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Research: Metals & Mining
Its FY22 results were much in line with our revised forecasts. A 23% drop in the PGM basket price, because of global recessionary concerns and production challenges in the first three quarters of FY22, was the main reason for the 43% decrease in EPS to 20.6c. The 8p/share dividend declared, a 9.2% dividend yield, was higher than our forecast 3.5p/share. At 22.1c/share our FY23e EPS is slightly higher than in FY22 because our PGM price forecasts take into account supply disruptions in South Africa and North America that could spill over into next year. The stock is cheap relative to our valuation, especially because of its low risk in terms of safety, low labour component and generally low-cost nature. Its US dollar costs could fall in FY23 as the South African rand weakens against the US dollar, as virtually all the major world currencies have. Furthermore, currency outflows from South Africa for the purchase of fuel outweigh the inflows from the sale of commodities, weakening the rand versus the US dollar.
Written by
Rene Hochreiter
Sylvania Platinum |
Low risk option on PGMs, stellar dividend payer |
Annual results |
Metals and mining |
12 September 2022 |
Share price performance
Business description
Next events
Analysts
SylvaniaSylvania Platinum Platinum is a research client of Edison Investment Research Limited |
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Its FY22 results were much in line with our revised forecasts. A 23% drop in the PGM basket price, because of global recessionary concerns and production challenges in the first three quarters of FY22, was the main reason for the 43% decrease in EPS to 20.6c. The 8p/share dividend declared, a 9.2% dividend yield, was higher than our forecast 3.5p/share. At 22.1c/share our FY23e EPS is slightly higher than in FY22 because our PGM price forecasts take into account supply disruptions in South Africa and North America that could spill over into next year. The stock is cheap relative to our valuation, especially because of its low risk in terms of safety, low labour component and generally low-cost nature. Its US dollar costs could fall in FY23 as the South African rand weakens against the US dollar, as virtually all the major world currencies have. Furthermore, currency outflows from South Africa for the purchase of fuel outweigh the inflows from the sale of commodities, weakening the rand versus the US dollar.
Year end |
Revenue |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/22 |
152 |
81 |
20.6 |
10.3** |
4.2 |
11.8 |
06/23e |
164 |
84 |
22.1 |
8.0 |
3.9 |
9.2 |
06/24e |
178 |
95 |
24.7 |
8.0 |
3.5 |
9.2 |
06/25e |
186 |
101 |
26.1 |
9.1 |
3.3 |
10.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Includes windfall dividend of 2.25p declared in April 2022.
Record safety performance
Sylvania Dump Operations (SDOs) achieved record safety statistics, with the Doornbosch plant achieving an incredible milestone of 10 years without lost time injury.
Near 10% dividend yield with strong cash generation
The company has declared an annual dividend of 8p/share (US$25m), compared to our forecast of 3.5p/share or a 9.9% dividend yield. The company may be able to pay an additional dividend, normally declared in December, depending on its windfall payment philosophy.
Valuation: 169p/share; 184p/share with expl projects
Our valuation is unchanged from previous levels, at 169p/share. Inflation pressures may present some downside risks to our valuation, but increased guidance from 67,053oz 4E to the 68–70Koz level for FY23 provides some comfort that the 49% trading discount to our valuation could narrow in the medium term, especially in light of the c 500Koz PGM production guidance downgrade of Anglo Platinum (8 September 2022) and the likelihood of an easing semiconductor chip shortage in FY23. We value Sylvania’s exploration projects at a book value of US$46m or 15p/share, bringing the total value to 184p/share.
FY22 results and updated forecasts
Financials: In line with our forecasts
Even though our headline earnings per share (HEPS) forecast of 19.8p for FY22 was close to the 20.6p reported for the year, Sylvania did not escape the possibility of a cyclical downturn in global economies and the threat of a global recession causing a weakening of platinum group metals (PGM) prices. This, together with high mining inflation across the industry, saw a 43% drop in group EBITDA. High inflation and global economic uncertainty continue to adversely affect the prices of reagents, fuel and transport.
