Earnings Labs

Sibanye Stillwater Limited (SBSW)

Q2 2020 Earnings Call· Thu, Aug 27, 2020

$11.90

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the Sibanye-Stillwater Interim Results Presentation. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Neal Froneman. Please go ahead, Neal.

Neal Froneman

Analyst

Good morning to those in America and good afternoon to those in South Africa and Europe. It's indeed a pleasure to welcome you to the presentation of our H1 2020 results, which I have the pleasure of presenting. As always, moving on to the second slide, that's a Safe Harbor statement. And I would urge you to take note of the forward-looking risks related to this presentation. Moving on to the next slide and the foundation of any business is, of course, strategy. And we constantly measure ourselves according to our strategy. And our strategy is simply strengthening our position as a leading international precious metals mining company by doing the following. And it really starts with and I'm looking at the 12 o'clock position, building a values-based culture, ensuring safe production and operational excellence, deleveraging our balance sheet, addressing our South African discount and then based on a strengthened equity rating pursuing value-accretive growth. Of course, all of that is pulled together by embedding our environmental, social and governance excellence as a way we do business. And I would like to move on to the next slide and actually just look at how we are progressing related to each one of those strategic goals. I'm not going to go through the slide in detail. But, first of all, looking at building a values-based organisational culture, we made good progress during COVID. We actually used the opportunity to accelerate our program, but still work in progress. And as you can see, we think we're about halfway there. Ensuring safe production and operating excellence, I personally think that as a company, we did extremely well, considering the COVID disruptions and from an operating point of view and a progress point of view we've given ourselves a big tick. Embedding ESG excellence…

Charl Keyter

Analyst

Thank you, Neal. Good morning and good afternoon. It gives me great pleasure to share our financial performance with you today. Moving on to the half 1 2020 results. As has been highlighted throughout the presentation, COVID-19 had a significant impact on quarter two. If we start with our deleveraging profile, you can see that net debt-to-adjusted EBITDA, which to date has been our primary financial performance measure reduced to 0.55 times that is down from 1.25 times at half 2 2019. And we are now well below our covenant limit, which is set at two and a half times. Net debt on an absolute basis reduced by 38%, or R5 billion to R16 billion. Adjusted EBITDA considering the impact of COVID-19 increased to just below R50 billion. The conversion of the convertible bond, which is currently trading well above the soft call will reduce debt and leverage significantly. As illustrated, you can see that net debt-to-adjusted EBITDA on a pro forma basis would have been 0.23 times at the end of half 1 2020. Looking at the next slide. The group is in a very good position from both the liquidity and the debt maturity position. And our next meaningful debt maturity is the 2022 bonds of $354 million dollars. Gross debt as at the end of half 1 2020 was R28 billion, and our medium term target is to reduce this to R15 billion as stated previously, and we are not far from our target considering that we are 12 billion cash on hand at the end of half 1 2020. First half 1 2020, we have already started repaying the rand and the dollar RCF, as I believe the risk of accessing these RCF's has abated. If we turned to the income statement, half one so 154%…

Neal Froneman

Analyst

Thank you, Charl. And I'll do the last part of the presentation now and I first want to talk about the PGM market outlook and I'm not going to spend too much time on this because we are in a very volatile phase that can change at short notice, but at this point in time, on the supply side, we are estimating a 15% decline year-on-year predominantly based on the South African PGM production, which has been disrupted due to the lockdown due to COVID-19. We also expect the recycling supply to decline by 15% year-on-year in 2020. On the demand side, order demand is expected to fall about 20% year-on-year to about 17 million passenger vehicles. We only expect passenger vehicle sales back to 2019 levels by 2022. And on the demand side, we will really expressed a very bearish jewelry outlook previously, but we will revise this down again by 20% in 2020 and 2021. As such if you now look at the market balance, our longer term forecasts remain unchanged. And rhodium moves closer to balance in 2020 and 2021. Platinum surplus narrows this year, but it increases in 2021 due to increased production from the South African region. And we believe and I have seen some commentary that there is some suggestion that substitution of palladium with Platinum won't happen, I can assure you it will happen. And actually it's inevitable. And if we don't do this, we will not alleviate the sustained palladium deficits and OEMs have a need to reduce the cost. So that will also provide a solution to the increasing cost of rhodium. Overall, we remain positive about the overall basket price when these moves change place, and I expect you will have much better visibility of substitution from 2021. Moving just…

Operator

Operator

Thank you. [Operator Instructions]. First question comes from Arnold Van Graan from Nedbank. Please go ahead Arnold.

Arnold Van Graan

Analyst

Good afternoon. So a couple of questions my side Neal. So the first one is can you just quantify the COVID losses for this half? Maybe I missed it and sorry if I did just sort of ounces per operation. And then my other question is related to Blitz. What really is the issue there seems geological challenges can you just give us a upgrade on executive working countering. And then the other question that relates to that is, will you be able to ramp it up to the regional plant level? So, you said it will ramp up it is going to take longer, but can you achieve your initial targets? And then importantly from a cost perspective, given the delays and given the geological challenges that you're facing there. Do you think you'll be able to achieve your regional envisage costs on that operation? Thank you.

