Sibanye-Stillwater mine in Montana, US. (Photo: Supplied) 
In the US state of Montana, the setting for the classic book A River Runs Through It and the movie it spawned, Sibanye-Stillwater landed the big one when it acquired the palladium-rich Stillwater operations in 2017 for $2.2-billion.
Now that catch is one of the reasons the company is reeling from the collapse of platinum group metals (PGMs) prices and is casting around to shore up its balance sheet. Stillwater accounted for $2.1-billion of the $2.6-billion in asset impairments that took the company from a $1.2-billion profit in 2022 to a $2-billion loss last year.
In the wake of that fall-out and depressed prices, Sibanye on 7 June announced it had renegotiated covenants on R6.5-billion in debt with 11 international and four South African banks.
This will raise the covenants to 3.5x earnings before interest, taxes, depreciation and amortisation (Ebitda) from 2.5x. Lenders can call in the loans if these thresholds are broken.
Analysts have applauded Sibanye for taking proactive measures on this front, but none of this was in the script.
“Stillwater went from the poster child to the serial underperformer,” Arnold van Graan, head of markets research at Nedbank, told Daily Maverick.
The initial reasons for the Stillwater transaction were as clear as a Montana stream. The operation mines the world’s highest-grade PGM deposits, and 78% is palladium – the key ingredient in emissions-capping catalytic converters for petrol engines.
Stillwater promised rich earnings in a jurisdiction devoid of South African risks, such as labour unrest, rampant crime, policy uncertainty and chronic power shortages.
Sibanye emerged more than a decade ago as a spin-off from Gold Fields’ deep-level and labour-intensive gold mines in South Africa. Adding Stillwater to its portfolio was pivotal in the company’s drive to diversify from those risky roots.
It was seen as such a game-changer that the company changed its name from Sibanye Gold to Sibanye-Stillwater – embedding the acquisition in its corporate identity.
And Stillwater initially delivered.
Within five years, the costs of the acquisition were repaid, and in 2019 the operation accounted for half of Sibanye’s Ebitda.
In 2021, Sibanye posted record earnings as palladium and rhodium prices were launched into orbit.
But the US PGM operations were now contributing a smaller percentage of its earnings, though still generating cash.
The Montana mines saw a slight decline in adjusted Ebitda that year to $727-million from $741-million in 2020, whereas adjusted Ebitda for the whole group soared to almost $4.6-billion from just shy of $3-billion.
These were the first glimmers that the grass is not always greener beyond South Africa.
“Palladium prices were the star performer in that transaction’s performance. To give them credit where credit is due, Sibanye got the timing right. They bought it at a low palladium price and then it had a phenomenal run and Stillwater did very well on the back of that,” said Nedbank’s Van Graan.
“But because of the significant run in the palladium price, a lot of the operational challenges at Stillwater went unnoticed.”
Production had been curtailed by a rail collision in June 2021 and that triggered a shutdown of mining blocks. Eskom also seemed to haunt the shafts, with power outages caused by extreme weather in December that year.
And costs were bubbling to the surface, driven in part by a skills shortage in North America’s mining sector, in part by royalties.
A river runs through it
And then a river literally ran through the access road to the mine in 2022 – a once-in-500-year flood event that shut the operation for about two months.
So there was a perfect storm brewing as PGM prices started crashing back to Earth.
From a high of close to $3,000 an ounce in May 2021, the price of palladium has sunk below $1,000 an ounce. For an operation with a palladium production base, beset by rising costs and operational challenges, this is quite material. An expansion project also came screeching to a halt – a prudent move under the circumstances.
“They then ran out of flexibility and mined themselves into a corner. The key to a successful mining operation is that you always need to have flexibility because it allows you, when you have an operational setback, to move those crews and teams to another area and they can keep on mining,” said Van Graan.
Palladium and PGM prices more broadly have been waylaid by a range of factors, including the fragile if rebounding global economy, the rise of electric vehicles, and the sluggish demand for cars with internal combustion engines that reflect these trends. Chinese substitution in the making of fibreglass also hammered the rhodium price.
“Higher prices will take care of a lot of the problems but more cars need to be sold and they need to have internal combustion engines,” Van Graan said.
Some analysts maintain that Stillwater’s shortcomings have long been apparent.
“It’s in a pristine area and it was always going to be difficult to expand. And not all of the shafts were sunk in the right places and the labour force has always been expensive and difficult,” one mining analyst, who asked not to be named, said.
Sibanye for its part still sees Stillwater as a key asset, and views the fundamentals as in place for an eventual rebound in palladium and other PGM prices. A lot hinges on when US interest rates start getting cut and that now looks like it won’t happen before November.
“Some people are saying why don’t you close the operation, but we believe we are at the bottom of the cycle and that prices will recover. And it is hard to close down an operation that is so important to the local economy,” Sibanye spokesperson James Wellsted told Daily Maverick.
Unlike a prime Montana trout stream, that price outlook remains murky. But a recovery in the palladium price would turn Stillwater into a money-spinner again. DM
This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.
You may write a letter to the DM168 editor at heather@dailymaverick.co.za sh
