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Research: Metals & Mining
Sylvania’s end March 2022 cash balance improved by 25.5% to US$138m and Q322 revenue increased by 17% as a result of higher platinum group metal (PGM) prices. Production improvement was slower than expected, which put pressure on unit costs over the quarter. Most of the operational issues of Q322 have now been or are almost resolved, with the company expecting a ‘significant increase’ in production in the fourth quarter. The Lesedi plant is back in full production and the Mooinooi plant’s run-of-mine (ROM) grades have improved post Q3. In light of the lower Q322 production versus Q222, we have nudged down our FY22 production estimate to 66,182oz, at the lower end of management’s unchanged guidance of 66,000–68,000oz. We expect unit costs to be flat in Q422 as ounce production is forecast to increase versus Q322. Overall, our modestly lower FY22 revenue forecast, combined with unchanged total cost forecasts, results in a 7.5% reduction in our EPS forecast to 22.6c. Our FY23 forecasts remain unchanged, with upside risk to PGM prices from supply constraints.
Written by
Rene Hochreiter
Sylvania Platinum |
Forecasts unchanged and outlook improved |
Q322 results |
Metals & mining |
6 May 2022 |
Share price performance
Business description
Next events
Analysts
Sylvania Platinum is a research client of Edison Investment Research Limited |
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Sylvania’s end March 2022 cash balance improved by 25.5% to US$138m and Q322 revenue increased by 17% as a result of higher platinum group metal (PGM) prices. Production improvement was slower than expected, which put pressure on unit costs over the quarter. Most of the operational issues of Q322 have now been or are almost resolved, with the company expecting a ‘significant increase’ in production in the fourth quarter. The Lesedi plant is back in full production and the Mooinooi plant’s run-of-mine (ROM) grades have improved post Q3. In light of the lower Q322 production versus Q222, we have nudged down our FY22 production estimate to 66,182oz, at the lower end of management’s unchanged guidance of 66,000–68,000oz. We expect unit costs to be flat in Q422 as ounce production is forecast to increase versus Q322. Overall, our modestly lower FY22 revenue forecast, combined with unchanged total cost forecasts, results in a 7.5% reduction in our EPS forecast to 22.6c. Our FY23 forecasts remain unchanged, with upside risk to PGM prices from supply constraints.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
06/20 |
115 |
65 |
14.6 |
1.6 |
8.3 |
1.8 |
06/21 |
206 |
143 |
36.7 |
7.8 |
3.3 |
8.7 |
06/22e |
161 |
90 |
22.6 |
6.2 |
5.4 |
6.9 |
06/23e |
176 |
105 |
26.9 |
4.9 |
4.5 |
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.
Cost pressures to abate as production normalises
Sylvania’s group cash cost per four-element (4E) PGM ounce increased 13% in Q322 compared to Q222. These unit cost increases were due to increased reagent costs, fuel and transport costs and lower production of 4E PGMs. We forecast unit cost pressures to flatten somewhat with the return to normal production levels from Q422 onwards. However, high inflation rates are prevalent throughout the South African mining industry, which may mean further cost increases are likely in the future.
Medium- and long-term outlook remains intact
Our PGM basket prices remain strong and unchanged from our previous forecasts, buoyed by concerns of PGM supply from Russia following its invasion of Ukraine (see our report on PGMs published in December 2021). High oil prices, another consequence of the invasion, could have a strong effect on the weakening of the South African rand versus the US dollar (as South Africa imports all its fuel) and could have the knock-on effect of reduced US dollar unit costs particularly in Q422 as the rand has fallen by 13% since the Ukraine war started. We have adjusted our rhodium and iridium prices slightly upwards for Q422.
Valuation: 163p/share plus 12p from exploration
Our valuation for Sylvania is unchanged at 163p/share for the producing Sylvania Dump Operations (SDOs). Our price outlook remains unchanged, but the risk is to the upside of the valuation. Exploration assets are valued at 12p/share.
