Is The Palladium Train Leaving The Station?

Palladium isn’t the first thing that jumps into the minds of most investors looking to generate alpha, or market-beating returns, but it cropped up on the radar recently. 

Buying precious metals directly can be a bit challenging, so in order to gain exposure to palladium a mining stock acts as a good proxy, and Sibanye Stillwater (NYSE:SBSW) in particular is known for its production of gold, palladium and platinum.

If palladium really is on its way higher, is it time to buy SBSW?

What You Need to Know About This Miner

Although Sibanye Stillwater is best known as a miner, it has a more resilient business model than most are aware of because a significant portion of its operations revolve around recycling platinum group metals. This approach leads to a more predictable supply of metals that is stable and unrelated to the supply spikes and troughs of mining activities.

Sibanye Stillwater also gains a competitive edge from its innovative mining technologies. For example, it incorporates automation and robotics into mining process in order to reduce the need for manual labor. And it relies on state-of-the-art processing methods, including better techniques for crushing and grinding minerals, to extract more valuable minerals from the ore.

So too does SBSW implement real-time data analytics to monitor and optimize operations dynamically, so energy usage, workforce efficiency, and tracking equipment can be adjusted to enhance productivity. By relying so heavily on technology in mining operations, management has more tools to support predictive maintenance so equipment failures can be anticipated ahead of time.

Further, the company is adept at optimizing resource extraction using advanced geological modeling and drilling technologies. This allows them to more precisely extract resources and lower the volume of non-valuable material which in turn heightens mining production.

In that same vein of productivity, worker efficiency is enhanced by tapping into augmented reality and virtual reality training programs that lead to more lucrative mining operations.

Lastly, Sibanye Stillwater is renowned for its high quality asset portfolio that includes some of the world’s highest-grade PGM and gold mines, which may prove crucial in the coming years as the company explores battery metals that are critical to electric vehicle production as well as renewable energy initiatives.

Is Sibanye Stillwater Stock Undervalued?

For a miner, the costs of exploration and extraction can be so high that a strong balance sheet is crucial to long-term solvency. On this front, Sibanye Stillwater shines. Although it has $1.3 billion in debt on the books, it also has $1.1 billion in cash and $9.5 billion in total assets.

There is lots to like about the company’s financials beyond the balance sheet, so is Sibanye Stillwater stock undervalued?

According to 5 analysts, Sibanye Stillwater is marginally undervalued by 18.2% with a consensus price target of $5.80 per share.

An examination of cash flows would suggest a more bullish argument could be made for the share price. A 5 year discounted cash flow forecast, for example, places fair value at $9.15 per share.

It’s quite possible that analysts are excessively pessimistic because of the string of six consecutive quarters where year-over-year revenues have tumbled. Notably, in spite of the decline in the top line, the company has still managed to squeeze out a positive operating income in each of those quarters.

It’s clear that management has a keen eye for cost efficiencies across their operations in order to be able to still turn a profit in spite of quarterly revenues dipping from $2.5 billion in Q4 2021 to $1.6 billion by Q2 2023.

The pullback in the top line has correlated with a share price decline, now all the way back to 2019 levels after a run-up to $18 per share in Q1 2022. 

Despite the bearish optics, many fundamentals remain in place. Not only the cost-cutting mentioned above but also the financial acumen of the firm in employing sophisticated hedging strategies to limit commodity price risk.

When you dig into the financial metrics, they impress on many counts. For example, the firm’s return on capital is 14.5% and its return on equity is 23%.

Is Sibanye Stillwater Stock a Buy?

Sibanye Stillwater share price has been truly horrendous in 2023, falling by 51% year-to-date. Post-selloff, it seems that the revenue declines that initially triggered the selloff might well be baked in at this time. That should result in more margin of safety now for prospective buyers.

Certainly, the fundamentals are compelling across key metrics from ROIC to ROE and the strong balance sheet fortifies the investment case.

Analysts are upbeat about the valuation now but not as much as a cash flows analysis would suggest that they could be. With 51% upside to intrinsic net worth, this palladium miner has the potential to outperform in a significant way in 2024.

In spite of the declining earnings per share in recent quarters, it’s trading at a rock bottom EBITDA valuation multiple. Expect value investors to spot the compelling reward to risk ratio soon, and lead to a resurgence in share price, particularly upon a break above the downtrending resistance line.  

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.