The fourth quarter trading report from Aim-traded Sylvania Platinum (SLP:17.25p), a fast-growing and low-cost South African producer and developer of platinum group metals (PGMs) platinum, palladium and rhodium, made for an interesting read ahead of full-year results on Tuesday, 28 August. I included the shares at 14.5p in this year’s Bargain Shares Portfolio, and reiterated that advice at 17.75p (‘Bargain Shares: another chance to bag some bargains’14 May 2018).
The company has two lines of business: the re-treatment of PGM-rich chrome tailings material from mines in the North West Province; and the development of shallow mining operations and processing methods for low-cost PGM extraction. Its dump operations comprise seven active recovery plants that treat chrome tailings from mines across the western and eastern limbs of the Bushveld Igneous Complex.
The key point to note in the fourth-quarter update is that production hit a record level of 20,278 ounces (oz) of PGM, up 20 per cent on the third quarter, taking the 12-month total to 71,026 oz, the fifth consecutive year of record output. The positive trend is set to continue as management guidance points towards output of 71,000 to 75,000 oz for the financial year to end June 2019.
True, softness in the platinum price meant that the average basket price was 2 per cent lower at US$1,167 per oz in the fourth quarter compared with the third quarter. That’s still more than double the $553 per oz cash cost, highlighting a very healthy profit margin. It’s worth mentioning that Sylvania continues to benefit overly from the 138 per cent rise in the rhodium price to $2,195 per oz over the past year as its rhodium share of production is between two and three times that of its peers at 14 per cent. Rhodium’s major use (approximately four fifths of global production) is as one of the catalysts in the three-way catalytic converters in cars. Because the metal is inert against corrosion and most aggressive chemicals, it is usually alloyed with platinum or palladium and applied in high-temperature and corrosion-resistive coatings to make electrical contacts too. Other applications for rhodium are electrodes in aircraft spark plugs, laboratory crucibles, and in combustion engineering nuclear reactors to measure neutron flux levels.
So, with Sylvania's output sharply higher and the Rand weakening by 6 per cent against the US dollar in the fourth quarter, this contributed to Sylvania posting quarterly net revenues of $20.1m, up from $14.5m in the third quarter. Moreover, with fourth quarter operating costs only 4 per cent higher at $11m in dollar terms (10 per cent higher in Rand), then fourth quarter net profits more than trebled from $1.1m to $3.9m to drive Sylvania's net profits to $10.4m for the 12 months to end June 2018. That represented an eye-catching 17 per cent increase on the same period in 2017.
Importantly, Sylvania retains a strong and debt free balance sheet, holding a net cash position of $12.6m (£9.8m) after taking into account the $2.5m invested in improving production at its plants at Millsell and Doombosch, and last autumn’s $6.3m acquisition of Lesedi, a PGM dump operation with an operational concentrator plant and 2.4m tonnes of tailings dump resources of a similar grade and recovery potential as Sylvania’s neighbouring Mooinooi dump operation.
Strip out net cash from Sylvania’s market capitalisation of £49.4m and an operation that has just posted annual net profits of £8m at current exchange rates is effectively being valued on five times historic post tax profits. That’s a harsh rating and one that offers scope for a re-rating to my 26p target price. Needless to say, the rationale for including Sylvania in my Bargain Shares Pportfolio is firmly intact. Buy.
■ Limited Offer. Until 3 September, Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased for £16.95 each with free postage and packaging (normally £2.95 per book) at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. Details of the content of both books can be viewed on www.ypdbooks.com.