Q322 results and updated forecasts
Sylvania’s Q322 (to end March 2022) results saw net revenue strongly up by 24% vs Q222 to US$47.9m and its end March cash balance up 25% to US$138m reflecting strong PGM basket prices. Despite cost pressures, which saw most unit cost categories up between 9% and 18% quarter-on-quarter, there was a significant increase in net profit of 36% to US$21.2m. Most of the operational issues of Q322 have been or are almost rectified and the company is expecting a significant increase in production in the fourth quarter as the Lesedi plant is back in full production and taking into account the improvement in the Mooinooi plant’s ROM grades identified post Q3.
After production in Q322 of 15,840oz 4E (48,216oz 4E for the nine months to end Q322) and with unchanged guidance of 66,000–68,000oz for FY22, we now estimate production of 17,966oz for Q422 or 66,182oz for the year to end June 2022 (previously 68,088oz). This would be the highest quarterly production rate in the year, but with most of the operations now firing on all cylinders, this is, in our view, likely to be achieved. Our slightly lower production estimate drives a reduction in our estimated revenue from US$167.2m to US$160.6m, as shown in Exhibit 1.
We have reduced our unit production cost estimates for Q422 because of the increased production in this quarter. Year on year, however, we estimate cash costs to be around 9.7% higher versus FY21 in US dollar terms, and 15% higher in South African rand terms. This is because of our FY22 production rate which, at 66,182oz. is still below last year’s production rate of 70,043oz, and because the prices of chemicals used in the recovery process (reagents) and the price of diesel fuel and transportation have risen by double-digit percentage figures. This inflationary trend is prevalent in the South African mining industry, and globally, with supply chain constraints and oil price increases occurring worldwide.
Our updated forecasts for FY22 compared to our previous FY22 numbers are shown in Exhibit 1. The production, revenue and cost assumptions mentioned above lead to a reduction in our net profit forecast, from US$66.8m to US$61.8m, and our EPS, by 7.5% to 22.6c.
Our forecasts for FY23 and FY24 remain unchanged with production issues expected to be fully resolved and our PGM forecasts intact, albeit offering upside risk from the war in the Ukraine.
Exhibit 1: H1and Q3 results (to 30 December and March 2021) and forecast changes
US$m |
H121 |
FY21 |
H122 |
Change on H121 % |
H222e |
FY22e previous |
FY22e updated |
% change |
Q322 |
9M22 |
FY23e |
FY24e |
Revenue |
85.2 |
206.1 |
69.1 |
(19.0) |
96.8 |
167.2 |
160.6 |
(3.9) |
47.9 |
115.6 |
176.4 |
174.0 |
Cost of sales |
24.7 |
54.8 |
29.2 |
18.2 |
30.1 |
59.4 |
59.3 |
(0.1) |
|
|
61.6 |
63.3 |
Costs (ZAR) |
400.8 |
840.2 |
438.9 |
9.5 |
460.2 |
915.5 |
911.7 |
(0.4) |
|
|
979.5 |
1,005.3 |
Gross Profit |
57.6 |
143.1 |
36.8 |
(36.1) |
61.7 |
100.5 |
93.3 |
(7.2) |
|
|
106.0 |
102.1 |
Profit before tax |
57.4 |
143.2 |
34.9 |
(39.2) |
60.9 |
97.8 |
90.5 |
(7.5) |
|
|
105.0 |
101.4 |
EBITDA |
58.0 |
144.9 |
36.2 |
(37.7) |
61.9 |
101.1 |
93.6 |
(7.4) |
30.0 |
65.9 |
108.0 |
105.0 |
Net Profit |
40.5 |
99.8 |
24.4 |
(39.9) |
42.5 |
66.8 |
61.8 |
(7.5) |
|
|
73.3 |
70.2 |
Basic EPS (US cents) |
14.9 |
36.7 |
8.9 |
(40.1) |
15.6 |
24.5 |
22.6 |
(7.5) |
|
|
26.9 |
25.7 |
Dividend (p) |
- |
4.0 |
- |
- |
3.9 |
4.3 |
3.9 |
(7.5) |
|
|
4.9 |
6.3 |
Windfall dividend (p) |
3.75* |
(40.0) |
- |
2.25** |
- |
|
|
3.9 |
6.0 |
|||
Production (4Eoz) |
36,335 |
70,043 |
32,376 |
(10.9) |
33,806 |
68,088 |
66,182 |
