affecting companies worldwide, skill shortages which we've had to deal with, and then also, obviously, the political situation in Ukraine. So that's added quite a lot of complexity to the operating environment. We also experienced external events like the 1 in 500-year flooding in Montana, which affected the whole region. And actually, as you said, resulted in access to our Stillwater mine being affected. So we couldn't get people in and out of the operations, even though our infrastructure was not damaged itself. The roads and the bridges were damaged. And as a result, we lost 7 weeks of production at that mine, which accounts for about 60% of our U.S. PGM production. And it then took us another -- up until November to really rebuild the production back to normal levels. So that was quite a significant change which impacted -- event which impacted our U.S. operations. And we also restructured those operations, or really repositioned them for lower palladium prices, which we now expect going forward. We've got more positive outlook on platinum and rhodium. But certainly, palladium, I think, we believe it's going to be under a little bit more pressure than it might have been a couple of years back.

Why do you stick with palladium? Why do you think?

It's mainly because -- was partly because of the increased substitution that we're seeing of platinum with palladium in gasoline water catalysts. If you remember the gasoline internal combustion engines primarily use palladium as the catalyst, and then, the diesel vehicles primarily use platinum. And what had happened in the past is, [ there'd ] been a shift from diesel towards gasoline internal combustion engine vehicles after the VW Dieselgate scandal that happened in 2015, which pushed the palladium price up significantly. In 2020, BASF developed what they call a Tri-Metal catalyst, which allows for substitution of that same palladium with platinum. And we're seeing that coming through, and it does mean that by about 2025, it will mean about 1.2 million ounces of less palladium demand and increased platinum demand. So you went on one side, but less on the other end. In the U.S., our U.S. operation is mainly a palladium mine, and as such, we've restructured it in that way. The other event that impacted quite significantly was the gold strike, which was unfortunate, but we had to take a position with the unions. They were demanding well above inflation increases, which would have deemed fit through the entire wage negotiations and our PGM operations in South Africa. So we decided to take a stand, and as we've done in our U.S. operations [ time ], get a more inflation-linked agreement, which then creates more sustainability of the operations. And we were successful in doing that, but it didn't mean we had to take a 3-month strike. And that is that most of the first half of the year, we produced very little gold. And then we also had to build up production in the second half of the year, which we achieved by about October, November. So both the U.S. PGM and SA gold operations were very, very severely disrupted. And going into 2023, we obviously expect a much better than not normal production levels. So we should see a much more stable operating performance with improved production, improved revenue and lower costs from those operations.

So that means that the outlook is much more on the positive side, I would say, first of all, for profit, for the net earnings, but also maybe for the dividend, because we saw quite a dividend cut compared to 2021. But I think, despite your disruptions, you guys looked it well on the cash flow side, right?

That's correct, Johan. I mean, 2021 was by far a record for the company. We had very, very high PGM prices due to various supply constraints, et cetera, with Norilsk flooding and then Anglo Platinum having their problems with their concentrators or their processing division. So prices were very, very elevated, and that pushed us to record levels of profitability in 2021. So we were always going to struggle to replicate that performance this year, particularly with the disruptions we had. But overall, we were free cash flow positive, and in fact, we managed to maintain our positive cash position on our balance sheet for 2021, which is very good, positive from a future perspective. It puts us in a very strong position going forward in terms of, obviously rewarding shareholders, but also growing the business in a value-accretive way. But because of that positive cash flow, we were able to pay at the end of our dividend policy again. It was lower than 2021, but it still was a 6% dividend yield for the year, which is well above most of our gold and a [ PGMs ] in the industry.

Yes, definitely. I really enjoyed that too. I think the [ payout ] is end of the month, right?

That's obvious.

That's good. So cash flow in my pocket. Great. Let's talk shortly about safety because, I think you guys have also improved massively on the safety, right?