Revenue declined 24% because of lower PGM prices, and at US$152m was slightly lower than our US$149m estimate. The reason was our slightly higher PGM price forecasts. Operating costs of US$62m were higher than our US$61m estimate because indirect operating costs rose more than we expected due to higher social responsibility costs. Consequently, reported EBITDA of US$82.8m was broadly similar to our US$80m forecast.
The group has strong cash balance of US$121.3m for capital expansions, process optimisation, safety and exploration projects and dividends.
In Exhibit 1 we compare the numbers published in our August Q422 update to those reported for FY22. We also show our revised forecasts out to FY25. Note that we see production of 4E PGMs increasing to 72Koz in FY24 and 73Koz in FY25, versus the 67Koz achieved in FY22 and the guided 68–70Koz for FY23.
Exhibit 1: FY22 results and updated forecasts
|
FY22 |
FY22e (old) |
FY22 vs FY22e |
FY23e |
FY24e |
FY25e |
Production |
|
|||||
PGM plant feed (t) |
1,221,687 |
1,221,687 |
0.0% |
1,268,330 |
1,297,341 |
1,325,590 |
PGM plant feed grade (g/t) |
3.21 |
3.20 |
0.3% |
3.06 |
3.12 |
3.12 |
Total 4E PGMs (ozs) |
67,053 |
67,053 |
0.0% |
69,895 |
72,007 |
73,072 |
Total 2E PGMs (ozs) |
18,606 |
18,606 |
0.0% |
21,334 |
22,082 |
22,623 |
Basket price ($/oz) |
2,890 |
2,645 |
9.3% |
2,839 |
2,966 |
3,040 |
|
|
|
|
|
|
|
Financials |
|
|
|
|
|
|
4E revenue (US$m) |
142.5 |
138.7 |
2.7% |
154.8 |
166.6 |
173.3 |
By-product revenue (US$m) |
12.4 |
11.9 |
3.9% |
9.3 |
11.8 |
13.1 |
Total revenue (US$m) |
151.9 |
149.3 |
1.8% |
164.1 |
178.4 |
186.3 |
Total operating costs (ZARm) |
890.5 |
878.8 |
1.3% |
1,071.9 |
1,107.0 |
1,134.1 |
Total operating costs (US$m) |
62.0 |
61 |
1.5% |
65.4 |
67.6 |
69.2 |
|
|
|
|
|
|
|
Basic EPS (USc) |
20.6 |
19.8 |
4.1% |
22.1 |
24.7 |
26.1 |
Dividend (p) |
8.0 |
3.5 |
128.6% |
8.0 |
8.0 |
9.1 |
Windfall dividend (p) |
2.25 |
2.3 |
0.0% |
3.3 |
6.2 |
9.4 |
Group cash cost (ZAR/4E oz) |
13,643 |
13,117 |
4.0% |
15,336 |
15,373 |
15,520 |
Group cash cost (US$/4E oz) |
897 |
862 |
4.1% |
936 |
939 |
947 |
Average ZAR/$ |
15.2 |
15.5 |
-1.9% |
16.4 |
16.4 |
16.4 |
Cash balance (US$m) |
121.3 |
121.3 |
0.0% |
124 |
152 |
168 |
Source: Sylvania guidance is for a range of 68–70k, 4E ozs for FY23, Edison Investment Research forecasts for FY24 and FY25
Operations: A difficult year but FY23 is looking much better
Lower feed grades in some of the SDOs, water and power shortages and the suspension of tailings dam-related operations at the Lesedi SDO in the first three quarters of FY22 led to a fall in material treated.
