Earnings Call Transcript - SBSW Q4 2022

Operator, Operator

Greetings, everybody, and good afternoon. Good morning. Not sure what time zones everyone is in, but a warm welcome to our Year End Results Presentation for the year ended December 31, 2022. You will note from the subtitle, we've called this a decade of shared value. And that is because we've just had our 10th anniversary. And we see this as a decade of having shared significant value with our stakeholders and our shareholders. And then, of course, the balance of that subtitle, we’re well positioned for future value creation. And I'm sure you will see that as we proceed through this presentation. Please take note of the Safe Harbor statement. There are forward-looking statements in this presentation. I'm going to proceed with the first part and I will wrap up the event at the end after having invited other colleagues to join. Let me pick up on the salient features for the second half of 2022 and the year end 2022. Very pleasingly, I can really be proud of the achievement around safety. We continue to show very substantial improvements in all safety indicators with a fatal injury frequency rate having improved by 75%. Yes, 75% from 0.133 for 2021 to 0.033 for 2022. It's our best performance ever and it's something that we as a team are very proud of.

Neal Froneman, CEO

As I mentioned in the beginning, this is our 10th anniversary. It's been a remarkable journey of evolution and growth, resulting in us having established a more sustainable business, which is currently pivoting to remain relevant due to the ever changing environment we found ourselves in. And of course, we will remain relevant in the future as well. We’re in a robust financial position. We generated positive free cash flow. Our net cash to adjusted EBITDA remained at 0.14x, something we're very pleased about. We did declare final dividend of 122 South African cents per share or 26.98 U.S. cents per ADR that amounted to R3.45 billion or $191 million. We have retained our industry leading 6% dividend yield and the total dividends for the year amounted to R7.37 billion or $421 million. Again, we are pleased about that. As you would know, we've had a number of significant disruptions or events this year. Very pleased to say that our operations, all of them are well positioned to perform in 2023. We achieved inflation-linked three-year wage settlements in our gold business that was after having to take or implement a three-month lockup. We have closed down some loss-making areas of our business, Beatrix 4 shaft in particular, and the KP1 processing plant that is always a disruptive process and the Section 189 is now complete. And therefore we can confidently say that we have stabilized production and gold should be well positioned to contribute significantly during 2023. Our South African PGM business remained a solid performer. We used our firm position in the gold wage negotiations that is to achieve an inflation-linked five-year wage agreement for Rustenburg and Marikana. That was a significant achievement in its own right. All-in sustaining costs came in at just over R19,000 per 4E ounce or in equivalent U.S. dollar terms $1,180 per ounce, that's 14% higher, but that's predominantly due to reduced volumes as a result of load shedding and cable theft. And I think our cost performance was an outstanding feature of this year. And I do believe all our operations are going to continue to move down the cost curve. We’re still enjoying, as you can see from the last sentence there, more than a 50% adjusted EBITDA margin. Our South African PGM business remains in a really robust position. Our U.S. PGM division was impacted by extreme weather events. We also proceeded to restructure or reposition that business unit during the year. We did announce that. We've de-risked, we've taken account of changing macroeconomic factors. And of course, we've positioned with increased flexibility by increasing the amount of development. So it's well positioned for the challenges that we all know about in the U.S. at the moment, lack of skills, ability to attract and retain people, workers. And of course, in the longer term, we do believe the palladium price will continue to weaken as ICE engines become less relevant, but I will say more about that further on in the presentation. The repositioned business post a few years of increased development will grow to about 700,000 2E ounces and most importantly, at a cost structure of less than $1,000 per 2E ounce. And that's targeted by 2027. We received and provided the green light for Keliber based on the receival of new permits, and Mika will talk you through that. Very important to note that the revised capital cost of this project, which should take into account just about all the recent inflationary increases, that amounted to €588 million capital costs. A large portion of that has already been funded through the equity infusion that we have put in through the acquisition of a majority stake in Keliber, so a small transaction for us. Our Sandouville nickel refinery, and I'll remind you that we never bought Sandouville for what it is. We bought it for what we're going to make it into, and that is a battery precursor nickel sulfate refinery. It's also going to form a base for our PGM recycling and battery recycling business in Europe. But Sandouville continues to be recapitalized. As I said, we are very proud of what we've achieved in health and safety. And we've moved really constructively along our safe production journey. And I'd like to just go through some individual safety results that are important to us. If we compare 2022 to 2021, we saw a 23% improvement in serious injury frequency rate. We saw a 27% improvement in lost time injury frequency rate. We saw a 29% improvement in total recordable injury frequency rate. We saw significant reduction in fatal incidents due to our focus on the fatal elimination plan. Having said that, despite our efforts, we still had five fatalities, which is clearly five fatalities too many. But it's the lowest annual number recorded in our history. There are some interesting graphs. As a large employer, you can see how our workforce has increased from 36,000 to 85,000 employees, and we're pleased to report that, even with this growth, we've managed to reduce and improve our safety record. This was achieved based on the safety review conducted by an independent person that I presented last year. And essentially, our safety strategy was endorsed. But there was a need identified to operationalize and institutionalize the commitment, and the responsibility for safety throughout line management. There was good ownership of our safety protocols and philosophies at the top, but we felt that it became weaker as we went lower down our operation. And of course, that has all changed. There's been a focus on real risk reduction, and we've made good advances there.

