Sylvania is overdue a re-rating

Sylvania Platinum (SLP:75p), a South African producer and developer of platinum, palladium and rhodium, has upgraded full-year production guidance and announced a smart joint venture that will add 9 per cent to annual output.

Following the successful roll-out of the group’s secondary milling and flotation programme, Sylvania invested $8.9mn in MF2 flotation circuits at its Lannex and Tweefontein dump operations to improve platinum group metal (PGM) recovery efficiencies. It is also enabling optimisation of PGM concentrate quality, a key focus, given the potential to improve smelter payability as both concentrate grade and metal recoveries contribute positively towards Sylvania’s revenue stream. The improved efficiencies from these investments as well as better feed stability and flotation performance at the Mooinooi operation underpin the raised production guidance.

A smart joint venture

The group’s new joint venture with a subsidiary of ChromTech Mining represents a major step forward in Sylvania's growth strategy and leverages its expertise in the recovery of chrome and PGM concentrates.

The joint venture will process PGM and chrome ores from historical tailings dumps and current arisings from the Limberg Chrome Mine, located on the northern part of the Western Limb of the Bushveld Complex, South Africa. It will add attributable production of 6,500 4E PGM ounces and introduce 200,000 tons of chromite concentrate to Sylvania’s existing annual production profile.

Construction of the new secondary fine chrome and PGM beneficiation plants will start in November 2023, funded by $32mn of investment. Sylvania is making a loan of half that sum to its joint venture partner to cover its share of the capital investment, but the group will earn a healthy 11.75 per cent interest rate in return and the loan is also secured on the existing 2mn tonnes of chrome tailings.

The investment will not only provide a healthy boost to Sylvania’s production when the new facilities become operational in the first half of 2025, but it will generate a healthy internal rate of return of 29 per cent at current spot prices, analysts at house broker Liberum Capital said. It also secures 200,000 tonnes of chromite concentrate per year, thus diversifying Sylvania’s cash flow.

Earnings recovery underpriced

True, weakness in the PGM basket price led to a 16 per cent fall in earnings per share (EPS) to 17¢ (13.6p) in the 12 months to 30 June 2023. However, the group is still highly cash generative and ended the period with net cash of $124mn (£100mn), a sum accounting for half Sylvania’s market capitalisation of £197mn. Sensibly, the board is returning cash to shareholders through EPS-enhancing share buy-backs and declared a final dividend of 5p a share to add to the interim payout of 3p a share to support a 10.6 per cent dividend yield.

For the year ahead, Liberum’s financial models point to a 28 per cent bounce-back in pre-tax profit to $83mn, implying the shares are rated on a cash-adjusted price/earnings (PE) ratio of 2.1. The projected recovery in profits is supported by strong vehicle sales growth across all global regions, a positive for rhodium demand in the autocatalyst, elevated used car prices keeping a lid on recycling, and an end of destocking of rhodium and platinum by manufacturers of glass fibre.

The lowly rated cash-backed shares have drifted down in line with the FTSE Aim All-Share index since I covered the third-quarter results ('Sylvania's 10% yield could make it London's lowest-rated stock' 16 May 2023), and now trade at price-to-book value parity. An overdue re-rating is in order and one driven by an earnings recovery. Buy.

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