Sylvania Platinum

I too am slightly mystified by the drop yesterday on Q2 results, which exceeded my expectations on pretty much every front.

There has been a determined seller for over a month now, and this combined with maybe a popular following amongst those with extremely short investment horizons (it was one of the top picks in the stock challenge for example) is the only reason I can see for any sell-off.

You can't really just double H1 FCF to get H2, since we have to assume that production will be lower in H2 since they haven't changed their 2020 production guidance, and the PGM spot basket price has gone up c40% since the end of Q2. How much of this rise ends up in the sales price for Sylvania Platinum (LON:SLP) is debatable, but it would seem amiss to exclude it completely. Q2 production will eventually be settled at mostly Q3 prices which should add an additional tailwind.

All things considered, I think $20-25m H2 FCF is a reasonable forecast before changes in working capital or tax payment timing effects, leading to c$60m cash on the balance sheet at year-end (assuming grasvally completes and no significant return to shareholders in the period.)

Notwithstanding some issues raised (and addressed) in Q2, 2020 update, the Financial results to 31 Dec 2019 (6 months) appear extremely strong from Sylvania Platinum.

Very Strong Cash Flow for the 6 months to Dec.31 2019:

Estimated use of Cash Flow from Operations USDm

Cash Flow from Operations 36.8
(Increase)/ Decrease in Debtors ( 8.7)
Capital Expenditure ( 3.0)
Tax ( 6.8)
FX Movement ( 1.3)
Other ( 0.2)

Dividends ( 2.9)
Share Buy-backs ( 2.2)
Increase in Cash 12.1

Cash June 30th 2019 21.8
Cash Dec 31 2019 33.9

If we assume the 2nd Half to June 30th 2020 matches the first half, then the Increase in Cash plus Dividends and Share Buy backs for the FY would be USD17.2m x 2 = USD34.4m or GBP26.2m. I believe this equates to 23.23% of Sylvania's Market cap GBP113.04m (SP41p). Given PGM prices in Q3 todate, the above cash flow may be achievable, especially if a material increase in debtors does not occur.

Imagine if GBP26.2m was paid as a Dividend, what might happen to the Share Price. Under this scenario, Cash is also maintained at June 30th 2019 levels.

Difficult to understand today's share price drop!

£SLP's 4E basket is up 17% in ZAR just in the last 10 days. Although Sylvania Platinum (LON:SLP) has risen this year, the rise doesn't track this rise in spot prices, especially when you consider the company has about 2x operational gearing.

Some of the lack of reaction is probably due to worries about how much load-shedding Eskom have been suffering from recently. They shouldn't have the same water issues they had last year, but the load shedding could have production impact.

If we assume plant feed is reduced by 10% from Q1, with similar grade and recovery reduced to 52% (the company guided "recovery figure will taper off to an expected rate of around 52% going forward" in Q1) the company would do 16.5koz/quarter. Which would be a miss on the 74-76koz annual guidance. So this is a risk but I can't help thinking the company were relatively conservative with the FY production guidance given the storming Q1, and the reducing recovery rate is to make the concentrate more marketable - production oz's are the only metric that matters here.

At current spot, 16.5koz/q is still likely to be around $13m EBITDA per quarter, $52m annualised, vs an EV maybe somewhere around $100m at year-end. Given that the company has more than 2 years of production and little capital requirements going forward, the market is clearly pricing that these spot values are not sustainable. The difficulty hedging the rhodium price, together with the political risk being maybe why more sophisticated funds are not buying SLP equity and hedging the PGM exposure to take account of this anomaly.

Like a number of parties that have commented on Sylvania, I am invested in them and for the reasons outlined below, believe this Financial Year has all the potential to show at 36.25p the shares are materially undervalued.

Before we get to the positives, the 2 negatives in my eyes r :
1) the litigation involving Sunamcor and 2) potential Load-shedding power outages.

I am probably less concerned about the litigation, firstly while Sylvania r mentioned, we r not looking at litigation involving them, secondly, the dates involved r some 12 years back and any Court will need some convincing of wrong doing given the time lapse and convincing that the parties involved have a case to answer. Whilst I thought Sylvania may put out a Press Release, on balance I can see y they have not, as they have almost certainly been advised it is not necessary, given they r not a party engaged in the litigation. Financial results in 3 of the 4 years following the contracts referenced, show Sylvania was loss making, hardly supporting the argument that the contracts were favourable.

The key to my positivity of the shares is broadly strong PGM pricing, that in Q1 possibly added a minimum of $1.2m to the company's budgeted numbers, assuming they had 19,000 oz of Production.