Richard Stewart, Head of Southern African Operations

Thank you very much, Neal, and good afternoon and good morning, ladies and gentleman. As we talk through the operating results of the Southern African region, they were certainly two impacts that significantly hit our business last year. One, of course, is the ongoing failure of Eskom and the significant load curtailment that impacted not only us, but the entire industry. We saw significant impact on not only the levels but also the duration of load curtailment during the last four months of last year. As a business, we've become quite accustomed to being able to manage the load curtailment well historically, and it hasn't had a significant impact on our revenue line. And this has largely been managed through a working capital approach, whereby we keep our key operations and rock breaking going. And through a stockpiling strategy, we are able to process that ore during off periods and holiday periods. Unfortunately with a significant increase that we saw during the last four months of last year, this became difficult to maintain and did start having a direct impact. That impact was small over the course of the whole of the year at our gold operations, we lost 38 kilograms. But I think importantly that 38 kilograms was lost as a result for the first time having to actually stop shafts for a few shuts. At our PGM operations, we suffered a loss of just under 23,000 ounces. And that was despite having spare processing capacity where we were able to completely catch up the stockpiles that we had over the December period. I think what is increasingly concerning is the forecast for 2023. If we take into account what we saw in the last four months of last year, what we've seen in the first two months of this year, and forecasts are continually decreasing energy availability factor from Eskom, that actually paints quite a dire picture for 2023, particularly during the winter months of this year. And if that forecast comes to fruition, we estimate that it could impact as much as 15% of total production output in our operations and in the South African industry in general. I think importantly to recognize that as the levels and the duration of curtailment goes up, the potential impact on production goes up exponentially because your ability to manage those working capital and stockpiles significantly decreases. This unfortunately has some significant unintended consequences, not just for the industry but for the country as a whole. Using revenue on our shafts will impact government's ability to earn revenue through taxes and royalties. And this is the exact revenue they require in order to address the challenges at Eskom. Marginal shaft will become increasingly unprofitable, and this may force early closure of the shafts which will exacerbate the already dire job situation in the country. Of course, we understand the impact of our stakeholders downstream, smaller communities and suppliers to the company will be impacted. Ultimately, we are looking at a spiral here, which if not addressed will become significantly worse in the coming years. The Minerals Council has indicated that the mining industry alone has a total of about 7.5 gigawatts of renewable projects that are currently in the pipeline. The only long-term solution to the load shedding and curtailment issue is firstly Eskom’s energy availability factor, getting their reliability back up, and secondly additional generation. While these renewable projects will significantly add to the generation capacity, that's not the ultimate solution for mining companies who still require a significant amount of base load. However, as stakeholders, we need to be working together to remove any red tape in order to get this additional generation online as quickly as possible. That has to be the single agenda for all stakeholders today. When we move into looking at the gold business, gold last year was significantly disrupted by the industrial action we experienced in the second quarter of the year. And for the year as a whole, that pleasingly ramped up during the second half of the year with steady state levels being achieved during the fourth quarter. For the year as a whole, we produced 620,000 ounces of gold. And as I said, that normalized during the fourth quarter of the year. All-in sustaining costs were of course negatively impacted by the much lower output levels. But I think very pleasing was the absolute cost control, both during the industrial action and during the subsequent ramp up period, where we managed to reduce our absolute costs by some R3 billion despite a very high inflationary environment. DRDGOLD produced 5% lower for the comparative period 2021 and they produced that at an all-in sustaining cost of about R800,000 a kilogram, some 20% higher, due to exceptionally high costs, specifically related to fuel, steel, ammonia and electricity. I think pleasingly we did see a significant reduction in terms of the loss that was suffered. In H1, we had a R3.1 billion EBITDA loss directly as a result of the industrial action and that narrowed to R440 million during the second half of the year. Considering that the third quarter was still at the highly disruptive quarter, we were incurring full costs but only realizing a portion of our revenue. I think this business is well positioned for the upcoming year. Very tough decision was made towards the end of last year to look at a process to either restructure or close our KP1 plant and Beatrix 4 shaft, which have been loss-making for an extended period of time. And that process is due to complete in March of this year. I think those engagements have been constructive and a lot of effort undertaken to minimize the impact of forced retrenchment on employees. But certainly that will reposition us well in terms of the sustainability for the rest of the gold business as we move into 2023. Finally, Burnstone was also impacted by the industrial action. That project is in ramp up with a critical path being the development and ultimately that project has been delayed with first production from Burnstone now forecast for 2024.