Neal Froneman

Analyst

Thanks, Arnold. Let me answer your questions in the order you gave them. So the COVID losses, and I don't have it in answers, but if you look at what was achieved in quarter two was roughly in the South African operations roughly 50% at Gold and 50% at Platinum So we lost 50% of quarter two's output and you can put a number to that. In terms of Blitz, it's a myriad of issues. And I'll ask Chris to come in. I'll just give you my view and then you can get it from the horse's mouth. But let's start to - our challenges started with the fall of grounds that we had, there was some knock on effects where we tried to concentrate mining, and we had ventilation constraints. And I must say all of these are actually just typical startup type problems that you find with bringing a new mine online. I've experienced that many times before the COVID, the COVID disruption is one way we can't complete some of the capital expansion around the most and we've had to remove a lot of contract labor in order to run let's call it the rest of the business, which is more steady state. And the ongoing impacts of COVID are really on the growth side of that business that's almost the flexibility we have to switch that on and off. So when you couple all of that, and let's say our improving understanding of the whole body, we anticipate delays of something like between 12 and 18 months, we are busy just redoing some of the planning around that. Let's walk it up to its original target of 300,000 ounces of additional production. And we expect that to happen 12 to 18 months later, Chris, I don't know if you want to add anything to what I've said.

Chris Bateman

Analyst

Neal, I mean quantify on the COVID cost in the U.S. those 3 million in the first half related to increase costs of COVID that equates to about 10 bucks an ounce was still spending around $500,000 a month and related to COVID. And I think Neal you hit all of the key points, we did have force majeure declared on various mill parts and we had a very short time period to respond to the COVID outbreak and one of the things we agreed with the county health officials Neal mentioned in his presentation was getting people upside. So we suspended a lot of the surface works the non-critical capital, we did keep going with Blitz underground development and we're pushing through that during COVID. I'm pleased to report good progress being made on the Benbow terminal which will connect the east side to the west side of Blitz, and we're expecting to finish that up in the first half of next year. We've got through the most challenging grants on there. That will open up a lot more ventilation, and as we develop on the 56th level, which was one of the other three main tunnel infrastructure we're drilling and further defining the ore body. And as we get that data, we're running it back through the models because the initial drilling was from surface and not density to fully define the ore body. So progress has been made. There'll be more news as we really run the numbers and look at the timelines with the impacts from COVID.

Neal Froneman

Analyst

Thanks, Chris. And we ready for the next question.

Operator

Operator

Okay, the next question comes from Laurence Heller from JPM. Please go ahead Laurence.

Laurence Heller

Analyst

Hello, can you hear me?

Operator

Operator

Yes.

Dominic O'Kane

Analyst

Hello. This is Dominic, JPMorgan. I got three questions if you don't mind. The first relates to the gold assets. So if we look at the guidance for second half of the year, we could be looking at a potential 50% increase in the output. The reserves for your South African gold operations are based off 600,000 rounds per kilogram. The current spot price is over a million rand per kilogram. How should we think about the optionality and the strategy in the gold assets? And if you don't mind, I'll may be follow-up with two quick questions afterwards?

Neal Froneman

Analyst

Okay, thanks, Dominic. Yes, you correct. The significant upside in the second quarter. And our planning parameters are conservative. And it does open up the opportunity to scale up our gold business and probably in flexibility looking at cutoff grades and so on. And I would argue and of course we would do that although we prefer to rather retain the margin than then let's say increase output. So we will look at that going forward, but I think the point is that our current gold business is being well managed at a certain level. And even if we were to I suppose, stretch it a bit more, that's still only going to be I don't know maybe 15% of revenue in the future. So, it is something we will constantly optimize and look at, but I think your overall sort of points you're making is upset.

Dominic O'Kane

Analyst

Okay. And then just two follow-on questions. So the Lonmin synergy number is up-scaled again. But how conservative is that number written realistically? Because Am I correct in assuming that there is no assumption in there for long-term mining synergies with respect to the boundary between Marikana and Rustenburg? And then my final question is related to sort of the comments around value accretive growth and I guess one of the things that we talk about with investors is M&A aspirations. Could you maybe just give us some context around what the rush is for pursuing those types of valuable creative growth opportunities and what the criteria you and the board are currently setting for looking at sort of M&A growth options?

Neal Froneman

Analyst

Yes. So let me pick up on the Lonmin synergies. It's our experience that the mining related synergies when you think of crossing boundaries and saving capital infrastructure is actually much bigger than these type of synergies that we've tabled today. And the problem is they come some way in the future and it's normally a commitment to progress a project. So there is no doubt in my mind that there is still significant upside in terms of value to be created from things like mining through boundaries, and so on at Lonmin. I would, however, say that I've considered our teams. We thought the 730 million overhead synergies was conservative. And it has turned out to be conservative. But remember, we also only had limited ability to do due diligence and hence, the conservative original estimates. So I wouldn't suggest you should go and extrapolate the increases year-on-year that we've had, I would say, we're now getting towards the sort of overhead synergy number that we always envisaged, but do not want to make public just because we didn't have the background information to do that. In terms of value-accretive growth, suppose we've made it very clear that certainly from an entry into PGMs, we like the idea and we see a lot of complementary benefits. When we look at the battery metals, there has been a study that is ongoing and remains an area of interest. We have previously said that we like gold, and in fact earlier this year prior to COVID gold would have been a really good entry. And the basis on which we said that is somewhat counter cyclical to PGMs and it is a business we know well, but it's incredibly difficult to find value in gold today. So we maintain a watching…

Dominic O'Kane

Analyst

Thank you very much.

