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Research: Metals & Mining
Sylvania Platinum is a safe, low-cost surface platinum group metals (PGM) dump re-treatment company operating in South Africa (SA). Its low-cost operations met production challenges in the first three quarters of FY22, but in Q4 recorded near-record production. However, PGM basket price pressures due to global recessionary concerns, and a modest tick-up in cost inflation, have resulted in a 12.5% reduction in our FY22 EPS forecast. Sylvania is still operating at a healthy margin of 41% on our FY22 estimates (FY21: 53%). Its concerted share buyback programme reduced the share count by 6.8m (2.5%) and has been value accretive to our FY23 forecasts and valuation. We expect a recovery in PGM prices in FY23 due to pent-up vehicle demand and improving supply chains and have left our forecast basket price unchanged. Our FY23e EPS is unchanged, with offsetting buy back and inflation impacts. We have lifted our valuation to 169p thanks to the buybacks. FY22 results are due on 8 September.
Written by
Rene Hochreiter
Sylvania Platinum |
Excellent Q4 production but lower PGM basket |
Q422 results |
Metals and mining |
2 August 2022 |
Share price performance
Business description
Next events
Analyst
Sylvania Platinum is a research client of Edison Investment Research Limited |
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Sylvania Platinum is a safe, low-cost surface platinum group metals (PGM) dump re-treatment company operating in South Africa (SA). Its low-cost operations met production challenges in the first three quarters of FY22, but in Q4 recorded near-record production. However, PGM basket price pressures due to global recessionary concerns, and a modest tick-up in cost inflation, have resulted in a 12.5% reduction in our FY22 EPS forecast. Sylvania is still operating at a healthy margin of 41% on our FY22 estimates (FY21: 53%). Its concerted share buyback programme reduced the share count by 6.8m (2.5%) and has been value accretive to our FY23 forecasts and valuation. We expect a recovery in PGM prices in FY23 due to pent-up vehicle demand and improving supply chains and have left our forecast basket price unchanged. Our FY23e EPS is unchanged, with offsetting buy back and inflation impacts. We have lifted our valuation to 169p thanks to the buybacks. FY22 results are due on 8 September.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/20 |
115 |
65 |
14.6 |
1.6 |
7.4 |
1.8 |
06/21 |
206 |
143 |
36.7 |
7.8** |
2.9 |
8.8 |
06/22e |
149 |
78 |
19.8 |
5.8** |
5.5 |
6.6 |
06/23e |
178 |
102 |
26.8 |
4.8 |
4.0 |
5.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Includes declared windfall dividend of 3.75p for FY20 paid in April 2021 and a windfall 2.25p for FY21 paid in April 2022. Windfall dividends are not forecast.
Strong production result
An excellent safety record of 10 years of no lost time injuries at the Doornbosch plant is a tribute to Sylvania and its surface dump re-treatment business. Tweefontein achieved record monthly, quarterly and annual production, while feed grade reached an 18-month high, assisted by Mooinooi. Despite EBITDA being down 44% in Q4 compared to Q3, record Q4 production resulted in 67,053oz 4E PGM for FY22, achieving the mid-range of Sylvania’s revised guidance and points to it likely being the lowest-cost PGM operation in SA with a Q4 cash cost of ZAR10,075/oz. Upcoming peer results could confirm this.
Value-accretive buybacks
Over Q422, Sylvania used its large cash position to take advantage of depressed trading levels to execute a large, accretive share buyback. The company spent US$7.64m on buybacks at an average price of US$1.1196/share (88.51p/share), resulting in a 2.5% reduction in shares in issue. The buybacks have enhanced our forecasts and valuation.
Valuation: 169p/share, up 3.5%
While our absolute valuation is largely unchanged, the value-accretive share buybacks have lifted our per share value by 3.5% to 169p. Rising inflation pressure presents some risk to our valuation, but continued production successes and the gap closing between spot PGM prices and our forecasts provides comfort that the current deep trading discount (48% to our valuation) could narrow over the medium term.
