The Sibanye/Stillwater ValuationStillwater Platinum Co's guidance for 2016 is, in round numbers, 550koz Pt/Pd production (mostly Pd) at a byproduct cash cost of USD 450/oz. According to the company, realised prices are currently about USD 750/oz blended PGMs, which seems about right for an 75-80% palladium mine with spot Pd around 700 and Pt around 900. So this would be 550k x (750 - 450) = USD 165M in cash flow. Sibanye Gold Ltd has entered into an agreement to acquire all 121M issued and outstanding shares of SWC for USD 18/share in cash, which amounts to a USD 2.2B purchase price. Given that SWC has about USD 100M in net cash, this puts enterprise value at USD 2.1B, so that EV/EBITDA = 12.7. These are my calculations. According to the press release the purchase price is a 14x 2017 EBITDA multiple of IBES consensus estimate. Let's go with the analyst estimates. After all they are the experts, who sharpen their pencils, use the forward strip, out-think management estimates and guidance strategy, account for changes in working capital, and apply the various statistical adjustments of their sophisticated models in order to out-estimate the other estimators.
In two previous posts entitled "Simple Math" and "Afrithmetic" I outlined a pre-tax cash flow estimate of CAD 0.86/share for Kamoa-Kakula and CAD 0.51/share for Kipushi. All assumptions are based on current economic conditions, technical reports and management guidance, which may be read there. The time frame would be 1-2 years for Kipushi and 2-3 years for K&K at the outside. The same 14x multiple of the sum would equal roughly CAD 19/share. Assuming 40% of Kamoa's USD 1B Phase 1 debt plus 68% of Kipushi's USD 200-300M financing, debt attributable to the company would amount to roughly CAD 1/share, back this out of EV to arrive at CAD 18/share. Comes the retort, "what about the political risk!?" Stillwater is in the United States with zero political risk, while K&K is in Congo, with infinity political risk. This has been and will continue to be debated endlessly. For the most part, mining is business-as-usual in the DRC. With the landmark deal for 20% of K&K to the DRC, the operation does appear to the present author significantly derisked. If you like, apply your own discount factor. Even if this is 50%, you still have $9 per share. This attributes no value to production escalation potential, and from a geological point of view, K&K is eminently scalable; capital and infrastructure are really the limiting factors. Although SWC has 17Moz of PGMs in reserves, the size of the K&K resource is quite a bit larger, and exploration has only begun. Note also that this gives no credit for Platreef, which has similar potential to Stillwater itself, as a low cost PGM mine. Only Platreef is much more platinum-heavy, and has a multiple of the resource, albeit less developed.
As an aside, there is little doubt Stillwater's East Boulder and Stillwater mines are large and very high-grade, and this is a mining asset of a high calibre. The acquisition, if completed, may prove to be shrewd. As Sibanye uses rising cash flows, from the now fizzling rally in the gold price and the devalued rand, to acquire high quality PGM reserves in a strong currency (which has depressed mine earnings via higher costs) at the bottom of the market for the sub-sector, a reversal of fortune may prove this to be a countercyclical diversifying investment. Further weakness in PGM demand and dollar strength, relative to an industry priced off rand and rubles, would be unfavourable, but Stillwater's Tier 1 operations should not be in jeopardy.
The point of this exposition is to illustrate an industry valuation of high quality mining assets, which undoubtedly KKK&P are. Part of the discount owes to geography, but a good deal to the stage of the project. A year ago, analysts were applying a 0.4x NPV multiple to the stock; today it is 0.65. Next year it may be 0.9, and the year after, 1.2. At some point the market can take these to 1.5-2.0x NPV, and this valuation peak coincides with maximum NPV, which is when cash flows from cycle peak metal prices are sky-high. So development to production, changes in metal prices, and concomitant changes in sentiment, all contribute to valuation advances in a high quality development project in the commodity up-cycle. Hence turbo-charged returns. Some may dispute this, but in my experience execution risk and at times political risk are somewhat over-discounted, whereas asset quality, i.e., geology, financial position, and management calibre are somewhat under-appraised in the mining equity marketplace.