Operator

Operator

The next question comes from Chris Nicholson from RMB Morgan Stanley. Please go ahead Chris.

Chris Nicholson

Analyst

Hi, good afternoon, Neal. Good afternoon, Charl. I also had three questions to be quite brief, and the first question is that it appears that you've drawn down on the inventory pipeline to the tune of about 150,000 for youngsters, we'll say in South Africa, and but what extent will you need to rebuild that later this year? So where are we in terms of those pipeline inventories? Second question on Blitz, I'm so interested to see that you're CapEx guidance for Stillwater is pretty much unchanged this year. Maybe a bit surprising given the slowdown we've seen in the Blitz project in particular, maybe just highlight why that CapEx has still come to prior levels? And should we be expecting with the extension of Blitz, CapEx exceeding, let say R200 million to R250 million next year or to what we call teach ethics. And then the final comment if you have some shave either and to travel to from the dilation of the convertible bond. This would seem to be obvious thing to do with your life that your final five your presentation tool shows. Thank you.

Neal Froneman

Analyst

Yes, thanks. Thanks, Chris. And funny we as an executive team did receive your note just before the call and your 130,000 ounces of inventory drawdown is not corrected probably less than half of that, and I think you got affect it in the force majeure and the blockage that we had with the Anglo converter issue, and you're right on the CapEx development, and the applets - you are right on the CapEx number, but I think as Chris pointed out, we have tried to continue to develop to get flexibility I would think that there could be an increase in total capital for Blitz because of the delay you do have fixed project costs, but as Chris also said, we are running a - let's call it an assessment of Blitz to come up with a re-plan. And that should probably be in the next three to four months. It'll be completed. So we'll give guidance on if there is any CapEx increase, which I think they may be I mean, that's just being you know, it's logical. In terms of share buyback due to the convert, and the answer is probably no. And the reason is that when we entered into that convert, what sorry - let me take a step back. When we entered into the acquisition of basically Stillwater, we would have wanted to do a bigger rights offer and have more equity and the pin in terms of the financing for Stillwater. Some of our shareholders couldn't step up to the plate, and we didn't want to overly burden them and dilute them so. So we had to embark on a smaller rights offer. And I think in terms of the convert and where it was struck in there, and the whole rights offer, at was our hope that the convert would convert and because we raised a lot of money at about 18, 19 rand Shea and you know the nice thing about a converter that converts it at a much higher price and then the stock price. And therefore we would like to see that we become equity in the company. And I also think we want to be prudent without our cash. And I understand the benefits of buyback. But I don't think in this case, that's what we are going to do. But that's not a final decision, Chris.

Chris Nicholson

Analyst

Great, thank you and other points on inventory. Thank you.

Neal Froneman

Analyst

Thank you, Chris.

Operator

Operator

The next question comes from Adrian Hammond from SPG Securities. Please go ahead Adrian.

Adrian Hammond

Analyst

Hi, Neal and team. Please - Neal, given the change in fortunes for boomers have led, could you just reiterate your capital allocation strategy to us? And secondly - previously, you mentioned that all cash flows from the gold business would be returned to shareholders. But obviously, that's still under the water, despite record gold prices. So how do you think about this strategy going forward? And would you consider divesting of these assets? Do you think they'll be better in the hands of other producers?

Neal Froneman

Analyst

Thanks, Adrian. And certainly image data front, we have no intention of divesting of our gold assets. I think in the longer run, we see real benefits of being a precious metals company, not just the PGM company, and if anything, we'd want to build out gold profile at the right point in time. Only at that point in time, maybe we might consider improving the let's call it the risk profile of the company. But certainly we like the exposure to gold. So coming to capital allocation, and I think that's it's suffice to say at the moment, we were very prudent on the dividend declaration, it was really only 15% as opposed to somewhere between 25% and 35%. It's I think we are just being prudent in terms of there could be a little bit more volatility in the last half of the year. And I think we would want to just be well positioned for that I think Charl made it quite clear that coming to a final dividend, and I think it'll be substantially bigger, I don't want to commit now. And we would like to get more towards our dividend policy in terms of a final declaration. So in terms of capital allocation, it is still very much the same. It's, I think our leverage post, let's say a convertible bond conversion will be at levels where that is very sustainable. That means the cash that is not allocated to let's say direct costs and capital, we don't intend to really embark on any major growth capital at this stage other than that, that's committed such as Blitz. The first priority remains returning cash back to shareholders in terms of our commitment to dividend out gold, all the gold earnings, we intend to do that I just think you need to give us a better chance just to get to steady state and make sure that the COVID disruptions are somewhat behind us and then I think we would have to sit back and say the balance of the cash especially at these commodity prices, can we employ it perhaps better than what our shareholders could, and if we can't, well, then I think our shareholders can look forward to even more cash returns. That's really how we think about capital allocation in this case.

