Sibanye Gold Ltd. (SBGL) Q2 2020 Earnings Call Transcript

Sibanye Gold Ltd. (NYSE: SBGL) Q2 2020 earnings call dated Aug. 27, 2020

Corporate Participants:

Neal Froneman — Chief Executive Officer

Charl Keyter — Chief Financial Officer

Chris Bateman — Executive Vice President: US PGM operations

Richard Stewart — Executive Vice President: Business Development

James Wellsted — Senior Vice President: Investor Relations

Analysts:

Arnold Van Graan — Nedbank — Analyst

Dominic OKane — J.P. Morgan — Analyst

Chris Nicholson — RMB Morgan Stanley — Analyst

Adrian Hammond — SBG Securities — Analyst

Leroy Mnguni — HSBC — Analyst

Alexandre Ayoub — Waha Capital — Analyst

Wade Napier — Avior Capital Markets — Analyst

Presentation:

Operator

Good day ladies and gentlemen, and welcome to the Sibanye Stillwater Interim Results Presentation. All participants will be in listen-only mode. There will be an opportunity to ask questions later during the conference. [Operator Instructions] Please note that this call is being recorded.

I’d now like to turn the conference over to Neal Froneman. Please go ahead, Neal.

Neal Froneman — Chief Executive Officer

Good morning to those in America, and good afternoon to those in South Africa and Europe. It’s indeed a pleasure to welcome you to the presentation of our H1 2020 results, which I’ve the pleasure of presenting. As always, moving onto the second slide, that’s a safe harbor statement and I would urge you to take note of the forward-looking risks related to this presentation.

Moving on to the next slide and the foundation of any business is, of course, strategy, and we constantly measure ourselves according to our strategy and our strategy is simply strengthening our position as a leading international precious metals mining Company by doing the following and that really starts with — and I’m looking at the 12 o’clock position. Building a values-based culture; ensuring safe production and operational excellence; deleveraging our balance sheet; addressing our South African discount, and then based on strengthened equity rating pursuing value-accretive growth. Of course, all of that is hold together by embedding our environmental, social, and governance excellence as a way we do business.

And I would like to move on to the next slide and actually just look at how we’re progressing related to each one of those strategic goals. I’m not going to go through the slide in detail. But first of all, looking at building a values-based organizational culture, we made good progress during COVID. We actually used the opportunity to accelerate our program. That’s still work in progress. And as you can see, we think we’re about halfway there.

Ensuring safe production and operating excellence, I personally think that as a Company, we did extremely well, considering the COVID disruptions. And from an operating point of view and the progress point of view, we’ve given ourselves a big tick. Embedding ESG excellence in the way we do work — we do business, and again, this is work in progress, will probably always be work in progress. We’ve put in a huge amount of effort, but I think again, we could — we can give ourselves half a tick. In terms of progress in deleveraging our balance sheet, I think this is one of the highlights of the quarter. We are well below our interim target of one times, and we are close to the top of leverage levels before we embarked on any acquisitions. And with a net debt-to-EBITDA — adjusted EBITDA of 0.55 times, we can give ourselves a big green tick there. Addressing our South African discount, this is probably going to be something that is ongoing, and again, I think we can give ourselves half a tick. We’ve had very good engagements in South Africa with our regulators. I do believe we’re making progress, and as I say, half a tick there is fine. Pursuing value accretive growth, well, when I get to end of this presentation, I will show you very clearly that we’re significantly undervalued, and until we see a proper valuation of our stock or equity rating, we will not pursue value accretive growth. So, there is still a lot of work in progress there.

Moving on to the next section of the presentation, and I really just want to spend some time on embedding ESG excellence in the way we do business; one of our central focus areas. And I want to start with the initiatives that we embarked on during the COVID-19 pandemic, which is obviously still in play. We made very significant contributions to ease the plight of our communities and other stakeholders. We contributed ZAR23 million to the relief funds, we provided financial support to our employees that we’re not working to the tune of ZAR1.5 million, a very, very significant contribution and probably one of the biggest in the industries. Employee donations interestingly matched by the Company amounted to ZAR2 million, very significant and great to see the participation of our employees. And through a very difficult period, we provided counseling and psychological support, which was extended not just to our employees, but to their families, as well. We provided over ZAR14.5 million of support to small businesses. We’ve provided ZAR5.5 million of social relief through food parcels, water tanks, blankets, and mattresses, and we contributed ZAR3 million through sanitization and catch-up programs to school and education.

One of the bigger contributions, of course, was preparing our own business for quarantine and isolation facilities and we established a 2,196 bed facility. We also contributed PPE, oxygen tanks for health facilities, sanitization, tracking and tracing, and that was to the tune of almost ZAR60 million. Hard to quantify the amount spent on education and awareness, and especially with 80,000 employees, that’s a very significant part of getting people to behave in the right way regarding COVID-19 as well. So, in my mind, a very significant step-up to the plight.

Moving on to the next slide regarding social issues is really the commitment to renewal and restitution at Marikana. We acquired the Lonmin assets with our eyes wide open and that really was reference to the Marikana tragedy. We saw this as an opportunity to create a new future with all stakeholders. And we do not intend to sweep this under the carpet and that is really an opportunity to do what I don’t think has been done up until now. And first of all, we’ve created sustainability by incorporating this business into our business and it is profitable, it’s significantly profitable. We are looking to progress fostering and healing and getting closure by providing ongoing counselling and emotional support for the widows and their families.

You would have seen from the many media releases after our Memorial Lecture, the Marikana Memorial Lecture, that we intend pursuing unfulfilled justice on behalf of the widows and the communities and restitution for those affected that have not yet received restitution. We intend honoring the educational support and sustainability that was set in place by the previous owners and managers of Lonmin. There are 144 beneficiaries to that. And then, of course, honoring Lonmin’s outstanding SLP obligations that is a commitment we’ve made at the Competition Commission, and we’re now in the process of engaging on what we call SLP III commitments.

Important to look at the pictures on this slide. You can see we handed over six houses and this is despite COVID. We have another 19 houses we intend to hand over before the end of the year and the balance of the widows’ houses will be completed next year. These are substantial and material houses. You can see a picture in the right bottom hand corner of the slide of one of the houses.

During the week of the commemorations or the week that the tragedy happened in 2012, we held prayer sessions and also amazingly, up until now there has been no war or monument unveiled and we unveiled a wall of remembrance, which is erected in memory of the fallen mineworkers. I think these are very significant steps. And certainly, in less than a year of owning these operations, a significant step-up to the plate.

One aspect that perhaps gets forgotten about is our investment in DRDGOLD. And in our view, DRDGOLD is a smart commercial entry into rehabilitation of the legacy environmental sites in the South African gold mining industry. A number of ESG highlights are contained on this slide. There has been continued investment by DRD in rehabilitation. Hundreds of hectares have been cleared, vegetating tailings deposits to reduce dusts, which is a major complaint and problem to the communities in the Johannesburg area, so that’s ongoing. And then DRD-specific response to COVID-19 is shown in the last few bullet points. They established a quarantine facility with 50 beds, that was at a cost of ZAR600,000. There is ZAR1.6 million in employee contributions to the Solidarity Fund, which is a voluntary contribution. And then over 5,000 food parcels, which were supplemented with support relief from 2,500 urban farmers. So, also, again one of our subsidiaries contributing to the COVID-19 pandemic in a very real and material way.

In terms of recognition for our ESG efforts, and remember what I said at the beginning of the presentation, I think we are only halfway there. We were admitted as ICMM members in February 2020. And that’s not just an organization you apply to become members of and you become a member when you pay your fees. There are very rigorous evaluation processes and standards required, and we are very proud to have been accepted as an ICMM member.

You can see the CDP climate change disclosure, we received an A rating, one of only 179 companies globally and the only one from South Africa, so that in our view is also significant. We were included in the Bloomberg 2020 Gender-Equality Index. And we’re one of only eight South African companies over 11 sectors to have received that inclusion. We were re-included in the FTSE Russell ESG Index of the JSE. And very pleasing, we were recognized by the Rand Water Board as the most collaborative and water saving company in the South African mining industry. And, of course, we’re very proudly members of the World Gold Council, and we subscribe to their protocols as well.

