Can Sibanye’s Valuation Rerate after the Stillwater Acquisition?



Enterprise value ratio

The EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio is a good measure for capital-intensive industries. It helps investors compare companies based on various capital structures.

The graph below compares gold miners’ EV-to-forward-EBITDA to the EBITDA margin for 2017.

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Breakdown of miners’ valuations

Anglogold Ashanti (AU), one of the largest gold mining players, has an EV-to-EBITDA multiple of 5.3x. That’s the highest among South African miners. Its estimated EBITDA margin for 2017 is 35.2%.

AU’s diversified production base and lower exposure to risky mining prospects in South Africa are the major reasons for the higher multiple.

It’s worth noting that South African producers are trading at a significant discount to global peers such as Barrick Gold (ABX) and Newmont Mining (NEM), which have multiples of 7.8x and 8.0x, respectively. Much of the discount is due to the geographical exposure of AU compared to seniors.

Gold Fields (GFI) has the highest expected EBITDA margin of 46.0%. But it’s trading at 5.0x. Harmony Gold (HMY) is trading at a multiple of 2.1x with an EBITDA margin of 31.0%.

Valuation rerating?

Sibanye Gold (SBGL) is currently trading at a forward multiple of 2.7x. It’s most likely factoring in a discount due to its full exposure to South Africa. The company expects a significant valuation rerating after its recent acquisition closes. Sibanye’s CEO (chief executive officer) Neal Froneman said during the conference call, “We suffer from low multiples when you look at our relative ratings compared to our peers; and one of the aspects is that Sibanye has all its assets in South Africa. And I think having exposure into a more stable jurisdiction with Tier 1 assets should see an improvement on the multiples.”

A more favorable geographical exposure as well as a favorable impact on its production and cost positions could also drive a valuation rerating for Sibanye Gold. Froneman also said the company is expecting an IRR (internal rate of return) of 17.0%. The potential increases from the acquisition could drive this up further, which would also be favorable for a Sibanye rerating.

Anglogold Ashanti accounts for 4.5% of the VanEck Vectors Gold Miners ETF (GDX). You can also consider the SPDR Gold Shares (GLD) to gain exposure to gold.


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