Neal Froneman’s career has been a series of risky acquisitions. Either he turns around lossmaking mines bought at a snip, or he buys assets at the bottom of the market cycle. Sometimes it’s both, such as the clever purchase of platinum mines that propelled his Sibanye-Stillwater to a market capitalisation of R169bn in 2022 from R10bn nine years earlier.
But his latest gambit – to provide “mobility metals” lithium and nickel to under-supplied Western markets – is taking time to come together. It could be Froneman’s biggest test yet, partly because it involves doing two things not attempted before by his company.
Firstly, unlike previous embarkations, Sibanye-Stillwater is building greenfield production. Secondly, the projects are not in South Africa’s precious metals industry which Froneman knows well as a former manager at Harmony Gold, JCI, and Gold Fields. The Keliber lithium project is a joint venture with Finland, while Rhyolite Ridge is in Nevada in the US, a state known in the mining industry for its vast gold resources.
On top of this, the two projects are expensive. Froneman has gone big in the debt and capital markets before – a rights issue for Stillwater Mining in 2017 was one of South Africa’s largest ever – but $1bn in preproduction costs for Keliber and Rhyolite Ridge, the latter not yet committed, is a big test for the South Africans. It comes just as cash flow from Sibanye-Stillwater’s platinum group metal (PGM) production dries up amid last year’s 40% decline in average metal prices.
In June, lenders agreed to relax their debt covenants which was a signal to the market that it should be fairly sanguine about Sibanye-Stillwater’s immediate debt relief prospects. Despite this Froneman desperately needs the PGM markets to recover. Nickel is also in deep trouble after the supply of low-grade exports from Indonesia knocked prices 30%.
Responding to a question at the London Indaba conference in June, Froneman told delegates the firm’s palladium-dominant US mine Stillwater could be placed on care and maintenance if the metal’s price continued to slumber. Previously he said the mine was too strategic to warrant mothballing. The fact that it’s now under consideration demonstrates the difficulty in the market for the group.
In just over six months, Sibanye-Stillwater has unveiled rounds of restructuring of its gold and PGM mines affecting more than 10,000 employees. The dividend, a key feature of Sibanye-Stillwater’s business case, was passed at year-end.
Expressing their frustration, nearly half of the firm’s shareholders voted down Froneman’s executive pay at the AGM in April. Sibanye-Stillwater’s market capitalisation was back to R60bn.
There’s been speculation that Froneman, who turns 65 this year, will soon retire. He stepped down from the Minerals Council South Africa where he’s long been an office holder in favour of Richard Stewart, 46, his number two in South Africa, COO, and most likely successor. But it would be a mistake to call time on Froneman right now.
Asked at the conference to dwell on things he might have done differently in his career, Froneman couldn’t think of a single major mistake. While the market would agree empire-building is his weakness, Froneman thinks Sibanye-Stillwater has actually been too reticent especially when opportunity knocks. So put that in your pipe, he seems to say. Clearly, you don’t get to be Neal Froneman by worrying about past events.
Instead he believes the recovery in PGM prices is imminent, and lithium prices will start soaring just as Keliber begins primary mine production. (It will treat third-party supply while it starts up.) “From 10 years ago to now, given our share price, I think we’ve done fairly well,” Froneman told conference delegates. “When I look at where the world is today, we are exceptionally well positioned, but we do need to accelerate our impact.”
Mad World
In South Africa, Froneman has long achieved commercial success on distress. He is a turnaround specialist of struggling mines usually by reducing overheads or having mines share services previously unavailable to them. As opportunities dry up in South Africa he’s hoping to capitalise on geopolitical chaos in the international mining market.
China’s dominance in critical minerals production has Western economies on the backfoot. In this struggle of “East versus West”, Sibanye-Stillwater wants to become a supplier to Europe and the US, and is prepared to take bold political positions in order to win favour. At the London Indaba he was openly critical of China, which leverages state-backed balance sheets in order to compete for assets. “I don’t know if there’s a word for ‘capital’ in Chinese,” he asked, facetiously.
“We have to help level the playing field as most of the companies we compete against are Chinese state-owned who talk about debt in terms of percentages,” says Froneman. “You can’t compete in the western capital market with companies that allow percentages of debt on balance sheet.”
Shareholders, however, have different priorities to Froneman’s politics of disruption. They are concerned the prolonged slump in PGM prices will damage the balance sheet further, and ask whether the company has done enough to restructure unprofitable production. “We expect Sibanye to announce further major restructuring/closures including Stillwater, Sandouville (a nickel refinery in France) and South African PGMs,” said Adrian Hammond, an analyst for Standard Bank Group Securities in a note in July.
Sibanye-Stillwater is RMB Morgan Stanley’s least preferred PGM stock. Market news on PGMs remained “mixed” in its view. In terms of PGM equities in general, the bank has cut its 2024 earnings estimates. Target prices have been reduced 3% downwards as a result. Analysts worry that despite evidence of supply deficits in most of the metals, sentiment continues to weigh against the PGM market.
Many of the traditional supply-demand drivers are less impactful than conventional wisdom suggests, while financial market factors tend to have a material influence on the price – Arnold van Graan, Nedbank Securities
Arnold van Graan, an analyst for Nedbank Securities, says sentiment and trading activity tends to have a greater bearing on short-term price movements than normally supposed. “Many of the traditional supply-demand drivers are less impactful than conventional wisdom suggests, while financial market factors tend to have a material influence on the price,” he says.
He does believe however that autocatalyst demand will continue to shape PGM market direction. The improved outlook for the internal combustion engine and the increased interest in hybrid electric vehicles, which use some PGMs compared to their electric vehicle models that don’t use any, is also supportive to the PGM market.
Based on this assumption, Froneman thinks prices for the likes of palladium, rhodium and platinum are due for imminent improvement.
“I think we have got to understand what is going to make up future mobility especially based on issues of global warming and carbon footprints,” Froneman told conference delegates of future demand for PGMs. “In the medium term PGMs have specific qualities. Fundamentals show that they are in deficit. It is not long now before we will see a pop in the price.”
There’s an enormous amount riding on how PGMs perform for the remainder of this year for Sibanye-Stillwater. The final instalment on its Keliber project falls due this year while a decision on whether it will take up its 50% stake in Rhyolite Ridge must also be made. Clearly, Sibanye-Stillwater has to press ahead but without damaging its balance sheet.
“There’s nothing fundamentally wrong with the market. It’s just a cyclical downturn including PGMs which is subject to destocking,” says James Wellsted, head of Sibanye investor relations. “But we are not going to stand still. We will respond to the PGM market by cutting high-cost shafts but we are comfortable in our long-term view,” he says.