The Rand, South Africa & SBGL

Fin24.com reprinted an article that had originally appeared in Bloomberg, titled Rand Perks Up After Moody's Reprieve. 

I have written about the benefits of a weaker rand on the PGM and gold producers. Revenues for these companies are denominated in dollars, but local mining expenses are paid in rand, so as the rand weakens, the margins increase. This however is a double edged sword, dependent on whether a rand weakening is a foreshadowing of an economy that ceases to function. Yes, that is a strong statement, but its implications, from higher tax rates to substantially higher ESKOM energy rates cuts the other way on margins. 

At the moment, the country has muddled thru, and the weaker rand is a benefit to margins. But be sure that the situation with the rand and with the economy of South Africa is a real issue on the minds of the country's CEOs. Interestingly, another cut at this is that a serious disruption of the economy should, by definition, lead to a disruption in mining, and as such a decline in the production of platinum group metals, in the country that is the largest miner of PGMs, and consequently, higher PGM prices,

All of this is just conjecture, and my guess is that the country and the mines muddle thru, and while there may be periodic issues, it will mostly be more of the same.

Now, back to the Bloomberg article, a relevant perspective, and the "back" story. While S&P had downgraded South African (SA) country debt to junk in 2017, Moody's maintained its Baa3 rating. This avoided the junk designation, and the forced sale of 225 billion rand of SA bonds, according to the Bank of New York Mellon, since the country would no longer be eligible to be part of the FTSE World Government Bond Index. 

Such a designation would certainly lead to a drop, if not a crash in the rand and seriously impede any possibility of funds flowing into the country, to help, for example, forestall the collapse of ESKOM. The SA utility has 450 billion of rand debt and is already receiving a 138 billion rand bailout from the government, which it can ill afford. 

This quote from Cristian Maggio, TD Securities London based head of emerging market strategy, that appeared in the article, is sobering: "South Africa has been a car crash in slow motion. We're still at a point where that car has not hit that wall, but you can definitely see that's where they're going."

Frankly, yes, all of this is sobering... not only in reflecting on the possible dislocations and its impact on people living in South Africa, but on the implications for business and for SBGL, in particular.

My own view is that this risk is a balanced one to some extent, given what I continue to perceive as a very inexpensive market cap for SBGL, in part reflecting these issues, and the potential for sharply higher metal prices not only as a result of the direction that the precious metals market is currently heading, but due to  problems within the country. SBGL has a commanding position in the world's platinum and rhodium markets as the number one producer of these critical elements, as well as its number 2 position in palladium, based on CEO Neal Froneman's brilliant diversification with the acquisition of US based Stillwater Mining. 

The Stillwater acquisition is an important hedge, and SBGL's remarkable lock, even stranglehold, on platinum and rhodium production, to me is a source of confidence that somehow this will work itself thru, to the benefit of Sibanye Stillwater. The world simply can't afford any disruption in supply in the PGMs, given how tiny supply already is and the deficits that already exist in the palladium and rhodium markets. 

I think it is fair to say though, that  at a minimum, the markets will become increasingly more aware of this dynamic, which will likely lead to higher PGM prices and lend further support to what I also perceive as the very bullish gold environment. Perhaps it also leads to volatility in SBGL, but to me both the trend and the fundamentals remain up.

Leave a comment