One aspect that I would say as world-class in terms of the basis on which this agreement has been created, is what we have in our US PGM operations. We call it the Good Neighbor Agreement. We’ve marked 20 years, this year of environmental and community collaboration. And in that period we’ve had absolutely no litigation. So, it shows, in a very litigious environment, mining companies can operate when they do the right thing and engage their communities in the right way and become good neighbors. So, we’re very proud of those recognitions and achievements.

Obviously, the primary focus of this presentation is our H1 results. And that really consists of two parts. One is the operational performance, safe operational performance, and of course, the financials. I will cover the operational performance, and as always, starting with safety. So I’m looking at the slide that says progressive safety performance. Important to note that we had zero fatalities in the Group in the second quarter of 2020, and that’s always pleasing. And it’s just part of the journey. Our South African gold operations have run fatality free for almost two years now. We’ve had 710 days with 13 million fatality free shifts. Unfortunately, we recently had a fatality. So that progress has been interrupted. We are seriously committed to achieving even better performance in our next part of the journey to zero harm.

Our US PGM operations have been fatal free since October 2011, that’s 3,194 days with 3 million fatality free shifts. And pleasing, in our South African PGM operations, we’re also fatal free since March 2020. And they’ve now achieved 2 million fatality free shifts.

The graphs on the right-hand side reflect the safety performance. The graph that is worthy of some mention is the serious injury frequency rate. In my view, the difference between a fatality and a serious injury is really a marginal difference. And we do track our serious injuries very carefully because as we all know, once you build up a number of serious injuries, you’re most likely to have a fatality. But what’s pleasing with that graph is the continuous downward trajectory. And we will strive to take that even lower.

We’ve also been recognized, and I’ve moved onto the next slide now, for our safety achievements at the South African Mining Industry safety and health excellence awards, we received the JT Ryan Award, a very prestigious award. Our Platinum division was recognized, came in first place at the Bathopele operations. Kroondal West was third place. And our Processing business, first place was ChromTech at our South African PGM operations, and in second place was our Precious Metals Refinery in South Africa. So, again, some recognition for the hard work that we as a Company are doing in this area.

Moving on to the next slide, which is titled responsible approach to COVID-19, and I want to spend a little bit of time on this slide. The approach to COVID-19, although similar in the US and South Africa, obviously, had very, very different impacts. Our US PGM business was largely unaffected outside of ongoing social distancing measures, which do disrupt production. They do occur higher costs. So, all of those need to be factored into the production and cost profiles in the — in this presentation. The US production achieved 89% of what their plan in quarter two, and that’s a great achievement considering the disruption of displacing contractors, introducing sanitizing and social distancing and so on. I think that’s a commendable performance under these conditions.

The South African operations entered full lockdown from the end of March, and restarting only started from the end of April 2020. And we have been particularly careful in the rebuild process in terms of making sure that we can prevent and manage the transmission of COVID-19. So we have not — we have been conservative in re-staffing our business.

The South African gold and PG PGM production was 54% and 47%, respectively, of planned output. So you can see approximately half of what was planned was achieved during quarter two due to the lockdown. While the end of H1, our South African gold operation had pulled back about 73% of the workforce, was achieving 80% of output, that’s reflected in the graph on the left-hand side of the slide. The South African PGM business had staffed up to 65% levels and was achieving 73% output level. So, we are seeing better productivity due to, I would argue, less constraints and easier logistics with lower staffing levels at this stage. It’s something we will watch. And we will fine-tune our re-staffing around these type of opportunities.

Interestingly, we have introduced a protocol to protect employees with co-morbidities. We have recognized that vulnerable employees, or those with co-morbidities and just about every single death we have had due to COVID-19 is employees that have co-morbidity. So, this is a moral issue, and we have introduced a protocol and that is in place and being implemented.

Moving on to the next slide, I want to state right upfront, these are record earnings despite COVID-19 for our Company. Q2 was severely impacted by COVID-19. You can see, as I said in the last slide that we only had about 50% of quarter two production, but it was anchored by a strong quarter one. And quarter one really gives you an indication of the earnings potential of the Company under normal conditions. We had an 8 times increase in adjusted EBITDA year-on-year and that was ZAR16.5 billion versus ZAR2 billion that was recorded in H1 2019. And in dollar terms that is $990 million versus $142 million in H1 2019.

Very important to note that 94% of our earnings have come from operations that we have recently acquired, and that would suggest to me that we have completed a very, very successful acquisition strategy, and of course, that is an entry into the PGM sector. And as I said right at the beginning of the presentation, we deleveraged back into pre-acquisition levels from our point of view of net debt-to-EBITDA.

Now, I want to make the point that it’s not just output that delivers results like this. During COVID-19, the Sibanye-Stillwater team sprung into action, got to grips with potentially very significant cost runaways due to lowering or decreasing volumes, got into control of capital, and working capital management, and all of that contributes to the results that you see today. So, it’s not just a focus on output, it’s a focus on controlling costs as much as we can under circumstances like this.

Just moving on to the next slide. And then the exposure to what I have seen referenced as rock star commodities at the right time is reflected in this slide. You can see the three-year performance of rhodium, ruthenium, palladium, iridium, silver, gold, already at the top end of this table, and very pleasingly we have significant exposure to these metals.

In terms of revenue contribution, interestingly, you can see rhodium makes up 21% of our revenue, which is similar to gold. And, of course, platinum is the laggard, but I think it’s safe to say that we are very well positioned for what we believe is a platinum market that has got longer — medium and longer term really good underpinning fundamental, so we look forward to getting the benefit from the future upside in platinum as well.

Moving on to the individual operations, and I am discussing them in order of contribution. So the next slide is titled South African PGM operations, and they’ve contributed 54% of Group adjusted EBITDA. And some important things to note. Production is 5% higher than the previous year, but that is really due to the inclusion of Marikana, so that creates a little bit of a distortion and offsets the COVID-19 disruption.

But the ramp-up in platinum was really very smartly done, that was risk-based. And the production came in at 47%, and it was offset by, obviously, much higher 4E PGM basket prices. The build-up was prioritized at mechanized sections because that’s clearly where you get higher productivity. And if you look at the details, you may see lower grades during this period, and that is because the focus was on UG2 reef, which, in the mechanized sections is lower grade, but with the contribution from rhodium and chrome is higher revenue per ton. So the ramp-up was appropriately focused.

The other difference between this and gold is, PGM ore bodies are more homogeneous in a grade profile than gold and you will see the relevant, so that do not come to gold, but there is clearly less flexibility to higher grade PGM mine. In fact, I’d say, there is no flexibility to do that. Interestingly, at this point in time, we’ve increased our staffing levels to 80%. And I think the other important aspect to note is that, our margin, the adjusted EBITDA margin is now sitting at 42% from these operations, which is remarkable that literally a short while ago and certainly when we purchased them, most of them were loss-making or really just breakeven. So very significant profitability from our South African PGM business.

We always get a lot of questions around Marikana, and I’ll move to the next slide. And I think very important to note that, at the last results presentation I mentioned that we had exceeded our own estimates of ZAR730 million a year of overhead cost synergies. We had achieved ZAR1.2 billion. Well, I’m very pleased to report that today we have identified ZAR1.85 billion of annual Marikana synergies that are now being recognized. That’s more than double what we originally estimated. And that’s highlighted in the annual benefits column very much on the right-hand side of this slide. So that is very pleasing. Of course, there is still additional upside from future processing of Rustenburg ore, when we do make the decision to move it from the Anglo Platinum processing facilities to our own. But to be clear, we have not made that decision.

I’d like to move on to the US PGM operations, which is the next slide. They contributed 36% of Group adjusted EBITDA. And the combination of mined and recycled production is shown in the graph. Important to note that year-on-year, we — despite COVID, we’ve achieved a 5% higher production output. We were able to continue with these operations. We had to displace our contractors, that was an agreement with the health practitioners or regulators in that region, which has affected our capital growth projects. I’ll get to that shortly. These are high margin underground operations with a 60% adjusted EBITDA margins.