Charles Carter, Head of U.S. Operations

Thank you, Richard, and good morning and good afternoon to participants. I think you're all familiar with the research we did mid last year when we revised our plan and gave a series of presentations as to how we saw the medium-term and long-term optionality of the Stillwater ore bodies and all the work needed to reposition the business for long-term flexibility, cost management, and to do justice to a world class ore body. And I think you're also all familiar with the fact that we had a significantly disrupted 2022 with flooding and other weather events. And we've had to manage the business accordingly in the short term, so obviously a frustrating 2022 year outcome. But I think the critical focus has to be on what we're doing to reposition this business long term. So you will have seen what we believe is a prudent response to the changing environment. I think one that is impacting all the companies that you follow, and certainly us in Montana is a very tight U.S. labor market. So you have a 3.4% national unemployment rate and you have a 2.8% unemployment rate in Montana specifically. And so we've been battling that all year. And I'll talk both to the macro impacts and then what we're doing specifically to address that. But I think importantly, we've had to manage through the year significant employee turnover. So average volume turnover has been 18% across the business in Montana in 2022. But much more importantly, when you go to specific job categories and key roles in the operations, you see 24% miner turnover, 20% mechanics turnover, 24% supervisory turnover, 25% geologist turnover, and 24% planner turnover. So that's not an issue that we’re complacent about, but it is a reality of our work environment both in mining in the U.S. right now and then on our two operations that have fairly remote access, long travel times and very limited housing options in proximity to the operations. And then where these skill sets are spoilt for choice on job opportunities both in mining and outside of mining, both in Montana and across the U.S., a very tough situation to manage. But I think we've started to get on the front foot on this, and I'll reflect on that in a moment. So you've got a tough labor market. You've got skill shortages. You're having to pay up for skills. And importantly, you're having to adjust your work cycles, shift cycle times, and putting in various bonus incentives to both attract and retain for skills. And we've been doing all of that and we've been doing it with some success through the year and particularly as we hit late year. And as we go into this year, we feel like we are starting to get a handle on this with some good outcomes. I think you would have also seen from our repositioning that we are positioning these assets through the commodity cycle. So right now we are enjoying very healthy pricing on the revenue side, and that's allowing us to do the difficult work we need to do to reposition while we've got that, that we’re repositioning with a view that over time, we will hit tougher price lines and we will have the flexibility to manage that accordingly. But in the short term, we have to do a lot of work to get that right. So you're not seeing short-term gains on costs and you're seeing high inflation impacting the business. But we're doing the work needed to put in robust pricing structures, long-term skill sets, mine planning, and all of the support systems are being modernized with a view to a long-term flexible, high margin set of operations. You would have also seen from our presentation earlier, last year that we've cut growth capital. We think we've got the capital that we need for what we're doing, but we are spending a lot right now just on getting development flexibility right, and improving the overall developed state of the operations. I think just to try and give a bit of context on that. It's important to understand at Stillwater West, we have limited flexibility currently. Our development ends in the depression zone and within the Stillwater East fourth zone. So we've got complex ground we are mining through. It doesn't have great grade. And it's given us a big focus on our mining methodology short term and what we have to do with that full complex ground conditions and variable grade. And so you've seen that in the reduced volumes and you've seen it in the reduced recoveries that we have to mine through these environments and position for the longer term where we start to get better grades, better continuity. We can increase our flexibility significantly. Currently, we are focused on definition drilling to aid in mine design as we work through this process. At Stillwater West, we expect to reach the depression zone only in 2025. To manage expectations, we recognize that we have a substantial amount of work ahead of us this year and into next year to handle this situation correctly, and we must mine through it. As a result, you will observe lower volumes and higher cost structures during this period.