Yes, that's correct. So we did have a regression in safety last year, particularly in fatalities, which was very, very concerning and tragic for the business. We had 21 fatalities last year, and it actually was replicated what we saw across the industry. So we're not 100% sure, but we do think it may have something to do with coming out of COVID, teams not been used to working together, et cetera. But nonetheless, we put a very, very significant focus on safety in the middle of last year, and we started to see those improvements -- sorry, in 2021. And we started to see those improvements coming through towards the end of the year. And that continued in 2022. We saw further improvements over 20% plus in most of the safety metrics that we measure. And most importantly, what's on the fatality side, we had a significant reduction, 75% reduction in fatal incidents with 5 fatalities for the year compared to 21 in the previous year. Now obviously, 5 is all 5 to many, but it does give us a lot of confidence or hope that we are doing the right things, and that we will be able to advance on this or progress on the safety performance and get closer to our goal of 0 harm in the workplace. So we're not quite there, but certainly, we've made very, very big strides in improving safety.

You were also -- you were already talking about the strike last year. So how long is the wage contract now running? Meaning, do we have to face maybe again a strike this year, or have done that over several years?

Yes. So we've got 1 negotiation this year in our Kroondal operation and the PGM operations. But I think, given that -- and again, as I said, the gold strike was a precursor to our PGM wage negotiations last year, and what we achieved there was a historic outcome for our business and for the industry, in fact, because a lot of our peers also achieved the same outcomes -- was a 5-year inflation-linked agreement. So what that means is, previously we had 3-year agreements, and they were timed consecutively with gold. It was a year after our gold operations. So what we'd experienced was that we'd be negotiating gold 1-year, we'd have that strike like we did last year, and then you'd go into PGM wage negotiations. And that causes a lot of uncertainty and disruption in the business. Now we've locked in 5 years inflation-linked. We know what the cost impact is going to be each year. And then it buys us essentially 5 years of relative peace and stability of those operations, which is going to be incredibly important for positioning going forward, because these are the biggest profit generators in our business.

Okay. Let's talk about future profit centers, because I find it really interesting that you guys are moving a bit away from the precious metal side, moving into the battery metal side. And I think last year was very important to you because you are only now 85% of Keliber and the construction of the lithium refinery has started. So, also in addition, Sandouville, Eramet, you bought with the nickel refinery, that is also producing already positive contributions to your business. So please give us a bit more insight onto those 2 operations, because I think those are -- yes, within the next 12 to 18 months is becoming very important for you, right?

Yes. So we have started looking at battery metals as an opportunity prior to 2017. It was really when we got into the PGM space. In 2019, we acquired a research group called SFA Oxford, who did a lot of work on understanding the battery chemistry, the evolution of the battery and electric mobility, and then which metals were going to be critical to that future. And we identified, obviously, the ones that everyone knows about, lithium, nickel, cobalt, which is in difficult area. So we struggled to get in there. But certainly, copper, et cetera, of interest to us. And in 2021, we were able to make quite significant moves into the battery metal space. We did 4 transactions into the green metals environment. We did Sandouville in France. We acquired a 30% stake in Keliber, in Finland, which is a lithium project. We acquired an option to do a JV in the U.S., in Nevada, called Rhyolite Ridge, which will be another significant lithium project. And then we bought a reprocessing --tailing -- reprocessing stake in Australia in a business called New Century, which we've now acquired control of. But Keliber, that's the one that you mentioned, we recently increased our shareholding from the initial 30% that we bought, to about 85%. We reduced the number of minority shareholders from 114 to 10, and that allowed us now to then progress with that project. So we got permitting for the refinery -- the lithium hydroxide refinery, which we have -- the Board approved the project, and we started the construction of that refinery in Kokkola in Finland, which is very, very close to the European ports and is of strategic significance. And then we've recently received a permit for the concentrator in the second mine that we will be developing to feed that refinery. So we're busy with that process, but it's very exciting. It means that we will -- we should be producing our own lithium hydroxide delivering into the European environment, by about 2025, 2026, about 15,000 tonnes of lithium. And certainly, as you say, I mean, if the lithium prices stay where they are, or even that -- the kind of prices that we've seen in the last 2 years, these are going to be very, very positive contributions to our profit over the next 5 to 10 years.