Also important to remember, when you look at the cost line, that the higher PGM prices increase your taxes and royalties and we’ve estimated that amounts to about $40 per 2E ounce in the cost line.

We were able to reduce our inventory, recycling inventory during the second quarter. That released about ZAR300 million of working capital. Of course, collections since then have been slow, and when I get to the — an overview of the market towards the end, I will share with your view on recycling and the impact that COVID has had.

The Blitz build-up has clearly been delayed. We have not brought back the contractors onto site. We’re expecting a delay or something between 12 months to 18 months due to the contracted demobilizations. There has been force majeure declared on equipment and we are improving our understanding on the ore body and factoring that into the ramp up as well. To be clear, Blitz will still achieve the same steady state production, but we are factoring in the delays of 12 months to 18 months, and much of it will also be dependent on the receptivity of the demand markets and I’ll get to that towards the end of the presentation. Fill the Mill project is proceeding as planned that is basically all in us work.

Moving on to the next slide, I’m very pleased to say that our gold operations were profitable, although, as you can see, gold in our business has become relatively small, and it only contributes to 10% of group adjusted EBITDA, but is a 17% year-on-year increase in production but we are comparing it to H1 2019, which was severely disrupted by the AMCU strike. We believe that the gold team approach the post-COVID ramp up in exactly the right way as well. Q2 production levels were at 54% and that was offset by a 28% higher rand gold price, which contributed to the profitability. As of today, we’ve increased staffing levels to 90% and that’s being a responsible ramp up, making sure that we weren’t exposing our workers to any health risks due to COVID-19. That has been very well managed in all sections of our business.

We focused on higher grade panels and effectively we’ve high-graded the side. That is by design. And of course, we’ll get back to more normal grade levels, and I’m really referring here to the underground grades. Of course, we made use of whatever surface capacity we could provide to Fill the Mill. And, of course, when you combine these, you may see a total lower grade, but the underground grade has been increased because of selectively targeting our grade areas. Our gold mine business is resting at a — running at a 16% adjusted EBITDA margin, and I have included the DRD production at 77,000 ounces at an all-in sustaining cost of ZAR605,000 per kilogram.

At this stage, I’d like to hand over to Charl Keyter to do the financial review. Thank you, Charl.

Charl Keyter — Chief Financial Officer

Thank you, Neal. Good morning and good afternoon. It gives me great pleasure to share our financial performance with you today. Moving on to the half one 2020 results. As it’s been highlighted throughout the presentation, COVID-19 had a significant impact on quarter two. If we start with our deleveraging profile, you can see that net debt to adjusted EBITDA, which to-date has been our primary financial performance measure, reduced to 0.55 times. That is down from 1.25 times at half two 2019, and we are now well below our covenant limit, which is set at 2.5 times.

Net debt on an absolute basis reduced by 38% or ZAR5 billion to ZAR16 billion. Adjusted EBITDA, considering the impact of COVID-19, increased to just below ZAR50 billion. The conversion of the convertible bond, which is currently trading well above the soft call will reduce debt and leverage significantly. As illustrated, you can see that net debt to adjusted EBITDA on a pro forma basis would have been 0.23 times at the end of half one 2020.

Looking at the next slide. The group is in a very good position from both the liquidity and a big maturity position. And our next meaningful debt maturity is the 2022 bonds of ZAR354 million. Gross debt as of the end of half one 2020 was ZAR28 billion and our medium-term target is to reduce this to ZAR15 billion as stated previously, and we are not far from our target considering that we have ZAR12 billion cash on hand at the end of half one 2020. Post half one 2020, we have already started repaying the rand and the dollar RCF, as I believe the risk of accessing these RCFs has abated.

If we turn to the income statement, half one saw 154% increase in revenue. The main reasons for this was the inclusion of the Marikana operations for a full six months and basket prices being up 92% at our SA PGM operations, 43% in dollar per ounce terms at the US PGM operations, and 45% at our SA Gold operations. This was however impacted by the severe production disruptions due to COVID-19. Cost of sales increased to ZAR37.7 billion, and that is again mainly due to the inclusion of the Marikana operations for a full six months and then an increase in recycling costs. As this has been highlighted by Neal, adjusted EBITDA at ZAR16.5 billion increased eightfold from ZAR2 billion in half one 2019.

The next big item to look at at the income statement is the gain on the financial instrument, and this relates to the downward valuation of the convertible bond and that is due to the movement in the share price. Mining tax at ZAR2 billion is directly attributable to the profitability of the Company. If we look at earnings for the period, that was just below ZAR10 billion or ZAR3.51 [Phonetic] per share compared to a loss of ZAR200 million for the same period in 2019.

Moving on to the next slide. The surge in earnings and our commitment to reinstating dividends once our net debt to adjusted EBITDA was below 1 times has resulted in us declaring an interim dividend of ZAR0.50 per share or about ZAR1.3 billion. Although a conservative interim dividend equaling 15% of normalized earnings, it does take into consideration the uncertain journey that is still ahead of us due to COVID-19. It has to be said that although only 15% of normalized earnings, it is the single biggest dividend declared to date and it highlights the significant transformation of the Company into a global precious metals Company. If the current trajectory continues and commodity prices hold up, I believe you can expect a significant dividend based on our full year results.

I will now hand back to Neal to conclude on the presentation. Thank you, Neal.

Neal Froneman — Chief Executive Officer

Thank you, Charl. And I will do the last part of the presentation now. And I first want to talk about the PGM market outlook and I’m not going to spend too much time on this because we are in a very volatile phase that can change at short notice. But at this point in time, on the supply side, we are estimating a 15% decline year-on-year, predominantly based on the South African PGM production, which has been disrupted due to the lockdown due to COVID-19.

We also expect recycling supply to decline by 15% year-on-year in 2020. On the demand side, although demand is expected to fall about 20% year-on-year to about 17 million passenger vehicles, we only expect passenger vehicle sales back to 2019 levels by 2022. And on the demand side, we’ve already expressed a very bearish jewelry outlook previously, but we’ve revised this down again by 20% in 2020 and 2021.

As such, if you now look at the market balance, our longer-term forecast remains unchanged. Rhodium moves closer to balance in 2020 and 2021. Platinum surplus narrows this year, but it increases in 2021 due to increased production from the South African region. We believe and I have seen some commentary that there is some suggestion that substitution of palladium with platinum won’t happen. I can assure you it will happen, and actually it’s inevitable. If we don’t do this, we will not alleviate the sustained palladium deficits and OEMs have a need to reduce their costs. So, that will also provide a solution to the increasing cost of rhodium. Overall, we remain positive about the overall basket price when these moves change place. And I expect you will have much better visibility of substitution from 2021.

Moving just to some guidance and some final conclusion. The slide titled 2020 annual guidance, I’m not going to go through all the details. Suffice to say that clearly production from an ounce point of view is down in all regions, but I still think quite respectable considering the disruptions we’ve had in the second quarter. Costs are mainly up and that’s primarily due to lower volumes. So unit costs do increase because of the high fixed cost component, and we’ve adjusted capital costs to suit going forward, and you can see the range of capital costs there.

I think you got to see that in context of the graph on the right-hand side. If you look at the rand 4E for the basket price and the rand gold price, those more than offset the reduction in volumes and the increase in costs. So, we actually see the second half of the year significantly better than the first half of the year from a profitability point of view.

Moving on to the next slide, which is titled offering value, and we offer very significant value as an investment. I mentioned earlier on that part of our strategy of value-accretive growth can only really be done of a strengthened equity rating. Well, this shows you why value-accretive growth is not something we consider — can consider using equity at this point in time. Although we’ve seen a substantial re-rating in our share price, you can see we are still significantly undervalued and you can look at all the different metrics on the slide, EV to EBITDA, price for free cash flow per share, net debt-to-EBITDA. We are now significantly de-risked and I do believe that with the introduction of the dividend, we will see now further significant re-rating and even on an EV and market cap, we will start seeing the enterprise value of the Company being converted into market capitalization. So, I remain very bullish regarding the way the market will revalue our Company, again, despite the very significant increase in valuations that we’ve seen in the last short while.