If spot prices remain at CURRENT elevated levels the news can only get better. The key will NOT be Platinum or Palladium, instead it will be Rhodium. From the Company's last Presentation, Rhodium accounts for 13% (or 9,750 Oz) of overall Production. On this basis and using USD4,600 an Oz v company budget of $3,585 (and spot bid price today of $5,150) Q2 to Q4 could see Revenues and EBITDA increase by USD7.4m from just Rhodium. Using an additional USD125 per Oz (over budget number of USD1,446 per Oz) for Palladium adds a further USD1.7m. (Palladium bid spot price is around USD1,740 per Oz). Wearing my rose coloured glasses, the above numbers plus the closing of the disposal referenced with last results could add circa USD14m to budgeted EBITDA of around USD37.5m. After allowing for tax (say 30%) and cap ex of USD10m, Free cash flow could be up to USD27.5m. Given the company has USD21.6m of net cash at June 30 2019, total cash at year-end could rise materially to circa USD49m. All these numbers come from my simplistic math calculations and makes the assumptions that PGM prices remain elevated (albeit well below current levels). On the basis of 282m shares, an exchange rate of USD:GBP of 1.30, the company could probably pay a 9p Dividend (19% yield) and still add USD1.7m to Cash reserves from June 2019. EV: EBITDA and PE numbers r all extremely low using the above scenario and can only lead to the SP moving materially higher as the year progresses and Qtly reports come out.

I felt the share price drop was unjustified given the tenuous nature of the court case and the distance between it and SLP. Another commentator on ADVFN suggested a tree shake was implemented on the back of the allegations and I felt the same given the very strong metrics for this company.. I jumped in and bought another 30k at 31.7 which is looking like a good move after today's rise to 37p. If it wasn't for the adverse publicity and the need to maintain a balanced portfolio I'd be tempted to buy a lot more at this price.

I'm not sure what the company could say or do that would ameliorate concerns at present. Any comment risks adding fuel to the "fire".

The drop is almost certainly due to the SA court case, combined with trailing stops being hit. In Rand Sylvania Platinum (LON:SLP) PGM spot basket pricing is up 34% since 30th June, and by my estimation Sylvania Platinum (LON:SLP) have about 50% operational gearing. Quarterly earnings at current spot prices are likely to be some 30% above 19Q4 level despite lower production guidance vs the record Q4 levels. So PGM pricing is unlikely to be contributing to the sell-off since it is still at or around the highs over the last few years.

I don't believe Sylvania Platinum (LON:SLP) has been sued at this stage - it is Sanamcor, operator of their host mines, that is facing the court action. However, Sylvania Platinum (LON:SLP) are named in the affidavit, with the accusation being that when they signed the deal with Samancor they issued shares to a third party which was ultimately controlled by the owners & directors of Samancor at the time, not the company itself, and therefore got favourable terms. The reason that this is an issue, rather than an internal accounting decision by the then owner of the mines, is that the mines operating subsidiaries are only owned 74% due to BEE legislation. This deal could be seen as a way of moving profits out of Samancor avoiding paying the 26%.

While this is a serious accusation, it should be noted that:

- The whistleblower in this case is a disgruntled former director who appears to have been making these accusations for almost a decade and this is the first action that has been taken.

- The plaintiff is the AMCU, which has had issues recently - almost being struck off by the government, and having to back down on pay deals and accept deals negotiated by other unions. I'm sure the timing of this and advancing a claim that was refused by all the other unions has a lot to do with trying to stem their membership losses.

- Even if the accusation is true, then it is one thing to prove that the Sunamcor created this scheme to avoid some of the BEE payments, it is much harder to prove that Sylvania Platinum (LON:SLP) were complicit. If a company you sign a deal with says that here are the terms but we want some equity in your business and it should go to the following subsidiary, you may just assume that the subsidiary is fully controlled by the company.

- The terms that Sylvania Platinum (LON:SLP) signed were not particularly generous, given that Sylvania Platinum (LON:SLP) provided an environmental cleanup, funded all the capex and returned all the chrome to Samancor for a nominal fee. Only since the operational improvements Sylvania Platinum (LON:SLP) have made over the last few years and the PGM pricing has improved is this looking so profitable.

The biggest risk that I see to Sylvania Platinum (LON:SLP) , apart from the reputational damage, is that the current owners use it as an excuse to renegotiate the re-processing agreements. With around $30m cash and Volspruit potentially worth around $20m this puts a floor on the valuation of around 14p per share even if all their contracts were cancelled tomorrow, so that helps protect the downside to some extent.

I am disappointed that we haven't seen a statement from the company - I guess it may be hard for them to make one until Samancor do, but this clearly had a negative impact on the share price so it would be good to get a company response.

In the absence of any reliable news, I'm regarding this as a tree shake. (I hold),

I hold SLP but I am worried by the price drop as the price of Platinum is cheap relative to Palladium and the stock has also been recommended by Vector Vest UK which would have thought has an influence on small caps