Power shortages take shine off Jubilee Metals

Jubilee Metals (JLP: 9.45p), an Aim-traded mining company that makes money by extracting platinum group metals (PGMs) and copper from mine tailings in South Africa and Zambia, has issued an operational update ahead of the release of interim results on 20 March 2023. It has not been taken well, prompting a 17 per cent fall in the share price even though the performance was “broadly in-line with management’s expected earnings and revenue targets”.

In South Africa, Jubilee’s strategy is to maximise the processing of historical tailings through its own operations, rather than use processing capacity offered by third-party facilities through existing joint venture agreements. In the six-month trading period, all the PGM output came from Jubilee's expanded Inyoni processing facility, which came on stream in March. However, the plant delivered 10 per cent lower half-yearly production of 18,208 PGM ounces (oz), slightly shy of Berenberg’s 18,600 oz forecast.

The issue is that although Inyoni has the capacity to deliver up to 44,000 PGM oz a year, output is being impacted by the country’s power outage issues. Coupled with the time lag to expand back-up power supply, this has prompted the directors to revise annual PGM production guidance downwards from 44,000 oz to 38,000 oz (excludes the option of 8,000 oz from third-party agreements). The PGM dump activities are highly profitable, as highlighted by a low operating cost of $516 (£429) per oz (including sales of by-products) or a quarter of the average basket price of $2,109 per oz. That said, the average basket price fell short of Berenberg’s $2,382 per oz estimate and half-yearly net earnings of $939 per PGM oz was 14 per cent lower on the same period in 2021.

Power outages hamper copper operations

There has been a production shortfall in Zambia, too, where Jubilee’s copper production of 1,149 tonnes fell materially below management’s guidance of 3,000 tonnes. The operations were also severely disrupted by the country’s power outages. To address the infrastructure challenges, Jubilee has invested $2.5mn in securing additional power, upgrading water infrastructure and replacing damaged equipment. Copper unit costs for the half were $6,468 per tonne, better than Bernberg’s $6,777 per tonne estimate, but net earnings per tonne declined 60 per cent to $1,485 per tonne due to the weaker copper price.

Copper production guidance is being adjusted downwards, too, although Jubilee is not providing revised estimates until next month’s interim results. In the near term, the group has de-bottlenecked its cobalt circuit to a production capacity of 450 tonnes of cobalt hydroxide per month (125 tonnes per month of contained cobalt, or 25 per cent higher than previous guidance) and is now prioritising higher-margin cobalt over copper until concentrate supply improves.

Value in the shares

Berenberg has a 20p per share target price, or more than double the current share price, based on a 12-month forward cash profit multiple of 6.5 times. However, broking house WH Ireland has placed its estimates under review with a view to reinstating forecasts on the £258mn market capitalisation company after next month’s interim results.

I note that the directors have been buying the shares at the current depressed level. At the end of last week, chief executive Leon Coetzer and non-executive chairman Ollie Oliveira acquired 270,000 and 426,000 shares, respectively, at 9.1p each. Former chairman Colin Bird also purchased 200,000 shares at 9.37p, too.

So, having initiated coverage on the shares at 15.8p, and last reiterated that advice, at 14.5p, I now rate the shares, at 9.45p, a hold until there is greater clarity on production estimates, and profit forecasts. Hold.

Please note that this article was first published on 15 February 2023 and updated on 20 February 2023 to incorporate the directors' dealings.