So with that, I would like to thank you for your time. And we will now open up the forum to questions. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question comes from Arnold Van Graan, from Nedbank. Please go ahead, Arnold.

Arnold Van Graan — Nedbank — Analyst

Afternoon. So, a couple of questions from my side. So the first one is, can you just quantify the COVID losses for this half? Maybe I missed it and sorry if I did, just sort of ounces per operation. And then my other question is related to Blitz. What really is the issue there? Some teams’ geological challenges, can you just give us an update on exactly what you are encountering?

And then the other question that relates to that is, will you be able to ramp it up to the regional plant level? So you said it will ramp up, it is going to take longer, but can you achieve your initial target? And then importantly, from a cost perspective, given the delays and given the geological challenges that you’re facing there, do you think you’ll be able to achieve your regional envisage cost on that operation? Thank you.

Neal Froneman — Chief Executive Officer

Thanks, Arnold. Let me questions in the order you gave them. So the COVID losses, I don’t have it in answers but, if you look at what was achieved in quarter two was roughly — in the South African operations, roughly 50% of gold and 50% at platinum. So, we lost 50% of quarter two’s output and you can put a number to that.

In terms of Blitz, that’s a myriad of issues and I’ll ask Chris to come in. I’ll just give you my view and then you can get it from the horse’s mouth. But Blitz started — our challenges started with the fall of grounds that we had. There were some knock-on effects where we — we then tried to concentrate mining and we had ventilation constraints. And I must say, all of these are actually just typical startup-type problems that you find with bringing a new mine on line. I’ve experienced it many times before. The COVID disruption is one way we can’t complete some of the capital expansion around the mills, and we’ve had to remove a lot of contract labor in order to run, let’s call it, the rest of the business, which is more steady state. And the ongoing impacts of COVID are really on the growth side of that business. That’s almost the flexibility that we have to switch that on and off.

So, when you couple all of that and our — let’s say, our improving understanding of the ore body, we anticipate delays of something like between 12 months and 18 months. We are busy just re-doing some of the planning around that. Blitz will get up to its original target of 300,000 ounces of additional production, and we expect that to happen 12 months to 18 months later.

Chris, I don’t know if you want to add anything to what I’ve said.

Chris Bateman — Executive Vice President: US PGM operations

Neal, I mean, quantifying on the COVID customer in the U.S., that was $3 million in the first half related to increased cost of COVID that equates to about $10 an ounce. We’re still spending around $500,000 a month related to COVID. And I think, Neal, you hit all of the key points. We did have force majeure declared on various mill parts, and we had a very short time period to respond to the COVID outbreak. And one of the things we agreed with the county health officials, Neal, mentioned it in his presentation was getting people offsite.

So, we suspended a lot of the surface works, the non-critical capital. We did keep going with Blitz underground development, and we’re pushing through that during COVID. I am pleased to report good progress being made on the Benbow tunnel, which will connect the east side to the west side of Blitz, and we’re expecting to finish that up in the first half of next year. We’ve got through the most challenging grounds on that. That will open up a lot more ventilation. And as we develop on the 56 level, which was one of the other three main tunnel infrastructure, we’re drilling and further defining the ore body. And as we get that data, we’re running it back through the models because the initial drilling was from surface and not a density to fully define the ore body. So, progress is being made. There’ll be more news as we rerun the numbers and look at the timelines with the impact from COVID.

Neal Froneman — Chief Executive Officer

Thanks. Thanks, Chris. We’re ready for the next question.

Operator

Okay. The next question comes from Lorenz Heller from JPM. Please go ahead, Lorenz.

Dominic OKane — J.P. Morgan — Analyst

Hello? Can you hear me?

Operator

Yes.

Dominic OKane — J.P. Morgan — Analyst

Hello. This is Dominic, J.P. Morgan. I’ve got three questions, if you don’t mind. The first relates to the gold assets. So, if we look at the guidance for second half of the year, we could be looking at a potential 50% increase in the output. The reserves for your South African gold operations are based on ZAR600,000 per kilogram. Current spot price is over ZAR1 million per kilogram. How should we think about the optionality and the strategy in the gold assets? And if you don’t mind, I’ll maybe follow up with two quick questions afterwards.

Neal Froneman — Chief Executive Officer

Okay. Thanks, Dominic. Yes, you’re correct. There is significant upside in the second quarter. Our planning parameters all are conservative and it does open up the opportunity to scale up our gold business and probably flexibility, looking at cut-off grades and so on. I would argue, and of course, we would do that, although we prefer to rather retain the margin than, let’s say, increased output, so we will look at that going forward. But I think the point is that our current gold business is being well managed at a certain level and even if we were to, I suppose, stretch it a bit more, that’s still only going to be, I don’t know, maybe 15% of revenue in the future. So, that is something we will constantly optimize and look at, but I think your overall sort of point you’re making is upside.

Dominic OKane — J.P. Morgan — Analyst

Okay. And then, just two follow-on questions. So, the Lonmin synergy number is up-scaled again, but how conservative is that number realistically? Because am I correct in assuming that there’s no assumption in there for long-term mining synergies with respect to the boundary between Marikana and Rustenburg? And then, my final question is related to sort of your comments around value accretive growth. And I guess one of the things that we talk about with investors is M&A aspirations. Could you maybe just give us some context around what the rush is for pursuing those types of value-accretive growth opportunities and what the criteria you and the board are currently setting for looking at sort of M&A gross options?

Neal Froneman — Chief Executive Officer

Yeah. So, let me pick up on Lonmin synergies. It’s our experience that the mining-related synergies, when you think of crossing boundaries and saving capital infrastructure, is actually much bigger than these type of synergies that we’ve tabled today. The problem is they come somewhere in the future and it’s normally a commitment to progress a project. So, there’s no doubt in my mind that there’s still significant upside in terms of value to be created from things like mining through boundaries and so on at Lonmin. I would, however, say that [Technical Issues] and so did our teams. We thought the ZAR730 million of overhead synergies was conservative and it has been — it has turned out to be conservative. But remember, we also only had limited ability to do due diligence and hence the conservative original estimates.

So, I wouldn’t suggest you should go and extrapolate the increases year-on-year that we’ve had. I would say we are now getting towards the sort of overhead synergy number that we always envisaged but could not — did not want to make public just because we didn’t have the background information to do that. In terms of value accretive growth, I suppose we’ve made it very clear that certainly from an entry into PGMs. we like the idea and we see a lot of complementary benefits when we look at the battery metals. That is being a study that is ongoing and remains an area of interest. We have previously said that we like gold and in fact, earlier this year prior to COVID, gold would have been a really good entry and the basis on which we said that is it’s somewhat countercyclical to PGMs and it is a business we know well but it’s incredibly difficult to fund value in gold today. So, we maintain a watch in brief.

From a board perspective, it’s really being, we want — we’re not let’s say actively engaged and the board has been very clear that our commitments to shareholders have been first of all deleverage and I think you’ve got a good — you’ve got good information on that today. And, secondly, we made a commitment to our shareholders that we will reinstate our dividend and yes, we’ve done that and clearly we need to make sure that our dividend is sustainable. When it comes, I supposed, overall, we will not embark upon M&A if it’s not value accretive and I think we’ve amply demonstrated that, there were a lot of naysayers but our entry into PGMs was really well-timed and very value accretive. And when we talk value accretion, we really look at a cash flow per share as well as all the other metrics as well but if it’s not cash flow per share accretive in a reasonable period of time. It just doesn’t stack up. And when you start factoring all those into account, you can imagine how difficult these two identified any value accretive targets at this point in time. Dominic, I hope that answered your questions.

Dominic OKane — J.P. Morgan — Analyst

Thank you very much.

Operator

The next question comes from Chris Nicholson from RMB Morgan Stanley. Please go ahead, Chris.