(2.8) |
15,840 |
48,216 |
69,290 |
69,975 |
Cash cost ZAR/4E PGM oz |
9,996 |
11,189 |
12,256 |
22.6 |
12,901 |
12,423 |
12,872 |
3.6 |
12,770 |
12,433 |
13,063 |
13,080 |
Cash cost US$/4E PGM oz |
616 |
729 |
815 |
32.3 |
846 |
827 |
850 |
2.8 |
839 |
824 |
822 |
823 |
Basket price (US$/oz) |
3,184 |
3,690 |
2,966 |
(6.8) |
3,337 |
3,031 |
3,113 |
2.7 |
3,327 |
3,035 |
3,054 |
2,965 |
Cash balance |
67.1 |
106.1 |
110.1 |
64.0 |
24.9 |
134.1 |
135.0 |
0.7 |
138.0 |
138.0 |
167.3 |
199.8 |
Source: Edison Investment Research. Note: *Paid in April 21 for FY20. **Paid in April 2022 for FY21.
Valuation unchanged at 163p/share and 175p/share with exploration assets
Our valuation of the SDOs remains unchanged, and we value the exploration assets at 12p/share, as valued in the company’s balance sheet as at end June 2021. Sylvania’s 74% share in the Grasvally Chrome mine is in the final stages of being sold. Work on the Volspruit project is continuing with the re-stating of the JORC compliant resource due in the fourth quarter. Further test work is being carried out on the recovery potential of the plant feed material. A preliminary economic assessment (PEA) is expected at end FY22. The drilling programme on the Northern Limb Projects has been completed, geological interpretation of the results is now in progress and the resource estimation is due to be completed in July 2022.
Operational issues
The operational issues of Q322 have largely been overcome. The new Lesedi Tailings dam (see Exhibit 2 for location) is in a safe and stable condition and commissioning of this facility will allow Lesedi to ramp up to full production during Q422. Its recently commissioned MF2 circuit should increase recoveries by around 10%, further improving the efficiency of the Lesedi plant. The Mooinooi plant’s problems regarding low-grade ore from the Samancor host mine have been addressed and preferred ore sources have been identified and are being processed. This should improve the ounce production from Mooinooi in the fourth quarter.
As previously mentioned, we have nudged back our ounce production forecasts to the bottom of the guidance range, reflecting the production challenges in FY22 so far, and taking into account Q322 production. However, we believe that FY23 could see an improved performance given that the FY22 challenges have been resolved and production could be very close to the 70,000oz 4E rate achieved in FY21 (Exhibit 1).
|
Exhibit 2: Location of Sylvania’s plants and projects on the Bushveld Igneous Complex in South Africa, the source of some 90% of the world’s resources of PGMs |
|
|
Source: Sylvania Platinum |
PGM market status: Rhodium price may exceed our forecasts in the longer term
We have increased our rhodium price assumption for Q422 from US$16,000/oz to US$17,500/oz for Q422 and a US$16,628/oz average for FY22 (Exhibit 3). The calendar year-to-date price for rhodium is US$18,210/oz. Rhodium represented around 60% of Sylvania’s revenue in FY21 and 40% in H122.
While the Ukraine invasion by Russia has resulted in upside risk to PGM prices, especially palladium, our base case in terms of PGM prices and their demand and supply remains unchanged (see our thematic report Invasion effect on PGMs.
|
Exhibit 3: PGM price forecasts (average annual prices to 2030) |
|
|
Source: Edison Investment Research |
Valuation
Sylvania is a tailings dump retreatment company that has planned steady production rates for the next 20 years (Exhibit 4). We use the following key drivers in our DDM₁₀ valuation (using a discount rate of 10% in real terms) to arrive at our SDO valuation of 163p/share.
