First-half results from Sylvania Platinum (SLP:50p), a South African producer and developer of platinum, palladium and rhodium, bear the scars of a weak platinum group metal (PGM) price environment. Sylvania’s average basket price of $1,311 per ounce (oz) was $1,202 per oz less than in the first half of the 2022-23 financial year, which on flat production of 38,405 ounces resulted in a near-50 per cent fall in revenue to $40.8mn.
At the same time, cash costs at its dump operations on the Eastern and Western Limbs of the Bushveld Complex increased by 13 per cent to $682 an oz. This reflected electricity price inflation, higher transport costs, and consumable and reagent costs associated with MF2 milling and flotation circuits that are improving PGM recovery efficiencies. Although Sylvania’s dump operations are still profitable with all-in costs of $1,037 an oz, the revenue shortfall sent pre-tax profit down from $45.5mn to $8.1mn.
However, analysts at brokerage Liberum Capital note that PGM executives believe that better PGM prices are “just around the corner”, a view based on an easing of the de-stocking by carmakers and glass fibre producers. Slowing electrical vehicle penetration rates is another positive as consumers continue to favour internal combustion engine (ICE) and hybrid vehicles, both of which use PGM metals in the auto catalyst. Higher PGM prices have an accentuated impact on profits given the group’s relatively fixed cost base.
Cash position supports investment in capital projects
Importantly, Sylvania retains a strong balance sheet. Net cash of $107mn (30.5p) equates to almost half book value of $229mn (65.5p) and is funding a joint venture (JV) with a subsidiary of ChromTech Mining to leverage Sylvania’s expertise in the recovery of chrome and PGM concentrates. The JV will process PGM and chrome ores from historical tailings dumps and current arisings from the Limberg Chrome Mine on the northern part of the Western Limb of the Bushveld Complex. It will add attributable production of 6,500 4E PGM ounces and 200,000 tonnes of chromite concentrate to Sylvania’s existing production.
New secondary fine chrome and PGM beneficiation plants are set to become operational in the first half of 2025. Sylvania is lending its JV partner $16mn (annual interest rate of 11.75 per cent) to cover its share of the $32mn total capital investment with the loan secured on 2mn tonnes of existing chrome tailings.
Given the strength of the chrome price, analysts at Liberum believe that the JV could ultimately deliver 80 per cent of group revenue at current spot prices. They also note that Sylvania is exploring a similar JV opportunity on the Eastern Limb, adding that the pull-back in PGM prices relative to chrome may help move the agreements along.
Modest valuation
Admittedly, after factoring in a better second-half performance, full-year pre-tax profits and earnings per share (EPS) are still forecast to fall 24 per cent to $50.7mn and 13¢ (10p), respectively. The annual dividend is set to decline, too, from 8p to 3p a share. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 5 and offer a prospective dividend yield of 6 per cent. Strip out the bumper cash pile and Sylvania’s enterprise valuation equates to only two times operating profit estimates.
Although the holding is up 450 per cent in my 2018 Bargain Shares portfolio, it is now showing a 30 per cent loss in my 2022 Bargain Share Portfolio, following a similar share price reversal since the annual results (‘Sylvania is due a re-rating, 7 September 2023). However, an expected recovery in PGM prices should deliver strong capital upside as highlighted by Liberum’s target price of 96p. Recovery buy.
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