Is Sibanye-Stillwater’s Rally Sustainable?

South Africa’s largest gold producer, Sibanye-Stillwater [stock_market_widget type="inline" template="generic" color="default" assets="SBGL" markup="(NYSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] is facing a ton of headwinds at its mines, but that hasn’t deterred investors from bidding the stock up big time this year. Sibanye stock is up more than 60% in 2019, though it recently took a big tumble after the company announced that it will raise more capital by issuing shares.

However, there are more headwinds that Sibanye faces if we look beyond this latest share price slump, which could eventually derail its rally. Let’s take a look.

Why Sibanye Has Been Forced to Issue More Shares

Sibanye has raised $130 million by issuing fresh capital so that it has enough financial flexibility to tackle the strike at its South African operations. The AMCU strike in South Africa began in November last year after 15,000 miners rejected its wage offer, as a result of which Sibanye’s adjusted EBITDA from its South African gold operations declined 75% for the entire year.

This threw the company’s strategic goals of deleveraging its balance sheet into disarray. Moreover, Sibanye will negotiate to bring an end to the AMCU strike at the end of the second quarter of 2019 when wage negotiations are expected to commence. This is why the company has taken the help of a share offering to shore up its finances before heading into the negotiations.

In a Tough Spot

The lack of visibility regarding its South African operations, as well as a declining production profile, present big red flags for investors who should be looking elsewhere to take advantage of increasing gold prices.

The AMCU strike at Sibanye’s South African operations has knocked the wind out of the company’s operations. For the first quarter of 2019, the company expects to produce 104,000 ounces of gold. According to Sibanye, that level of production is just 36% of what it produced in the year-ago period, and represents 90% of what the company was planning to produce after taking the strike into account.

Sibanye needs to quickly resolve the strike if it wants to get its business back on track. However, that looks like a messy business right now since there have been nine fatalities due to a part of the strike turning violent.

Also, Sibanye reportedly said at the end of March that it is looking to exit its gold operations completely after winding down operations at the Driefontein gold mine in South Africa. The winding down of operations at the mine will take about a decade, as the company tries to find new opportunities to get into.

Sibanye-Stillwater is not in a great state right now. The lack of visibility regarding its South African operations, as well as a declining production profile, present big red flags for investors who should be looking elsewhere to take advantage of increasing gold prices.

There are several options out there that investors can tap into if they want to benefit from an increase in the price of the precious metal. Sibanye-Stillwater is definitely not one of them because of the challenges it faces, which is why investors shouldn’t be betting on this stock despite the gains that it has recorded so far this year.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.

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