However, these problems are likely to be alleviated in FY23 with several interventions and projects designed to circumvent most of these issues. Back-up power supplies have been installed, as well as a new water pipeline to the affected SDO. The second milling and floatation circuit (MF2) expansion at the flagship Tweefontein plant is on track for delivery by December 2022. Currently some plants only have MF1 plants (ie milling of the material to ultra-fine levels and then followed by only one flotation circuit), which means lower recoveries. If the material is floated a second time, or MF2, recoveries improve by about 10%. The next SDO where MF2 will be implemented is the Lannex plant towards the end of CY23. As the SDOs are fitted with MF2 circuits production should increase, hence the increased production that we forecast in Exhibit 1. The Lesedi SDO commissioned a new Tailings storage facility (TSF), which will allow safer tailings deposition. The old Lesedi dump became unstable and was partly the cause of the lower production in FY22. Sylvania is also developing a novel chemical process that binds chromite together into pellets that are more desirable for ferrochrome smelters such as Samancor and will enhance the value of its chromite sales.
Valuation
Our valuation of Sylvania has remained unchanged even though we have revised our PGM price forecasts slightly. In terms of the basket price, there is a 3.6% difference between our old and our new FY22 forecasts, while there is virtually no difference in the FY24 forecasts (Exhibit 2). This is because year-to-date average prices of platinum and, to a lesser extent, rhodium, iridium and gold are lower than our forecasts. Given that there are only four months of the year left, we have lowered our forecasts to be more in line with the average year to date prices. Our palladium price forecast is nearly spot on and our ruthenium price forecast is, in fact, too low.
Exhibit 2: PGM price forecasts made in our PGM outlook thematic report in December 2021
US$/oz |
FY19 |
FY20 |
FY21 |
FY22e old |
FY22e new |
FY23e old |
FY23e new |
FY24e |
FY25e |
FY26e |
FY27e |
FY28e |
FY29e |
FY30e |
Platinum |
827 |
875 |
1,089 |
1,025 |
950 |
1,025 |
990 |
1,075 |
1,111 |
1,125 |
1,137 |
1,162 |
1,237 |
1,343 |
Palladium |
1,230 |
1,865 |
2,400 |
2,100 |
2,102 |
1,900 |
2000 |
1,877 |
1,857 |
1,630 |
1,500 |
1,500 |
1,500 |
1,500 |
Rhodium |
2,664 |
7,564 |
20,124 |
16,000 |
15,368 |
14,964 |
14,950 |
15,215 |
15,853 |
16,301 |
16,300 |
16,100 |
15,992 |
15,506 |
Gold |
1,263 |
1,582 |
1,799 |
1,819 |
1,819 |
1,714 |
1,725 |
1,715 |
1,649 |
1,585 |
1,539 |
1,524 |
1,524 |
1,524 |
Ruthenium |
264 |
262 |
564 |
417 |
551 |
442 |
463 |
471 |
495 |
506 |
514 |
520 |
526 |
530 |
Iridium |
1,466 |
1,555 |
5,066 |
4,937 |
4,391 |
5,131 |
4,525 |
5,268 |
5,445 |
5,618 |
5,770 |
5,919 |
6,077 |
6,239 |
Basket price* |
1,133 |
1,920 |
3,762 |
2,890 |
2,784 |
2,733 |
2,731 |
2,472 |
2,873 |
2,873 |
2,850 |
2,845 |
2,878 |
2,888 |
Source: Edison Investment Research. Note: *Sylvania average basket price.
The effect on earnings is shown in the Financials section below.
We see the global semiconductor chip shortage easing in Q422 and into CY23. The pent-up demand for vehicles could see vehicle sales rising towards the end of CY23 and extending into FY24 with a commensurate rise in demand for PGMs, especially palladium and rhodium, which are used mainly in catalytic converters in gasoline engines. The authoritative LMC Automotive recently increased its CY22 light vehicle sales forecast to 82m, from a previous level of 76m, and 89m in CY23. In addition, on 8 September 2022 Anglo Platinum, the largest producer of PGMs in the world, reduced guidance for its CY22 production of PGMs from 3.9–4.3Moz to 3.7–3.9Moz. This is because materials received for the re-build of its Polokwane smelter were below standard, which is now a cause for concern on the supply side of PGMs and is likely to result in increased PGM prices in the next few months.
