South Africa’s biggest domestic gold miner, Sibanye Gold, has confirmed that it is to acquire Anglo American Platinum’s (Amplats) Rustenburg platinum mining operations. Sibanye was spun out of Gold Fields as a separate company some three years ago, and in its own right is already the world’s 10th largest gold miner in terms of gold output – 49.4 tonnes last year. Assuming the Rustenburg acquisition goes ahead, and there’s no reason to suggest that it will not, the company will also become the World’s fifth largest producer of platinum group metals with current output of over 800,000 platinum ounces per year – around 13% of global new mined platinum output based on the latest quarterly production figures as assessed by the World Platinum Investment Council.
Sibanye’s CEO, Neil Froneman, is of the opinion that now is the ideal time to make such an acquisition given his view that precious metals prices are currently at, or near, their likely low points in the commodities cycle. Even so it is something of a gamble given that many of the operations are marginal producers at the current platinum price, albeit just about profitable in the first half of 2015 in generating cash of around US$19 million – but the platinum price is currently around 10% below its half year average. Amplats has, however, been rationalising operations at Rustenburg, closing unprofitable sections and reducing the labour force and will continue this process until the transaction is complete.
The Rustenburg platinum mining operations are similar in many ways to Sibanye’s gold mining operations involving narrow ‘reef’ structures, and are exceedingly difficult to mechanise without excessive ore dilution. Because the rocks are younger than in the Witwatersrand gold mines, the rock temperature gradient is higher and there can be problems in dissipating heat as the mines get deeper – but in general the Rustenburg operations are not as deep as the gold mines and the platinum reefs are generally more consistent in dip and grade. Sibanye has excellent experience and a good track record so far in working these types of narrow reef horizons and is confident it can carry this over to Rustenburg.
Should precious metals prices pick up this will be seen as a very opportune acquisition, although if not the operations could prove to be a short term drag on the company’s financial performance. There are some inbuilt protections against this in the proposed deal, while there are also arrangements which will limit Sibanye’s potential profits from the operations over the next six years should pgm prices and profitability pick up.
Sibanye Media Release
The full Sibanye media release is set out below – and a more detailed report on the proposed transaction is set out on the company’s website – www.sibanyegold.co.za where the full SENS (Johannesburg Stock Exchange’s Stock Exchange News Service) statement is available.
Sibanye today announced the proposed acquisition of the Rustenburg Operations from Anglo American Platinum Limited (“AAP) for an upfront consideration of R1.5 billion in cash or shares and a deferred consideration equal to 35% of the distributable free cash flows generated by the Rustenburg Operations over a six year period, subject to a minimum nominal payment of R3 billion(“Deferred Payment”). Should there still be an outstanding balance at the end of the six year period, Sibanye may elect to extend the period by a further two years. Any remaining balance at the end of this period will be settled by Sibanye either in cash or shares.
In addition to the Deferred payment, which allows for a favourably extended payment period; should the Rustenburg Operations generate negative distributable free cash flows in either 2016, 2017 or 2018, AAP will be required to pay up to R267 million per annum to ensure that the free cash flow for the relevant year is equal to zero. This provides important capital investment and downside price protection for Sibanye, facilitating ongoing capital investment in the first 3 years following the conclusion of the Transaction. Should higher prices result in early repayment of the Deferred Payment during the first 6 years, Sibanye will share the upside with AAP.
Commenting on the Transaction, Neal Froneman CEO of Sibanye said: “We have for some time indicated our interest in participating in the PGM sector and believe that these assets provide an attractively priced entry at an advantageous moment in the price cycle. The Rustenburg Operations are similar in nature to Sibanye’s current gold operations and, after extensive engagement with AAP and completing a thorough due diligence, we are confident that we will be able to realise value for our stakeholders by leveraging our successful operating model. The Rustenburg Operations have been significantly restructured and are well positioned to benefit from a recovery in PGM market conditions and provide a platform to grow regionally within the PGM sector. The outcome is a sensible commercial transaction, which is strategically advantageous for both parties.”
Consistent with its transformation objectives, Sibanye will be including a consortium of Broad Based Black Economic Empowerment stakeholders (“BBBEE Stakeholders”) such that, at the closing of the Transaction Sibanye will own 74% of the Rustenburg Operations, with the BBBEE stakeholders owning 26%. Discussions are underway with the following broad based partners: employees, the surrounding community, the Royal Bafokeng Holdings and the Bakgatla-Ba-Kgafela Traditional Community.
The Rustenburg Operations are located centrally on the Western Limb of the Bushveld Complex, near the town of Rustenburg and comprise the Bathopele, Siphumelele, and Thembelani (incl. Khuseleka) mining operations, two concentrating plants, an on-site chrome recovery plant, the western limb tailings retreatment plant and associated surface infrastructure as well as approximately 4 months of working capital on a going concern basis. The lease area covers an extensive 28 km strike length with the ore body extending 8 km down dip.
Current PGM (4E) Mineral Reserves comprise approximately 9.7 million oz and Mineral Resources 88.8 million oz. With annual production of over 800,000 oz the Rustenburg Operations are placed firmly as the fifth largest PGM producer globally. AAP recently rationalised and restructured the Operations, eliminating loss making production and reducing the workforce by approximately 7,500 people. Operational optimisation will continue under AAP until the conclusion of the Transaction, but in H1 2015, the Rustenburg Operations generated approximately R261 million in cash, despite prevailing low PGM prices.