Q422 results and updated forecasts
Sylvania’s 4E PGM (platinum, palladium, rhodium and gold) production in Q4 was 4.8% better than expected due to improved, higher PGM plant feed grade, lifting our FY22 production estimate to the reported 67,053oz, in the middle of the guidance range. Plant feed was the highest in six quarters, assisted by Mooinooi, and remains a focus area. 2E PGM (iridium and ruthenium) production was 7.6% lower than forecast because ore from the plants that produced high volumes of PGMs in Q4 (Tweefontein and Lesedi) have lower grades of these two metals.
The Q4 4E basket price of US$2,589/oz was 22% down on both Q3 and on our expected US$3,347/oz, resulting in an 8.5% reduction in our FY22 forecast. In Q4, recessionary fears rose dramatically as the US Federal Reserve battled inflation with a record 75bp rate hike, supporting the US dollar and putting pressure on all precious metals and commodities. The net impact of higher production and a lower basket price is to lower our FY22 revenue forecast by 6.8%. We expect PGM prices to recover in FY23 on the back of improved vehicle production, resulting from improved supply chains, to meet pent-up demand for new vehicles. We therefore maintain our FY23 numbers, which imply a 15% increase in the basket price versus FY22.
Exhibit 1: Q422 results and forecast changes
Q421 |
Q322 |
Q422e old |
Q422 |
FY21 |
FY22e old |
FY22e new |
Q422 vs Q322 |
Q422 vs Q421 |
Q422 vs Q422e |
FY22e vs FY21 |
FY22e old vs FY22e |
|
Production |
||||||||||||
PGM plant feed (t) |
323,012 |
300,869 |
332,478 |
331,578 |
1,272,974 |
1,222,587 |
1,221,687 |
10.2% |
2.7% |
-0.3% |
-4.0% |
-0.1% |
PGM plant feed grade (g/t) |
3.07 |
3.17 |
3.19 |
3.30 |
3.17 |
3.18 |
3.20 |
4.1% |
7.5% |
3.4% |
1.0% |
0.9% |
Total 4E PGMs (ozs) |
16,289 |
15,840 |
17,966 |
18,837 |
70,044 |
66,182 |
67,053 |
18.9% |
15.6% |
4.8% |
-4.3% |
1.3% |
Total 2E PGMs (ozs) |
4,891 |
4,240 |
5,320 |
4,914 |
23,998 |
19,012 |
18,606 |
15.9% |
0.5% |
-7.6% |
-22.5% |
-2.1% |
Basket price ($/oz) |
4,059 |
3,327 |
3,347 |
2,589 |
3,690 |
2,890 |
2,645 |
-22.2% |
-36.2% |
-22.6% |
-28.3% |
-8.5% |
Financials (US$m) |
|
|
|
|
|
|
|
|
|
|
|
|
4E revenue (US$) |
44.1 |
38.5 |
45.1 |
34.4 |
188.3 |
145.8 |
138.7 |
-10.6% |
-22.0% |
-23.7% |
-28.2% |
-7.3% |
By-product revenue (US$m) |
4.1 |
3.0 |
3.7 |
3.2 |
13.3 |
12.5 |
11.9 |
7.6% |
-21.0% |
-12.5% |
-9.0% |
-3.5% |
Total revenue (US$) |
48.4 |
47.9 |
48.9 |
34.9 |
206.1 |
163.3 |
149.3 |
-27.0% |
-27.9% |
-28.6% |
-26.2% |
-6.8% |
Total operating costs (ZAR)*** |
211.1 |
258.2 |
218.8 |
245.9 |
788.5 |
851.6 |
878.8 |
-4.8% |
N/A |
N/A |
N/A |
3.2% |
Total operating costs (US$)*** |
14.9 |
17.0 |
14.3 |
15.8 |
51.4 |
56.3 |
57.7 |
-7.0% |
N/A |
N/A |
N/A |
2.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS (c) |
5.4 |
8.0 |
|
5.2 |
36.7 |
22.6 |
19.8 |
-34.7% |
-4.0% |
N/A |
-46.0% |
-12.5% |
Dividend (p) |
N/A |
N/A |
N/A |
N/A |
4.0 |
3.9 |
3.5 |
N/A |
N/A |
N/A |
-12.3% |
-11.0% |
Windfall dividend (p) |
N/A |
N/A |
N/A |
N/A |
3.75* |
2.25** |
2.25** |
N/A |
N/A |
N/A |
-40.0% |
0.0% |
Cash cost (ZAR/4E oz) |
12,892 |
11,538 |
12,178 |
10,075 |
11,189 |
12,897 |
13,117 |
-12.7% |
-21.9% |
-17.3% |
17.2% |
1.7% |
Cash cost (US$/4E oz) |
912 |
758 |
798 |
646 |
729 |
852 |
862 |
-14.8% |
-29.2% |
-19.0% |
18.3% |
1.2% |
Average ZAR/$ |
14.1 |
15.2 |
15.3 |
15.6 |
15.3 |
15.4 |
15.5 |
2.4% |
10.3% |
2.1% |
1.0% |
0.8% |
Cash balance (US$m) |
101.1 |
138.0 |
N/A |
121.3 |
106.1 |
135.0 |
121.3 |
-12.1% |
19.9% |
N/A |
17.0% |
-8.0% |
Source: Sylvania Platinum, Edison Investment Research. Note: *Paid in April 2021 for FY20. **Paid in April 2022 for FY21. ***Q322 and Q422 have been restated, resulting in comparison with Q321, FY21 and previous forecasts not being meaningful.