Adrian Hammond

Analyst

Just to be clear then, I mean, if you're going to reduce debt through the calling of the bond, you should get pretty close to gross debt of 15 at no cost to you really, other than raising other than issuing new shares. So, just trying to understand what you intend doing all the cash because your dividend policy, then perhaps would you reconsider adjusting that policy to return more cash to shareholders or would you keep the balance short for potential M&A?

Neal Froneman

Analyst

No, I think we would be - if we cannot create more value than by returning it back to shareholders, we will exceed our dividend policy of 25% to 35%. So Adrian, we would have to see at the time, but certainly it would be very nice to return more cash back to shareholders than this.

Adrian Hammond

Analyst

Thanks and just maybe one question for Richard, if he is around, just want to - could you perhaps give us some color on how we should think about sales versus production at Rustenburg for the year given the benefits you had of the pipeline in H1 and whether there's going to be a lag effect in H2 at all, please?

Neal Froneman

Analyst

Rich?

Richard Stewart

Analyst

Sure. Good afternoon, Adrian. Yes, it's I think just in terms of sales in a very high level as Neal mentioned, two different factors, obviously, the COVID impact and then the downtime on the converter plant. Roughly speaking, if you take the total pipeline over Rustenburg, that was - it's called a depleted net of being delayed through force majeure notices and COVID against metal that's been delayed into the future. We're looking at about 50,000 ounces on the Rustenburg side, and Marikana saw benefit of a similar amount due to treating material essentially stepping in for processing and totaling on behalf of [indiscernible] during that period for the other operations. I hope that addresses your question Adrian.

Adrian Hammond

Analyst

Just say, are we going to balance out by the end of the year in terms of a full year number, or is it going to be like into a next year?

Richard Stewart

Analyst

No, we'll be balanced after we'll be comfortably balanced out by the end of the year Adrian, that’s right. Yes.

Adrian Hammond

Analyst

Great. Thanks.

Richard Stewart

Analyst

Thank you.

Operator

Operator

The next question comes from Leroy Mnguni from HSBC. Please go ahead, Leroy.

Leroy Mnguni

Analyst

Hi, good afternoon guys. A couple of questions, please. So the first one is when Anglo Plats declared the force majeure, and you processed your own material, I understand it would have been brief because the lockdown kicked in, but how did your processing operations cope with the increased volumes? Were there any learnings any sort of areas of concern around increasing the throughput? And then just on the substitution of platinum back in for palladium in the gasoline Autocat. Like I understand that the time it was a specific model in the U.S. where it was going to be applied and it was quite a large vehicle. Are there any indications at the moment that solution can be applied a bit more broadly, or slightly smaller models? And then, just lastly, you spoken quite a bit about your equity being cheap at the moment and it needing to re-rate before you consider value creative M&A. I mean, how do you think about that, how will you know when equities fairly valued? Is there a kind of an absolute share price? Is there a target multiple? Or do you just kind of use a peer group average? Thanks.

Neal Froneman

Analyst

Yes, thanks, Leroy. And let me pick up on the force majeure. And because it was such a quick move from let's call it total lockdown to you can restart your business. There was very little and slowly and the other thing is of course, Anglo platinum repaired their converters much, much quicker than what we expected. There was very little processing that actually went through from Rustenburg into the Marikana facilities now, so we never really got to test the nameplate capacity, but there were a lot of learnings. It's not as simple process just to one day add in another constituent of PGM. So, there is a lot of chemistry involved and a lot of planning and logistics. So getting to understand the sulfur content the copper and nickel and so on. It was critical and that took our team some time to get to grips with and then of course introducing you no match or any other material into a process not through your normal pipelines is challenging. So there were a lot of good learnings. I would say that other than having tested or not being able to test our processing facilities for that additional material, we learned a lot and we are certainly in a much better position, should another incident like that happen. So, that is what happened around the force majeure issue in terms of substitution clearly from the last time we spoken mentioned this issue COVID-19 has occurred and I would suggest that most companies have been busy navigating their way through a lockdown and a restart and supply chains have been severely disrupted, so substitution hasn't been the main focus. And as far as I'm aware, larger vehicles are still predominantly the target market. And it's not just in America, I think we already seen substitution in China. And just repeat your question on value accretive growth again. I just lost track of that.

Leroy Mnguni

Analyst

Sorry, that was just how do you gauge when your share price, the value is and when you're ready to do M&A?

Neal Froneman

Analyst

Yes, sorry. That's a good question. And really, I think it's all relative. So the last slide in the presentation is the slide that tells us whether we are being valued appropriately and it's really based on multiples and where you slot within your peer group, and when you sit at the bottom of those tables and we know why we are there, I really do believe it'll change because our risk profile has changed. But that's only when you sit and you're in your peer group, can you really start considering the relative valuation of your equity. There is not an absolute number. It's how you all already relative to your peers, of course to shareholders, this is an absolute number. And, and we know that number is significantly higher than where it is now.

