Although Sibanye Gold has delivered on its guidance for six quarters on the trot, CEO Neal Froneman tells Alec Hogg in this interview he would be disappointed if the share price had to settle at the current level â because the company has been paying consistent dividendsâŚand has a strategy to continue doing so. Why? Because the financial and business models show that it is sustainable. In fact, says Froneman, if you convert the dividend into a yield percentage, which is typical for the sector, the Sibanye share price should be substantially higher than where it is. The (success) story of Sibanye has less to do with entrepreneurial flair than with understanding and motivating good, well-trained peopleâŚto the extent that they have seen the ending of the old GoldFields âHarvest Planâ which in effect was reaping without reinvesting.  Now, says Froneman, âweâre in charge of our own futureâ. Turning to life-of-mine, he says that mining the orebodies incrementally, rather than in the âBig Bangâ manner of the past, is both life-extending and affordable. That, coupled with a lower pay limit than in the past, provides a 10-year life with good grade. Turning to the companyâs perceived future intended identity as a precious metals company â probably with platinum somewhere in the equation â Froneman says the core competency of Sibanye is clearly defined not as a gold miner but rather as a hard-rock, tabular, labour-intensive, medium-to-deep mining operation which âcan be extrapolated into areas like platinum.â Yes, he is very interested in the platinum interest Amplats intends to offload. – GK
ALEC HOGG: Neal Froneman is the favourite of the gold share Chief Executives on the JSE. Not surprisingly, because Sibanyeâs been a massive success story. Did you think youâd see 220 percent in the share price in a year Neal, when you listed?
NEAL FRONEMAN: No, not at all. I think we knew we listed at a very low price and that there was upside, but I was surprised at how quickly we were able to turn the operations around.
ALEC HOGG: I guess every set of results that come out becomes that little bit harder to meet expectations, as happened with the current set that you delivered today.
NEAL FRONEMAN: Yes, absolutely. Certainly, where the IPO occurred early last year, the weighted average number of shares was much lower because prior to listing, there were only 1000 shares in issue. Since then, weâve done an acquisition involving equity where another 156-million shares were issued, so the weighted average number of shares being issued over this period has varied greatly. Of course, everybody looks at your earnings on a per share basis, and you have all this distortion in the numbers, so it becomes very difficult. Not only that, itâs like a good car: you buy a good car. Somewhere youâll get a puncture. Thatâs not the carâs fault, but you have to stop and fix them, and you get these hiccups. Weâve been fortunate. In six quarters, weâve delivered on our guidance.
ALEC HOGG: That could be that youâre managing expectations well.
NEAL FRONEMAN: Well, itâs a bit of both. In the beginning, we really had very little history to go off on the new assets, but it is. Weâve certainly put the guidance lower so that we could over-deliver, but it does become more and more difficult. The expectations become higher and higher.
ALEC HOGG: Do you think the share price â and it has had a terrific run â has gotten to a level where itâs now going to settle?
NEAL FRONEMAN: I would be disappointed if it settled at this level and the reason is that we are paying consistent dividends. We have a strategy to continue doing that. Not only that, our business and financial models show thatâs sustainable as well. If you convert the dividend into a yield percentage, which is typical for this sector, our share price should be substantially higher than where it is.
ALEC HOGG: So thereâs still a lot of upside. This story of Sibanye is one of assets that were owned by a corporate, an entrepreneur (yourself), an entrepreneurial manager taking over, reducing the staff levels to more manageable levels – down by 7,000 to 36,000. It has to have been the peopleâŚwhat have you done thatâs different compared to the people within the mines that you acquired?
NEAL FRONEMAN: The one attribute that I have is I understand people very well and I find it reasonably easy to motivate them. This situation was probably even easier than most in that you had a group of people – good people, well trained, been with Goldfields a long time â had seen that the cash flows from these operations were being invested in other projects and became demoralised. Theyâd seen the development of what we call the harvest plan and it was not difficult to come in and say to them âright, weâre in charge of our own future. Our cash flows are ring-fenced for own needs, as long as we cover our dividends for our shareholders, and we have to extend the life of this business; not just for you, but for your children as wellâ. It was very easy to improve and increase the morale on that basis.
ALEC HOGG: A harvest plan.
NEAL FRONEMAN: We called it a harvest plan. The costs had risen to a point where the reserves had decreased to 13-million ounces. We were producing just over 1.2/1.3-million ounces, so thatâs theoretically a ten to 11-year life. Goldfields developed a plan, which underpinned the equity story for the unbundling, which was about the dividend and the yield. That was smart but of course; I think weâve been able to continue with that theory and market the company as such, as well as to improve the life by reducing the cost, which creates more sustainability for that dividend flow.
