Sibanye-Stillwater CEO outlines strategy on green energy metals

This week Sibanye-Stillwater (NYSE: SBSW; JSE: SSW) announced the US$1 billion acquisition of the Santa Rita nickel mine and the Serrote copper mine in Brazil from London-based Appian Capital. In a webcast, Sibanye-Stillwater CEO Neal Froneman discussed the deal and the company’s broader strategy on green energy metals and developing a ‘climate change resilient’ business. What follows is a transcript of his introductory remarks.

“Core to our strategy is embedding ESG excellence as the way we do business and that’s evolved into a sustainability strategy, which I’ll cover in the next slide, and coming out of that sustainability strategy is really the strategic focus area of building an operating portfolio of green metals and related technologies, which of course is what this presentation is all about.

As I’ve said, the sustainability themes that underpin our ESG commitments are embedding human rights and ethics, developing a climate change resilient business, entrenching long-term economic sustainability and you can see all the sub aspects to that, and then of course being a data driven and considered decision making business as well. What you can’t measure, you can’t manage. But coming back to developing a climate change resilient business, there are two aspects to that, there’s a road to carbon neutrality, which is really embodied within plans on the assets we already own, and then important to climate change resilient business is building a portfolio of green metals and that is in a considered way driving our external growth strategy and of course all of the United Nations Sustainable Development goals feature in underpinning our ESG commitments.

So just looking at our strategic growth track record, and where Santa Rita and Serrote fit in, important to note, that we established ourselves as an industry leading dividend payer through our gold business, our gold business still has a long life, we took a conscious decision after two years of planning to enter the PGM space and we made a number of acquisitions in South Africa, but more importantly, we externalized the, we started the externalization of Sibanye and changed the name to Sibanye-Stillwater when we acquired the Stillwater assets in 2017. That was a transformative transaction and I would suggest very similar in many respects to the acquisition of Santa Rita that was announced this morning, and I’ll tell you why a bit later.

The acquisition of Stillwater gave us the best geographical diversity of any PGM company. It also gave us very substantial access to the circular economy through the PGM recycling business, and once we had completed this, we had a very good understanding of the underlying demands for the global carpool. And how that would include battery electric vehicles,  and we started a two-year planning exercise, getting ready to understand the electric power train, and we acquired SAF Oxford in 2019 to help us do that, and that was the start of our fourth sigmoid curve into green metals.

So two years later we’ve confirmed our understanding of the chemistries that are important for battery metals and we’ve listed it under the sigmoid curve: lithium, nickel, cobalt, manganese, graphite is not a metal but important, of course recycling is going to feature even more predominantly, and we are very happy to grow our exposure in the recycling of battery metals in the future.

Uranium, we have a considerable amount of uranium associated with our gold business, and we’ll be bringing that to account. Of course the PGMs will transition into the hydrogen economy and I want to make it very clear at this stage that we remain very confident about the future demand for PGMs. Of course copper is an important element and then of course we have also grown our exposure to the circular economy through the tailings retreatment. But post understanding what are the right battery metal chemistries and what are the right metals that make that up, we’ve recently made some very quick moves to acquire Keliber, Sandouville, the Rhyolite Ridge joint venture and the announcement this morning of Santa Rita, which is nickel and cobalt, and Serrote, which is copper. So that is how we see our strategic track record and the evolution into green metals.

There’s no doubt there’s strong demand for both battery metals and PGMs and again, I’m going to say it a few times, please do not read our entry into battery metals as having lost confidence in PGMs. In fact, these two graphics below actually show you out until 2030 we see very little change in PGM demand. We do see very significant penetration rates by battery electric vehicles (BEVs). We see fuel cell EVs becoming more of the demand post 2030, but I also want to say that we believe most assumptions on BEV penetration rates are understated and that will become evident when you look at the deficits in the metals that are required to achieve that. So we remain very confident in our very substantial PGM business but we’re building a value proposition in getting exposure to the battery metals as well.

If you look at nickel specifically, you can see the growth in nickel demand is predominantly through growing battery demand. … We expect it to reach about 20% of nickel demand, and of course there is a nickel sulphide premium, which has averaged about US$2,000 a tonne and we think it will increase.

If you look at copper it’s absolutely essential to meeting global decarbonisation goals through electrification, that’s not new, that’s well known. I think, though, when you look at the surplus/deficit graph, when you see large deficits for a period of time as you see in the graph on the left-hand side, clearly that’s not sustainable, and either you have to provide more supply, which I think is going to be quite challenging, or there are going to be constraints in what can be achieved and there will be reactions to price, and I think that’s probably more likely the scenario, but it’s not the scenario that we’ve included in our valuations to acquire these assets.