Grant Stuart, Head of Recycling

Thanks, Charles, and good day to all. In 2021, recycled production was 755,000 ounces. Last year, that dropped to 600,000 ounces. And we believe that two key factors have really played into those declines. One, the market dynamics including Russia's invasion of Ukraine, rising inflation and sort of tightening financial conditions or financing conditions, and availability of new vehicles and high used car prices, which simply translated to all the cars or vehicles being kept for longer. And second, our principled approach to ensure a solid chain of custody for recycled material. In this regard, we are working with the International Precious Metals Institute in the auto cat 5th committee to promote policies regarding the prevention of copper cable theft. The average 3E PGM basket price for the recycling operations decreased by 13% year-on-year to just over $3,000 or just over R50,000 per 3E ounce. And with that, we delivered an adjusted EBITDA number of $78 million. On a net profit basis, after financing income, the recycling operation delivered a healthy $92 million. In the longer term, we see recycled supply being a key source of total supply growth.

Mika Seitovirta, Chief Regional Officer for Europe

Thank you, Grant, and hello, everyone. My name is Mika Seitovirta, and I'm the Chief Regional Officer for Europe. We did quite some progress in the region last year. We finalized our European strategy work and we started to deliver on that one. We also advanced with our European organization and strengthening our capabilities in battery metals with several top recruitments. So we start to form the European leadership team running the businesses. European region is currently our Sandouville nickel refinery in France and it's the lithium hydroxide project at Keliber in Finland. We are building our strategy around France and Finland for the time being and around those ecosystems that are to be created and developed. Why this? Because in both countries, the governments are very much demanding that we should have control over the critical metals, not only in France and Finland, but also when it comes to the European Union. And obviously, this is supporting our efforts in those regions to develop our future business. Let me first briefly comment on Sandouville. Actually we acquired Sandouville last year and we got the keys in March. The year has been two folded. First of all, the H1 actually really did have good production volumes. And we did improve our profitability as well. However, during H2, we had technical challenges, which led to prolonged maintenance break and we lost a lot of the production dates. You can actually see it in the adjusted EBITDA picture. For H1, we were positive on the EBITDA, good progress; H2, because of the reasons mentioned, was disappointing. However, we're also planning to make losses there and we are well aware what we need to do and what kind of action we need to take in order to improve this year and for the coming years. First of all, we have developed a different commercial strategy than before. Instead of going for wholesalers that match directly, we have been going directly to end customers. Secondly, we have a very clear industrial agenda how to do our refurbishment investments and debottleneck and make sure that we can stabilize the production. This year we have planned and budgeted 16 million of investments for only that purpose. And third but not least, we have also our people agenda. So we have strengthened our management, our senior management in Sandouville and in France and on a European level to support all these activities. We have also a new site manager since January this year. On top of this, it needs to be mentioned that we are going to finalize actually three prefeasibility studies this year, one of them in PGM recycling where we are already big in U.S. as you know. The second one being that we also do a prefeasibility study on nickel sulfate. And the third one is battery recycle. These are all part of our strategy and we are going to look those market opportunities very carefully. And then over to Keliber, the lithium hydroxide project in Finland. We had a very busy year, but a very good year with Keliber. The project is now fully permitted and also fully funded. So we are going to move to the next phase of the project where actually we start the construction. And we start the construction from the lithium refinery in Kokkola. And it's very close to construction start. It's happening next week. Now having said that, we have also updated our numbers and due to inflation reasons, also because we did some more detailed engineering work, so you can see that the 588 that's in October last year, updated CapEx total project capital number and that's excluding the sustaining capital. But with that capital and with the same price assumptions that we have had during the whole project where the lithium hydroxide price has been $26,000, you can see that we get an internal return rate of 20%. It's also very sensitive about pricing. However, we have been conservative and we want to be conservative here. So we are still sticking to our 26,000 as a long-term forecast. The capacity unchanged, 15,000 tons per annum and the life of mine 16 years. Our plan is that we are ramping up as first European lithium hydroxide producer from its own ore 2025 and this is unchanged target for us and it's very much something that we feel is doable, and we are today when speaking to you we are on track with our project plan. Then let's talk a little bit about green lithium. One of the things we believe is that when we say that we go to battery metals, we often use the terminology that we go for the green metals. And this is very high on our agenda. Now concerning the Keliber project, this is something very special that we want to highlight because we feel that we are absolutely one of the cleanest lithium hydroxide producers in the future. And why is that? First of all, it is because we can use very clean energy. We can use 100% nuclear, so actually the CO2 is zero. If you want to, even the average in Finland is very clean in comparison with many other countries. We are also going to use the natural gas which is going to help us to keep our CO2 values low during the whole process. And then thirdly, what you don't think that often is that our lithium hydroxide is not going to travel a long way, unlike lithium hydroxide to many customers in Europe today. So we want to prefer European production, European supply to European customers. And this is also what our customers want. And it means that instead of traveling to different continents from mineral to hydroxide and then back to Europe, so we are very close. We are part of Europe and the way to Continental Europe is not that far. And this is giving us a CO2 benefit. So in these studies, we look at the Scope 2. We will in the future look also into the Scope 3. And of course, we are looking for clean premiums here and providing our customers something which is very unique.

