Could these cash-rich platinum miners shine again amid EV market shifts and looming Russian sanctions?

Platinum group metals (PGMs), which include well-known metals such as platinum and palladium, and the lesser-known metals rhodium, ruthenium and iridium, enjoyed a stellar run at the start of the decade. Demand for PGMs surged, fueled by expanding industrial applications and heightened investor interest. However, fortunes have changed quite significantly over the past few years.

The profitability of most PGM producers has eroded as the basket price (or the weighted average price of the company’s PGM output) has plunged to levels near or below breakeven for many operators. Fortunately for those with more platinum-heavy assets, there has been greater price stability in recent years, underpinned by structural supply deficits.

Source: Johnson Matthey

However, palladium and rhodium have seen their prices plummet as the growing adoption of electric vehicles (EVs) has significantly changed the demand-side dynamics for PGMs. Palladium prices, which reached $2,645 per ounce in March 2022, have averaged just under the $1,000 level this year. Rhodium prices are off by around 85% since their dazzling highs of over $28,000 in 2021.

This is a direct result of gasoline-powered internal combustion engine (ICE) vehicles losing market share. These vehicles use plenty of palladium in their catalytic converters, which help to reduce carbon emissions from vehicles. Palladium’s and Rhodium’s loss has been copper’s gain, as copper is required in greater quantities in electric vehicles.

These structural changes have cast a bleak outlook for PGM prices, but there may be signs of hope. Over the past year, global sales of electric vehicles have lost momentum, whilst hybrid vehicles (which still require PGMs) have seen increased demand. Indeed, some automakers that have misjudged the speed of the move to EVs have been forced to make cuts and close factories.

Source: Goldman Sachs 

Goldman Sachs analysts have cited the rising EV capital costs, election-driven policy uncertainty, and inadequate charging infrastructure as key reasons behind this waning demand. As governments cut electric vehicle subsidies, the comparative appeal of hybrids or traditional gasoline-engine vehicles will continue to grow.

The improving demand outlook seems to have helped PGM prices find a bottom. All recent drops have been bought up in rapid succession. From a supply perspective, there may also be issues on the horizon for palladium. Stricter sanctions on Russian palladium are being touted. As the world's largest palladium producer, this could provide some supply shock and boost ailing prices.

Additionally, as palladium production becomes unprofitable for the majority of producers, there are active mine suspensions or closures. Major PGM producer, Sibanye Stillwater, has curtailed the production of its assets in Montana in the US due to the current pricing environment. Over the long term, this could bring more price stability as it’s difficult to bring the production back online.

As the PGM cycle shows signs of potentially bottoming out, it’s an opportune moment to take a closer look at some of the producers listed on the London markets.

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Sylvania Platinum (LON:SLP) 

A previous fan-favourite amongst the community here, Sylvania Platinum, has struggled to reclaim its former glory. The challenging PGM backdrop has seen the company’s share price collapse from an intra-day high of 150p a share in 2021 to trade at 48.5p today.

Declining production, reduced profitability, and shrinking shareholder returns cast a shadow over the company’s future. Any further sustained drops to the company’s PGM basket and it will start burning through its cash reserves.

The image below highlights the extent to which margins and profitability have fallen since the peaks in 2021. However, it also demonstrates how much better things might become if there is a turnaround in fortunes in the PGM market. Over the period 2019-2023, Sylvania’s operating margins averaged just under 50%, whilst its ROCE averaged a staggering 32%. The company’s low-cost operations mean that rapid restoration of margins and shareholder value is likely to take place, even if PGM prices recover only slightly.

In FY2024, Sylvania produced over 72,500 ounces of 4E PGMs (the collective term for platinum, palladium, rhodium, and gold, which are often minded together) in spite of operational challenges such as wage-related strikes and slower-than-expected ramp-ups at certain operations. The financial results paint a bleaker picture.

The average basket price the company received for its PGMs fell 36% to $1,339 an ounce. This was largely due to a 51% deterioration in rhodium prices and a 38% decline in palladium prices in the prior year. Overall, the combination of lower prices and slightly lower production led to a 37% decline in revenues to $81.7m compared to $130.2m the year before.