Leroy Mnguni

Analyst

No, thank you.

Operator

Operator

The next question comes from Alexandre Ayoub from Waha Capital. Please go ahead Alexandre.

Alexandre Ayoub

Analyst

Hi, and thank you very much and congrats for the results. I'm calling from the bond side. So just want to have a bit more insight on the capital structure, your use of cash, if you don't mind reminding us quickly on the debt strategy. So what is it you want to hit the 1 billion gross debt? And we'll be using some of that cash to decrease your gross debt. Is that correct?

Neal Froneman

Analyst

Alexandre, I'm going to actually ask Charl to fill that question. Charl?

Charl Keyter

Analyst

Yes, Alexandre. Good afternoon. Yes, I mean, exactly that remember - that we've put out a quality intermediate target. Our first primary consideration was to get our leverage below one, which we've achieved now. And the next target we imposed upon ourselves was to get out grossed it down to about $1 billion, and that is simply a number that we back calculated to make sure that, we are comfortable throughout any cycle that we can face. So yes, some of the cash that we have on hand will obviously go towards repaying some of the random dollar RCFs, as I said on the results presentation, we have restarted that. Remember, at the time when we went into lockdown, we fully drew under those facilities, just to make sure that we had adequate liquidity. And just to be careful that there were no restrictions imposed on us by the lenders, but clearly that was not the case. So we've restarted repaying those or RCFs, so yes, some of that cash is already been applied to that.

Alexandre Ayoub

Analyst

Sure, but then you still have a lot of cash on balance sheet. So I was running with you. For example, the calling the bonds, the 2022 bonds because I have a call option. And in relation to the convert, I guess it sounds like you're just been elected converting to share. So you will be issuing new shares and that there will not be any cash burden on the convert side is that correct.

Charl Keyter

Analyst

We are keeping an eye on the convertible bond, clearly it's trading above the soft call price. And it's something that we are keeping an eye on, but at this point, there is no immediate plans to call the 2022 or the 2025 bonds. As Neal said, you know, one we have to preserve liquidity in the business, I think we're going to have a bumpy ride is still ahead of us due to the global pandemic. So it's just an overall cautious approach to make sure that we have adequate liquidity. And as Neal said, clearly based on the results and if the results continue as is some of that money will be returned to the shareholders in the form of the final dividend.

Neal Froneman

Analyst

Yes. Just to add in there, I think we like the idea of a mature balance sheet with some gearing on it, and I don't think there is any intentions to early call any of the high yield bonds is such a thing.

Alexandre Ayoub

Analyst

So yes, that's correct.

Neal Froneman

Analyst

Yes.

Alexandre Ayoub

Analyst

Fantastic. And sorry. So, just to clarify, can you quantify what you mean by preserve liquidity like, Is it like $300 million of cash on balance sheet, and then just the last one is on M&A, so I understand you only look at value accretive M&A. But would you have kind of size the maximum size would you be going embarking through another maybe $1 billion acquisition or that's really not what you're having in mind now? Are you really exclude that?

Neal Froneman

Analyst

Yes. You do the capital.

Alexandre Ayoub

Analyst

In terms of liquidity, the internal policies to have two months of operating expenditure in the form of liquidity, and let's go through a balance of cash and available revolving credit facilities. So the number at this point in time is roughly about R12 billion. And about a third to a half of that we would like to have in cash, so I'm not converting it to dollars. So it's between R4 billion and R6 billion that we would like to have cash on balance sheet?

Neal Froneman

Analyst

Yes, on the size of M&A targets it doesn't make sense to do small acquisitions. Although I think, when we look at the battery metals strategy, we don't see that the same type of strategy as we embarked upon in the PGM sector, it's going to be a lot more selective and strategic, but so those could be smaller acquisitions. We are a company that can stretch our mind for the right reason, and the acquisition of Stillwater was at a time and Stillwater was bigger than the market cap of the company. So Alexandre, it really depends on the target. We don't have a specific size that we target. We look for certain quality and a certain value accretion and then we will work out how best to do it.

Alexandre Ayoub

Analyst

Is it fair to say that you would keep your leverage within one-time or around one-time even though you find a very large big acquisition or you would be happy to stretch it also temporarily?

Neal Froneman

Analyst

Yes, so listen under normal operating conditions, we'd want to be where we are now and below. So, that's when there's no M&A, that is mining and it's prudent and in our view the right thing. When it comes to M&A, there is no reason why you can't exceed 1x, possibly even though to 2, maybe 2.5x. As long as you are certain, and in most cases, you have to be absolutely certain you can mitigate any risks of deleveraging. And the Stillwater acquisition was exactly that we moved to about 2.5, just under 2.5x, but we were confident of the markets and our ability to deleverage. It's not pleasant going up to those sort of numbers, but - and a board will really only support it if they are reasonably confident you can deleverage. So under normal conditions 0.5 and below, for a good reason or an appropriate acquisition going above 1x is also not something that we would shy away from.

Alexandre Ayoub

Analyst

Got it. Thanks. Very helpful.