Chris Nicholson — RMB Morgan Stanley — Analyst

Hi. Good afternoon, Neal. Good afternoon, Charl. So, not to be left out, I also had three questions, but I think it will be quite brief. The first question is that it appears that you’d drawn down on the inventory pipelines to the tune of about ZAR150,000 or so in South Africa. To what extent will you need to rebuild that later this year? So, where are we in terms of those pipeline inventories?

Second question, on Blitz, I’m just interested to see that your capex guidance for Stillwater is pretty much unchanged this year. Maybe a bit surprised given the slowdown we’ve seen in the Blitz project in particular. Maybe just highlight why that capex has still come to prior levels. And should we be expecting with the extension of Blitz, capex exceeding, let’s say, $200 million to $250 million next year or two, are we past the capex?

And then just final comments, would you [Technical Issues] share buyback and to try and offset from the valuation of these convertible bonds? Just what seems to be the obvious thing to do if you’re right from the — that your final slide of your presentation that your shares are [Indecipherable]? Thank you.

Neal Froneman — Chief Executive Officer

Yeah. Thanks. Thanks, Chris. And, we as an executive team did receive your note just before the call, and your 130,000 ounces of inventory drawdown is not correct. It’s probably less than half of that. And I think you’ve got to factor in the force majeure and the blockage that we had with the Anglo converter issue.

You’re right on the capex development. The — at Blitz, we have — sorry, you’re right on the capex number, but I think as Chris pointed out, we have tried to continue to develop to get flexibility. I would think that there could be an increase in total capital for Blitz because of the delay. You do have fixed project cost, but as Chris also said, we are running, let’s call it, an assessment of Blitz to come up with the replan, and that should probably be in the next three to four months that will be completed. So, we’ll give guidance on if there is any capex increase, which I think there may be. I mean, that’s just being — it’s logical.

In terms of a share buyback due to the convert, the answer is probably no, and the reason is that when we entered into that convert — well, sorry, let me take a step back. When we entered into the acquisition of basically Stillwater, we would have wanted to do a bigger rights offer and have more equity underpinned in terms of the financing for Stillwater. Some of our shareholders couldn’t step up to the plate and we didn’t want to overly burden them and dilute them. So, we had to embark on a smaller rights offer.

I think in terms of the convert and where it was struck and the whole rights offer, it was our hope that the convert would convert because we raised a lot of money at about ZAR18, ZAR19 grand a share, and the nice thing about a convert is it converts at a much higher price than the stock price. And therefore, we do — we would like to see that become equity in the Company.

I also think we want to be prudent with our cash. And I understand the benefits of buyback, but I don’t think in this case that’s what we are going to do, but that’s not a final decision, Chris.

Chris Nicholson — RMB Morgan Stanley — Analyst

That’s great. Thanks, Neal. And [Indecipherable]. Thank you.

Neal Froneman — Chief Executive Officer

Great. Thank you, Chris.

Operator

The next question comes from Adrian Hammond from SBG Securities. Please go ahead, Adrian.

Adrian Hammond — SBG Securities — Analyst

Hi, Neal and team, please. Neal, given the change in fortunes for your business of late, could you just reiterate your capital allocation strategy to us? And secondly, previously you mentioned that all cash flows from the gold business would be returned to shareholders, but obviously that’s still under the water despite record gold prices. So, how do you think about this strategy going forward and would you consider divesting of these assets? Do you think they’ll be better in the hands of other producers?

Neal Froneman — Chief Executive Officer

Thanks, Adrian. And certainly let me state upfront, we have no intention of divesting of our gold assets. I think in the longer run, we see real benefit of being a precious metals Company, not just a PGM Company. And, if anything, we want to build our gold profile at the right point in time. Only at that point in time, may we — we might consider improving the, let’s call it, the risk profile of the Company, but certainly we like the exposure to gold.

So, coming to capital allocation. I think that’s suffice to say at the moment, we were very prudent on the dividend declaration. It was really only 15% as opposed to somewhere between 25% and 35% [Phonetic]. It’s — I think we are just being prudent in terms of there could be a little bit more volatility in the last half of the year, and I think we would want to just be well positioned for that. I think, Charl, made it quite clear that coming to a final dividend, I think it will be substantially bigger. I don’t want to commit now. And we would like to get more towards our dividend policy in terms of a final declaration.

So, in terms of capital allocation, it is still very much the same. It’s — I think our leverage post, let’s say, a convertible bond conversion will be at levels where that is very sustainable. That means the cash that is not allocated to, let’s say, direct costs and capital, we don’t intend to really embark on any major growth capital at this stage other than that that’s committed such as Blitz. So, the first priority remains returning cash back to shareholders.

In terms of our commitment to dividend out gold — all the gold earnings, we intend to do that. I just think you need to give us a better chance just to get to steady state and make sure that the COVID disruptions are somewhat beyond us. And then, I think we would have to sit back and say the balance of the cash, especially at these commodity prices, can we employ it perhaps better than what our shareholders could. And if we can’t, well, then I think our shareholders can look forward to even more cash returns. That’s really how we think about capital allocation in this case.

Adrian Hammond — SBG Securities — Analyst

Just to be clear, Neal, I mean, if you’re going to reduce debt through the calling of a bond, you should get pretty close to gross debt of ’15 [Phonetic] at no cost to you really other than raising — other than issuing new shares. So, I’m just trying to understand what you intend doing with all the cash, because your dividend policy then perhaps would you reconsider adjusting that policy to return more cash to shareholders or would you keep the balance short for potential M&A?

Neal Froneman — Chief Executive Officer

No, I think we would — if we cannot create more value than by returning it back to shareholders, we will exceed our dividend policy of 25% to 35%. So, Adrian, we’d have to see at the time. But certainly, it would be very nice to return more cash back to shareholders than this.

Adrian Hammond — SBG Securities — Analyst

Thanks, Neal. And just maybe one question for Richard, if he’s around. Just want to — could you perhaps give us some color on how we should think about sales versus production at Rustenburg for the year given the benefit you had of the pipeline in H1 and whether there’s going to be a lagged effect in H2 at all, please?

Neal Froneman — Chief Executive Officer

Rich?

Richard Stewart — Executive Vice President: Business Development

Sure. Good afternoon, Adrian. Yeah. So, I think just in terms of our sales on a very high level, as Neal mentioned, two different factors: obviously, the COVID impact; and then the downtime on the converter plant. Roughly speaking, if you take the total pipeline over Rustenburg that was let’s call it depleted net-net of being delayed through force majeure notices and COVID against metal that’s being delayed into the future, we’re looking at about 50,000 ounces on the Rustenburg side. And Marikana saw a benefit of a similar amount due to treating material essentially stepping in for processing and tolling on behalf of [Indecipherable] during that period for the other operations. I hope that addresses your question, Adrian.

Adrian Hammond — SBG Securities — Analyst

Just — so, are we going to balance out by the end of the year in terms of a full-year number or is there going to be lag into next year?

Richard Stewart — Executive Vice President: Business Development

No, we’ll be balanced after — we’ll be comfortably balanced up by the end of the year, Adrian. That’s right. Yeah.

Adrian Hammond — SBG Securities — Analyst

Great. Thanks.

Richard Stewart — Executive Vice President: Business Development

Thank you.

Operator

The next question comes from Leroy Mnguni from HSBC. Please go ahead, Leroy.

Leroy Mnguni — HSBC — Analyst

Hi. Good afternoon, guys. A couple questions please. So, the first one is when AngloPlats declared their force majeure and you processed your own material, I understand it would have been brief because the lockdown kicked in. But how did your processing operations cope with the increased volumes? Where there any learnings, any sort of areas of concern around increasing the throughput? And then just on the substitution of platinum backing for palladium and the gasoline autocat. Look, I understand at the time it was a specific model in the U.S. where it was going to be applied and it was quite a large vehicle.

Are there any indications at the moment that, that solution can be applied a bit more broadly or on slightly smaller models? And then just lastly, you’ve spoken quite a bit about, your equity being cheap at the moment and needing to re-rate before you consider a value accretive M&A. I mean, how do you think about that? How will you know when your equity is really valued? Is there kind of an absolute share price? Is there a target multiple or do you just kind of use that peer group as it? Thanks.