Unit costs at ZAR10,075/oz improved by 13% on Q3 because of the 3.4% increase in grade and increased PGM production. Total operating costs were 4.8% down on Q3 in South African rand terms, but due to a reclassification between direct and indirect, including the quarterly disclosure of royalties, they are not directly comparable to our expectations. On a comparable basis, allowing for the reclassification (and assessing the EBITDA impact, which declined by 44% in Q4 versus Q3 mainly as a result of lower PGM prices received), South African rand costs were 8.3% above expectation and US dollar costs 5.4%, allowing for 2.1% South African rand depreciation over the period. We have increased our FY22 US dollar cost forecast by 2.3% and have allowed for a similar increase in our FY23 forecasts.
Lower basket prices relative to FY21 and H122 have resulted in shrinking margins and net profit. Allowing for higher production and an upwards adjustment to US dollar cost forecasts results in a 12.5% reduction in our FY22 EPS forecast to US$0.198. The US$121.3m cash balance was 12% down on Q3, largely driven by a concerted share buyback programme costing US$7.64m and reducing shares in issue by 6.8m (3%). The buyback is accretive to our forecasts, especially from FY23, and to our valuation.
Our FY23 EPS forecast was negatively affected by higher forecast US dollar costs, but this was largely offset by the share buyback, resulting in a 0.3% change to US$0.2676. Our FY24 EPS forecasts are largely unchanged.
Valuation
Our PGM outlook for FY23 is unchanged; we think that the PGM basket price will be 15% higher than FY22 levels (and an 18% increase on the Q422 reported basket price) on the back of an improved global economic outlook and increased vehicle production as supply chains improve to supply pent-up demand for new cars. The better-than-expected production in Q4 has been reflected in our FY23 forecasts, but has been offset by moderately increased cost inflation. Inflation is a key area to monitor and poses risk to our forecasts and valuation. In absolute pound sterling terms, our valuation since our Q322 note is largely unchanged, with higher cost inflation offsetting the impact of the time value of money. On a per share basis, however, our valuation has increased by 3.4% from 163p to 169p because of the value-added share buybacks.
We will provide a sensitivity analysis in our FY22 results report for Sylvania to assess the effect of changes in the PGM price on the company’s value, EBITDA and EPS.
