Stock Pitch - Sylvania Platinum (LON:SLP)

17th Nov '20 by Jack Brumby

51 comments 12491 reads

Sylvania Platinum (LON:SLP) was pitched to the Stockopedia Investment Club on 23 April 2020 when the share price was 38.7p. At the time of writing, approximately five months later, the share price is 76.3p. That is a material rerating and a 97% gain over that timeframe.

And yet even now Sylvania's Value scores are striking, with a forecast PE ratio of 4.4, a forecast PEG of 0.4, and a price to TTM free cash flow of 5.0. You might argue it continues to be cheap, but there are also valid risk reflected in this valuation which we will explore below.

The April pitch to the Club was that Sylvania was priced incorrectly and was due a rerating. Here we revisit that pitch and update it for new information as we explain why we have not sold this Platinum Group Metals (PGM) play quite yet.

Are we right to hold on, or should the Club bank profits while it can?

TL;DR

Sylvania Platinum, a small-cap PGM producer with operations located in the South African Bushveld Igneous Complex, offers striking value and exposure to growing markets such as electric vehicles.

Bull Points: Low-cost producer, strong PGM demand and spot prices, cash generative, broad factor exposures, qualifies for nine Guru Screens, developing exploration assets
Bear Points: operational disruption, depressed chrome market, dependence on host mines, profitability driven by PGM spot prices, finite life and lack of scalability of dump operations

Profile

What is the opportunity type?

Sylvania Platinum produces and sells 'Platinum Group Metals' (PGM), which are platinum, palladium and rhodium. It is a small cap Super Stock in the Basic Materials sector and comes with a Speculative RiskRating.

With a market cap of £190m, a share price of 76p, and an EMS of 20,000, liquidity is not so much of an issue as you can buy around £14,000 without moving the market.

The StockRank is 99 thanks to strong Ranks across the board, with a Quality Rank of 99, a Momentum Rank of 95, and a Value Rank of 78.

Trends/Market/Competition

Competition

Sylvania operates with a natural geographic moat, as PGM metals can only be mined in a few locations. This means both competition and opportunities are relatively scarce.

Competitive advantages

Sylvania has two distinct lines of business: the re-treatment of PGM-rich…

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Martin VT

18th Nov '20

Thanks for this Robin. I agree with your analysis.
I was sceptical about the Green Hydrogen thesis, but with the Biden win in US, Carrie taking over Government policy in U.K., plus EU with its usual desire to intervene in all things ‘green’ substantial expenditure (and it would have to be because its expensive!) on green hydrogen seems both feasible and now likely in the next 2 - 5 years.
I then saw a news story re BP signing a deal on the production of green hydrogen in Denmark!

Finally as a store of value, platinum historically is usually is more valuable than gold, now it's
half the price. But platinum is much rarer and it makes just as nice jewellery. Covid has put Governments around the World on a path of massive expansion of debt that they will never repay at current values so their policies must be to reduce the value of the debt through Magic Money Tree policies. I find it difficult to imagine a World where this does not help support the platinum (and indeed palladium and rhodium) price over the next decade.

I hold and will continue to do so.

JohnEustace

One of the demand drivers that was delayed due to the pandemic this year was the tightening of car exhaust emission standards in China. Meeting the higher standards requires more PGM use in the catalytic convertors. The new regulations are now due to come in effect in January 2021. Only cars that meet the new China 6 standard can be sold or registered after Jan 1st.

newbieinvestor

Thanks for such a comprehensive article, Jack.

As a long-term holder, having bought in at 16p in February 2018, I have been watching the slow progress for the first year of holding the stock, only to endure the wild ride of 2020. It is now my second largest holding, after Tristel (LON:TSTL)

Whilst the growth has been strong this year, I still feel it is good value, and am only frustrated that I didn't top up during the huge (unwarranted) spike down in March and July this year.

The fundamentals look strong, underpinned by the (current) all time high of Rhodium price, so in answer to your question "With shares now at all time highs, has the easy money been made or does this re-rating have further to run?"

I believe it has much further to go.

Oldsod

Consider JBL - Jubiliee metals a turn round situation from poor managment the same PMG processing on a larger scale with copper added - simliar chart . Also consider DRD for gold and Tharisa for PMG but there is a lack of liquidity .The short market for Rhodium is likley to continue for a year or two .There are some supportive write ups on the US on SYL so the buying is not just UK

I hold both SYL & JBL on the basis that risng metal prices will mean improved free cashflow and ROC.

jwebster

20th Nov '20

I currently hold SLP

My main reason hold buying is I'm a medium term bull on industrial metals. Next year, I would expect the ongoing China inflation story to rumble on supported by a global economic recovery.

That said, there are a couple of things I'm wary of.

