Sylvania Platinum — Forecasts unchanged and outlook improved

Sylvania Platinum (AIM: SLP)

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Research: Metals & Mining

Sylvania Platinum — Forecasts unchanged and outlook improved

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.

Metals & Mining

Sylvania Platinum

Forecasts unchanged and outlook improved

Q322 results

Metals & mining

6 May 2022

Price

94p

Market cap

£256m

US$1.36/£

Net cash (US$m) at 31 December 2021

110.1

Shares in issue

272.5m

Free float

97.7%

Code

SLP

Primary exchange

AIM

Secondary exchange

NA

Share price performance

%

1m

3m

12m

Abs

0.0

0.0

(30.5)

Rel (local)

2.3

1.5

(32.8)

52-week high/low

143p

84p

Business description

Sylvania Platinum focuses on the re-treatment and recovery of platinum group metals including platinum, palladium and rhodium, mainly from tailings dumps and other surface sources, but also lesser amounts of run-of-mine underground ore from Samancor chrome mines in South Africa.

Next events

FY22 annual results

5 September 2022

Analysts

René Hochreiter

+44 (0)20 3077 5700

Lord Ashbourne
(formerly Charles Gibson)

+44 (0)20 3077 5700

Sylvania Platinum is a research client of Edison Investment Research Limited

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*
(US$m)

EPS*
(c)

DPS**
(p)

P/E
(c)

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.


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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