Sylvania Platinum (SLP:21p) a fast-growing and low-cost South African producer and developer of the platinum group metals (PGMs) platinum, palladium and rhodium, has delivered a robust set of first-half results despite facing some one-off production issues that led to a modest increase in output to 34,045 oz in the six-month trading period. These have been addressed, and the directors are confident of achieving production of 73,000 to 76,000 oz in the 12 months to end June 2019, markedly higher than last year’s record output of 71,000 oz, and supportive of a sixth consecutive year of production growth.
I included the shares, at 14.5p, in my 2018 Bargain Shares portfolio, attracted by the favourable valuation and as a play on the PGM commodity complex. The company has two distinct 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.
The shares have rerated by 50 per cent in the past 12 months, but investors are still not fully factoring in the ongoing strong tailwinds benefiting the business. For instance, the palladium price has risen by 68 per cent since last August in an incredibly tight market, and one that is being driven quite literally by demand from the automotive sector. The rhodium price has risen by 45 per cent in the past 12 months, which is worth considering given that Sylvania’s 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. Furthermore, Sylvania's revenues from by-products are being buoyed by average higher prices for Iridium and Ruthenium, up by 50 per cent and 167 per cent, respectively, in the two respective half year periods to end 31 December 2017 and 2018.
These sharp price moves help explain why Sylvania’s average gross basket price rose by 14 per cent to $1,201 an oz in the latest six-month trading period and buoyed revenues by the same percentage to $32m, of which revenue from by-products surged from $1.6m to $3m. Moreover, with ‘all in unit costs’ increasing by 9 per cent to $692 an oz, so lagging revenue growth, a greater proportion of incremental revenues dropped to the bottom line, which is why Sylvania’s first-half post-tax profits surged by 29 per cent to $6.95m (£5.4m). The company is highly cash generative, too, as highlighted by a 63 per cent year-on-year rise in net funds to $19.9m (£15.5m, or 5.4p a share), a sum that accounts for a quarter of the company’s market capitalisation of £60m and more than a sixth of its net asset value of $114.5m (£89m).
This means that net of cash on the balance sheet Sylvania’s shares are effectively rated on a bargain-basement 4.5 times 12-month trailing net profits even though the company looks set to deliver second half profits materially higher than the $5.6m reported in the second-half of the 2018 financial year, buoyed by a sharp rise in the average basket price and the benefit of 5,000 oz of additional output. That should be good news for shareholders after the board paid a maiden dividend of 0.35p a share last year. My 28p to 30p target price is likely to prove conservative. Strong buy.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
