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Research: Metals & Mining
Sylvania’s Q424 results were negatively affected by a delayed recovery in production following the 22-day strike during Q324. This resulted in 21% lower revenue than expected and EBITDA of only US$2.8m, 68% below our expectation. We have reduced our near-term platinum group metals (PGM) price assumptions on the back of elevated surface inventories and sustained South African production, but bolstered our long-term forecasts due to an expected higher demand for platinum and palladium on the back of fibreglass, hydrogen economy and hybrid vehicle demand. We forecast a recovery in production for Sylvania from FY25 with somewhat higher costs after the recent US dollar depreciation. We have cut our EPS estimates by 17.3% in FY25 and 25.7% in FY26, but see a positive impact from our higher long-term PGM forecasts thereafter. As a result, we have reduced our valuation by 6.5% from 120p/share to 112.2p/share. With exploration assets valued at book and conservatism in our Thaba joint venture (JV) valuation, our overall valuation offers upside as projects graduate from exploration to production over the coming years.
Written by
Rene Hochreiter
Sylvania Platinum |
Q424 results |
Metals and mining |
14 August 2024 |
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Business description
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Sylvania Platinum is a research client of Edison Investment Research Limited |
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Sylvania’s Q424 results were negatively affected by a delayed recovery in production following the 22-day strike during Q324. This resulted in 21% lower revenue than expected and EBITDA of only US$2.8m, 68% below our expectation. We have reduced our near-term platinum group metals (PGM) price assumptions on the back of elevated surface inventories and sustained South African production, but bolstered our long-term forecasts due to an expected higher demand for platinum and palladium on the back of fibreglass, hydrogen economy and hybrid vehicle demand. We forecast a recovery in production for Sylvania from FY25 with somewhat higher costs after the recent US dollar depreciation. We have cut our EPS estimates by 17.3% in FY25 and 25.7% in FY26, but see a positive impact from our higher long-term PGM forecasts thereafter. As a result, we have reduced our valuation by 6.5% from 120p/share to 112.2p/share. With exploration assets valued at book and conservatism in our Thaba joint venture (JV) valuation, our overall valuation offers upside as projects graduate from exploration to production over the coming years.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS** |
P/E |
Yield |
06/23 |
130.2 |
67.0 |
17.0 |
8.0 |
4.4 |
13.7 |
06/24e |
84.7 |
19.9 |
5.8 |
3.4 |
12.9 |
5.9 |
06/25e |
106.4 |
29.8 |
7.7 |
4.2 |
9.8 |
7.2 |
06/26e |
134.2 |
38.2 |
10.1 |
5.8 |
7.4 |
9.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Exclusive of windfall dividends.
Q424 results pressure due to lagging production
Q424 revenue faced pressure, due to a lagged recovery in production following the strike action in Q324 and lower by-product prices. Full-year 4E PGM production of 72,700oz missed guidance of 74,000–75,000oz, while ruthenium and iridium prices declined on Q324. The depreciation of the US dollar relative to the South African rand resulted in higher operating costs, which put further pressure on EBITDA (US$2.8m vs US$8.9m expected). The cash balance remained strong at US$97.8m.
Near-term PGM forecasts cut, but long-term upside
We have cut our near-term PGM price forecasts, affecting palladium and rhodium, while our long-term forecasts for platinum, palladium and gold have been increased on the back of fibreglass, hydrogen economy and hybrid vehicle demand. As a result, we have lowered our EPS estimate by 17.3% in FY25 and 25.7% in FY26 but lifted our longer-term forecasts, supported the Thaba JV starting production in FY25.
Valuation: 112.2p/share; SDO down 9% to 81.5p
We value the Sylvania Dump Operations (SDO) at 81.5p per share, which is down 9% on our previous valuation of 89.5p per share on the back of lower PGM price forecasts. We have slightly increased our valuation for the Thaba JV to 16.9p per share, with proximity of cash flows limiting the PGM downgrade impact. We continue to carry exploration assets at book value of 13.8p per share.
Delayed recovery in production and PGM prices
The investment case for Sylvania is mainly based on a low-risk dump retreatment operation to which we ascribe the bulk of the company’s valuation. It also has exploration assets in the northern part of the Bushveld Igneous Complex of South Africa. A preliminary economic assessment (PEA) is being conducted for Volspruit, following an updated mineral resource estimate (MRE), which was released recently. This will be followed by a preliminary feasibility study (PFS) over coming months. In August 2023, the company announced a Thaba JV with Limberg Mining Company (LMC), which will diversify Sylvania’s production to include chrome concentrate from H225.