Charl Keyter, CFO

Thank you, Mika. Good afternoon and good morning to all participants. Despite the challenges that we have endured during 2022, I'm pleased to present a very solid and may I say a resilient set of financial outcomes. Starting with the capital approval framework, I can report that we have delivered on all constituents of the framework. On project capital to date, we have spent approximately R2.2 billion, which is roughly R1.1 billion each on both Burnstone and K4. Our Board also approved the capital expenditure on Keliber of €588 million. We have maintained our cash reserves and at year end, the balance was R26 billion or $1.5 billion. Dividends for the year amounted to R7.4 billion and the establishment of the Sibanye Foundation nonprofit company is in the last phase with a few regulatory hurdles still outstanding. This fund will go a long way to ensure social upliftment in the areas where we operate. Net cash to EBITDA came in at 0.14x despite our investments into battery metals. The refinancing of the $600 million revolving credit facility is nearing completion and we are targeting an upsize of a minimum of $800 million. Again, this will be on a three-year plus two optional one year extensions as a tenor. And finally, just to repeat that we have increased our holding in Keliber to 85% and our further investment in New Century resources is now at approximately 53%. Turning to the income statement. Revenue was down 20% year-on-year to R138 billion and this was driven by lower volumes and commodity prices across all our operating segments. Pleasingly, despite above inflation increases across almost all input costs, driven by global inflation, cost of sales before amortization and depreciation was down 6%. And here all credit has to go to our operational teams that have held cost steady in real terms. Adjusted EBITDA for 2022 was R41 billion or $2.5 billion. Taxes and royalties were in line with lower profitability. Profit for the 12 months was just under R19 billion and normalized earnings was R21 billion. Using our dividend payout ratio of 35%, we declared a final dividend for the year of R1.22 per share. And this brings the full year payout to R2.60 a share which is a 6% yield, which is still industry leading. Taking a forward look at our capital requirements, an area where we have received a lot of questions, it is really an undemanding capital profile. The capital expenditure will be in the next two years as the bulk of capital will be spent on Burnstone, K4 and the now approved Keliber project. At the gold operations, we expect our reserve development capital and stay in business capital to reduce in line with our end of life shafts. Capital at the SA PGM operations will stabilize following the ramp up of K4. And at our U.S. operations, no further growth capital will be spent following the ramp up to 700,000 ounces. As reported earlier, the capital for Keliber was approved at €588 million and we are targeting a split of 50% debt and 50% equity. 175 million of equity has already been secured following our investment in Keliber and a further 118 million equity will be raised through a proportional rights issue at the asset. The debt funding is well underway with beyond expectation interest by lenders and providers of debt capital. And then lastly, on Rhyolite Ridge, our commitment is activated once and only once all permitting has been satisfied. We are also very pleased with the support that we have received at the project level from the U.S. government through a loan from the Department of Energy for an amount up to $700 million. Finally, and just to reiterate, capital expenditure is focused, it is well planned, and it's undemanding on the organization.

Neal Froneman, CEO