Exhibit 4: Key inputs to our DDM₁₀ model
FY21 |
FY22 |
FY23 |
FY24 |
FY25 |
|
PGM plant feed (tonnes) |
1,272,974 |
1,222,587 |
1,268,330 |
1,271,727 |
1,268,227 |
PGM plant feed grade (g/t) |
3.2 |
3.2 |
3.0 |
3.1 |
3.1 |
PGM cash cost ZAR/4E PGMoz |
11,257 |
12,872 |
13,096 |
13,048 |
13,336 |
PGM cash cost US$/4E PGMoz |
734 |
850 |
824 |
821 |
839 |
Source: Edison Investment Research
Relative valuation
Sylvania offers good value relative to its peers. Our P/E ratios, based on our forecasts, are lower than those of consensus for its peers (Exhibit 5). Compared to peers, our forecast dividend yield for Sylvania is generally lower in FY22 but improving in FY23 and in the upper range of the peer dividend yields in FY24.
Exhibit 5: Peer comparison
Current market cap |
P/E (x) |
Dividend yield (%) |
||||||
Ticker |
(£bn) |
2022e |
2023e |
2024e |
2022e |
2023e |
2024e |
|
Sylvania (Edison) |
SLP-GB |
0.3 |
3.9 |
3.3 |
3.5 |
6.9 |
5.4* |
7.0* |
Sylvania (consensus) |
SLP-GB |
0.3 |
4.3 |
3.8 |
4.1 |
4.8 |
4.7 |
5.7 |
Anglo Platinum |
AMS-ZA |
23.1 |
7.2 |
9.7 |
11.8 |
11.0 |
6.8 |
4.4 |
Implats |
IMP-ZA |
8.7 |
5.1 |
4.5 |
6.0 |
9.9 |
13.5 |
11.9 |
Sibanye |
SSW-ZA |
7.9 |
3.3 |
3.3 |
7.7 |
9.5 |
7.7 |
6.7 |
Northam |
NPH-ZA |
3.7 |
6.4 |
4.5 |
5.0 |
0.0 |
11.8 |
13.9 |
Royal Bafokeng Platinum |
RBP-ZA |
2.3 |
8.1 |
8.6 |
10.6 |
9.3 |
10.0 |
9.5 |
Jubilee |
JLP-LON |
0.4 |
10.4 |
5.7 |
3.9 |
0.0 |
0.0 |
0.0 |
Source: Edison Investment Research for Sylvania Platinum, consensus data from Refinitiv for all other countries. Note: *Does not include windfall dividend. Prices as at 4 May 2022.