ALEC HOGG: People who know South African gold shares will know Driefontein and Kloof as fantastic operations in years gone by. Have the rich ore bodies now completely gone, or as you go deeper, are you finding more discoveries which could extend the life still further?
NEAL FRONEMAN: Thereâs definite opportunity to extend the life on the higher-grade ore bodies â the primary ore bodies, which in our case are the carbon leader and the VCR ore bodies. It does mean you have to go deeper if you do it in an incremental way thatâs affordable. Most of the big companies look at it in a âbig bangâ approach, which then of course, creates a lot of capital high-risk. Certainly, we do not expect to have to go deeper in the next four to five years. We have quite a lot of secondary reefs and we have many areas that were uneconomical to mine because they fell just below what we call a high-pay limit. That pay limit is reduced with us reducing costs and itâs created new white areas that we can into, so we donât have 50 years of life ahead of us like Driefontein and Kloof had when they started, but we certainly have ten years of life with good grades.
We have our secondary reefs, which give us more life and if we balance all this, we have another 20 yearsâ worth of life, at least.
ALEC HOGG: The exciting part, apart from that, is that you have also said youâre looking to become a precious metals company, which presumably means youâd look at platinum.
NEAL FRONEMAN: Yes. Once we had established Sibanye as a dividend yield company, the shareholder base changed from one that was primarily focused on gold, growth, and perhaps even value to one that is looking at sustainable yields, so itâs more the pension funds etcetera. Once youâve established your shareholder base as such and you define your core competency â not as gold mining, but as hard rock, tabular, labour intensive, medium to deep mining â you should be able extrapolate that model into another area, where itâs still hard rock, tabular mining and of course, platinum is very similar. The processing of platinum is different, but of course, you can acquire those skills so it was not too difficult once we had established a proper operational base on our gold assets, to get âin principleâ support from our shareholders.
We would only make the step into platinum if it were earnings enhancing on a per share basis. Itâs going to depend on the quality of those assets and the price we pay.
ALEC HOGG: Neal, the platinum operations in Rustenburg that Anglo wants to get rid of have been described to me as a turnaround waiting to happen. Is that something that would attract you?
NEAL FRONEMAN: Absolutely. If weâd had this chat on the listing of Sibanye, you would have had the same impression I think, of the Sibanye assets. Certainly, many of the people I spoke to saw them as old assets, high cost, labour intensive, and with all sorts of problems, but they were a turnaround opportunity. In our hands, we have made them what you see today in terms of their ability to generate cash and dividends. The same applies to assets that have really become [inaudible 08:08] in a bigger company, not because theyâre a bad company but because they have better toys to play with, and now weâd like to play with those toys and create some value.
ALEC HOGG: On the other hand, you have the labour issue. When we talk to people from AMCU and those who went on strike for five months, they say it wasnât money. There was another reason behind this. It was more politically driven, etcetera. Doesnât that complicate issues, particularly in the platinum sector?
NEAL FRONEMAN: Look, I think we have those exact issues in the gold sector, and we have AMCU as the majority union at Driefontein so itâs not an unknown entity to us. My view is that AMCU and NUM are the same problem in what they stand for and what they try to achieve. Our view is that if we address our Employees and all the stakeholders in a way where we create value, (which is our vision, by the way)⌠Weâre there to create superior value for all stakeholders: our shareholders, our Employees, and the communities. Unions are not necessary. It doesnât mean theyâll go away, but I think through the implementation of gain-share, looking at the indebtedness (and weâre aggressively doing that on our gold assets), I think we can get around the issues that plague the platinum industry and no doubt, will move into the gold industry unless you address them.
ALEC HOGG: But we had the situation at Kumba, which would count against that. People got R450, 000.00 each, on average, and they still went on strike.
NEAL FRONEMAN: Yes, and there were probably underlying reasons, but I also must say that I think share options for people lower down in the organisation donât really work. Those have worked. Thereâs no doubt. Well, perhaps the direct correlation between input and output is not seen and thatâs why they went on strike. For the lower level of the organisation, you need something that is more correlated to your input this month. The profit that you get out of this month, you share in a way thatâs appropriate and commercial, but material, so that in the short-term you see the impact of your actions. If you work hard, you get a bigger gain-share. If you go on strike, you are significantly affected by it. Thatâs how it has to be.
ALEC HOGG: Neal Froneman is the Chief Executive of Sibayne.
