Sibanye’s profit warning is a reminder that mining is not for the faint-hearted

Gold and platinum group metal (PGM) producer Sibanye-Stillwater expects headline earnings to drop by about half for 2022 after accounting for a series of mishaps, including a three-month strike in SA and a seven-week shutdown of its Montana plant in the US following a flood.

While other mining groups were relatively quick to reach wage agreements with labour unions in 2022, Sibanye dug in its heels, recognising that each percentage point increase in wages conceded now compounds into a potential business killer in later years.

There are already some frightening cost increases barrelling down on it: energy accounted for about 9% of costs in 2009. That figure is now more than 20%.

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Wages in its gold operations account for about 50% of total costs, and about 40% on the more heavily mechanised PGM operations.

Profit dip not unexpected

The announcement of a sharp drop in profits for 2022 should not come as much of a surprise, as the impact of the strike between March and June 2022 was already known in the market, as was the seven-week shutdown in June 2022 at the Stillwater plant in Montana following what was described as a one-in-300-year flood.

The flood destroyed bridges and roads, which had to be rebuilt and repaired to restore access to the mine. Operations only returned to normal by November.

The 2022 strike by workers followed a torrid few years, including the Covid lockdowns in 2020 and an earlier strike in 2019 over pay – where Sibanye again dug in its heels against union pay demands.

“Our gold production fell 50% in 2022 because of the strike and the gradual ramp-up to full production, which we only achieved towards the end of the second half,” says James Wellsted, head of investor relations.

ALSO READ: Sibanye-Stillwater strikers have already lost R950m in wages

“We think we are well positioned for a much improved performance in 2023, as many of the events that hit our bottom line in 2022 are unlikely to repeat.”

Despite the loss of production in 2022, Wellsted says it was essential to resist the trade unions’ pay increase demands, which were well above inflation at the gold operations, as this enabled it to lock in a lower wage cost for the next three years at the gold operations, and importantly, five years at its PGM operations.

Sibanye eventually settled for an average 6.3% annual increase over the three- and five-year periods.

Challenges, impact

The trading update says the company is likely to post earnings per share of R6.83 as opposed to R11.40 in 2021.

A more challenging macroeconomic and geopolitical environment resulted in a 9% lower average rand PGM basket in 2022.

Sibanye’s PGM production accounts for about 50% of revenue and 75% of profits. Production from the SA PGM operations was marginally lower than expected for 2022, notwithstanding power outages, cable theft and safety-related stoppages.

The biggest hit to production was in the gold operations, mostly in the first half of the year during the strike – with output down 50% to 441 623 ounces.

Production returned to more normal levels in the second half.

ALSO READ: Sibanye-Stillwater increases wage offer in bid to end 45-day strike

US PGM operations also normalised towards the end of 2022,with production forecast to build towards 700 000 ounces of platinum and palladium by 2027.

“We have used 2022 to carefully navigate wage negotiations in both our SA gold and PGM operations and reposition the Montana operations for the current skills shortage and changing macro environment,” says CEO Neal Froneman.

“The company is now well positioned to deliver an improved performance for 2023 through the normalisation of production rates at the SA gold and US PGM operations with the concomitant improved unit cost performance.”

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.