Sylvania Platinum (SLP:33.5p), a cash-rich, fast-growing, low-cost South African producer and developer of platinum group metals (PGMs) platinum, palladium and rhodium, has released an impressive set of first quarter results.
Buoyed by a 25 per cent rise in the average basket price to $1,654 an ounce (oz) on quarterly output of 20,797 oz, and a $4.7m positive adjustment for fourth-quarter sales that were invoiced in the first quarter of the new financial year [at the much higher basket price], Sylvania’s net revenue surged by more than half to $31.1m in the three months to 30 September 2019. True, operating costs increased by 10 per cent to $11.4m, reflecting employee cost pressures, but the average basket price was $1,079 an oz ($832 an oz in the previous quarter) above the group’s cash cost of $573 an oz. This higher operating margin explains why Sylvania’s quarterly cash profit more than doubled from $9.3m to $19.2m and net profit soared by 158 per cent to $12.5m. Its cash pile increased by 22 per cent to $26.6m during the three-month period, worth 7.4p a share.
To put the performance into perspective, in the financial year to 30 June 2019, Sylvania reported annual net revenue of $70.5m and cash profit of $30.2m, so the company has already booked 63 per cent of last year’s total cash profit. Furthermore, the directors reiterated production guidance of 74,000-76,000 oz, up from a record 72,000 oz in the 2018-19 financial year, so the company will benefit from higher production growth at a time when demand for palladium and rhodium, a mining by-product whose major use is as a catalyst in three-way catalytic converters in cars, has sent metal prices soaring.
In fact, the rhodium price has nearly doubled in the past six months and is up by almost 400 per cent to $4,950 an oz since the summer of 2017. The tight market environment is unlikely to change any time soon. That’s because rhodium is between two to three times more effective than platinum in the auto-catalyst, and helps reduce nitrogen oxide emissions, so stricter emission targets imposed by governments looking to reduce pollution levels is buoying end-market demand from the automotive industry. The price of palladium has risen by 62 per cent in the past 12 months, and has trebled in value since October 2016, reflecting both a market in deficit and one benefiting from demand from the automotive sector.
The point being that although Sylvania has a much higher exposure to rhodium than its peers, the ongoing buoyant market pricing is not reflected in analysts’ profit forecasts. Liberum Capital is conservatively factoring in an average rhodium price of only $2,956 an oz in its cash profit estimate of $36.3m for the 12 months to 30 June 2020. However, if the rhodium price holds at close to $4,950 an oz, it would drive a 63 per cent cash profit upgrade.
That’s a potential cash profit windfall of $23m that would lift Liberum’s current year underlying pre-tax profit estimate of $28.9m ($23.9m in 2018-19) to north of $50m and produce a net profit of around $35m. On this basis, EPS would more than double to 12.6¢ (9.8p), miles ahead of Liberum’s conservative full-year forecast of 6.96¢ (5.4p). In other words, analysts are going to have to push through material earnings upgrades in the coming months unless the rhodium price plunges. Also, Liberum has embedded an average palladium price of $1,450 an oz into its 2019-20 profit forecast, or almost 20 per cent below palladium’s current spot rate.
Trading on a bargain basement cash-adjusted PE ratio of 5, a multiple that would halve if the rhodium price holds at the current level and analysts upgrade their profit forecasts as I have outlined above, Sylvania shares are by some distance my top pick in the mining sector. For good measure, the share price has pulled back from summer highs and retested its long-term bull market 200-day moving average, so this looks an ideal time from a technical perspective to exploit the chronic undervaluation, and one that offers potentially 79 per cent upside to my 60p long-term target price. Income seekers please note that analysts at Liberum are pencilling in a hike in the payout per share from 1¢ to 1.74¢ (1.36p), so the prospective dividend yield of 4 per cent is pretty healthy, too.
So, having included the shares, at 14.5p, in my market beating 2018 Bargain Shares portfolio, and banked dividends of 1.13p a share, I rate Aim-traded shares in the £94m market capitalisation company a strong buy on a bid-offer spread of 33p to 34p ahead of second quarter results in January. Strong buy.
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