Sibanye Gold (NYSE:SBSW), a gold producer with mines located throughout South Africa, saw its stock drop 34% through the month of May. Although investors had initially reacted favorably to news that the Stillwater Mining acquisition had been completed early in the month, the share price plummeted -- and failed to recover -- after the company announced the final terms of a fully underwritten renounceable rights offer.
News of the rights offer, in and of itself, was not the culprit behind the stock's decline. In April, Sibanye had announced that it planned to raise $1 billion through an equity sale and $1 billion in debt to service a $2.65 billion bridge loan that the company took out in order to finance the Stillwater Mining purchase.
Rather, it's the discounted price at which shares were valued that caused the havoc leading to the stock's decline. According to the terms of the offer, Sibanye is offering a total of 1.2 billion shares, valued at 11.28 South African rand. Based on the exchange rate on May 17, the day before the offer was announced, this equates to $0.86 per share -- 60% lower than the price at which shares closed that day.
Although some investors might be initially drawn to Sibanye thanks to its enticing 8.3% dividend yield, the terms of the rights offer (among other things) are a sobering reminder that it is incumbent on investors to dig deeply into a company's financials before picking up shares.
Unable to generate sufficient cash, Sibanye has relied on continually issuing shares and taking on hefty amounts of debt to finance its continued operation -- strategies which are hardly conducive to growing value for shareholders.
Considering the fact that Sibanye had to resort to a $2.65 billion loan in order to facilitate the acquisition of Stillwater, one wonders whether this expansion into North America in pursuit of platinum group metals is really the company's best opportunity for growth.
In the upcoming quarters, investors should be keenly focused not just on how much value Stillwater is bringing to the company, but on whether Sibanye is moving in the right direction in terms of generating cash from operations rather than through selling equity and taking on debt. For example, the company has struggled with contracting margins over the past year. In the quarter that ended March 31, Sibanye reported an 18% operating margin -- considerably lower than the 38% it reported in the same quarter of 2016. Likewise, Sibanye reported all-in sustaining costs of $1,163 per gold ounce in the recently completed quarter -- 30% worse than the AISC of $895 per gold ounce that it reported during the same period in 2016.