Operator

Operator

[Operator Instructions] James, I'd like to hand over to you for the questions on the webcast. Hello, James.

James Wellsted

Analyst

I know James was also watching the webcast, so he might be on mute or not at his computer.

Operator

Operator

Let’s just see. Ladies and gentlemen, if you could please remain online while we try and reach James if you could please hold. Thank you. While we try and reach James, we're going to take a question from Wade Napier from Avior Capital Markets. Please go ahead, Wade.

Wade Napier

Analyst

Hi, Neal and team. Thanks. Thanks for the opportunity. Just a couple of questions from my side. Given that production has recovered post the lockdowns ahead of the sort of rate of return of employees to the mines. Have you seen sort of any opportunities to sort of optimize your headcounts within this sort of SA operations? And then my second question is really around your tolling agreement with Amplats. I mean, you've previously described that as a sort of insurance policy against external risk factors such as load shedding. Are you sort of seeing anything in the next sort of two to three years that would suggest you - you’re willing to shift more volumes back through the Marikana processing facilities?

Neal Froneman

Analyst

Yes, thanks. Thanks, Wade. There is no doubt that COVID has provided, let's say, a number of opportunities to just relook at the way we do business and the one you're referring to we are watching very carefully and that is that we are getting - we're getting better productivity with less amount of production. So there is a case to be made that you're going to get to a point of diminishing returns as we call it. And we are watching that closely now. At the start of COVID-19 and with the introduction of social distancing constraints, we were concerned that, especially in our gold division, we would not get back to 100% just because of the logistics, I think, since we've done a lot more work. We do have plans that take us back to 100%. And so to answer your question, we will look to see if we can optimize our business a bit better. And we are getting to that 80%, 90% staffing level where we'll look at it, but I wouldn't like to commit any particular number in terms of productivity improvements or even worse, job losses. We certainly would not enter into a 189 under these conditions. We would look at other mechanisms’ natural attrition and so on. So, we will try and balance the productivity aspects as we enter this area of diminishing returns. On the tolling arrangement, it’s a very good arrangement for us with Anglo Platinum. And that does give us the flexibility in terms of growing our own business should we want to do that, and therefore, there doesn't seem to be any real strategic reason why we would want to give notice earlier on that agreement. Obviously, we just keep an open mind and we have a good relationship with Anglo Platinum. It works for us. I suspect it works for them as well. And we will keep an open mind on that. But certainly things like load shedding and so on, it does put us in, I think, a better position having that toll treatment arrangement.

Wade Napier

Analyst

Perfectly understood. Thank you.

Neal Froneman

Analyst

Thanks, Wade. James, are you online?

James Wellsted

Analyst

Yes. Hi, Neal. Can you hear me now?

Neal Froneman

Analyst

Yes, we can hear you now. So…

James Wellsted

Analyst

Okay, thanks. So sorry, I just had a bit of problems with it. Obviously wasn't coming through. I'll just read through a couple of the questions I've got on the webcast, from the webcast. Some of them are repeat, so if I don't ask your specific question, please I apologize up front. Just one from Sophie Davids asking about as low employees, how will they benefit as women in mining? I thought maybe you could make some comments about our approach to the gender equality of women in mining in response.

Neal Froneman

Analyst

Yes. So, I have actually volunteered to champion on behalf of the minerals in industry - sorry, the Minerals Council, the whole women in mining initiative and that's as a male in the women in mining task team now. I think we all know that you know right now the majority of senior management is men. And therefore men actually have the ability to make this work or not work. And I suppose outwardly men will say yes, let's make it work, but sometimes deep down they will stand on the sidelines and perhaps even watch an initiative fail. I think to - I intend to make sure that doesn't happen and promotes the benefits of women in mining. And first of all you increase your exposure to a source of expertise and capacity that in my mind in many areas do the work and tough, they do it better than men in many areas. And certainly, we are, as a company, going to drive the women in mining initiative on the basis that it's good for us, it's good for the company and it's just the right thing to do. So we've actually put very specific capacity in place. Within Sibanye-Stillwater there's been a number of meetings and we intend to double women in mining from the current levels of about 11%, 12% into the mid-20s within five years. And that's a very, very significant commitment. And then together with the Minerals Council on behalf of the mining industry, we are looking at getting up to the 40%, 50% levels by the end of the decade, 2030.

James Wellsted

Analyst

Thanks, Neal. The next question is from [indiscernible] asking what our long - what is the long-term plan for the DRDGOLD investment?

Neal Froneman

Analyst

Yes, Charles, we have them Niel Pretorius on the call and we work extremely, I suppose, closely and well with the DRD executive. Our view is to provide the support and the guidance that we can as a shareholder and hopefully see the DRD business evolving to something that is multi-commodity international and become an even better business than it is today and it's a great business today. We believe that the focus on environmental as we presented in our presentation is certainly a shareholder view. We are mindful of not affecting liquidity in terms of the share. We are very comfortable with our current position. We would like the current large exposure that we have, and we will certainly be supportive of the DRD vehicle going forward. We think that's a very good arrangement. I trust that answers the question, Charles.

