Desert Lion Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of +15.8% was delivered by the fund for the Q1 of 2021, outperforming the e FTSE/JSE All Share Index that delivered a +4.5% return for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Desert Lion Capital, in its Q1 2021 investor letter, mentioned Sibanye Stillwater Limited (NYSE: SBSW), and shared their insights on the company. Sibanye Stillwater Limited is a South Africa-based gold mining company that currently has a $13.2 billion market capitalization. Since the beginning of the year, SBSW delivered an 11.45% return, extending its 12-month gains to 127.63%. As of June 15, 2021, the stock closed at $17.71 per share.
Here is what Desert Lion Capital has to say about Sibanye Stillwater Limited in its Q1 2021 investor letter:
“Sibanye is a South African gold and platinum group metals (“PGM”) producer with mines in South Africa and the U.S. Established in 2012, it has since become one of South Africa’s largest gold producers and the largest PGM producer in the world. Sibanye also operate a PGM recycling facility and own a majority interest in DRDGOLD, a specialist in the recovery of gold and other precious metals from open pit tailings.
The investment thesis incorporates the following logic:
- If central banks globally are going to continue printing money unabated, precious metals prices should rise.
- The drive for cleaner and greener is accelerating. The market for platinum, palladium and rhodium is structurally attractive.
- The company is generally mischaracterized. Ask around, and one will find that most people still refer to Sibanye as “a South African gold miner” with “lots of debt from that Stillwater acquisition.”
- It is not quick and easy to ramp up PGM supply in response to higher demand and prices. Favorable supply-demand characteristics will likely remain favorable for longer.
- Bad capital allocation decisions, corporate excesses, and resultant tarnished reputations from the previous boom period are still fresh in the minds of most mining executives. Neal Froneman has proven himself a disciplined capital allocator. His approach to capital allocation is straightforward: deploy capital at expected returns that enhances value to shareholders or distribute it via dividends and buybacks.
- The company is debt-free and generating heaps of cash.
- The valuation is cheap. At current metal prices, Sibanye is trading at about 5 times after-tax cash profits.
Sibanye is effectively a call option on a potential commodity super cycle. In the meantime, the value of our “option” is unlikely to deteriorate as we are rewarded with healthy dividend flows.”
Our calculations show that Sibanye Stillwater Limited (NYSE: SBSW) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the first quarter of 2021, Sibanye Stillwater Limited was in 16 hedge fund portfolios, compared to 17 funds in the fourth quarter of 2020. SBSW delivered a -6.15% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