In fact the same picture is clear for lithium, as an adoption of BEVs and this being a primary metal for batteries. Clearly these deficits tell you that something has got to change. You cannot have such large deficits and again our view is that this will have an impact on the rate of penetration of BEVs into the global carpool, which of course will be to the benefit of PGMs as well, but they will both play a role and hence our need to have exposure to all these metals.

So the primary reason for today’s presentation was to share with you the acquisition of Santa Rita and Serrote in Brazil. Santa Rita is a nickel cobalt project and Serrote is a copper project. … The key terms:

It’s a US$1 billion upfront payment for the acquisition of both assets, and I want to make it very clear that we’re not taking on, in addition to that $1 billion, the debt. At closing it’s subject to normal closing adjustments for net debt and working capital, it’s all included in that US$1 billion.

The US$1 billion is based on the reserves of the Santa Rita open pit, and the Serrote existing open-pit operation. The 5% is an option fee, essentially an option fee for the potential underground extension of the Santa Rita nickel deposit. Normal conditions, there are actually very few conditions precedent to this transaction. The South African Reserve Bank approval is required … which we think we will get.

Closing is expected in Q4.

If we look at the rationale, and I’m sure my introduction has already covered some of the rationale, but if we look at the asset quality, and clearly this is part of us doing a risk management related to the acquisition. Santa Rita is a top ten nickel sulphide asset, first quartile cost production, a seven- year life of mine with potentially 27 years of underground extensions.  That’s still got to go through proper engineering work, but as I say the 5% royalty is related to that underground extension.

Serrote similar in terms, it’s also in the lower quartile of cost producers, it’s got a 13 year life of mine and both assets have potential for mine life extensions, and I don’t intend to go through all the issues in terms of strategic fit. In terms of ESG, what’s important to us, really important, is the strong relationships with local communities in both cases, and it won’t surprise you that a single management team has achieved that and that management team I will get to now, will be joining us as our management team for our Latin American growth aspirations.

Important to note that 85% of energy is hydro-power based at Santa Rita, first quartile carbon emissions and at Serrote we also have first quartile carbon emissions.

In our investor days, we very consciously and specifically exposed you to the deep depth of leadership that we have within our company, and people are considered the most important part of our business. So to us it was very important that we identify assets of this size with a quality management team. And certainly we have done that. We have had very good interactions … we have assessed a management team that has a good culture, is very competent and certainly provides us with confidence to back this management team to grow our business within Brazil. …

Looking at value creation, I can assure you that in modeling the value of these assets, and we all know what Appian paid for them, we know what capital was spent on them. To me that’s irrelevant. What’s relevant is, what is the value of these assets in our hands and I can assure you on conservative commodity price assumptions they more than meet our hurdle rate, and that’s for let’s say the areas of the business where we have a lot of confidence. It’s in the open pit reserve plan. It does not include the option value ascribed to the underground extension at Santa Rita. That’s upside. In fact I will go as far as I’ve said in the beginning, that Santa Rita is very much like what Stillwater was when we acquired Stillwater. They both had operational issues, but through our competence of understanding mining assets, through the good work of the Brazilian management team that you’re going to meet shortly, these assets have been turned around. There’s no debt that we have to deal with as in the past. And we saw that at Stillwater. We saw the upside being in the palladium price, we saw the upside in terms of blitz, and here we see the upside in terms of both nickel prices and of course the underground extension so we’re very comfortable with what we’re paying.

It’s an attractive entry point in the commodity cycle, we may think that copper and nickel prices are relatively high, as I’ve shown you we are working towards very substantial deficits and I suspect it will be difficult to bring on supply to offset those deficits, so we expect a positive price reaction. Both assets will contribute very substantially to free cash flow at current commodity prices, so they are value accretive from day one. Just in terms of upside potential … Santa Rita has an underground extension, which once we’ve done the engineering and as long as it stacks up, will  extend the mine life by 27 years. There’s onsite resource potential and of course there’s regional exploration opportunities both at Santa Rita and Serrote. At Serrote we have the potential to debottleneck the system or the plant, and as you would have seen, this is in the early stages of ramp-up. So again, lots of potential upside.

Just to reinforce the fact that these were acquired at an attractive entry point from a value point of view. We’ve looked at multiples, enterprise value based on 2022 EBITDA multiples, as an example, you can see the acquisition multiple is well below nickel peers, it’s below the copper peers as well. If you look at P/NAV multiples, again the acquisition multiple is well below some recent acquisitions and peer comparisons.

We are absolutely elated with the fact that we have been able to acquire these assets that exceed our hurdle rate in terms of our measurements, but when we stack them up against the market peers, we are also very happy with our acquisition.”