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Sibanye avoids risk, diversifies into palladium with US$2.2B Stillwater purchase

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Sibanye avoids risk, diversifies into palladium with US$2.2B Stillwater purchase

Sibanye Gold Ltd. avoids riskier jurisdictions, including in its home base of South Africa, and diversifies more heavily into palladium in a US$2.2 billion takeover of Stillwater Mining Co., a U.S.-focused palladium and platinum miner.

The deal, focusing on platinum group (PGM) metals assets, was announced early Dec. 9.

Neal Froneman, Sibanye President and CEO, stressed asset quality and also underlined diversification into lower-risk jurisdictions and palladium in a conference call about the transaction.

"The importance was the quality of the asset," Froneman said Dec. 9, referencing Stillwater's mines. "This is a tier 1 asset; the highest grade PGM asset basically in the world."

He added: "What was of real interest to us was the [palladium bias] being 78% palladium versus 22% platinum."

Stillwater mostly mines palladium at two mines in the U.S., while Sibanye largely mines gold and platinum at operations in South Africa.

The move into palladium notably increases Sibanye exposure to demand for palladium from the production of gasoline-powered cars.

Platinum and palladium, while both jewelry and investment metals, are primarily used in the manufacturing of catalytic converters, a car part that removes pollution from exhaust fumes.

Platinum is more heavily used in diesel cars, while gas cars, which dominate the U.S. and Chinese markets, depend far more on palladium.

Beyond metals, in taking over Stillwater, Sibanye also diversifies its holdings into a lower risk jurisdiction.

Sibanye has cut its teeth on gold and PGM assets in South Africa, but politics and labor relations in the country are frequently unstable.

"That is not to say we are leaving South Africa," Froneman said, but he called South Africa a "challenging environment" and questioned further investment in the country.

"I'm not sure we would be doing anything in South Africa until there's clarity on certain issues," he said.

Indeed from a risk and PGM perspective, it was the U.S. or bust, Froneman suggested.

"There's only one other region that we could really grow in if it wasn't in South Africa and that is Russia, if anything was for sale," Froneman said.

"But clearly that isn't going to improve our risk diversification," he added.

Stillwater President and CEO Mick McMullen called the deal the "best outcome for shareholders" following a recent process to consider offers.

Stillwater gets a 20% premium to the company's recent share price and McMullen noted that the deal suggests a forward-looking 14-times EBITDA multiple.

"That's a pretty reasonable premium for shareholders," he said.

Following the deal, at least one law firm quickly sent out a release looking to contact potentially discontented shareholders. A firm called Rigrodsky & Long said it sought an "investigation" of the deal. Multiple requests for comment from the firm were not answered.

On metals prices, historically raw prices of palladium, and some other PGM prices, are very high and after a recent rout have come back significantly.

"We view the fundamentals of palladium to be pretty good," McMullen said, noting he does not forecast prices. "We view the fundamentals of platinum to be less good. And that's what you're seeing playing out in the metals prices, let's say, in the last six months."

"Where do we think we are in the cycle? Clearly we're not in the bottom of the cycle. That was January. Are we at the top of the cycle? Possibly not. But we're closer to the top than the bottom."

Ultimately, Sibanye plans to borrow and raise US$750 million through a rights offering to finance the deal, which is all cash. Initially, a consortium of financial institutions will fund the deal, the miner has said, in a bridge loan.

The funding "is doable," Froneman said, but the prices it will close at "remain to be seen." Sibanye has scheduled the deal to close in the first half of 2017.