Stock Brief - Sylvania Platinum (LON:SLP)

Sylvania Platinum is a platinum group metals (PGM) producer with six chrome beneficiation and PGM processing plants in the Bushveld Igneous Complex in South Africa. The company’s share price has been on a stellar run as far back as 2018 on account of surging PGM prices but has recently given back some of these gains despite revealing in its recent Annual Report that net profit is up 143% to $99.8m and closing net cash has risen by 90% to $106m.

Recent share price weakness comes as a result of softer palladium and rhodium prices (down 19% and 43% respectively on their record 2021 peaks), which have caused a drop in Sylvania’s average basket price on a quarterly basis. Importantly though, these markets are still forecast to be in deficit this year, the medium term outlook is favourable, and Sylvania remains hugely profitable at current spot metal prices. Its average basket price for FY21 was up 83% year-on-year to $3,690/oz - nearly five times group cash costs of $755 per oz.

There’s no doubt the shares look cheap - the forecast rolling PE ratio of 3.1x reduces even further after adjusting for cash to just 2x - but how certain can we be that SLP is in fact cheap, given the degree to which profitability is driven by commodity prices? The company has demonstrated that its results - and its share price - can be volatile in the short term but medium term PGM drivers remain positive and the group is forecast to generate nearly one third of its current market cap in free cash flow over the next year alone.

Profile

What are the company's principal business activities, how does it generate its revenues?

Sylvania is a producer of PGMs including platinum, palladium, and rhodium. Unlike miners, the core business of SLP is the retreatment of PGM bearing chrome tailings material at its six plants, although the group also holds mining rights for a number of PGM projects and a Chrome prospect on the Northern Limb of the Bushveld Igneous Complex in South Africa.

Sylvania produces around 70,000 ounces of PGM metals per year with the following prill split.

Source: Sylvania Platinum Presentation, 2021-06-09

Size, Sector & Exchange

Sylvania Platinum is a metals & mining company operating in the Basic Materials sector. The shares currently trade at 101p, valuing the company at £280m (or around £203m on an enterprise value basis after accounting for the group’s sizable net cash position). The stock is listed on the LSE AIM market.

Business strategy

The group’s strategy is to generate high levels of free cash flow by producing PGMs at low cash costs (target <$600oz), which it can then reinvest in the company and return to shareholders. It seeks to accomplish this by:

• Maintaining production of c70koz of PGMs annually, optimising recently commissioned projects, and extracting value from exploration assets,
• Strengthening its relationship with host mines and continuing studies of new tailing dam facilities and mining projects,
• Progressing R&D and exploration projects in fine-chrome beneficiation and PGM recovery to enable re-treatment of dumps that would otherwise be sterilised,
• Exploring potential new PGM tailings treatment opportunities and alternative feed sources.

History & Growth

Sylvania Platinum has rerated aggressively over the past three years or so, from around 18p to today’s c100p level on account of surging PGM prices.

The revenue growth chart roughly mirrors this, again reflecting the recent improvement in PGM prices.

Recent News

Most recent trading update

Full year accounts - 6 September 2021

FY21 results were strong but management notes rising cost pressures and guides towards the possibility of a lower (but still favourable) PGM pricing environment.

It is no secret that our Group costs have risen over the course of the pandemic, and we have been navigating the knock-on effects relating to the reduced feed sources from our host mines. Taking the incidental costs on the nose was a prudent move by management... With the market forecast for PGMs, and in particular Palladium and Rhodium, to remain in deficit throughout the 2021 calendar year, coupled with the demand for PGMs remaining robust, we are expecting PGM prices to remain healthy during FY2022, although not necessarily at the levels experienced during the past year.

Q4 report - 27 July 2021

The most recent quarterly update touches on the softening basket price although, at $4,059/ounce, it remains above SLP’s FY21 average of $3,690.

Whilst the record profits realised in Q3 were boosted by the spike in the price of rhodium and its effect on our basket price, we have seen quite a pull-back in the rhodium price in recent months which has inevitably impacted the Group's revenue and profit for Q4.