Quarterly results below our expectations
Sylvania missed our Q424 forecasts as a result of a lower-than-expected production recovery following Q324 production pressures due to a 22-day wage strike at the company’s western operations in February 2024. The PGM basket price was in line with expectation during the quarter, while costs were slightly higher than expected. Exhibit 1 shows the quarterly results and the differences between them and our prior forecasts.
Exhibit 1: Comparison of Q424 results with Q324
|
Q324 |
Q424 |
Q424e |
Q424 vs Q324 |
Q424 vs Q424e |
Production |
|||||
Plant feed (t) |
580,572 |
600,058 |
670,000 |
3.4% |
(10.4%) |
Feed head grade (g/t) |
2.07 |
1.89 |
1.87 |
(8.9%) |
0.7% |
PGM plant feed (t) |
330,379 |
336,029 |
358,450 |
1.7% |
(6.3%) |
PGM plant feed grade (g/t) |
3.06 |
3.03 |
3.03 |
(0.8%) |
0.0% |
Total 4E PGMs (oz) |
17,232 |
17,067 |
19,374 |
(1.0%) |
(11.9%) |
Total 6E PGMs (oz) |
21,857 |
21,896 |
24,801 |
0.2% |
(11.7%) |
Basket price ($/oz) |
1,303 |
1,383 |
1,383 |
6.1% |
0.0% |
Financials |
|||||
4E revenue (US$m) |
16.1 |
17.0 |
20.9 |
5.5% |
(18.8%) |
By-product revenue (US$m) |
3.1 |
2.8 |
3.7 |
(9.4%) |
(23.7%) |
Total revenue before sales adjustment (US$m) |
19.2 |
19.8 |
24.6 |
3.1% |
(19.6%) |
Sales adjustment (US$m) |
1.1 |
0.8 |
1.5 |
(25.3%) |
(44.5%) |
Total revenue (US$m) |
20.3 |
20.6 |
26.1 |
1.5% |
(21.0%) |
Total operating costs (ZARm) |
313.5 |
318.3 |
309.7 |
1.5% |
2.8% |
Total operating costs (US$m) |
16.6 |
17.2 |
16.5 |
3.4% |
3.9% |
Other costs (US$m) |
0.7 |
0.7 |
0.7 |
10.4% |
(1.7%) |
EBITDA (US$m) |
3.1 |
2.8 |
8.9 |
(7.7%) |
(67.9%) |
Net interest (US$m) |
1.4 |
1.3 |
1.3 |
(7.0%) |
0.0% |
Net profit (US$m) |
2.5 |
2.8 |
8.9 |
8.0% |
(69.1%) |
Gross margin |
18.4% |
16.9% |
36.8% |
(8.3%) |
(54.2%) |
Basic EPS (c) |
1.0 |
1.1 |
3.4 |
8.0% |
|
Capex (US$m) |
3.5 |
5.3 |
51.2% |
||
Cash balance (US$m) |
101.3 |
97.8 |
(3.5%) |
||
Average ZAR/US$ rate |
18.90 |
18.56 |
18.90 |
(1.8%) |
(1.8%) |
Spot ZAR/US$ rate |
18.91 |
18.19 |
18.90 |
(3.8%) |
(3.8%) |
Unit costs (US$) |
|||||
SDO cash cost /4E PGM oz |
826 |
875 |
731 |
5.9% |
|
SDO cash cost /6E PGM oz |
651 |
682 |
571 |
4.7% |
|
Group cash cost / 4E PGM oz |
980 |
1027 |
890 |
4.8% |
|
Group cash cost / 6E PGM oz |
789 |
801 |
695 |
1.5% |
|
All-in-sustaining cost (4E) |
1008 |
1077 |
957 |
6.8% |
|
All-In cost (4E) |
1145 |
1161 |
888 |
1.4% |
Source: Edison Investment Research, Sylvania Platinum accounts
Specific deviations from our Q424 expectations are as follows:
■
Q424 production was slightly lower than the depressed Q324 level with the expected recovery in the quarter being delayed, resulting in plant feed 10.4% lower and total 4E PGMs 11.9% lower than our expectations (17,067oz).
■
4E PGM basket prices increased by 6.1% compared to Q324, in line with our expectation. However, iridium and ruthenium prices were slightly down on Q324 and also relative to our expectations.
■
4E revenue of US$17.0m was 5.5% higher than in Q324, but 18.8% below our expectation, due to the lower-than-expected production. By-product revenue declined by 9.4% on Q324 due to the lower prices and missed our Q424 expectation by 23.7% due to a combination of lower-than-expected prices and production. The combined impact on total revenue was 21% lower than our forecast.
