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5/23/17

Sibanye Gold (SBGL) and that rights offering (from IKN418)

I really don't feel like writing much today so here's the piece from IKN418 last weekend on Sibanye Gold (SBGL) and that rights offering we saw last week. It's an explainer on how the rights offering works and, as the company is part of our tracking "Producer Basket" in the weekly, a word on a necessary price adjustment for the 2017 table in The IKN Weekly.

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Sibanye Gold (SBGL): Friday morning saw a big change in numbers at SBGL as the bottom fell out of the nominal share price of Sibanye Gold (SBGL). This was due to the announcement (8) of a rights issue to existing shareholders that lets them buy nine shares for every seven they already own at a discount which is up for debate (it depends how you frame the terms), but was generally reported at 60% by the bizwires and media. That made for a big difference and the 32.2% drop on Friday got me blogging (9) along with the rest of the world. Before we go any further I do think it a negative deal because the raise was much bigger than expected. In effect SBGL are saying that equity is cheaper than debt, the implied message being shareholders are bigger suckers than banker (no disagreement there but I wish they hadn’t been so blatant about it). I also certainly stick by the main thrust of my post on Friday, that sell side anal ysts sitting in their cubicles in brokerages are either 1) groping in the dark about company strategies along with us or 2) in possession of illegal inside information. However, we need to address the share price drop caused by the rights call because as you can see above, SBGL shares are still in the green in my little list. How so? Read on.



Rights offerings are more common in UK listed stocks than they are in companies listed on in The Americas and I don’t mind admitting, it’s a long time since I modelled a real live issuance (though I did have to do a few ciggypack calcs on Minera IRL when the scumbags running the show in 2015 and 2016 threatened us all with one). In this case SBGL (the object of our affection, the NYSE ADR) is offering two things to its existing shareholders:



  • If you own 7 shares of SBGL you have the right to buy 9 new shares.
  • You can buy those 9 new shares at a hefty discount (details further down on that)



That means the current share count is going to be diluted heavily and that showed in the share price dumpage. SBGL closed U$8.13 on Thursday, the day before the rights announcement and after the hoo-hah of Friday closed 32.23% down at U$5.51. But! What we need to understand is that the holders of SBGL shares haven’t just lost that money. They’ve also been given the right to buy a whole bunch of new stock at a big discount which they can either buy and hold or, if they prefer, sell immediately. That’s the “right” they have in the deal, (it’s called a rights offering after all) and it’s worth money. Our job is to find out how much it’s worth and for that, here we go with a little model based purely on the SBGL ADR that’s traded in New York. The bullet points go like this:



  • Person X owns 1000 shares of SBGL. As they closed at U$8.13 on Thursday, the position was worth a total of U$8,130.



  • The rights offering happens and as a result, SBGL gives Person X the right to buy 1,285 shares at a 60% discount. As a matter of fact, the much-bandied 60% number is a bit false, it’s done to a nominal price of U$8.60 per ADR as the deal is being struck in South African Rand and on May 17th closing prices, there is a bit of looseness to reality.



  • Anyway, in real terms that means Person X can now buy 1,285 shares at U$3.44 per share (assuming the US Dollar/Rand forex remains unchanged during the period).



  • Person X decides that they will indeed take up their rights in full. Friday sees the stock close at U$5.51.



  • Therefore person X now owns U$5,510 of common stock, plus 1,285 pieces of paper, called “rights”, to buy SBGL at U$3.44 a pop.



  • The difference between the U$5.51 close and the U$3.44 rights price is U$2.27. therefore and in effect, Person X holds 1,285 in-the-money call options that they can exercise and sell on the very same day (if they so desire) which would net them U$2,917 (pre-commish).



  • Therefore, as at this weekend Person X now has a total holding in SBGL of (5510 + 2,917) U$8,427. Far from being down, that person is now theoretically up on the deal by U$297. For sure there is commission to take into account, but it’s a lot less dramatic than it looked in the first place.



So that’s the math, far less dramatic than the big fat red number we saw on the boards Friday, is it not? However, it also means that to stay within the realms of reality here at The IKN Weekly Producer Basket I need to adjust the table line item for SBGL. Therefore, in order to make the SBGL position in the Producer Basket as near to reality as possible I’ve decided to reduce the December 31st reference price by U$2.27 (the difference between the rights value and Friday’s close). That brings down the original price as at December 31st to an artificial U$4.79, which obviously wasn’t the price that day but is in line with true stock value.



It’s not a perfect solution, it doesn’t take into account any slippage due to commissions on trades of the rights stocks or any forex adjustments, but it’s the easiest way to get to a more reasonable baseline level for SBGL. You’ll also note that I’ve assumed a 100% take-up of the rights offering and the shares out count has moved from 228.71m to 522.77m (228.71/7x9+228.71). That’s an interim number, we’ll find out how many ADR Equivalent shares exist once the rights offering is closed but at the moment it values SBGL at U$2.88Bn.