Firstly, the share buybacks, while described as "The group aims to create shareholder value through high levels of free cash flow generation and opportunistic share buybacks when the share price is lower than the internal company valuation" I can't find any internal company valuation, rather SLPs last annual report seems to focus somewhat on share buybacks to reduce the dilution impact on staff remuneration than shareholder returns, but Chairman does state:

The Board will continue to buy shares (rather than issue new shares)
to top up the share schemes on an ‘as needs’ basis. In terms of a
more general buyback I note this shareholder’s recent comment:
“Management are unlikely to be buying shares into a rising market,
they are too prudent for that. They’ll wait for a dip.” I concur with this
comment! We will evaluate any buyback (opportunistically).

It's an interesting one, mgt deserve to share in the rewards, but when mgt ramp employee share schemes it can signal an top sometime next 1-2 years.

The finite lifespan "Finite life of tailings projects. The company estimates that the tailings projects have got another 10 years in them". Simplistically, SLP needs to pay high dividends for investors to get their money back and make a return, given a suitably high discount rate for various operational, political and metals price uncertainties. As we get closer to that date, SLP shares will become more 'bond coupon' like.

Currently the earnings are there, so I'm a holder albeit with a wary eye.

john2

As for the finite lifespan, do you know how probable it is that Sylvania will gain access to the tailings from other mines over the next few years?

S G1

Excellent analysis. Thanks! Any thoughts on this company being bought by another?

The skier

The management conducted a recent webinar and did mention the possibility of a special dividend. I hold quite a large number from 2017 and 2018.

They said in their results webinar that the mine operators were looking for more than they are currently willing to pay. The mine operators are looking to sell rights based on higher PGM pricing than Sylavania believe will persist through a cycle. Basically they don't want to overpay at a market top.

Joncarr1894

I am still holding in and showing a good profit, but it really worries me that the directors of such an apparently successful company do not appear to want to buy and hold their own company shares. If it’s almost as if it is too good to be true ?

MichaelFBS

21st Nov '20

Thank you for the great write up on £SLP. I hold.

And I should add some equally excellent comments from readers!

Simon I think you should be more ambitious. :-) I am nudging 60 but expect to be around for another 40 years! There is no reason that a reasonably fit and healthy year old who looks after themselves cannot expect the same! A 25+ year time horizons!

It is available on Research Tree. I don’t know if available for free elsewhere.

Regards

Michael.

hugoc

I am very bullish for precious metals and from 2025 for platinum in particular.

There are however two problems for SLP: -

The first applies to all the platinum producers, which is Country Risk. Higher metal prices fall straight through to the bottom line, particularly for low cost producers. There is ample evidence that governments, in cash-strapped countries like S. Africa move to expropriate such "windfall gains".

The second is Mine Life. SLP's mine life is so short that it can only be viewed as an annuity.

Stockopedia is wonderful platform but it has limitations when it comes to Miners. It cannot value exploration potential, reserves, country risk or prospects for metal prices.

A Stock Rank of 99 does not reflect these risks. My advice to the Investment Club is to sell half the holding and take a free ride. Invest the profits in another low-cost PM miner without Country Risk but with exploration potential and long-term existing reserves.

Remember, the definition of a mine: -

"A hole in the ground with a liar at the top".

Anthony Beater

(LON: SLP) I have bought these shares and they have done well for me. Most investments carry a risk. I have put my money here. I would not add my shirt.

Westway001

Thanks for this observation, I think I will follow your advice and sell half of my holding in SLP now that it is up 103%. Any suggestions for alternative PM miners for further research?

Dojosan

22nd Nov '20

Indeed. I'm still waiting for Sylvania Platinum (LON:SLP) to come down to the 40s. Might as well wait until the cows come home.

30th Dec '20

That's also what I like to know - there is Jubilee Metals (LON:JLP) and Tharisa (LON:THS) but both in S.Africa jurisdiction

Jack Brumby

29th Jan '21

Sylvania Platinum (LON:SLP) Q2 update out today - there's a write up in the SCVR here: https://www.stockopedia.com/co...

Momoko Miyamoto

I've been resisting the temptation to take profits on Sylvania Platinum (LON:SLP) . The recent trading update doesn't reflect the recent surge in rhodium price cos it takes a while for Sylvania Platinum (LON:SLP) to receive the cash from the refiners. The fundamentals for PGMs look robust. Most of the world can't afford $50k+ EVs which may become obsolete anyway if fuel cell cars take off. Fuel cells and green hydrogen production will need lots and lots of platinum. Battery powered aviation and HGVs are a non starter but hydrogen is a viable option.

Stock Pitch - Sylvania Platinum (LON:SLP)

TL;DR

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Jack Brumby

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