■
Operating costs were reasonably well controlled, ending the quarter 1.5% higher in South African rand terms but, due to a weaker dollar over the quarter, in US dollar terms the increase was more pronounced at 3.4%. US dollar-based expenses were 3.9% higher than our expectation, largely driven by the weaker exchange rate.
■
EBITDA was 7.7% down on Q324 due to cost growth exceeding revenue growth and missed our expectation by a wide 67.9% due to the lack of recovery in production and the lower iridium and ruthenium prices.
■
Cash levels reduced from US$101.3m at end Q324 to US$97.8m following the payment of a US$3.0m ordinary dividend and a US$3.0m special dividend during the quarter.
Changes to PGM price forecasts
We have updated our commodity price forecasts (Exhibit 2) as a result of fairly large surface stocks of platinum, palladium and rhodium, in our view, compounded by continued production from South African mines, which will likely have the effect of keeping prices flat until these stocks are run down and/or mine supply reduces. We think this may take several years.
Compared to our previous forecasts in February 2024, we have increased our platinum price assumptions because of greater demand from the fibreglass sector as a result of it using 100% platinum in its bushings, and eliminating rhodium mainly because of the high price of the latter metal in the last three years. As a result, the durability of the bushings has dropped significantly, needing a far greater amount of platinum to be replaced than it did previously in the next few years. Over the longer term, demand for the hydrogen economy is likely to increase with the large number of new entrants into the hydrogenation and fuel cell markets, benefiting platinum and iridium prices.
Exhibit 2: Edison updated PGM price forecasts (average June year-end prices)
US$/oz |
FY23 |
FY24 |
FY25e |
FY25e new |
FY26e |
FY26e new |
FY27e |
FY28e |
FY29e |
FY30e |
FY30e new |
Platinum |
1,000 |
906 |
1,007 |
1,010 |
1,085 |
1,111 |
1,252 |
1,405 |
1,580 |
1,200 |
1,743 |
Palladium |
1,711 |
1,073 |
940 |
960 |
1107 |
981 |
1,066 |
1,175 |
1,286 |
1,112 |
1,358 |
Rhodium |
11,778 |
4,285 |
5,163 |
4,641 |
6,492 |
4,580 |
4,894 |
5,349 |
5,673 |
8,764 |
5,903 |
Gold |
1,868 |
2,310 |
1,837 |
2,170 |
1,860 |
1,935 |
1,966 |
1,890 |
1,726 |
1,661 |
1,727 |
Ruthenium |
480 |
444 |
418 |
412 |
398 |
411 |
413 |
411 |
410 |
448 |
408 |
Iridium |
4,406 |
4,863 |
5,025 |
4,726 |
5,094 |
4,709 |
4,747 |
4,786 |
4,798 |
5,460 |
4,808 |
Source: Edison Investment Research, ALG, LSEG Data & Analytics
Palladium prices are likely to remain broadly flat until around 2028, when higher demand from hybrid vehicles, which are taking away market share from sharply falling sales of battery electric vehicles and also gasoline vehicles, will almost certainly have a positive effect on palladium prices. For rhodium, the same applies with the added negative effect of thrifted rhodium as mentioned above, adding to surface stocks of the metal. Therefore, for the next few years, we think that these surface stocks could the depress prices and we have lowered our forecasts as a result.
Forecast revisions
Our forecast revisions are shown in Exhibit 3. We have maintained our FY25 PGM plant feed, 4E PGM production and 2E PGM production forecasts. As a result of our lower PGM price forecasts, we have moderated our revenue forecast by 3.8%. Due to the depreciation of the US dollar relative to the South African rand and our constant currency valuation approach, we have lifted our FY25 expense forecasts by 2.6%. The net impact of these two changes is a 16% reduction in our FY25 EBITDA forecast to US$30.8m and a 17.1% cut in our FY25 EPS forecast from 9.3c to 7.7c.