Source: Sylvania Platinum Investor Presentation

Despite these headwinds, Sylvania has kept a cash balance of $97.8m, giving investors a comfortable cash cushion worth well over half the value of the company. This cash pile could be used for further share buybacks or increased dividends in the future, but if I were the management team, I'd be looking for the right opportunities to be more aggressive with this cash on hand.

The management team has proven that they are excellent operators, but they need to replicate this success with further commodity-diverse assets and, ideally, in different jurisdictions. An announcement of an option to purchase copper tailings or further near-term chrome-producing assets would likely provide a much-needed boost to the company's ailing share price. 

Looking to the future, Sylvania is currently looking at its Volspruit and Thaba Join Venture projects to boost growth. The recently completed scoping study for Volspruit highlighted a notable improvement in project economics, increasing the pre-tax net present value (NPV) to $69m, up from $27.3m in the 2022 study.

Source: Sylvania Platinum Annual Report 2024

The Thaba JV is a nearer-term project that is expected to add 6,800 4E PGM ounces and 210,000 tons of chromite concentrate annually from H2 2025. The chrome production is particularly attractive, as prices remain elevated on the back of strong demand from Chinese stainless steel makers. The project is forecast to achieve payback within 3 years and will provide some much-needed diversification to the company’s revenues.

Given current PGM prices, rising costs, and some operational setbacks, Sylvania will likely continue to struggle in the short term. However, the company’s valuation metrics are now extremely enticing, and the shares trade at a 30% discount from their book value.

The added bonus of the upcoming diversification of revenue streams and a whopping cash pile of nearly $100 million will further help investor appeal. Brokers are already forecasting a return to profitable growth next year, and the management outlook seems quite rosy from its latest Q1 2025 report:

“Despite the continued macro-economic challenges, I am pleased with the significantly improved production performance of the SDO and Group results in general for Q1 FY2025. This is especially promising as we have been seeing a gradual improvement in the PGM basket price in recent weeks, which bodes well for potential increased profitability going forward.”

Tharisa (LON:THS)

Another South Africa-focused PGM producer, Tharisa, has suffered a fate similar to that of its peer, Sylvania Platinum. Its share price has dropped to 67.5p, a steep drop from its high of 167p in April 2022. Despite this sharp correction, Tharisa’s profitability has shown greater resilience

Sylvania’s larger rival has benefitted greatly from its chrome exposure over the past two years, which now makes up around two thirds of the company’s revenues. The stronger chrome pricing environment has stablised group profitability and reduced the impact of PGM price volatility.

This advantage is evident in Tharisa’s superior quality metrics compared to Sylvania, which relies heavily on its PGM operations. Metrics such as return on capital employed, return on equity, and operating margins have outperformed those of Sylvania over the last 18 months. Tharisa’s diversified revenue streams have contributed to smoother earnings throughout the commodities cycle.

For FY2024, which ended on 30th September 2024, Tharisa produced over 145,000 ounces of PGMs and a record-high output of 1.7 million tonnes of chrome. The chrome production marked a notable increase on the 1.5 million tonnes produced in 2023. Tharisa’s chrome output continues to benefit from its strategic position as a major supplier to key markets, with approximately 10% of China and Indonesia’s chrome demand being supplied directly by Tharisa.

Source: Tharisa HY 2024 Presentation

From a financial perspective, Tharisa continues to perform well despite external challenges. Net cash flow from operations stood at $86.2m for FY2024, allowing the company to re-purchase $5m worth of shares and pay an interim dividend of 1.5¢.

The net cash balance of $108.7m is of particular note. This has actually increased from the prior year and is especially important given Tharisa’s growth plans in the coming years. The company will require a lot of capital expenditure (it has already invested over $100m) when it decides to crack on with its Tier 1 Karo Platinum Project in Zimbabwe.

The project was purposely delayed earlier this year, given weak PGM prices. However, the mine is expected to produce 190,000 ounces of PGMs once fully operational and will transform Tharisa into one of the largest PGM producers in the world with significant reserves and long-life assets.

Source: Tharisa HY 2024 Presentation

In the meantime, Tharisa is making significant strides in its underground development at its flagship Tharisa Mine, which will extend the life of the asset and give it greater mining flexibility.