Neal Froneman — Chief Executive Officer

Yeah. Thanks, Leroy. Let me pick up on the force majeure. Because there were such a quick move from let’s call it a total lockdown to — you can restart your business. There was very little, and sorry, and the other thing is of course Anglo Platinum repair. They convert as much quicker than what we expected. There was very little processing that actually went through from Rustenburg into the Marikana facilities now. So, we never really got to test their nameplate capacity, but there were a lot of learnings. It’s not a simple process just to one day add in another constituent of PGMs. There’s a lot of chemistry involved and a lot of planning and logistics.

So, getting to understand the sulfur contents, the copper and nickel and so on, it was critical and that took our team some time to get — to grips with them and then of course introducing the meth or any other material into a process not through your normal pipelines is challenging. So there were a lot of — there were a lot of good learnings. I would say that other than having tested — not been able to test our processing facilities for that additional material, we learned a lot and we are certainly in a much better position, should another incident like that happen.

So that is what happened around the force majeure issue. In terms of substitution, clearly from the last time we spoke and mentioned this issue, COVID-19 has occurred. And I would suggest that most companies have been busy navigating their way through, through a lockdown and a restart and supply chains have been severely disrupted. So it hasn’t — substitution hasn’t been the main focus and as far as I’m aware, larger vehicles are still — are still predominantly the target market, and it’s not just in America. I think we are really seeing substitution in China. Just repeat your question on that value-accretive growth again. I just lost track of that.

Leroy Mnguni — HSBC — Analyst

Sorry. It was just, how do you gauge when your share prices are shortly valued, as in when you’re ready to do M&A again?

Neal Froneman — Chief Executive Officer

Yeah. Sorry. That’s a good question. And really, I think, it’s all relative. So the last slide in the presentation is a slide that tells us whether we are being valued appropriately and it’s really based on multiples and where you’re slot within your peer group and when you sit at the bottom of those tables and we know why we are there, I really do believe it’ll change because our risk profile has changed. But only when you sit and you’re in your peer group can you really start considering the relative valuation of your equity. There’s not an absolute number. That’s how you are really rated relative to your peers. Of course, to shareholders, there’s an absolute number and we know that number is significantly higher than where it is now.

Leroy Mnguni — HSBC — Analyst

Right. Thank you.

Operator

The next question comes from Alexandre Ayoub from Waha Capital. Please go ahead, Alexandre.

Alexandre Ayoub — Waha Capital — Analyst

Hey. Thank you very much and congrats for these results. I’m calling from the bond side. So, I just wanted to have a bit more insight on the capital structure, your use of cash. If you don’t mind reminding us quickly on the debt strategy, so what — did you want to hit the $1 billion gross debt and so you’ll be using some of that cash to decrease your gross debt? Is that correct?

Neal Froneman — Chief Executive Officer

Alexandre, I’m going to actually ask Charl to field that question. Charl?

Charl Keyter — Chief Financial Officer

Yeah. Alexandre, good afternoon. Yes, I mean exactly that. Remember that we’ve put out a, call it an intermediate target. Our first primary consideration was to get our leverage below $1 billion, which we’ve achieved now. And the next target we imposed upon ourselves is to get our gross debt down to about $1 billion. And that is simply a number that we back calculated to make sure that we are comfortable throughout any cycle that we can face. So, yes, some of the cash that we have on hand will obviously go towards repaying some of the rand and dollar RCFs. As I said on the results presentation, we have restarted that. And remember, at the time when we went into lockdown we fully drew under those facilities just to make sure that we had adequate liquidity. And just to be careful that there were no restrictions imposed on us by the lenders. But clearly, that was not the case. So, we’ve restarted repaying those RCFs. So, yes, some of that cash is already been applied to that.

Alexandre Ayoub — Waha Capital — Analyst

Sure. But then you still have a lot of cash in balance sheet. So, I was wondering would you, for example, be calling the bonds — the 2022 bonds because they have a call option. And in relation to the convert, I guess, it sounds like you’re just going to let it convert into shares so you’ll be issuing new shares and that it will not be any cash burden on the convert side. Is that correct?

Charl Keyter — Chief Financial Officer

Yeah. So, we are keeping an eye on the convertible bond. Clearly, it’s trading above the soft call price. And it’s something that we — that we are keeping an eye on. But at this point, there’s no immediate plans to call the 2022 or the 2025 bonds. As Neal has said, one, we have to preserve liquidity in the business. I think we’re going to have a bumpy ride still ahead of us due to the global pandemic. So, it’s just overall cautious approach to make sure that we have adequate liquidity. And as Neal has said, clearly based on the results, and if the results continue as is, some of that money will be returned to the shareholders in the form of a final dividend.

Neal Froneman — Chief Executive Officer

And I think…

Alexandre Ayoub — Waha Capital — Analyst

Perfect. So, just one…

Neal Froneman — Chief Executive Officer

Yeah. So, just to add in there, I think we like the idea of a mature balance sheet with some gearing on it. And I don’t think there’s any intentions to early call any of the high-yield bonds if there is such a thing.

Charl Keyter — Chief Financial Officer

Yeah. That’s correct, Neal.

Neal Froneman — Chief Executive Officer

Yeah.

Alexandre Ayoub — Waha Capital — Analyst

Fantastic. And sorry, so just to clarify, can you quantify what do you mean by preserved liquidity? Like is it like ZAR300 million of cash on balance sheet? And then just the last one is on M&A. So I understand you only look at value-accretive M&A, but do you have the kind of size — the maximum size, would you be going — embarking to another maybe ZAR1 billion acquisition or that’s really not what’s your having in mind now or you would really exclude that?

Charl Keyter — Chief Financial Officer

Yeah. So…

Neal Froneman — Chief Executive Officer

Yeah. So, due to the capital. Charl?

Charl Keyter — Chief Financial Officer

Yeah. So, in terms of liquidity, our internal policy is to have two months of operating expenditure in the form of liquidity and that’s through a balance of cash and available revolving credit facilities. So, the number at this point in time is roughly about ZAR12 billion and about a third to a half of that we would like to have in cash. So, I’m not converting it to dollars, so it’s between ZAR4billion and ZAR6billion that we would like to have cash on balance sheet.

Neal Froneman — Chief Executive Officer

Yeah. On the size of M&A targets, it doesn’t make sense to do smaller acquisitions although I think when we look at the battery metal strategy, we don’t see the same type of strategy as we embarked upon in the PJM sector. It’s going to be a lot more selective and strategic, but — so those could be smaller acquisitions. We are a Company that can stretch our mind for the right reason, and the acquisition of Stillwater was at a time when — and Stillwater was bigger than the market cap of the Company. So, Alexandre, it really depends on the target. We don’t have a specific size that we target. We look for certain quality and a certain value accretion. And then we work out how best to do it.

Alexandre Ayoub — Waha Capital — Analyst

Is it fair to say that you would keep your leverage within 1 time or around 1 time even though you find a very large big acquisition or you would be happy to stretch it also temporarily?

Neal Froneman — Chief Executive Officer

Yeah. So, listen, under normal operating conditions, we’d want to be where we are now and below. So, that’s when there’s no M&A. That is mining and it’s prudent and, in our view, the right thing. When it comes to M&A, there’s no reason why you can’t exceed 1 times, possibly even go to 2 times maybe 2.5 times. As long as you are certain, and in most cases, you have to be absolutely certain you can mitigate any risks of deleveraging. And the Stillwater acquisition was exactly that. We moved to about 2.5 times, just under 2.5 times, but we were confident of the markets and our ability to deleverage. It’s not pleasant going up to those sort of numbers, but — and the Board will really only support it if they are reasonably confident you can deleverage. So, under normal conditions, 0.5 and below. For a good reason or an appropriate acquisition, going above 1 times is also not something that we would shy away from.

Alexandre Ayoub — Waha Capital — Analyst

Got it. Thanks. Very helpful.