Thank you, Charl. And let me conclude by saying as I've said right at the beginning that we are very well positioned in 2023 and even looking forward to create further value. And let me tell you why? The South African gold business has been through the industrial action which was necessary to establish an acceptable wage agreement. The next wage negotiation is only in July of 2024. And hopefully, it'll be a different type of wage negotiation. But the phase production build up is now complete and that was completed in November 2022. And we should have a pretty normal year in gold. The South African PGM business achieved a five-year inflation-linked wage agreement, which was settled in late 2022. So we have a period of stability and focus, which also bodes well for good volumes and good safety and low costs. The one aspect that may have been missed by the market, the Rustenburg acquisition payments to Anglo American were completed late last year and that results in an incremental 35% of Rustenburg’s free cash flow flowing through to the bottom line. So that is something that you must consider when you look at your valuations for Sibanye-Stillwater. The U.S., hopefully we'll not re-see extreme weather events. We are certainly where we've been able to make repairs, have ensured that we can cater for extreme weather events with the infrastructure that was damaged. But more importantly, the U.S. is well on its way to delivering on the reposition plan, attention and attraction of personnel is well in hand. And we can look forward to a phase build up over the next two to three quarters. It will not be smooth sailing. And in fact, that's why you will see there's a slightly smaller tick with a sign of some volatility for the next few quarters. The European region has a very good battery metals strategy and they are busy consolidating their position. The Keliber project is now approved and the lithium hydroxide refinery is in construction. Sandouville is being integrated and the feasibility studies are underway. So our European region is in a solid position. I want to say that just as a broad comment, there are significant supply risks in the South African PGM sector which in my mind will offset any destocking and possible demand reductions in the various markets where PGMs are used. I suppose what I'm saying is there's more supply downside risk than there is demand downside. So that bodes well for, let's say, solid and stable prices for PGMs. Probably more importantly though, I think it's probably now well agreed that a potential recession, global recession is becoming smaller and less. And if there is a recession, at one time it will be shorter but it will have less debt. So we are certainly working our way into an improving macroeconomic environment. So we have a stable operating outlook with a constructive metal price environment across the board. So we look forward to a much better 2023 than we saw in 2022. Just very briefly, the operating guidance is contained in this slide. I don't intend to go through all of it. But output should increase in the U.S. Recycling should be stable. The South African PGM operations, again, very similar production forecast. Costs will go up slightly. But I dare say that our cost increases will be less than the rest of the sector. The South African gold operation should have a much improved 2023, and Sandouville should certainly achieve its design outputs for 2023 as well. And, of course, Keliber is a project in construction and should remain on time and on budget. And you can see the capital cost there. So thank you for your time. We'd be very pleased to take any questions that you may have. So let me at this stage hand over to James. Thank you, James. Please go ahead.