Furthermore, Tharisa’s focus on beneficiation is evident through its successful production of chrome alloy using a proprietary process developed by its R&D business, Arxo Metals. This product is now being sold to commercial customers, positioning Tharisa as a key player in the downstream value chain.

Like many operating in the South African mining space, Tharisa has faced challenges due to electricity constraints and logistical complexities due to a lack of adequate transport infrastructure. But it seems that the management team is more optimistic about its outlook:

“We have made great strides in furthering our technical study work on the underground development at the Tharisa Mine and I know this will be a welcome addition to our mining flexibility with the open pit operations being supported by the on-reef underground mine development.

In our efforts to reduce our carbon emissions and secure energy independence, we entered into a 15-year agreement with Etana Energy, who will be providing up to 44% of the Tharisa Mine’s electricity demand via wheeled renewable energy.

We remain optimistic on the fundamentals of the PGM market and have thus continued to optimise our Karo Platinum project and have progressed with the plant construction, in line with capital availability, and we see this strategy continuing until we finalise the funding for the project.”

Tharisa will publish its full-year results next week, November 28th, 2024. Its undemanding valuation might appeal to patient value-focused investors looking for bargains within the PGM space. A forward price-to-earnings ratio of 5.2 and the fact that the company is valued at a steep discount of less than half its book value will also encourage deep-value investors seeking a notable margin of safety. 

Conclusion

The sustained price weakness has evidently taken its toll on PGM producers. Earnings have retreated significantly in most cases and it has forced companies to curtail investments, delay growth projects, and restructure operations.

Despite these obstacles, the long-term outlook for the industry remains cautiously optimistic, with emerging opportunities in clean energy and hybrid vehicle technologies offering potential lifelines. The looming threat of supply disruptions due to sanctions or other geopolitical tensions, unprofitable production coming offline and a lack of investment into new projects could also provide some impetus to PGM prices in the future.


Source: mine.nridigital.com

Miners like Sylvania and Tharisa are well-placed to weather the current storm, given their significant cash piles and upcoming or current chrome production. Any recovery in PGM prices will feed through to the income statement very quickly as well.

I actually had a very interesting conversation with our very own Mark Simpson about this and the wider mining industry a few weeks ago. It’s one of the few industries where private investors can really get ahead of the brokers and identify opportunities that might be overlooked by the market if they keep up to date with commodity prices.

Brokers will typically update their forecasts only after each set of interim or annual results. In the UK, this means most companies could go up to 6 months without getting any coverage of their business performance or activities. Herein lies the opportunity, especially in the mining sector.

The trading updates issued will typically disclose mining production stats, and these are sometimes issued on a monthly basis, but more often on a quarterly basis. Given the widespread access to metal spot prices (and other commodities for that matter), private investors can take the average price over a certain period of time and multiply this by the latest production stats. This gives private investors better short-term visibility over earnings.

If a company is forecasted to produce 100,000 ounces of PGMs this year, and the basket price has surged to over $2,000 per ounce, but all the prior broker forecasts and price targets were based on assumptions of $1,500 per ounce, you might have uncovered a significant valuation disconnect.

Equally, if a company's production stats are falling short of the targets set earlier in the year (and they don’t highlight that there will be a better weighting in the next quarters), or if the average commodity price is trending well below what brokers or the company initially forecast, it might be a sign to jump ship.

There is a unique opportunity for private investors to get ahead of the wider market when it comes to miners. Although, as everyone who has ever invested in the mining industry will know, there is a whole wider range of risks to consider, from volatile commodity prices to operational challenges and geopolitical uncertainties. So it’s not all plain sailing!

For those interested in exploring the PGM space further, it’s worth looking at the industry's main players, such as Anglo American (LON:AAL), Sibanye Stillwater (NYQ:SBSW) and Zimplats Holdings (ASX:ZIM). 

For courageous and patient investors, PGMs may present an attractive entry point near the bottom of the cycle. However, as always, the outlook depends on broader macroeconomic stability, and that’s not the easiest thing to guess at the minute.

It would be great to hear some thoughts on PGM miners in the comments! I’m sure there are some companies worth further research on the global level.