Operator

[Operator Instructions] James, I’d like hand over to you for the questions on the webcast. Hello, James?

Neal Froneman — Chief Executive Officer

I know James was also watching the webcast, so he might be on mute or not at his computer.

Operator

Let’s just see. [Operator Instructions] Thank you. While we try and reach James, we’re going to take a question from Wade Napier from Avior Capital Markets. Please go ahead, Wade.

Wade Napier — Avior Capital Markets — Analyst

Hi, Neal and team. Thanks. Thanks for the opportunity. Just a couple of questions from my side. Given that production has recovered post the lockdowns ahead of the sort of rates of return of employees to the mines, have you seen sort of any opportunities to sort of optimize your headcounts within the sort of SA operations?

And then my second question is really around your tolling agreement with Amplats. I mean, you’ve previously described that as a sort of insurance policy against external risk factors such as load shedding. Are you sort of seeing anything in the next sort of two to three years that would suggest you’re willing to ship more volumes back through the Marikana processing facilities?

Neal Froneman — Chief Executive Officer

Yeah. Thanks, Wade. There is no doubt that COVID has provided, let’s say, a number of opportunities to just relook at the way we do business. And the one you’re referring to, we are watching very carefully, and that is that we’re getting better productivity with a less amount of production. So, there is a case to be made that you’re going to get to a point of diminishing returns, as we call it, and we are watching that closely.

Now, at the start of COVID-19 and with the introduction of the social distancing constraints, we were concerned that especially in our gold division, we would not get back to 100% just because of the logistics. I think since we’ve done a lot more work, we do have plans to take us back to 100%.

And so, to answer your question, we will look to see if we can optimize our business a bit better, and we are getting to that 80%, 90% staffing level where we’ll look at it, but I wouldn’t like to commit any particular number in terms of productivity improvements or even worse, job losses. We certainly would not enter into a 189 under these conditions. We would look at other mechanisms, natural attrition, and so on. So, we will try and balance the productivity aspects as we enter this area of diminishing returns.

On the tolling treatment [Phonetic] arrangement, it’s a very good arrangement for us with Anglo Platinum, and it does give us a flexibility in terms of growing our own business should we want to do that. And therefore, there doesn’t seem to be any real strategic reason why we would want to give notice earlier on that agreement. Obviously, we just keep an open mind and we have a good relationship with Anglo Platinum. It works for us. I suspect it works for them as well. And we will keep an open mind on that. But certainly, things like load shedding and so on, it does put us in, I think, a better position having that toll treatment arrangement.

Wade Napier — Avior Capital Markets — Analyst

Perfectly understood. Thank you

Neal Froneman — Chief Executive Officer

Thanks Wade. James, are you online?

James Wellsted — Senior Vice President: Investor Relations

Yeah. Hi, Neal, you all, can you hear me now?

Neal Froneman — Chief Executive Officer

Yes. We can hear you now, so.

James Wellsted — Senior Vice President: Investor Relations

Okay. Thanks. So, sorry, you all. I just had a bit of problems. Obviously, I wasn’t coming through. I’ll just read through a couple of the questions I’ve got on the webcast, from the webcast. Some of them are repeat. So if I don’t ask your specific question, please I apologize upfront. Just one from Sophie Davids [Phonetic] asking about as low increase, how will they benefit as women in mining. I thought maybe you could make some comments about our approach to the gender quality and woman in mining in response.

Neal Froneman — Chief Executive Officer

Yes. So, I have actually volunteered to champion on behalf of the minerals industry, oh, sorry, the Minerals Council, the whole women in mining initiative and that’s as a male in the woman in mining task team. Now, I think we all know that, you know, right now, the majority of senior management is men and therefore, men actually have the ability to make this work or not work. And, you know, and I supposed outwardly men will say yes, let’s make it work but sometimes and deep down, they will stand on the sidelines and perhaps even watch an initiative fail.

I think to — our intent to make sure that doesn’t happen and promote the benefits of women in mining in our first world increase your exposure to a source of expertise and capacity that in my mind in many areas do the work and tough they do it better than men in many areas. And certainly we are as a company, going to drive the women in mining initiative on the basis that’s good for us, that’s good for the company, and it’s just the right thing to do. So we’ve actually put very specific capacity in place within Sibanye-Stillwater. There’s been a number of meetings and we intend to double our women in mining from the current levels of about 11%, 12% into the mid-20s within five years. And that’s a very, very significant commitment. And then together with the Minerals Council on behalf of the mining industry, we’re looking at getting up to the 40%, 50% levels by the end of the decade, 2030.

James Wellsted — Senior Vice President: Investor Relations

Thanks, Neal. The next question is from Charles Bolt [Phonetic], asking what our long — what is the long term plan for the DRDGOLD investment?

Neal Froneman — Chief Executive Officer

Yeah. Charles, we have Niel Pretorius on the call, and we work extremely, I suppose, closely and well with the DRD Executive. Our view is to provide the support and the guidance that we can as a shareholder and hopefully see the DRD business evolving to something that is multi-commodity, international and become an even better business than it is today and it’s a great business today. We believe that the focus on environmental, as we presented in our presentation, is certainly a shareholder view. We are mindful of not affecting liquidity in terms of the share. We are very comfortable with our current position. We would like the current large exposure that we have. And we will certainly be supportive of the DRD vehicle going forward. We think that’s a very good arrangement. I trust that answers the question, Charles.

James Wellsted — Senior Vice President: Investor Relations

Thanks, Neal. The next question or two questions are from Martin Crema [Phonetic]. Firstly, will we be taking steps to mechanize Marikana in the same way as Rustenburg and Crandall are mechanized? And then the second one, I think we’ve answered to some extent, which is the opportunity to convert more gold resources into reserves in the short term. What is the opportunity at the gold operation?

Neal Froneman — Chief Executive Officer

Yeah. Thanks, James, and I think we — there is opportunity and I did cover that, Martin. Martin [Phonetic], the — we would like to mechanize as much as we can. And certainly, I think where we — where we have the right ore body properties or profiles, we have mechanized and mechanized very successfully. We — a substantial part of our businesses is mechanized. The U.S. operations are basically totally mechanized and large parts of Rustenburg being [Indecipherable] are also mechanized. However, it becomes very, very difficult to mechanized orebodies that are narrow and tabular and that remains a challenge. But in principle, whatever we can mechanize, we will and we constantly trialing, new equipment, low profile equipment to try and achieve it. And that’s probably, that’s a very broad answer. I can’t give you any specifics. But I think the bottom line is, where we can mechanize, we certainly will.

James Wellsted — Senior Vice President: Investor Relations

The next question is from Rene Hochreiter, asking about the SA discounts, which he says he imagines can only be removed by leaving South Africa completely, which we obviously can’t do. So, could you expand a little bit on how we — what are we doing to try and reduce the SA discount?

Neal Froneman — Chief Executive Officer

Yeah. So, as I’ve said before, there’s two parts to addressing the South African discount. The one is actually trying to improve the perception of business in South Africa and the investor climate in South Africa. And that’s an advocacy issue. It’s an issue of engaging with government. And, as you know, I’ve been pretty outspoken about the current state of affairs and my complete disillusionment with the current leadership. Now, having said that, I must also just add that we have a wonderful minister within the — in the DMRE that listens to us, that engages with us, doesn’t always agree. In fact very rarely agrees, but at least we can engage. And unfortunately, that’s a microcosm in a much bigger national environment, which just doesn’t allow that to blossom.

But our minister is influential. We will continue to engage with him. His heart is in the right place. And I have no doubt that if we can be successful as an industry, that he will influence the national agenda. So, that is one key thrust that we worked very hard at together with the Minerals Council. In terms of you’re right, Rene, I think the ultimate is you need to exit South Africa or re-domicile. And unfortunately, we seem to have as a country taken a step back in that. So for now, there will always be a South African discount. But I think we can do a lot without re-domiciling from the current levels. And for us as a company, it really involves improving or — yeah, improving our profile outside of South Africa. We have to build that profile to offset the perception that we — our — majority of our assets are in South Africa. So we will continue to drive both of those. But I think the recent AngloGold Ashanti issues are very, very sad and completely inappropriate for business. That’s just another negative regarding investors looking at this country and I hope that government takes note that, that is not the right thing to have done. Let me leave it there. Thanks, James.