Catalysts

Trends & Events

Upcoming project catalysts

The upcoming year will see a lot of capital investment from Sylvania - capital spend was $5.4m in FY20 and $7.5m in FY21, but will rise to $22m in FY22. This includes:

• The completion of Project Echo, its primary MF2 milling and flotation project,
• Tweefontein’s MF2 project and similar MF2 roll-out to the Lesedi operation (which will improve the upgrading and recovery of PGMs),
• Tailings re-management projects to be undertaken at Mooinooi, Lesedi and Doornbosch, to extend life of operations,
• Work will continue on realising value from the group’s exploration assets.
• Also not included in current forecasts is work into specific fine chrome recovery which will enable the re-treatment of low PGM grade tailings resources that would otherwise have been sterilised.

PGM prices

From the company’s Annual Report:

There is no doubt that the need for PGMs with their extraordinary and unique properties, remains robust. The perception that the electric car will ultimately render these metals obsolete is rapidly being eroded by a plethora of research into the use of the metals in the hydrogen economy and for certain types of electrical propulsion and generation. So, the fundamentals look good whichever way you look at it... We expect prices to remain healthy with possibly modest pull-back in palladium and rhodium prices, but as a sector it remains highly investible given its cash flows.

A ‘modest pull-back’ would still make for an extremely cash-generative producer. Counter to recent sentiment, SLP continues to benefit from the strong PGM price environment and the current basket price generates healthy profits.

Risks

What risks does the business face?

Commodity price risk - SLP is a price taker and changes in commodity prices affect profitability and cash generation. The group believes Covid led to ‘near panic-buying’ of palladium and rhodium, as well as speculative activity.

Country risk - civil unrest, Covid, and taxation are issues here. Management appears to think the market reaction to Covid and civil unrest has been overblown, however.

From our perspective, the reaction of shareholders to both COVID and the recent civil unrest in South Africa seemed more dramatic than the actual impact on the Company.

Feedstock supply - A key challenge has been the lower amount of fresh feedstock received from host mines that impacted on both PGM feed grades and recoveries. Feed grades have been lower as a result, but Sylvania has maintained a stable PGM ounce profile.

Rising costs - Costs have risen over the course of the pandemic, with the SDO cash cost up from $615/ounce to $729/ounce. This results from power rate increases, higher process consumables, and increased costs associated with lower grade feedstock. Currency moves and taxes also had an impact.

Life of operations - often flagged as a concern but is something management has ably handled for years. The group would have gone out of business at 2013 levels of 40,000 ounces a year without the spend on Project Echo. Management comments: We are in this for the long-haul in conjunction with our host mine, thereby maintaining a sound investment rationale as well as continually reviewing the acquisition of new resources and being cognisant of the variability of the metal prices.

Summary

Bull points

Valuation and balance sheet - Trading at spot FY22 free cash flow yield of some 29.5% and with a cash-adjusted forecast PER of just 2x. At current levels, you could more or less buy the company with its own free cash flow in a few years’ time and run it for free beyond then. Net cash of $106m is expected to grow and represents around 28% of market cap.

Capital returns - Final dividend of 4p marks a 250% increase on prior year. This combined with the 3.75p special declared in February gives a total yield of nearly 8%. Scope for additional buybacks and special dividends.

Medium term PGM price outlook and exploration assets - Rhodium and palladium markets forecast to remain in deficit on a longer term view, beyond this year’s disruption. Work continues on upgrading exploration assets.

Bear points

Short term PGM market - lower basket price in Q4 as a result of chip shortages holding back auto production. The basket price is around 33% lower from its peak, but is still up year-on-year.

Cost inflation primarily due to Samancor mine closures that have temporarily reduced feedstocks and have caused Sylvania to turn to more expensive methods of extraction.

Price taker - a fundamental weakness of SLP (and all commodity producers) is that they are dependent on the external variable of the relevant commodity price. Performance is to some degree beyond management control, and volatility in both profits and share prices can be expected.

If you’d like to read more in-depth analysis of Sylvania Platinum, then there is plenty of coverage on Stockopedia including this piece from March 2020 as well as the SIC’s Stock Pitch. Edmund Shing has covered it in his Market Musings series and the community has set up a general discussion thread here, which can also be found in the Stock Threads Index.