James Wellsted, Head of Investor Relations

Thank you, Neal. Just got a couple of questions from the webcast. We do have limited time, I'm afraid. So I'm going to try and consolidate some of the similar questions to make the response quicker. We've only got about half an hour before we have to close down the Q&A. So the first question I think is on recycling, so probably Grant or Kleantha. Why are you guiding lower volumes for your recycling business when you expect global recycling volumes to increase by 8%? The second follow-on is can you maintain historical 4% margins at the U.S. recycling operations with declining volumes? And then the third is the recovery rate of auto catalysts in Europe. In the U.S., that's about 40% of the auto cat's demand eight years ago. Do we have an idea of what the comparable European recovery rate is given the strict intercompany export and import rules for spent auto catalysts? Thank you.

Grant Stuart, Head of Recycling

Yes, good. Thanks, James. Appreciate that. I think in respect of the 8% in the growth, I think what we need to appreciate is that these recycling growth forecasts are very regional, with China being a big growth story after the Day Zero COVID rules ended. I think chip shortages have also been less of an issue in China, meaning that they use cost scrappage rates are a lot higher in that region. In contrast, the U.S. market, which is a relatively mature market, has been characterized by reduced volumes over the last 12 to 18 months for the reasons that I mentioned earlier. But you're also seeing I guess as a result of the lower price environment and thinner margins holding, so less flow. We have also taken a very principled and measured position to responsible sourcing in the customers with whom we engage. By no means should you see us as being complacent in this space. We do see green shoots, and I think we're well positioned to welcome that growth when it does come in and we anticipate that sort of towards the middle of this year. In respect of the answer to can we maintain the margins? I think the short answer to that is yes, our business model is not heavily geared or sensitive to price given our limited sort of commodity exposure. We do have a hedging policy in place. We have a relatively low fixed cost base and with our treatment charges largely aligned to the volumes that we process, I think I'm fairly confident to say that we can maintain those margins as we have historically done. Regarding the recovery of the European market, I see a significant opportunity there. That market is not as mature as the U.S. market. The introduction of silicon carbides and diesel catalysts will likely boost those volumes. While I'm not an expert in this area, I would guess that those figures would be similar to what you've indicated, James.

Richard Stewart, Head of Southern African Operations

Yes, thanks very much, James. And, yes, I guess firstly, I should perhaps place in context the 15% possible production loss that we put out there and what that forecast actually means. If we take a look at what happened last year, there was a significant change in load curtailment levels from September onwards, both in terms of the levels we experienced and the duration. I think the second factor you've got to take into account, that is if we look historically at Eskom, we've seen over the last five or six years a constant decline in terms of the energy availability factor, which is essentially how much power they can generate. And we've seen that decreasing by about 4% or 5% a year, currently sitting below 50%. So if you take the base off last year and you extrapolate a similar continued decline in the energy availability factor, that is where the potential for up to 15% production losses comes. And I think the key message to take away from that is that is a downside scenario. But a scenario we should all be very aware of. Because if we don't do anything different or don't address it, that could be the situation that the entire industry faces. I think, of course, as management, our job is to mitigate against that and we do have plans in place to try and mitigate against that. Part of it is, of course, how we manage our business. But I guess increasingly, it's also becoming how we manage it on a regional basis which does mean your more marginal shafts are going to be impacted rather than the higher margin one. So you’re managing not just to output, but ultimately managing to profitability. In terms of what we've included in our guidance, that is largely based on what we saw in the last quarter of last year. That is what we can forecast forward. That's what we've seen in the first two months of this year. So that's what's incorporated into the guidance.