James Wellsted

Analyst

Thanks, Neal. The next question or two questions are from Martin Creamer. Firstly, will we be taking steps to mechanize Marikana in the same way as Rustenburg and Kroondal are mechanized? And then the second one I think we've answered to some extent, which is the opportunity to convert more gold resources into reserves in the short-term. What is the opportunity at the gold operation?

Neal Froneman

Analyst

Yes, thanks James. And I think there is opportunity and I did cover that Martin. Martin, the - we would like to mechanize as much as we can. And certainly, I think, where we have the right ore body properties or profiles, we have mechanized and mechanized very successfully. We - a substantial part of our businesses is mechanized. The U.S. operations are basically totally mechanized and large parts of Rustenburg being Bathopele are also mechanized. However, that becomes very, very difficult to mechanize ore bodies that are narrow and tabular and that remains a challenge. But in principle, whatever we can mechanize, we will and we constantly trialling new equipment, low profile equipment to try and achieve that. And that's probably - it's a very broad answer. I can't give you any specifics, but I think the bottom line is where we can mechanize we certainly will.

James Wellsted

Analyst

The next question is from Rene Hochreiter asking about the SA discount, which he says he imagines can only be removed by leaving South Africa completely, which we obviously can't do. So could you expand a little bit on how we - what are we doing to try and reduce the SA discount?

Neal Froneman

Analyst

Yes. So, as I've said before, there's two parts to addressing the South African discount. The one is actually trying to improve the perception of business in South Africa and the investor climate in South Africa and that's an advocacy issue. It's an issue of engaging with government. And as you know, I've been pretty outspoken about the current state of affairs and my complete disillusionment with the current leadership. Now, having said that, I must also just add that we have a wonderful minister within in the DMRE that listens to us, that engages with us, doesn't always agree. In fact, we really agree, but at least we can engage. And unfortunately that's a microcosm in a much bigger national environment, which just doesn't allow that to blossom, but our minister is influential we'll continue to engage with them. It’s hard. It’s in the right place. And I have no doubt that if we can be successful as an industry that he will influence the national agenda. And so that is one key thrust that that we worked very hard at together with the Minerals Council. In terms of - you’re right, Rene, I think the ultimate is you need to exit South Africa or re-domicile. And unfortunately, we seem to have as a country taken a step back in that. So for now, there will always be a South African discount, but I think we can do a lot without re-domiciling from the current levels. And for us as a company, it really involves improving - improving our profile outside of South Africa. We have to build that profile to offset the perception that we are - majority of our assets are in South Africa. So, we will continue to drop both of those, but I think the recent AngloGold Ashanti issues are very, very sad and completely inappropriate for business that's just another negative regarding investors looking at this country. And I hope that government takes note that that is not the right thing to have done. Let me leave it there. Thanks, James.

James Wellsted

Analyst

The next question from Nkateko at Investec. Congratulations in the quarter. Just a question on the recycling volumes and our expectations for global recycling. We’re talking about a 15% decline. We're showing a 6% decline in H1 at the U.S. operations. What are the key contributors? And do we expect Stillwater volumes to suffer further in order to, I guess, match that expectation on the 15% global decline?

Neal Froneman

Analyst

Yes, so, the - more recently we've seen recycling volumes normalize. And I would suggest what we see as probably the biggest recycler internationally is probably indicative of what's happening in the rest of the world. So, recycling volumes are back to normal levels. So the decrease that we have put forward is really based on the period that's passed. I hope that clarifies the numbers, James. Thanks.

James Wellsted

Analyst

Yes, I think that's fine and I'll follow-up with the Nkateko check afterwards. And then from Jonathan Bloom, a potential from Burnstone under current gold price environment.

Neal Froneman

Analyst

Yes, so that's a good question. There is potential for Burnstone. We have been in the process of dusting off the study. However, I want to say that we would need to think very carefully about investing more money in South Africa at this point in time. I think the climate is not conducive to investment. And I've told the minister, there are many, many projects that companies have in their bottom drawers that we would be so happy to invest in if the right things were done. And all stakeholders need to actually take note that this is not a patriotic thing. You called the unpatriotic when you won't do it. And you’re only done if you do it under conditions like this. Government and other stakeholders need to nurture business, recognize business. It's highly unlikely that anyone can develop - anyone else - any other stakeholder can develop these types of projects. So the sooner there is a recognition to embrace business, create an investor friendly environment and nurture business and these projects that will happen. But other than - if that doesn't happen, I cannot see shareholders allowing us to use their money to invest under these conditions.

James Wellsted

Analyst

There was a similar question from Steve Shepard regarding K4 and the likely life of the Marikana asset. You mentioned that it's a very large, long life high grade Merensky and UG2 proposition, which was abandoned due to financial distress of the previous company. So maybe if you can just elaborate on that, whether the same conditions apply there.

