SIF June Review: Miners Anglo Pacific & Sylvania Platinum Are Up 40%

25th Jun '19 by Roland Head

8 comments 4365 reads

It’s almost the end of June, but this month I’m happy to report that I have two profitable positions to review! After recent calamities such as Staffline and Bilby, this makes a nice change. So without further ado, let’s see what’s been happening to the SIF folio’s miners.

Stocks for review

I added two companies to the SIF fund in September 2018. After nine months in SIF, both are now due for review:

Anglo Pacific (LON:APF) - a highly profitable mining royalty firm with a dependency on coal. Can APF diversify in time?
Sylvania Platinum (LON:SLP) - this South African tailings specialist has been cashing in as the price of palladium has roared ahead. Is it too good to last?

Here’s how these two companies have performed during their time in the portfolio:

Let’s take a closer look at the news that has driven these gains and find out whether each stock still passes my screening tests.

Anglo Pacific (LON:APF)

(Original coverage 04/09/2018)

Mining royalty group Anglo Pacific came through the 2015/16 mining downturn relatively unscathed, albeit with a dividend cut. But the balance sheet remained fairly strong and chief executive Julian Treger’s decision to maintain a dividend payout was vindicated.

The shares have quadrupled from the lows seen in early 2016, as commodity prices have rocketed ahead once more. However, I think it’s fair to say that Anglo Pacific has benefited from a mix of good judgement and good luck here.

In the right place at the right time: The firm’s main cash-producing royalty asset is a stake in the Kestrel coal mine in Australia. This accounted for 70% of Anglo’s royalty-related revenue last year.

However, this interest only covers certain parts of the mine acreage, so royalty income is dependent on which areas the mine’s operator chooses to work. The proportion of Kestrel mining taking place in Anglo Pacific’s royalty lands has moved in the firm’s favour since 2015:

The combination of strong coal prices and a bigger share of Kestrel royalties has worked wonders for Anglo Pacific’s revenue, most of which falls through to the bottom line as profit:

Heading for a blow out?

A…

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JohnEustace

25th Jun '19

I’m not saying you’re wrong to sell Sylvania Platinum (LON:SLP) but it’s not a rule based decision is it?

Roland Head

Hi John,

Thanks for your comments.

I can see why you might say this, but I can confirm my decision to sell Sylvania Platinum (LON:SLP) is completely a rules-based decision (even though I agree with it).

The rule in question is that the stock's rolling forecast P/E of 5.5 is below my minimum of 7. Sorry I didn't make this clearer in the article, I've amended it now.

As a side note, until April, my minimum P/E was 5. I increased it following my annual review of the SIF folio in order to try and avoid stocks that were unusually cheap. In my experience, this can be a sign that the market is pricing in a cut to earnings.

I'm not necessarily suggesting that's the case here, but that's the rule I'm working too. As always, these articles only represent my views and are not advice. I may well have sold Sylvania too soon...

Regards,

Roland

robin penfold

5th Jul '19

Hi Roland,

Like John I understand your logic, especially after the gains you have made but I do believe you have sold too soon.

The greatest unknown for me is the reliability of the company's production forecasts both for Q4 and 2020.
If we assume that Q4 is in line with April guidance, then results to June (and beyond) should be outstanding, given PGM prices. Platinum is around 1% down on 12 months ago (and appears to have support at 780 to 800$ oz), Palladium is up 63% YOY, +20% over 6 months and +16% over30 days and near all time highs - currently $1547 Oz. Rhodium is at $3,150 oz up from $2,100 oz 12 months ago. My estimate is that Rhodium and Palladium now account for approximately 33% and 27% of Sylvania's revenues.

Given what should be very strong cash flow in Q4 (and currently 2020 FY commencing July 1st), a dividend likely over 3.5% and reducing cap.ex, I believe this share could rise between 20 and 40% post Q4 Operational report. I am sure I have missed the negatives - beyond production and price levels and would be grateful for views on what the other negatives are.

8th Jul '19

Hi Robin,

I agree that I may have sold Sylvania Platinum (LON:SLP) too soon, in terms of share price movement. Ultimately, my decision to sell was forced by my trading rules, as I've explained elsewhere.

I don't have any special insight into the outlook for the firm, other than that in my view the valuation is now likely to be very sensitive to any falls in PGM prices. Although unexpected operational disruption is always a risk with small miners, I believe commodity prices are the major risk for shareholders right now.

I can certainly see arguments in favour of continuing to hold. As always, it's a case of DYOR.

Good luck with your position, if you hold.

Regards,
Roland

William K

9th Jul '19

My inclination is to continue holding Sylvania Platinum (LON:SLP) - like Robin Penfold I think the steadily rising price of Palladium is one good reason not to sell. Incidentally I've also invested in a physical palladium ETF IShares Physical Palladium ETC (LON:SPDM) since palladium is rising and the amount produced by Russia looks likely to fall ih the short term.

31st Aug '19

Still looks v.cheap to me despite the rise from circa 30p to 43p. Platinum, Palladium and Rhodium (now the main income generator) are rising to incredible levels. Expect 50p shortly!!

I'm holding on to £SLP. It's a high risk investment like all miners. But the share price is more likely I think to go up than down. It produces two of the four precious metals - platinum and palladium. The price of gold and silver has jumped over the last couple of months. Palladium went up around 4% yesterday. The price of platinum has gone up 10% over the last 3 days. Precious metals are likely to increase in value whilst there is fear of recession, and the fear of recession could last another couple of years or until the next recession actually hits us. There is no compelling reason for investors to sell now, although traders might want to take a quick profit.

iwright7

Profits rose by 29% during the first half of the current year, even though production was only 4.5% higher.... Although the outlook remains positive, a forecast P/E of 5.1, below my minimum P/E of 7. This suggests to me that the market sees some downside risk to earnings. I share this view.

Rowland - Interesting that you are following your sell @ PE <7 rule, but rather than reflecting immediate downside market risk, isn't it more likely that the low PE is an example of PEAD (Post Earnings Announcement Drift) with a succession of new 52 Wk Highs, while the market attempts to catch up with Sylvania Platinum (LON:SLP) operational gearing and speciality metal pricing new news?

SIF June review: Miners Anglo Pacific & Sylvania Platinum are up 40%

Stocks for review

Anglo Pacific (LON:APF)

Heading for a blow out?

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Roland Head

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