Exhibit 3: FY25 and FY26 forecast changes
Old FY25e |
New FY25e |
FY25e vs old FY25e |
Old FY26e |
New FY26e |
FY26e vs old FY26e |
|
Production |
||||||
Plant feed (t) |
2,698,007 |
2,797,434 |
3.7% |
2,642,826 |
3,039,182 |
15.0% |
PGM plant feed (t) |
1,447,204 |
1,447,428 |
0.0% |
1,387,484 |
1,537,103 |
10.8% |
Total 4E PGMs (oz) |
77,718 |
77,683 |
0.0% |
81,643 |
83,872 |
2.7% |
Total 2E PGMs (oz) |
23,791 |
23,795 |
0.0% |
22,393 |
22,395 |
0.0% |
Basket price ($/oz) |
1,499 |
1,444 |
-3.7% |
1,751 |
1,505 |
-14.0% |
Financials (US$m) |
||||||
4E revenue |
90.9 |
87.5 |
-3.8% |
113.5 |
100.2 |
-11.7% |
Total revenue |
110.5 |
106.4 |
-3.7% |
148.2 |
134.2 |
-9.4% |
Total operating costs |
72.0 |
73.9 |
2.6% |
92.2 |
92.1 |
-0.1% |
Group EBITDA |
36.7 |
30.8 |
-16.0% |
52.8 |
38.9 |
-26.3% |
Net profit |
24.6 |
20.7 |
-15.9% |
35.7 |
26.4 |
-25.9% |
Gross margin |
29.8% |
27.1% |
35.7% |
28.7% |
||
Basic EPS (c) |
9.3 |
7.7 |
-17.1% |
13.6 |
10.1 |
-25.7% |
Capex |
9.8 |
9.8 |
0.0% |
5.7 |
5.7 |
0.0% |
Cash balance |
99.5 |
100.6 |
1.1% |
102.2 |
102.2 |
-0.1% |
Source: Edison Investment Research
In FY26, we forecast a meaningful 14.5% increase in 4E revenue relative to FY25 and an even more meaningful 26.1% increase in total revenue as the Thaba JV starts contributing. This pick-up is lower than our previous forecast due to a 14% reduction in our PGM basket price forecast.
After allowing for US dollar operating costs in line with our previous forecast, we have pulled back our FY26 EBITDA forecast by 26.5% and our FY26 EPS by 25.7% from 13.6c to 10.1c.
Our cash balance forecast has increased slightly for FY25 and is flat for FY26 on the back of a weaker spot US dollar exchange rate, affecting the conversion of sizeable cash held in rand and sterling.
While our new near-term PGM forecasts have had a negative impact on our explicit EPS forecasts to FY26, the longer-term forecasts have improved, with higher platinum, palladium and gold forecasts being very material towards FY30. As a result of these improved forecasts, the impact of near-term EPS cuts have been moderated as they relate to our valuation for Sylvania.
Valuation
On the back of our lower near-term PGM price forecasts, we have lowered our EPS forecasts, which has resulted in a 6.5% reduction in our valuation for Sylvania from 120p/share to 112.2p/share. Our valuation is made up of an SDO valuation, a valuation for Sylvania’s 50% share of the Thaba JV and a value for its exploration assets (carried at book value).
Our PGM forecast changes have resulted in an 8.9% reduction in the SDO valuation to 81.5p/share. In the case of our Thaba JV valuation, the impact of our more conservative near-term PGM forecasts is outweighed by our more aggressive long-term forecast and the increased proximity of cash flows, with the JV forecast to start producing in FY26 with dividends forecast to flow from FY29. The exploration asset carrying value is unchanged at 13.8p/share.
Exhibit 4: Valuation downgrade on PGM forecasts
Current |
Previous |
Change |
|
Combined valuation (p/share) |
112.2 |
120.0 |
-6.5% |
SDO (p/share) |
81.5 |
89.5 |
-8.9% |
Exploration (p/share) |
13.8 |
13.8 |
0.0% |
Thaba JV (p/share) |
16.9 |
16.7 |
1.2% |
FY24 EPS (p/share) |
5.8 |
7.2 |
-19.8% |
Implied P/E (x) |
19.3 |
16.6 |
|
FY25 EPS (p/share) |
7.7 |
9.3 |
-17.3% |
Implied P/E (x) |
14.6 |
12.9 |
|
FY26 (p/share) |
10.1 |
13.6 |
-25.7% |
Implied P/E (x) |
11.1 |
8.8 |
Source: Edison Investment Research
The implied forward P/E multiple of our new valuation has increased based on our explicit FY24, FY25 and FY26 EPS forecasts relative to our previous valuation, but becomes more attractive based on FY26 EPS with a P/E multiple of 11.1x, especially in the light of forecast uplifts in PGM prices thereafter and to FY30.
