Wednesday, January 03, 2018

South African Dealmaker Takes a Punt on Platinum
Since 2015, Neal Froneman has turned Sibanye-Stillwater into a major force in precious metals.

Henry Sanderson and Neil Hume
Financial Times
JANUARY 1, 2018

He is known in banking circles as Neal “the deal” Froneman, and for good reason.

Since 2015, the South Africa-born mining engineer has launched four takeover offers, turning Sibanye-Stillwater, the company he runs, into a major force in the precious metals market.

But Mr Froneman’s appetite is far from sated. In December, he made his boldest move yet, launching a £285m all-share offer for Lonmin, the London-listed miner on the brink of collapse.

If the deal is approved by regulators and shareholders, Sibanye will become the second-largest producer of platinum in the world, a remarkable result for a company that was formed only five years ago out of two unwanted gold mines spun off from South African producer Gold Fields.

Mr Froneman is betting he can restructure Lonmin and use its smelters and refineries to process the ore Sibanye digs out of the ground.

But the deal comes with considerable challenges, including cutting thousands of jobs at a company that has struggled with labour disputes at its mines in South Africa.

The future of platinum as an industrial metal is also uncertain given its use in catalytic converters, which are not needed in electric cars.

It also comes after the $2.2bn cash purchase of US palladium and platinum miner Stillwater in 2016, which left Sibanye with a large debt load.

While the Lonmin deal will not add to its borrowings, it will increase Sibanye’s exposure to the platinum price.

“He’s taking a contrarian bet in a sector that’s very unloved and so far it’s worked out well for him,” Richard Hatch, an analyst at RBC Capital Markets, said of Mr Froneman’s move.

Even though the platinum price has slumped 33 per cent in the past six years, it shows no signs of recovering. It is currently trading at its biggest discount to the closely related metal palladium since 2001.

Analysts at BMO Capital Markets see the price falling a further 16 per cent in 2018 to $964 an ounce and staying around $1,000 between 2019 and 2021.

A steep decline in the sale of diesel vehicles in Europe because of environmental concerns is one of the factors depressing prices.

It is against this backdrop that Mr Froneman has made his bid for Lonmin but, beyond closing Lonmin’s older mine shafts, the South African engineer has said that Sibanye will not cut profitable production to help balance the market.

However, the company will stick with Lonmin’s plans to close older shafts and to cut more than 12,600 jobs, of a total workforce of 32,500, over the next three years.

These particular promises could encounter resistance from politicians and trade unions in a country where unemployment is about 28 per cent. The Association of Mineworkers and Construction Union (AMCU), the majority union at Lonmin, has already indicated its concerns about the takeover.

“If you buy this asset and if the platinum price goes up, you have the best operational leverage and you look like a hero,” said Ben Davis, an analyst at Liberum. “But the bigger concern would be the political ramifications if things go bad. Can they turn off those [mining] shafts? That has blowbacks.”

Even if Sibanye is blocked from buying Lonmin, 12,000 jobs will disappear, Mr Froneman said. If he is allowed to combine the two companies, 20,000 jobs will be secured.

Mr Froneman has a reputation as a fixer, for his ability to buy cheap assets and turn them round. He first gained that reputation for his work on Harmony Gold Mining in the 1990s.

He made his first foray into platinum in April 2016, when he acquired Aquarius Platinum for $294m. Six months later, he bought the nearby Rustenberg platinum mines from Anglo American Platinum, a unit of miner Anglo American.

Mr Froneman dramatically cut costs at Rustenberg, averting the closure of up to 300,000 ounces of production. He will use that experience to restructure Lonmin, according to people close to the deal.

“He doesn't make a move until he knows the people he has can run the asset or the local team he buys can run the asset and are respected,” one adviser said.

For Mr Froneman the real benefits will come from having Lonmin’s refineries, which will enable Sibanye to become a “mine-to-market company”, processing metal from his existing platinum mines.

“Aquarius, Rustenberg and Lonmin fit together,” Mr Froneman said last week. “They fit very nicely together.”

If he can pull off the Lonmin deal, Mr Froneman said Sibanye will have completed its platinum strategy and will be able to think about its next acquisition — a gold deal in North America.

“Of course, we’d like to grow our gold business more, and that will get your attention in the not-too-distant future,” he said.

No comments: