Aim-traded Sylvania Platinum (SLP:44.5p), a cash-rich, fast-growing and low-cost South African producer and developer of platinum group metals (PGMs) platinum, palladium and rhodium, has delivered the bumper set of results I anticipated when I advised buying the shares, at 33p, ahead of the release (‘Playing the precious metal complex’, 29 July 2019).
The short-term 33 per cent paper gain aside, the share price hit an eight-year high this morning and the holding has now produced a total return of 205 per cent in the 19 month period since I included Sylvania’ shares, at 14.5p, in my market beating 2018 Bargain Shares portfolio. There is potential for further material potential share price upside which is why I am upgrading my target price from 50p to 60p.
Buoyed by a sixth consecutive year of record production to 72,090 ounces on the back of improved PGM efficiencies and recovery rates, and a 13 per cent higher average gross basket price of US$1,277, Sylvania’s annual net revenue surged from $62.7m to US$70.5m. It’s increasingly profitable, too. That’s because all in-cash costs only edged up by 2 per cent to US$672 per an ounce (oz), and operating costs actually declined by one per cent to $38.4m, so all of the $7.8m net revenue increase dropped through to boost cash profit (US$30.2m) and operating profit (US$23.7m). Both net profit and earnings per share (EPS) rose by two-thirds to $18.2m and 6.37c (5.2p), respectively, the latter 7 per cent higher than house broker Liberum Capital’s forecast.
Shareholders have been rewarded with a 116 per cent hike in the payout to 1c (0.8p) per share, and rightly so given Sylvania’s net cash pile has risen by more than half to US$21.4m. It will be boosted further as post the 30 June financial year-end the company agreed a binding offer to sell its non-core Grasvally Chrome Mine for US$7.6m. When that disposal goes through then almost a fifth of Sylvania’s market capitalisation of £127m will be backed by cash.
Sylvania is also keen to dispose of its permitted Volspruit asset, a PGM-base metals project that differs from typical South African platinum mines as its revenue is more weighted to nickel (24 per cent) and palladium (42 per cent), rather than platinum (21 per cent). Management decided not to pursue the project as it falls outside their current business model and is less capital efficient than investment in its core tailings retreatment plant capacity. Volspruit is held in Sylvania’s balance sheet at US$43m (12.3p) and any sale would provide a material share price catalyst.
Operating in a sweet spot
Admittedly, Rand weakness against the US dollar enhanced the company’s financial performance, the exchange rate declining by 10 per cent on average over the 12-month reporting period, thus mitigating the impact of domestic cost pressures.
Sylvania also benefits from selling into a palladium market that has been in deficit since 2012, with stock levels depleted by an aggregate of 4.6m oz, the market tightness being exacerbated by demand from the automotive sector. The same factor has been buoying demand for rhodium, a mining by-product whose major use is as one of the catalysts in the three-way catalytic converters in cars. Rhodium is between two to three times more effective than platinum in the auto-catalyst, and is also useful in reducing nitrogen oxide emissions, so stricter emission targets imposed by governments looking to reduce pollution levels is buoying end-market demand, too.
In fact, the rhodium price has recently surged to multi-year highs of US$4,900 per oz, up from $575 per oz only three years ago. This is very good news for Sylvania which has a relatively large exposure to rhodium, compared with peers. In fact, the gross PGM basket price at which Sylvania sells for is around US$1,631 per oz, or 27 per cent higher than the average in the 2018/19 financial year. Bearing this in mind, Liberum is conservatively factoring in an average rhodium price of US$2,956 per oz in its current year cash profit estimate of $36.3m, up US$30.2m in 2018/19. However, if the PGM basket price maintains its elevated level, then Liberum’s forecasts would have to be upgraded by 63 per cent, thus offering scope for massive earnings upgrades to its pre-tax profit estimate of US$28.9m (up from US$24.4m in 2018/19) and EPS estimate of 7c (5.7p).
The bottom line is that with the board’s guidance pointing towards 74,000 to 76,000 oz output this year, analysts forecasts looking incredibly conservative, and Sylvania considering further assets sales, then the shares offer compelling value on a cash-adjusted price/earnings (PE) ratio of 6. Buy.
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