Exhibit 5: Financial summary
US$m |
2022 |
2023 |
2024e |
2025e |
2026e |
Year ending 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
Revenue |
151.9 |
130.2 |
84.7 |
106.4 |
134.2 |
Cost of Sales |
(61.6) |
(63.2) |
(65.6) |
(73.9) |
(92.1) |
Royalties Tax |
(6.9) |
(4.9) |
(3.6) |
(5.3) |
(6.7) |
Gross Profit |
83.4 |
62.1 |
15.5 |
27.2 |
35.4 |
EBITDA |
82.8 |
67.9 |
17.0 |
30.8 |
38.9 |
Operating Profit (before amort. And except.) |
79.7 |
61.8 |
12.1 |
24.0 |
32.2 |
Intangible Amortisation |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other |
(6.7) |
(8.1) |
(8.0) |
(10.0) |
(10.1) |
Operating Profit |
79.7 |
61.8 |
12.1 |
24.0 |
32.2 |
Net Interest |
1.3 |
5.2 |
7.8 |
5.8 |
6.0 |
Profit Before Tax (norm) |
80.9 |
67.0 |
19.9 |
29.8 |
38.2 |
Profit Before Tax (FRS 3) |
80.9 |
67.0 |
19.9 |
29.8 |
38.2 |
Tax |
(24.8) |
(21.6) |
(4.7) |
(9.4) |
(11.8) |
Profit After Tax (norm) |
56.1 |
45.4 |
15.2 |
20.5 |
26.4 |
Profit After Tax (FRS 3) |
56.1 |
45.4 |
15.2 |
20.5 |
26.4 |
Average Number of Shares Outstanding (m) |
272.3 |
266.6 |
262.6 |
261.6 |
261.6 |
EPS – normalised (c) |
20.6 |
17.0 |
5.8 |
7.7 |
10.1 |
EPS – normalised fully diluted (c) |
20.4 |
16.7 |
5.8 |
7.7 |
10.1 |
EPS – (IFRS) (c) |
20.4 |
16.7 |
5.8 |
7.7 |
10.1 |
Dividend per share* (p) |
8.0 |
8.0 |
2.4 |
4.2 |
5.8 |
Gross Margin (%) |
55% |
48% |
18% |
26% |
26% |
EBITDA Margin (%) |
54% |
51% |
20% |
29% |
29% |
Operating Margin (before GW and except.) (%) |
52% |
47% |
14% |
23% |
24% |
BALANCE SHEET |
|||||
Fixed Assets |
92.7 |
101.5 |
153.3 |
159.1 |
160.8 |
Intangible Assets |
46.1 |
46.5 |
42.1 |
42.5 |
46.5 |
Tangible Assets |
46.3 |
48.7 |
65.6 |
68.6 |
67.6 |
Investments |
0.3 |
6.4 |
45.5 |
47.9 |
46.8 |
Current Assets |
186.7 |
168.2 |
133.7 |
142.4 |
142.4 |
Stocks |
4.3 |
5.1 |
1.6 |
1.9 |
2.0 |
Debtors |
52.9 |
35.7 |
27.9 |
32.8 |
34.9 |
Cash |
121.3 |
124.2 |
96.5 |
100.6 |
102.2 |
Other |
8.3 |
3.3 |
7.6 |
7.2 |
3.3 |
Current liabilities |
11.2 |
13.9 |
5.9 |
6.9 |
7.3 |
Creditors |
11.2 |
13.9 |
5.9 |
6.9 |
7.3 |
Short-term borrowings |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Long-term liabilities |
17.6 |
16.5 |
19.3 |
20.1 |
18.7 |
Long-term borrowings |
0.0 |
0.4 |
0.0 |
0.0 |
0.0 |
Other long-term liabilities |
17.6 |
16.2 |
19.3 |
20.1 |
18.7 |
Net Assets |
250.7 |
239.4 |
261.8 |
274.5 |
277.2 |
CASH FLOW |
|||||
Operating Cash Flow |
91.9 |
77.7 |
19.1 |
26.3 |
37.1 |
Net Interest |
1.5 |
5.1 |
9.3 |
6.1 |
6.3 |
Tax |
(23.8) |
(19.8) |
(3.6) |
(9.2) |
(11.6) |
Capex |
(16.4) |
(14.5) |
(21.8) |
(9.8) |
(5.7) |
Acquisitions/disposals |
0.0 |
0.0 |
(18.5) |
0.0 |
2.4 |
Financing |
(20.1) |
(10.6) |
(0.8) |
0.0 |
0.0 |
Dividends |
(22.7) |
(35.5) |
(17.4) |
(7.7) |
(23.8) |
Net Cash Flow |
19.7 |
6.6 |
(33.3) |
6.1 |
4.8 |
Opening net (debt)/cash |
106.1 |
121.3 |
124.2 |
96.5 |
100.6 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other |
(4.5) |
(3.7) |
5.6 |
(2.1) |
(3.2) |
Closing net (debt)/cash |
121.3 |
124.2 |
97.8 |
100.6 |
102.2 |
Source: Company accounts, Edison Investment Research. Note: *Excludes windfall dividend.
|
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Research: Investment Companies
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