James Wellsted — Senior Vice President: Investor Relations

The next question from Nkateko at Investec. Congratulations in order. Just a question on the recycling volumes and now expectations for global recycling. We’re talking about a 15% decline. We’re showing a 6% decline in the H1 at the U.S. operations. What are the key contributors and do we expect Stillwater’s volumes to suffer further in order to, I guess, match that expectation on the 15% global decline?

Neal Froneman — Chief Executive Officer

Yeah. So, the — more recently, we’ve seen recycling volumes normalize. And I would suggest what we see as probably the biggest recycler internationally is probably indicative of what’s happening in the rest of the world. So, recycling volumes are back to normal levels. So, the decrease that we have put forward is really based on the period that’s passed. I hope that clarifies the numbers, James. Thanks.

James Wellsted — Senior Vice President: Investor Relations

Yeah. I think that’s fine. I’ll follow up with Nkateko to check afterwards. And then from Jonathan Bloom [Phonetic], Potential from Burnstone under current gold price environment?

Neal Froneman — Chief Executive Officer

Yeah. So, that’s a good question. There is potential for Burnstone. We have been in the process of dusting off the strategy — sorry, the study, not the strategy. However, I want to say that we need to think very carefully about investing more money in South Africa at this point in time. I think the climate is not conducive to investment. And I’ve told the minister, there are many, many projects that companies have in their bottom draws that we would be so happy to invest in if the right things were done. And all stakeholders need to actually take note that this is not a patriotic thing. You’re called unpatriotic when you won’t do it. You’re only dumb if you do it under conditions like this.

Government and other stakeholders need to nurture business, recognize business. It’s highly unlikely that that anyone can develop — anyone else, any other stakeholder can develop these types of projects. So, the sooner there’s a recognition to embrace business, create an investor-friendly environment, and nurture business and these projects, that will happen. But other than — if that doesn’t happen, I cannot see shareholders allowing us to use their money to invest under these conditions.

James Wellsted — Senior Vice President: Investor Relations

There was a similar question from Steve Shepherd regarding K4 and the likely life of the Marikana asset. You mentioned that it’s a very large, long-life, high-grade Merensky and UG2 proposition, which was abandoned due to financial distress of the previous Company. So, maybe if you can just elaborate on that whether the same conditions apply there?

Neal Froneman — Chief Executive Officer

Yeah, Steve, and it’s a similar — it’s a similar answer except we need to be mindful of, let’s call it, how receptive the market would be to more platinum, palladium, and — or, yeah PGMs in general. It’s a great project and that is the one that I really hope our minister and our cabinet actually give us the excuse to develop because it deserves to be developed. We have made some commitments to the comp commission and we will obviously honor those, but it’s a project that does deserve to be developed. And again that’s just one of these really good job creation opportunities that squandered by a lack of leadership in South Africa. And this view that some stakeholders have that they just press a button and money is created. So, I really do hope that these answers find their way into the media in terms of what is such a bad situation in South Africa at the moment.

James Wellsted — Senior Vice President: Investor Relations

Then, I’ve got a couple of questions which are similar around the — on costs. First of all, from Nkateko again about guidance for the SA PGM for higher all-in sustaining costs despite expecting higher production in the second half and the Marikana synergies, and then from Roger Williams about — it looks like reconciliation on the cost per unit in gold, PGM, and Stillwater, because it looks like costs are escalating at about 15%. Slightly different, but maybe if we can just cover them under the cost focus.

Neal Froneman — Chief Executive Officer

Yeah. And I’m going to speak just in general about costs and certainly, Nkateko, we can, as James said, just make sure that we answer your questions properly offline. I just want to say that one of your biggest cost drivers is volume. And I tried to make that point at the beginning of the presentation, and when I listen to myself, I didn’t make it very well.

As I say, one of your biggest cost drivers is volume and the moment especially in the short term where you have volume reductions, you incurred very significant higher unit costs. And the volume reductions in the second quarter have been a very substantial driver of higher unit costs. And then within specific regions, you have specific issues. So, in the U.S., we’ve had — because of commodity prices, we’ve had higher royalties and taxes and we actually quantify that at about $40 an ounce. And, in addition, across the entire business, we’ve had increased costs due to sanitizing, transport, social distancing, and so on.

So, I would suggest that some of those are ongoing and they’re here with us for the long term, some of them are once-off and they’re more or less a once-off cost of establishing facilities and so on. But unfortunately, the costs — the increasing costs are not because of poor management. I believe that we as a team done a very good job in managing costs under these conditions that could have been a lot worse. So, that is unfortunately what it is. We will try and claw back, and I would think next year would be a more normal year, we will see better unit costs.

James Wellsted — Senior Vice President: Investor Relations

And then two questions similar in nature again around the electricity issues in South Africa and our plans to maybe generate renewable electricity ourselves or how we plan to deal with the issues that we’re facing with Eskom?

Neal Froneman — Chief Executive Officer

Yeah. So, it’s a bit of the same answers as some of the other questions. We are an energy-intensive Company. Primarily, my biggest concern is, is the exposure to CO2 emissions through Eskom as a consequence of using coal. So, there’s many reasons why we would want to generate our own electricity from renewable sources not only just not only just the unreliable power supply. However, it is very difficult to do that on the scale that is required. It is also still difficult to do it on the basis that some of our operations don’t have enough life to recover the cost of the investment in those plants. However, I think it’s changing quite fast as well.

And with rampant Eskom price increases which we expect, that scenario can also change. We are looking at some new options where we have longer life. We are also mindful of DRD as being part of that solution in — especially in the west. That’s where we’ve got many years of tailings retreatments and, of course, that’s not an energy-intensive business. So, between ourselves there could be quite a lot of sustainability. So, that’s all being addressed and not on a part-time basis. We’ve got dedicated capacity looking at this, working with the energy-intensive user group, and trying to assist the Energy Department in fine tuning these applications. Ours is particularly complex because of wheeling and then perhaps even having to consider selling power back to the state.

James Wellsted — Senior Vice President: Investor Relations

And just finally I think similar questions again but slightly different. Would we consider if we don’t re-rate and close the discounts again? Would we consider disposals of assets whether that be in this instance mentioned gold or even Stillwater to a lot — would potentially get a substantial premium to the values that’s been given in Sibanye?

Neal Froneman — Chief Executive Officer

Yeah. I have to believe we will re-rate. And of course, if we don’t, we’re the sort of team that will ensure that we deliver value to our shareholders. I can assure you that all those things are well-understood and they’re being debated many times. But as I said earlier on, we know why we have traded at a discount relative to our peers, and that was principally because of the risk of the high leverage on our balance sheet. I think we understand the profile of our gold business, but there are other companies with similar profiles and we’re not naive to that. But I would suggest you would see a significant re-rating, not in the next day or two. I think this is the first step in returning cash back to shareholders. It could well be seen as a flash in the pan that’s going to take two or three dividend declarations. So I’m not proposing that we would have a re-rating in the short term. This is a medium term expectation.

James Wellsted — Senior Vice President: Investor Relations

Thanks, Neal. I think that’s it from my side. There are one or two questions, which we’ll respond to, I think individually in the interest of time. It’s almost two hours since we began. So from the webcast, I think that’s all for now.

Operator

And from the audio line, there are no further questions. Neal, do you perhaps have any closing comments before we conclude?

Neal Froneman — Chief Executive Officer

Yes, thank you. And I know it’s been a long two hours. I want to say thank you to everybody for taking the time. The questions were really good. If there were specific details that we didn’t quite answer, we’re happy to do that. And really, I think I can certainly say I’m really very pleased with the delivery that the Sibanye team has put here on the table. It’s been a tough half to the year and I think we move into the second half in a really good position. So, again, thank you for your time and we look forward to talking to you early next year with our full year results.

Operator

[Operator Closing Remarks]