Sibanye Gold Ltd (ADR) (NYSE:SBGL) is a big business miner with a couple billion dollars in annual sales and operating margins of nearly 20%. Sibanye is the largest producer of gold in South Africa and one of the ten largest globally, and it is now much larger after acquiring the largest producer of PGMs (Platinum Group Metals) outside of South Africa and the Russian Federation, Stillwater Mining. Sibanye Gold Ltd (ADR) (NYSE:SBGL) will add $700 million in revenue with Stillwater and will instantly become a worldwide powerhouse in producing gold and PGMs. In a nutshell, that’s why SBGL stock’s 32% intraday collapse is such a great buying opportunity.
Fact is Sibanye Gold Ltd (ADR) (NYSE:SBGL) is a big, profitable business with a strong balance sheet. However, there is essentially zero value in Sibanye stock, and the $2.2 billion acquisition of Stillwater was not easy to absorb.
SBGL stock trades at 4.5x earnings. Prior to Friday, Sibanye Gold Ltd (ADR) (NYSE:SBGL) had a market capitalization near $2 billion. This makes it hard to acquire a company for $2.2 billion, and it makes debt markets a necessity. With that said, Sibanye Gold Ltd (ADR) (NYSE:SBGL) was forced to finance $1 billion at a 60% discount to its closing stock price the day prior to complete this acquisition. Importantly, that is the deal it could get to close this acquisition. As a result, SBGL stock was heavily diluted and fell 32% on Friday in response to this news.
While the stock loss is discouraging for Sibanye stock owners, it is imperative to keep in mind that it was necessary to close a game-changing acquisition that will ultimately create tons of shareholder value long-term. Yes, it will be difficult in the short-term thanks to the dilution and the costs that come with absorbing a company of equal value.
However, the purchase of Stillwater will enable Sibanye to boost PGM production 50% to 1.5 million ounces a year. Sibanye will then become the world’s third largest palladium/platinum producer. Furthermore, the acquisition of Stillwater gives Sibanye the world’s highest-grade PGM deposit with significant production upside over the next five years.
Even with dilution, SBGL stock trades at a mid-single digit P/E ratio, is highly profitable, and its balance sheet is still strong. With this merger, and others over the last year, Sibanye Gold Ltd (ADR) (NYSE:SBGL) is well positioned as a very diversified miner. Investors are naturally discouraged by the loss, but understand it was and is necessary.
BNL Members can continue to read below and better understand how we plan to play SBGL stock in response to Friday’s loss. Prior to Friday, Sibanye Gold stock was about 1% of the BNL Portfolio, but at such a cheap valuation and a 7.6% dividend yield, SBGL stock should be a bigger piece of a high growth, aggressive portfolio strategy.