Any followers of Lonmin (LON) or Anglo American (AAL) will know that the South African platinum industry has been beset with issues in the past two years. First came major industrial strife and strikes, then unsustainably low metals prices. So the June debut of Tharisa (THS) - a platinum and chrome producer with operations in the south-western limb of South Africa's Bushveld complex - was a surprising addition to London's main market, which had not seen a mining company list in five years. But, as a number of institutional investors have noted, Tharisa's valuation reflects a still-tarnished sector rather than the prospects for its stable, cheap, open-pit production. Besides, most of the company's sales are from its output of chrome, which should limit comparisons with platinum specialists. And even if prices for Tharisa's metals remain flat, it is generating enough cash to lead to a maiden dividend in 2017.
- Low costs and positive cash flows
- Platinum deficits
- Possible maiden dividend
- Premium chrome product
- Current platinum prices
- The shares lack liquidity
Those low-cost operations were highlighted in half-year results to March. Although average prices sat at $686 (£526) an ounce of platinum group metals sold (also known as the PGM basket price, which changes from mine to mine), all-in costs were just $492 an ounce, including capital spending and non-cash-flow items apart from financing. In the same period, Lonmin's unit cash costs were $782 per PGM ounce, slightly more than its basket price.
Even better, Tharisa has a major secondary source of income: chrome concentrate, which is largely used in stainless steel manufacturing. While chrome prices fell in the last reported period to $106 per tonne, management reduced all-in costs to $102 and is now quoting July sales at $150 per tonne. This price rise (which is also anticipated for PGMs) could continue if chrome falls into a supply deficit in the next two years, as some analysts expect. If this happens, higher-cost chrome mines will still need to see more price appreciation to restart operations, an event only likely if steel makers eat into their stockpiles.
Both the PGM and chrome produced by Tharisa involves a high degree of mechanisation, and - somewhat critically - highly-skilled contractors, who are subject to national construction settlements rather than union-brokered wage deals. And, while the company's open pit mine is near full capacity and has 20 years before operations need to move underground, near-term expansion is hardly limited. Management has identified three projects that could boost profit: a magnetic separation plant to increase chrome recovery; a fine grind circuit to boost platinum recovery; and a rail loop to reduce tailings costs.
This requires cash, but cash generation is something Tharisa should be good at. If higher prices can help the company build on a first-half gross profit margin of 25 per cent, then operating cash flow is likely to increase significantly beyond the $18.4m generated in the last period. The company could then use that excess cash for more than just debt repayments and dividends.
| THARISA (THS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 68p | MARKET VALUE: | £175m | |
| TOUCH: | 65-68p | 12-MONTH HIGH: | 68p | LOW: 35p |
| FORWARD DIVIDEND YIELD: | 2.4% | FORWARD PE RATIO: | 4 | |
| NET ASSET VALUE: | 52p | NET DEBT: | 16% | |
| Year to 30 Sep | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2013 | 215 | -63.0 | -20.0 | nil |
| 2014 | 241 | -40.3 | -20.0 | nil |
| 2015 | 247 | 9.6 | 2.0 | nil |
| 2016* | 216 | 29.4 | 8.3 | nil |
| 2017* | 295 | 75.5 | 21.3 | 2.1 |
| % change | +37 | +157 | +157 | – |
Normal market size: 3,000 Market makers: 4 *Peel Hunt forecasts; £1=$1.304 | ||||