Neal Froneman

Analyst

Yes, Steve, and it's a similar answer except we need to be mindful of, let's call it, how receptive the market would be to more platinum, palladium and - or PGMs in general. It's a great project and it is the one that I really hope our minister and our cabinet actually give us the excuse to develop because it deserves to be developed. We have made some commitments to the comp commission and we will obviously honor those, but it's a project that does deserve to be developed and again it's just one of these really good job creation opportunities that squandered by lack of leadership in South Africa. And this view that some stakeholders have that they just press a button and money is created. And so, I really do hope that these answers find their way into the media in terms of what is such a bad situation in South Africa at the moment.

James Wellsted

Analyst

Then I've got a couple of questions, which is similar around the - on costs. First of all, from Nkateko again guidance for the SA PGM for higher all-in sustaining costs, despite expecting higher production in the second half and the Marikana synergies, and then from Roger Williams about, it looks like a reconciliation on the cost per unit in gold, PGM and Stillwater because it looks like costs are escalating at about 15%, slightly different, but maybe if we can just cover them under the cost focus.

Neal Froneman

Analyst

Yes, and I'm going to speak just in general about costs a bit. And certainly, Nkateko, we can, as James said, just make sure that we answer your questions properly offline. I just want to say that one of your biggest cost drivers is volume. And I've tried to make that point at the beginning of the presentation. When I listen to myself, I didn't make it very well. As I say, one of your biggest cost drivers is volume and the moment especially in the short-term where you have volume reductions, you incur very significant higher unit costs. And the volume reductions in the second quarter have been a very substantial driver of higher unit costs. And then within specific regions, you have specific issues. So, in the U.S. we've had - because of commodity prices, we've had higher royalties and taxes, and we actually quantified that at about $40 an ounce. And in addition across the entire business, we've had increased costs due to sanitizing, transport, social distancing and so on. So, I would suggest that some of those are ongoing, and they are here with us for the long-term, some of them are once-off and they’re more or less a once off cost of establishing facilities and so on. But unfortunately the costs, the increasing costs are not because of poor management. I believe that we as a team did a very good job in managing costs under these conditions that could have been a lot worse. So, that is, unfortunately what it is. And we will try and clawback and I would think next year would be a more normal year. We will see better unit costs.

James Wellsted

Analyst

And then two questions similar in nature again around the electricity issues in South Africa and our plans to maybe generate renewable electricity ourselves or how we plan to deal with the issues that we’re facing with Eskom?

Neal Froneman

Analyst

Yes. So, it's a bit off of the same answers as some of the other questions. We are an energy intensive company. Primarily, my biggest concern is the exposure to CO2 emissions through Eskom as a consequence of them using coal. So there's many reasons why we would want to generate our own electricity from renewable sources not only just the unreliable power supply. However, it is very difficult to do that on the scale that is required. It is also still difficult to do it on the basis that some of our operations are - don't have enough life to recover the cost of the investment in those plants. However, I think, it's changing quite fast as well. And with rampant Eskom price increases, which we expect, that scenario can also change. We are looking at some new options where we have longer life. And we are also mindful of DRD as being part of that solution in especially in the [indiscernible] we've got many years of tailings retreatment. And, of course, that's not an energy intensive business. So between ourselves there could be quite a lot of sustainability. So that's all being addressed and not on a part time basis, we've got dedicated capacity looking at this working with the energy intensive user group and trying to assist the energy department in fine tuning these applications as is particularly complex because of wheeling, and then perhaps even having to consider selling power back to the state.

James Wellsted

Analyst

And just finally, I think similar questions again, but slightly different. Would reconsider if we don't re-rate and close the discount again? Would we consider disposals of assets, whether that would be in this instance mentioned gold or even Stillwater to a lot which would potentially get a substantial premium to the value that's been given in Sibanye?

Neal Froneman

Analyst

Yes. That I have to believe we will re-rate. And of course, if we don't, we - the sort of team that will ensure that we deliver value to our shareholders. I can assure you that all those things are well understood and have been debated many times. But, as I said earlier on, we know why we have traded at a discount relative to our peers. And that was principally because of the risk of the high leverage on our balance sheet. I think we understand the profile of our gold business, but there are other companies with similar profiles and we're not naïve to that. But I would suggest you will see a significant re-rating not in the next day or two. I think this is a first step in returning cash back to shareholders. It could well be seen as a flash in the pan that's going to take two or three dividend declaration. So I'm not proposing that that we would have a re-rating in the short-term. This is a medium-term expectation.

James Wellsted

Analyst

Thanks, Neal. I think that's it from my side. There are one or two questions, which we'll respond to, I think, individually in the interest of time. It's almost two hours since we began. So, from the webcast, I think that's all for now.

Operator

Operator

And from the audio line, there are no further questions. Neal, do you perhaps have any closing comments before we conclude?

Neal Froneman

Analyst

Yes, thank you. And I know it's been a long two hours. And I want to say thank you to everybody for taking the time. The questions were really good. If there were specific details that we didn't quite answer we happy to do that. And really I think I can certainly say I'm really very pleased with the delivery that the Sibanye team has put you on the table. It's been a tough half to the year. And I think we move into the second half in a really good position. So, again, thank you for your time. And we look forward to talking to you early next year with our full year results.

Operator

Operator

Thank you. Ladies and gentlemen that concludes today’s conference. Thank you for joining us. You may now disconnect your lines.