Exhibit 6: 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 |
161 |
176 |
174 |
Cost of Sales |
(45) |
(45) |
(47) |
(55) |
(59) |
(62) |
(63) |
Royalties Tax |
0 |
0 |
(1) |
(8) |
(8) |
(9) |
(9) |
Gross Profit |
18 |
26 |
67 |
143 |
93 |
106 |
101 |
EBITDA |
16 |
30 |
69 |
145 |
94 |
108 |
105 |
Operating Profit (before amort. and except.) |
16 |
24 |
64 |
142 |
90 |
103 |
99 |
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 |
90 |
103 |
99 |
Net Interest |
1 |
1 |
2 |
1 |
1 |
2 |
2 |
Profit Before Tax (norm) |
16 |
24 |
65 |
143 |
90 |
105 |
101 |
Profit Before Tax (FRS 3) |
16 |
24 |
56 |
143 |
90 |
105 |
101 |
Tax |
(5) |
(6) |
(15) |
(43) |
(29) |
(32) |
(31) |
Profit After Tax (norm) |
11 |
18 |
51 |
100 |
62 |
73 |
70 |
Profit After Tax (FRS 3) |
11 |
18 |
41 |
100 |
62 |
73 |
70 |
Average Number of Shares Outstanding (m) |
286 |
286 |
280 |
272 |
273 |
273 |
273 |
EPS - normalised (c) |
3.8 |
6.4 |
14.6 |
36.7 |
22.6 |
26.9 |
25.7 |
EPS - normalised fully diluted (c) |
3.8 |
6.2 |
14.3 |
35.9 |
22.0 |
26.9 |
25.7 |
EPS - (IFRS) (c) |
3.8 |
6.2 |
14.3 |
35.9 |
22.0 |
26.9 |
25.7 |
Dividend per share (p)* |
0.0 |
0.0 |
1.6 |
4.0 |
3.9 |
4.9 |
6.3 |
Gross Margin (%) |
28% |
36% |
58% |
69% |
58% |
60% |
59% |
EBITDA Margin (%) |
25% |
43% |
60% |
70% |
58% |
61% |
60% |
Operating Margin (before GW and except.) (%) |
25% |
34% |
55% |
69% |
56% |
59% |
57% |
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
95 |
93 |
74 |
86 |
95 |
105 |
105 |
Intangible Assets |
57 |
53 |
43 |
45 |
48 |
48 |
48 |
Tangible Assets |
37 |
38 |
30 |
40 |
47 |
57 |
56 |
Investments |
1 |
2 |
0 |
0 |
1 |
1 |
1 |
Current Assets |
41 |
59 |
89 |
188 |
205 |
239 |
270 |
Stocks |
1 |
2 |
2 |
4 |
4 |
3 |
3 |
Debtors |
25 |
8 |
12 |
69 |
56 |
58 |
57 |
Cash |
14 |
22 |
56 |
106 |
135 |
167 |
200 |
Other |
0 |
28 |
19 |
9 |
10 |
10 |
10 |
Current Liabilities |
6 |
7 |
9 |
14 |
11 |
12 |
12 |
Creditors |
6 |
7 |
9 |
14 |
11 |
12 |
12 |
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Long Term Liabilities |
18 |
18 |
13 |
16 |
17 |
20 |
21 |
Long term borrowings |
18 |
18 |
13 |
16 |
17 |
20 |
21 |
Other long-term liabilities |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Net Assets |
112 |
128 |
141 |
244 |
268 |
312 |
342 |
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
18 |
25 |
71 |
114 |
99 |
107 |
106 |
Net Interest |
1 |
1 |
2 |
2 |
1 |
2 |
2 |
Tax |
(4) |
(8) |
(15) |
(47) |
(28) |
(31) |
(30) |
Capex |
(8) |
(8) |
(5) |
(8) |
(18) |
(15) |
(5) |
Acquisitions/disposals |
(6) |
0 |
0 |
0 |
0 |
0 |
0 |
Financing |
(3) |
(1) |
(18) |
(4) |
(5) |
0 |
0 |
Dividends |
0 |
(1) |
(3) |
(20) |
(23) |
(29) |
(40) |
Net Cash Flow |
(0) |
8 |
41 |
39 |
29 |
35 |
32 |
Opening net (debt)/cash |
15 |
14 |
22 |
56 |
106 |
135 |
167 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Other |
(1) |
(0) |
(7) |
12 |
0 |
(3) |
0 |
Closing net (debt)/cash |
14 |
22 |
56 |
106 |
135 |
167 |
200 |
Source: Company accounts, Edison Investment Research. Note: *Excludes windfall dividend.
|
|
Research: Industrials
Kendrion’s revenue growth of 13% in Q1 was better than we expected, despite increased uncertainty in its markets. Industrial remains the star performer (revenues +28%), benefiting from the accelerating transition to clean energy and electrification. Automotive faced declining car production in Europe but managed to limit the revenue decline to 1%. The EBITDA margin was below last year’s level due to higher raw material prices and volatile demand. Kendrion’s long-term outlook remains positive, with healthy demand for its smart actuators.
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