There has been much conjecture about the decline in internal combustion engine (ICE) vehicle production as the green revolution gathers momentum. This has implications for miners of platinum group metals (PGMs) such as platinum, palladium and rhodium, the key components in the auto-catalyst which reduces harmful nitrogen oxide emissions.
However, unless green stimulus is targeted on purely electric vehicles rather than hybrids that require high PGM loadings, demand destruction for PGMs is unlikely to happen anytime soon. Research consultancy LMC Automotive forecast an 11 per cent fall in sales of gasoline and diesel vehicles globally between 2019 and 2027, but a quadrupling for hybrids, leading to a 9 per cent increase overall for vehicles needing PGMs in the auto-catalyst. Car makers earn a higher margin on petroleum cars than on electric ones, about $7,000 according to brokerage Liberum, so have an incentive to extend their life.
Moreover, although car makers charge a premium for electric vehicles due to their lower running costs, the global spike in energy prices means that the relative savings are not as great as they once were. To paraphrase Mark Twain, “Death of the internal combustion engine has been greatly exaggerated.”
Sylvania Platinum’s compelling value opportunity
- Final dividend per share doubles to 8p, a third higher than forecasts
- Windfall dividend of 2.25p per share paid in April 2022
- Net cash of $121mn (39.7p a share)
- Production guidance of 68,000 to 70,000 ounces for 2022/23
Sylvania Platinum (SLP:88p), a cash-rich, fast-growing, low-cost South African producer and developer of platinum, palladium and rhodium, has announced a bumper final dividend way above analysts’ estimates, and upgraded production guidance for the new financial year, too.
The group’s cash pile ballooned from $106mn (£92mn) to $121mn (39.6p a share) in the 12 months to 30 June 2022, buoyed by a $69.6mn cash inflow from operations that enabled the board to spend $17.2mn on capital projects (see below), buy back shares worth $9.8mn and pay out dividends of $22.7mn. The proposed 8p a share final dividend will cost $24.5mn, a small dent in the cash position.
Admittedly, weakness in PGM prices meant that Sylvania’s average basket price of $2,890 per ounce (oz) was 23 per cent lower than in the prior financial year, production dipped from 70,000 oz to 67,000 oz and group cash costs were 19 per cent higher at $897 per oz, hence why annual cash profit of $82.8mn was well shy of the record $144.9mn result in 2021/22.
However, it is still a hugely profitable operation that generated net profit of $56.2mn (20.6¢ a share) and one that will now benefit from better grades from operations at Mooinooi, and the installation of milling and floatation technology projects at Lannex and Tweefontein, which will help improve the future recovery of PGMs. Management guidance is for higher production this year, too.
Prospects of a bounce back in Sylvania’s earnings this year are being severely underrated for several reasons. For starters, there is backlog of pent-up demand for new vehicles, car production having been impacted by global semiconductor shortages which led to record high used car values. Also, PGM exports from Russia are set to compress as the lack of access to capital equipment impacts at a time when potential energy shortages in South Africa could hit supply coming onto the market, thus driving up PGM prices. The latter country accounts for 80 per cent of rhodium global mine supply, Sylvania's exposure to the metal being three times that of its mining peers. In a weaker global economic environment, the much lower upfront cost of new ICE cars could actually help boost its market share, too.
Liberum have taken a sensible approach in their forecasting, predicting Sylvania’s revenue will bounce back 16 per cent to $177mn in the new financial year to lift pre-tax profit by more than $30mn to $114mn and boost EPS from 20.6¢ to 28¢, or 24p at current exchange rates. On this basis, around 60 per cent of anticipated net cash flow from operations of $86.3mn will add to Sylvania’s cash pile even after factoring in generous dividend payments. This explains why Liberum forecast net cash of $174mn (57p a share) by 30 June 2023, a sum equating to two-thirds of Sylvania’s current market capitalisation. Effectively, the shares are priced on a prospective cash-adjusted price/earnings ratio of one, a bargain basement valuation in anyone's book, and that ignores scope for a repeat of this year's generous dividends.
So, having recommended buying the shares at 93p in my 2022 Bargain Shares Portfolio, I have no hesitation repeating that advice. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus postage and packaging. Details of the content can be viewed on www.ypdbooks.com.
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