- Secures two long-term PGM feed supply agreements.
- Sizeable amount of feed is particularly high in rhodium content.
- Commissioning of new chrome ore processing facility by the end of July.
Jubilee Metals (JLP: 19.6p), an Aim-traded mining company that makes it’s money by extracting platinum group metals (PGMs) and copper from mine tailings in South Africa and Zambia, has secured a significant amount of PGM containing surface material and expanded its operational footprint beyond the Western Limb of the Bushweld Complex.
In quick succession, the company has entered into two long-term PGM feed supply agreements on the Eastern-Limb of the Bushweld Complex that will deliver an additional 46,500 tonnes per month of PGM rich feed, equivalent to the production of 33,700 PGM ounces (oz) per year. The consideration is linked to the prevailing PGM basket price and is payable monthly in advance of uplifting the material and transporting it to Jubilee's Inyoni PGM plant.
A sizeable amount of the feed is based on the LG6 chrome reef, an area that is particularly high in rhodium content (12 per cent of produced PGM ounce). The price of rhodium, a mining by-product used as a catalyst in three-way catalytic converters in cars, has been on a tear in the past year, quadrupling in value, driven by demand from car makers. The market is forecast to be in a 60,000 ounces deficit this year, or 5 per cent of estimated market demand (source: Johnson Matthey).
In addition, Jubilee has acquired outright a further 255,000 tonnes of PGM containing chrome tailings, equivalent to the production of 12,300 PGM ounces. The material will be initially processed at Jubilee's expanded Inyoni PGM facility and ensures that the expanded capacity is fully committed, with current arising tailings prior to the plant’s expansion. The directors confirmed that the company is on target to deliver record production of more than 50,000 PGM ounces this year.
They also confirmed that commissioning of Jubilee’s new 80,000 tonnes per month chrome ore processing facility near its Inyoni operations is expected by the end of July. This will increase overall processing capacity to 250,000 tonnes per month. The company has already entered a third-party Run-Of-Mine chrome ore offtake agreement with Samancor which will fully commit both Jubilee’s Windsor chrome beneficiation plant as well as the future capacity of the new 80,000 tonnes per month chrome facility for the next three years, with an option of an extension, thus supplementing its secured surface chrome tailings stockpiles. The chrome will be supplied to Samancor on a fixed margin contract.
Importantly, Jubilee now controls the source feed to its fine chrome and PGM circuits, which ensures stability of operations and means that it can capture 100 per cent of the value. Effectively, the chrome production is paying to pre-concentrate the PGM circuit feed. It’s low risk production, too. That’s because the material treated by Jubilee is at surface and usually pre-ground, thus reducing the two major costs in a typical mining operation (mining and comminution) and eliminating the risks of mining almost entirely. This means Jubilee provides investors exposure to South African PGMs without the normal risks associated with deep mining.
Furthermore, with Jubilee’s spot PGM basket price six times higher than unit operating costs of US$470 per oz, then the company is guaranteed to report eye-catching record results for the financial year to 30 June 2021, and another step change in profitability in 2021/22. Analysts at house broker WH Ireland expect annual pre-tax profit to more than treble from £13.7m to £47.8m on revenue up from £54.8m to £113m, rising to pre-tax profit of £96m on revenue of £243m in the 2021/22 financial year.
On this basis, expect earnings per share (EPS) to double to 1.9p in 2020/21, and almost double again to 3.4p in 2021/22. Cash flow from operating activities is forecast to more than double, too. Analysts at WH Ireland are pencilling in a cash inflow of £48m to drive up net cash from £8.6m (30 June 2021) to £64.9m (30 June 2022), a sum worth 3p a share. The risk to forecasts looks to the upside.
A copper-bottomed profit generator
That’s because investors have yet to fully cotton onto the potential for Jubilee’s Zambian copper operations to produce eye-watering amounts of cash flow and profit. WH Ireland estimate Jubilee’s 100 per cent owned Sable Refinery, located adjacent to its Kabwe tailings resource in the Zambian Copper Belt, could produce copper revenue of US$119m in the 2021/22 financial year, based on 13,000 tonnes of output, an outcome that underpins operating profit of US$48.7m from that one activity alone.
If the copper price continues to perform robustly, then there could be even more upside given Sabre’s relatively fixed operating costs and a targeted unit cost of US$4,000 per tonne. The current copper spot price is US$9,780 per tonne, buoyed by the ongoing global economic recovery and US$30 trillion of fiscal stimulus programmes have been unleashed around the world to revive economies in response to the Covid-19 pandemic. These programmes all have one common factor – they are all copper-intensive.
For example, copper is expected to benefit from greater demand for electricity in a shift away from fossil fuels given that a greater portion of future power generation is forecast to come from renewable energy. Wind farms and solar panels require as much as five times more copper than that needed for fossil fuel power generation. Also, electric vehicles use four times as much copper as internal combustion engine (ICE) vehicles. Analysts at Bernstein estimate that copper demand from renewables and electric vehicles could increase by more than seven times by the 2050s, if the world is going to meet its net zero greenhouse gas emissions target.
Ongoing demand from China – the country accounts for 40 to 50 per cent of global demand, but only 8 per cent of supply – and the resurgent North American economy are other key reasons why the copper market moved from surplus to deficit in 2020, with estimated global demand of 26.1m tonnes exceeding supply of 25.5m tonnes. An undersupplied market is certainly good news for Jubilee as every US$1,000 per tonne increase in the copper price adds US$13m to operating profit based on 13,000 tonnes annual production.
Modest rating
Trading on a prospective cash-adjusted price/earnings (PE) ratio of 5, with the PGM price complex well underpinned and Jubilee set to ramp up copper production, I envisage Jubilee’s ongoing share price re-rating to continue.
In fact, having first advised buying the shares at just below 16p (Alpha Research: ‘A copper bottomed investment for the mining bull market’, 26 April 2021), I am raising my target price from 25p to 30p to factor in the sharp increase in the copper price since I initiated coverage. Strong buy.
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