Buy SBSW
The Stock: Sibanye Stillwater Ltd
The Ticker: SBSW
The Trade:
Purchasing shares:
Buy shares of SBSW up to $12.50. Low price target: $16.40. High price target: $41. Timeframe: 3 to 5 years.
Sean’s Note:
I recently discussed how June is typically a terrible month for the stock market — especially during a midterm year.
Below is a chart showing the average monthly returns of the S&P 500 (a broad index of the American stock market) during a midterm year:
The blue bar represents the average monthly return, while the green dot represents how often returns are above that average.
As you can see, in June, the average monthly gain is -1.8%... and 61.1% of the time, the market’s returns are worse than that.[i]
Considering that the S&P 500 is down about -8.27% between June 1 and June 21 so far, it seems like this statistic is going to hold true this year.
So what does that tell us, since July tends to be a positive month?
The best way to play the market at this time, then, is to buy on dips and average down costs in our stocks.
For that reason, many of my recommendations this month will involve buying back into my past recommendations to average down costs on stocks that still look attractive.
To determine which growth stocks we should buy, I applied three formulas from the hedge fund manager Joel Greenblatt:
Share Price / Earnings before Interest and Taxes per share (over the last 12 months)
This determines how “cheap” a stock is. And:
Earnings per share / Share Price
This determines how “profitable” a stock is. And:
Earnings before Interest and Taxes per share (over the last 12 months) / (Net Current Asset Value Per Share – Cash Per Share) + Net Fixed Assets
This determines how “capitally efficient” a stock is.
I then applied these formulas to every stock I’ve recommended so far to find which one seems like the best value with the highest growth potential.
Below, then, is my original investment thesis for Sibanye Stillwater (SBSW), which ranks at the very top according to these formulae.
Trade Notes:
If there’s one industry investors should generally avoid, it’s mining.
Mining is a nasty business. It’s expensive to open and operate a mine. It’s fraught with regulatory hurdles and all sorts of uncontrollable risks. And the value of the actual products they produce are subject to the whims and caprice of an ever-fluctuating global market.
(It is also the only industry I have found where companies regularly report how many fatalities occur as a result of normal operations. Unpleasant stuff.)
Most mining companies—especially ones without proven production—have asymmetrical downside risk. That’s a fancy way of saying: you can lose all your money.
For that reason, I’m extremely picky when it comes to mining companies.
However, when economic conditions are right, the business is perfectly situated to benefit from a long-term trend, and the company is actively producing materials…
Well, then mining companies can produce exceptional returns for investors.
So when a colleague recently told me to look into Sibanye-Stillwater (SBSW), I was initially skeptical…
But after looking into their operations and long-term plans, the company does indeed seem uniquely situated to benefit both from the current macroeconomic environment as well as major trends that will unfold over the next 10 years.
Let me explain…
The next U.S. Producer Price Index (which measures inflation companies must face, rather than consumers) comes out tomorrow, on March 15. I expect it to reveal a fairly shocking increase in producer prices.
Why?
Because right now, due to the crisis in Ukraine, we’re seeing the costs of materials from wheat to neon facing extreme pressure due to scarcity.
Take semiconductors, for example. Microchips in every device need neon (for laser lithography). Microchip components need palladium (for chip capacitors).
90% of the world’s neon comes from Ukraine. 40% of the world’s palladium comes from Russia.
And of course, all the uncertainty in the world pushes many investors to retreat to gold for safety.
Sibanye is a South African company and one of the world’s major producers of precious group metals (PGMs), with market dominance on platinum, palladium, and rhodium.
PGMs are chemically similar elements that are widely used for industrial, medical, and electronic purposes. These elements are used in catalysts, electronics, fuel cells, glass, ceramics, and pigments, as well as medical/dental and pharmaceutical applications.
Right now about 16% of Sibanye’s earnings (EBITDA) comes from gold…
But 58% come from PGMs.
The increased demand as well as the increased prices of these materials have sent Sibanye’s financials skyrocketing.
The company reported record financial results in early March for the year of 2021.
Profits went up by 27%. Free cash flow increased by 88%. And the company continues to increase its asset base (read “active mines”) and reward shareholders by paying down debts and paying hefty dividends.
If all of that were the end of the story, though, I still wouldn’t recommend Sibanye.
The reason being: You always have to wonder how much near-term price increases are “priced in” to a stock.
So we need to look farther out and see if its recent growth is sustainable.
It’s here that we see Sibanye’s potential.
The company has one of the most progressive, forward-looking growth strategies I’ve ever seen in a miner.
Sibanye has been investing a tremendous amount of money into so-called “green metals.”
Materials like lithium, nickel, cobalt, graphite, and manganese that are essential to modern battery technologies used in electronic devices and electric vehicles.
In addition to this, the company is expanding heavily not just into mining these materials, but recycling them as well.
The company has expanded into recycling all of these metals.
In fact, in 2022 the company expects to produce more PGM materials from its U.S. recycling operations than its U.S. mining operations.
That puts Sibanye squarely in front of a tidal wave of demand that’s hitting just as the supply of necessary materials is becoming increasingly constrained.
For that reason, I think this company is a strong buy…
But expect this company to be extremely volatile. Sharp dips and sharp spikes. Treat dips as a potential opportunity to sell out and buy again at a lower price, and don’t be shy about capturing quick profits if the stock shoots up.
Company Info:
Sibanye Stillwater Ltd is a South Africa-focused mining company. The Group currently owns and operates five underground and surface gold operations in South Africa: the Cooke, DRDGOLD, Driefontein, and Kloof operations in the West Witwatersrand region, and the Beatrix Operation in the southern Free State province. In addition to mining, the company owns and manages extraction and processing facilities at its operations, where gold-bearing ore is treated and beneficiated to produce gold ore. The gold ore is further refined at Rand Refinery into gold bars with a purity of at least 99.5% and is then sold on international markets. Sibanye holds a 44% interest in Rand Refinery, global refiners of gold, and the largest in Africa. Rand Refinery markets gold to customers around the world.
Key Stats:
Market Cap
$12,267,991,500
HQ
South Africa
Sector
Basic Materials
Industry
Gold
Exchange
NYSE
Relevant Company Financials:
SBSW caught my attention due to the outstanding spike in its revenue and profitability.