But what cost per tonne do you expect approximately?

Listen, we use much more conservative prices. When we bought the first 30% stake in Keliber, the lithium price was about $13,000 per tonne. We're using about $26,000, $27,000 per tonne for our valuation purposes and for our planning, but it's been sitting at around $60,000, $70,000 per tonne. So some of the analysts have remarked actually that, if Keliber -- I mean, if the price stays where it is last, $60,000 per tonne, there is a bit of a pullback at the moment. But if it stays at those kind of levels, Keliber will be actually worth more than our market cap at the moment.

Crazy. Okay. I got to buy more shares. No, because, obviously, I really see it like that. I think it's a healthy correction in the midterm market because it was hopefully [ heated ] definitely. But I think -- in the long-term, $50,000 to $60,000 per tonne, I think it's a no-brainer because the demand is there but not the supply.

Yes, that's exactly the problem. I mean, it took us 10 years to permit Keliber in Finland. And what we're seeing around the world is a similar situation. We adjust the time to get these operations permitted and into production -- is so long. And we've got a chart in our results, which -- if people want to go and have a look at our results presentation on our website -- which shows that on -- what we're seeing at the moment is that there were a couple of brownfields expansions in Australia, Chile, et cetera, which has brought on some supply, which will mean that there's more balance in the market for the next year or 2, and we expect the lithium prices to come back. But beyond that, for the demand that's been projected for battery EV, electric vehicles projection or entering the global auto sector, we're going to need a lot more new projects being brought online to fill that demand gap. And we just don't see those projects. The risk is much more skewed on the supply side. So in our view, there's going to be a significant deficit from about 2026 onwards, and that means that prices are going to be elevated. Not only battery metals or lithium, but also it means that there's not going to be -- the penetration of battery electric vehicles that people have been kind of forecasting, is not going to be possible, which means that the internal combustion engine vehicles are going to persist for longer, which means greater demand for our PGMs as well. So for us, it's a win-win. We'll win on pricing on the battery metals, but we'll also win on greater demand on the PGM side because of the supply issues that we are about to [ have ].

Absolutely. So that means you underwrite business.

We have that.

And let's talk shortly about nickel -- Sandouville, the nickel refinery you bought from Eramet. I have the feeling, that is also something really for the future because we were talking, I think, it was last year -- about battery recycling, and that is something which will come yes, online, I could imagine within the next 3 to 4 years, when the first wave of the e-cars maybe are coming back, because the battery is down, it's below those this 80% levels. So what is going there with the battery recycling? Because I think this is also part of the future [ game ] recycling definitely, because we need the raw materials. If we look at the environment, it makes much more sense to recycle than to maybe build a new mine when possible, yes. So I have to think, your thinking is really correct. On the one hand, you have a mining business, but also you have a recycling business like with the autocatalysts you have already. So how is it going with the battery recycling and how is it going with the nickel refinery itself? Because I saw in your balance sheet, it's really contributing now, and I could imagine you want to grow the business?

We -- it contributed in the first half of the year, but unfortunately, second half of the year with the higher input prices, European -- the gas prices were a lot higher, and we had some disruptions at our plants. Remember, we acquired it from Eramet in February last year. So we've been integrating the business. We do have to spend a bit more capital because it's been an unloved asset in the Eramet for some years. So we -- what we are trying to do at the moment is get the existing facility back to profitability on a sustainable basis, and that will take a year or 2 to get there. But in the meantime, we are also looking at the feasibility of a PGM recycling business at that facility. And then also, as you said, first of all, battery metal refinery to produce nickel sulfate for the growing battery metal industry in Europe, and particularly France. We've aligned with Verkor for instance, which is going to be building the first Giga-factory in France, and the idea is to try and align our product with what their demand is going to be with the chemistry that they're going to be building their batteries with. And then, also build a relationship so you can start to process some of the waste from that battery metal production as your recycling -- your initial recycling. And then, that will obviously get built on through batteries that are recycled at the end of their lives. So we are trying to position ourselves at the moment. As you say, it will take a little bit more time before we get there. We've got to do the studies. But certainly, in the next 3 to 4 years, we'd expect to have some very positive moves in terms of that.