Neal Froneman, CEO

Yes, thanks, James. Look, it's very early days in the Mopani process and it's unfortunate that it's become quite public. But let me start from the top. We think we refund contender wide because, a, we have deep level mining skills which are absolutely necessary in that environment. I think we're a company that has demonstrated its ability to deal with difficult situations and are referred to, to London. And there's no doubt that Mopani is a difficult situation, perhaps not as difficult as London, but we also a company that I think can implement quite intrapreneurial structures such as the Rustenburg structure where the commitment is upfront or relatively low and you can focus on looking through the ore body and investing in the ore body. So we see the opportunity to leverage those attributes probably ahead of most people that would be interested in Mopani. I personally think that the commitments will really rather be in terms of capital, and as Charl showed you the capital profile of the company is relatively light. So we have a lot of flexibility. Timing is not driven by ourselves. It's really driven by the people running the process. We like what we see. We still got to conduct significant due diligence. So I really don't want to speculate on potential. But I can assure you that if Sibanye Stillwater moves forward with Mopani, it will be in a value accretive way. Otherwise, we won't do it. Thanks, James. Yes, so clearly what you heard Richard describe is a situation that we need to manage in the next couple of years. Of course, we are also working towards solutions. We're not going to, let's say, remain dependent on Eskom and its poor performance for forever and a day, and most companies you would know are probably driving renewable energy projects primarily to reduce their carbon footprint but of course it will make them less dependent on Eskom. The problem with renewable energy is that it's not base load. We are looking at some base load projects. And once we've got more definition around those, we will share it with you. So I would suggest, although load shedding or load curtailment may be with us for a long time, as South Africans obviously as a business, we are making plans to reduce our exposure over the longer term. So I wouldn't factor in a 15% reduction forever and a day. That is significant and that is something we need to acknowledge in the next year or two. In terms of our capital profile, I think Charl demonstrated that our capital profile drops off very significantly, and in fact drops from roughly 19 billion to about 10 billion. And that includes things like Keliber and so on. And that's Rand per year. So there's lots of flexibility in our ability to fund and manage. Software PGM prices I think is short-term volatility. And where I'm leading to with all of this is that the company remains in a very robust position, remains in a position to progress that strategy without betting the farm. But let me come back to PGM process. That short-term volatility that we're seeing, the fundamentals for PGM, especially if you factor in a 15% plus supply risk and you factor in a lower or a shorter recession, the downside risks are more on the supply side than the demand side. So I think we're moving through a period of weakness, but the medium and the long-term remain very good, which is also what I tried to present. So our M&A, let's say, strategy, it's not the primary focus of the group. But I do think as I've said before, you'll probably see some more movement this year than you did last year. And I think that's off a base where the underlying strength of the company remains very good.

James Wellsted, Head of Investor Relations

Thank you, Neal. The last question comes from Richard Hatch from Berenberg. Please proceed with your question, Richard.

Richard Hatch, Analyst

Our M&A strategy is not the primary focus of the group. However, as I've mentioned before, you will likely see more activity this year compared to last year. This is based on the fact that the underlying strength of the company remains very good.

Charles Carter, Head of U.S. Operations

What I was trying to convey was a gradual progression. Certainly, quarter-on-quarter throughout this year, you won't see significant declines, but we're doing everything possible to reduce costs and increase volume. However, this is a three to four-year process and it will develop progressively. You'll see this reflected in the charts we discussed last year, and we are committed to that plan.

James Wellsted, Head of Investor Relations

Thank you, Charles. Thanks everybody for attending. I’m afraid we're going to have to wrap it up now. We do have other commitments. There are a couple of more technical and more detailed questions online, and we will respond to those. If you have any other further questions, please don't hesitate to contact the IR team and we'll get back to you as soon as possible. Neal, if you'd like to say any last remarks?

Neal Froneman, CEO

Thanks, James. I think it's all been said. I know the market’s disappointed with our results. We see the underperformance where it's occurred. I think our message is that we continue to drive operational excellence. We are very well positioned based on not having the same type of disruptions in front of us in this year. Our strategy remains intact. In fact, if anything, we seeing good signs of being in the right place at the right time. We appreciate your time today.