Exhibit 2: Financial summary
US$m |
2018 |
2019 |
2020 |
2021 |
2022e |
2023e |
2024e |
Year ending 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
63 |
71 |
115 |
206 |
149 |
178 |
175 |
Cost of Sales |
(45) |
(45) |
(47) |
(55) |
(61) |
(66) |
(67) |
Royalties Tax |
0 |
0 |
(1) |
(8) |
(8) |
(9) |
(9) |
Gross Profit |
18 |
26 |
67 |
143 |
81 |
103 |
99 |
EBITDA |
16 |
30 |
69 |
145 |
80 |
105 |
102 |
Operating Profit (before amort. and except.) |
16 |
24 |
64 |
142 |
77 |
101 |
96 |
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Exceptionals |
0 |
0 |
(10) |
0 |
0 |
0 |
0 |
Other |
(2) |
(9) |
(9) |
(5) |
(7) |
(7) |
(8) |
Operating Profit |
16 |
24 |
54 |
142 |
77 |
101 |
96 |
Net Interest |
1 |
1 |
2 |
1 |
1 |
1 |
2 |
Profit Before Tax (norm) |
16 |
24 |
65 |
143 |
78 |
102 |
98 |
Profit Before Tax (FRS 3) |
16 |
24 |
56 |
143 |
78 |
102 |
98 |
Tax |
(5) |
(6) |
(15) |
(43) |
(25) |
(31) |
(30) |
Profit After Tax (norm) |
11 |
18 |
51 |
100 |
54 |
71 |
68 |
Profit After Tax (FRS 3) |
11 |
18 |
41 |
100 |
54 |
71 |
68 |
Average Number of Shares Outstanding (m) |
286 |
286 |
280 |
272 |
271 |
266 |
266 |
EPS - normalised (c) |
3.8 |
6.4 |
14.6 |
36.7 |
19.8 |
26.8 |
25.5 |
EPS - normalised fully diluted (c) |
3.8 |
6.2 |
14.3 |
35.9 |
19.2 |
26.8 |
25.5 |
EPS - (IFRS) (c) |
3.8 |
6.2 |
14.3 |
35.9 |
19.2 |
26.8 |
25.5 |
Dividend per share (p)* |
0.0 |
0.0 |
1.6 |
4.0 |
3.5 |
4.8 |
6.2 |
Gross Margin (%) |
28% |
36% |
58% |
69% |
54% |
58% |
57% |
EBITDA Margin (%) |
25% |
43% |
60% |
70% |
54% |
59% |
58% |
Operating Margin (before GW and except.) (%) |
25% |
34% |
55% |
69% |
52% |
57% |
55% |
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
95 |
93 |
74 |
86 |
94 |
104 |
104 |
Intangible Assets |
57 |
53 |
43 |
45 |
48 |
48 |
48 |
Tangible Assets |
37 |
38 |
30 |
40 |
46 |
56 |
55 |
Investments |
1 |
2 |
0 |
0 |
1 |
1 |
1 |
Current Assets |
41 |
59 |
89 |
188 |
190 |
223 |
254 |
Stocks |
1 |
2 |
2 |
4 |
3 |
3 |
3 |
Debtors |
25 |
8 |
12 |
69 |
52 |
59 |
58 |
Cash |
14 |
22 |
56 |
106 |
124 |
152 |
183 |
Other |
0 |
28 |
19 |
9 |
10 |
10 |
10 |
Current Liabilities |
6 |
7 |
9 |
14 |
10 |
12 |
12 |
Creditors |
6 |
7 |
9 |
14 |
10 |
12 |
12 |
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Long Term Liabilities |
18 |
18 |
13 |
16 |
18 |
20 |
21 |
Long term borrowings |
18 |
18 |
13 |
16 |
18 |
20 |
21 |
Other long term liabilities |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Net Assets |
112 |
128 |
141 |
244 |
251 |
296 |
325 |
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
18 |
25 |
71 |
114 |
93 |
101 |
103 |
Net Interest |
1 |
1 |
2 |
2 |
1 |
2 |
2 |
Tax |
(4) |
(8) |
(15) |
(47) |
(24) |
(30) |
(29) |
Capex |
(8) |
(8) |
(5) |
(8) |
(18) |
(15) |
(5) |
Acquisitions/disposals |
(6) |
0 |
0 |
0 |
0 |
0 |
0 |
Financing |
(3) |
(1) |
(18) |
(4) |
(22) |
0 |
0 |
Dividends |
0 |
(1) |
(3) |
(20) |
(23) |
(27) |
(38) |
Net Cash Flow |
(0) |
8 |
41 |
39 |
18 |
31 |
32 |
Opening net (debt)/cash |
15 |
14 |
22 |
56 |
106 |
124 |
152 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Other |
(1) |
(0) |
(7) |
12 |
0 |
(4) |
0 |
Closing net (debt)/cash |
14 |
22 |
56 |
106 |
124 |
152 |
183 |
Source: Company accounts, Edison Investment Research. Note: *Excludes windfall dividend.
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