So we were talking now about precious metals, battery metals, but I think one metal we missed so far -- I saw an interview with [indiscernible]. He has the same opinion as I have, copper $7 per pound. Yes. So I found it really interesting because I had the feeling I'm the only one, I've seen that. But if [indiscernible] sees it the same way, it looks like that I'm on the right path. But the thing is, to me -- is copper something you would maybe pursue in the future a bit more harder and, let's say, put more of the focus on? Is that something you could imagine?

Copper is certainly of interest to us. It's been -- it's a much more competitive industry than -- or sector than what we've already moved into. You've got a lot of big players -- a lot of the big diversified players already involved in the copper market, as you know. But as you know, they've also had some issues in South America with some of the copper mines, existing mines and the expansions. Where we see an opportunity and our CEO, Neal Froneman has spoken about it, is potentially in Africa and Zambia, particularly where the -- historically a very famous copper belt, which has not been developed adequately over the last couple of years due to various factors -- relating political factors and others. And there's a new government in place, a new President, and they're very -- they think very economically or commercially and are trying to attract investment into the country, and to try and reinvigorate that industry. So at the moment, there are processes underway with some of the mines, Mimosa and Kokkola -- sorry, your KC or Kokkola Copper Mines, which is a Vedanta mine, et cetera, which are now being looked at again, and there are processes underway with government to try and find new operators for these operations. And we are obviously participating in that process. It's still quite early days, but we do think we've got a very strong case because of our deep-level mining experience being located in Africa and operating in the African environment. We think that we can make a very good partner for the Zambian government in those operations.

Well, it sounds a very good game there. Okay. For the end, very interesting for our shareholders is, of course, if you expect higher profits this year, how we're going to benefit? Higher dividend, share buyback?

Listen, our dividend is obviously very important to us. We want to maintain a leading dividend. We do see -- unless there's a significant collapse in the precious metals prices, which we don't foresee at all -- And also, we've got the benefit, obviously, of the rand in South Africa, that does tend to weaken when the dollar is strong. So it does offset those kind of movements in gold and PGM prices. So we're actually still experiencing 50% plus adjusted EBITDA margins at our SA PGM operations. And as I said, with our gold operations, we were 50% down in terms of production last year. That will recover back to normal -- or has recovered back to normal levels. The U.S. PGM operations will be back at normal levels again in 2023. So we're expecting a much stronger performance this year. And with current prices, we should see quite a strong recovery in our earnings as well, and that would support a higher dividend and cash flows. Now obviously, further returns to shareholders. I think the Board will have to consider at the time, depending on the prevailing environments, the economic outlook, political environment. But certainly, it's something that we have committed to is to continue to return value to all stakeholders.

All right, James. Thank you very much for the 25-minute update. Fantastic. Yes, definitely, I will consider to buy some more shares. That is for sure, because I think you guys are in the right businesses and you are expanding into the right metals. I really like that. And yes, I wish you all the best. Thank you very much and hope to see you soon.

Thank you. Thanks [ Johan ].

Yes. Ladies and gentlemen, he was James Wellsted, the Executive Vice President, Investor Relations and Corporate Affairs of Sibanye Stillwater. You heard it last year, it was a challenging year with the super flooding in Montana on the PGM production there, but also they had this big strike. And -- but they solved everything in a February fine way. Now they have a 5-year wage agreement which makes it really -- which makes it [ capable ] for the foreseen future here. That is, on one hand, fantastic. On the other hand, I really like the expansion into the battery metals, especially with Keliber, with Sandouville, but also with the iridium project in the U.S.. And yes, those things are really -- look very, very promising. And I could also imagine, like James said, higher margins for this year, better. The prices stay hopefully at least stable, maybe move higher, but also improving margins, and that means higher dividend and maybe some share buybacks. We will see. Definitely, stock price is too low. You should really check on share buybacks in Stillwater. Thanks for watching us and bye-bye [indiscernible].