Ratings agency S&P Global has revised its outlook for JSE- and NYSE-listed Sibanye Gold to negative, over concern about the gold miner’s ability to absorb potential near-term liquidity events.
The agency cites factors such as upcoming wage negotiations at its South African platinum operations, the integration of recently acquired Lonmin, and the extension of its R6-billion revolving credit facility as reasons for its decision.
“The negative outlook reflects that we could downgrade Sibanye if liquidity deteriorates further, or if new strikes or lower-than-expected metal prices result in continued negative free operating cash flow that delays Sibanye's deleveraging,” the agency reported on Thursday.
Wage negotiations at the South African platinum group metal (PGM) operations should start this month. The Association of Mineworkers and Construction Union (AMCU), which led a five-month strike at Sibanye earlier this year, on Friday said it would seek a monthly basic wage of R17 000 for its members. The lowest-paid worker in the platinum sector currently earns about R11 000.
“Sibanye's contingency plans in the event of a protracted strike include having larger mine stockpiles to extend the processing period before operations are affected, and a refining pipeline that should deliver cash flows for the first three months of any strike,” S&P stated.
The agency said the cost of a strike at the PGM operations would amount to about R350-million a month, compared with over R500-million a month during the recent strike at Sibanye’s South African gold operations.
“While Sibanye is, in our opinion, better prepared to manage losses occurring from a potential strike at its South African PGM operations than it was at its South African gold operations, prolonged strikes – exceeding three months – would most likely lead to significant deterioration in credit measures and liquidity.”
Further, Sibanye's latest gold production guidance for 2019 indicated that losses would be wider than previously anticipated, with negative earnings before interest, taxes, depreciation and amortisation amounting to between R1.5-billion and R2-billion.
S&P also cited Lonmin’s reporting weaker operational performance in the second quarter of 2019, which was expected to continue for the remainder of the year.
“On a stand-alone basis, we consider Lonmin's business profile is weaker than Sibanye's, reflecting its status as a single-commodity producer in a single location, and its position in the fourth quartile of the industry's cash cost curve,” the agency reported.
While the acquisition increased Sibanye's exposure to South Africa and its inherent risks, as well as adding to its fixed operating cost base, potentially diluting its margins and lowering the company's resilience to PGM basket price downturns, S&P said it was confident in Sibanye’s track record of successfully realising synergies with acquisitions. “Our current assessment [is] that the Lonmin acquisition will be neutral to Sibanye's risk profile over time.”
S&P noted that Sibanye's creditworthiness would “significantly depend on its operational performance, the realised rand exchange rate, and precious metal prices”.
While noting that new strikes, lower-than-expected metal prices, a stronger rand exchange rate, or unexpected operational issues could lead to a downgrade if Sibanye liquidity were to deteriorate further, S&P also noted that the outlook could be revised back to “stable”, should Sibanye's operational performance strengthen.
“An established track record of resilient and stable operational performance across the asset portfolio, as well as improving cost profiles, could also support a stable outlook.”