THE BOTTOM LINE
Was Sibanye’s roll of the dice good for it - or just the bank?
$500m deal (or bet) gives it breathing room to trade its way out of its current state, but the cost is also extreme
As a way to understand the true nature of a streaming deal in the mining industry, one instructive measure would be to quickly compare the tangible book value per share (BVPS) of the companies involved. The BVPS of gold companies is about six times its share price on average.
The most valuable streaming company, Franco-Nevada, on the other hand, trades about 25 times tangible book value per share. In the world of mining, the streaming company is the same as the bank in the casino: they don’t lose.So news that Sibanye-Stillwater has concluded a streaming deal for $500-million is something of a double-edged sword. One way of looking at a streaming deal is to think of it as you would a bond issued to a distressed bank. The bank is betting it can trade its way out of its problem and is prepared to give away some of its financial upside to back that bet. But should shareholders celebrate or mourn?
In Sibanye’s case, the streaming deal has two immediate benefits. It means a thumping cash call is now off the cards. Secondly, it has the breathing room to trade its way out of its current state, at a more leisurely pace.
But the cost is also extreme, as you would expect when cutting a deal with the casino’s bank. The company itself estimates that the price of gold and palladium would have to rise by 27% to match the company’s cost of debt. Analysts suggest it will cost the equivalent of about a 6% interest rate per year at current spot prices.
Throw all these aspects into the mix, and the fact that Sibanye’s share price didn’t move much on Monday from its parlous state is probably a fair reflection of the pros and cons of the deal.