Of concern are the double-digit unit cost increases that are a ‘new pandemic’ in the South African mining industry, because of price increases of up to 60% for reagents, chemicals, diesel and consumables in the wake of the war in Ukraine. These increases should reduce in FY23 to more palatable single-digit increases. Depending on the level of the rand to the US dollar in FY23, Sylvania management has indicated that unit cost increases of around 4–8% in US dollar unit costs can be expected in FY23.
Valuation method
We calculate our valuations using a dividend discount model for Sylvania at a 10% real rate of return, using our outlook for PGM prices as shown in Exhibit 2. Our value is 169p/share for the operations, unchanged from our previous number, and a total value of 184p/share adding in the book value of the exploration projects. Sylvania has two exploration projects, the group’s Volspruit and the Northern Limb PGM opportunities, which we currently value at directors’ value. The book value of the projects is US$46m or 0.15p/share. An exploration report is expected to be published in the coming weeks, when we will undertake a more detailed valuation of these projects.
Financials
Our updated financial forecasts are shown in Exhibit 3. We are publishing FY25 estimates for the first time.
Earnings and cash flow outlook
Historical earnings growth was stellar, more than doubling each year from FY19 to FY21. In FY22, normalised EPS fell by 42% for the reasons explained in this report. Projected growth trends in EPS indicate a growth rate of around 10% a year going forward with a steady increase in production and the forecast PGM prices that we have shown in Exhibit 2. This compares to our previous forecast of a 35.3% rise in EPS into FY23 and a flat EPS growth for FY24 y-o-y.
Cash generation at the company is strong and we forecast US$88m in operating cash flow before tax in FY23, increasing by 8% to US$95m in FY24 and a further 8.4% to US$103m in FY25. This compares to our previous forecast of US$101m in FY23 and US$103m in FY24.
Balance sheet
The balance sheet is impressively strong. The group had a cash balance of US$121m at the end of FY22 (Exhibit 3). This compares to our previous forecast of US$124m.
We forecast long-term borrowings/leases of US$18m, US$19m and US$21m in FY23, FY24 and FY25, which pale in comparison to the cash levels, which are forecast at US$124m, US$152m and US$168m for the same periods (Exhibit 3). These compare to our previous forecasts of similar debt of around US$20m, but cash levels of US$152m and US$183m for FY23 and FY24, respectively.
Exhibit 3: Financial summary
US$m |
2019 |
2020 |
2021 |
2022 |
2023e |
2024e |
2025e |
Year ending 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
Revenue |
71 |
115 |
206 |
152 |
164 |
178 |
186 |
Cost of Sales |
(45) |
(47) |
(55) |
(62) |
(70) |
(74) |
(75) |
Royalties Tax |
0 |
(1) |
(8) |
(7) |
(8) |
(9) |
(9) |
Gross Profit |
26 |
67 |
143 |
83 |
86 |
96 |
102 |
EBITDA |
30 |
69 |
145 |
83 |
88 |
99 |
105 |
Operating Profit (before amort. and except.) |
24 |
64 |
142 |
80 |
83 |
93 |
99 |
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Exceptionals |
0 |
(10) |
0 |
0 |
0 |
0 |
0 |
Other |
(9) |
(9) |
(5) |
(7) |
(7) |
(9) |
(9) |
Operating Profit |
24 |
54 |
142 |
80 |
83 |
93 |
99 |
Net Interest |
1 |
2 |
1 |
1 |
1 |
1 |
2 |
Profit Before Tax (norm) |
24 |
65 |
143 |
81 |
84 |
95 |
101 |
Profit Before Tax (FRS 3) |
24 |
56 |
143 |
81 |
84 |
95 |
101 |
Tax |
(6) |
(15) |
(43) |
(25) |
(26) |
(29) |
(31) |
Profit After Tax (norm) |
18 |
51 |
100 |
56 |
59 |
66 |
69 |
Profit After Tax (FRS 3) |
18 |
41 |
100 |
56 |
59 |
66 |
69 |
Average Number of Shares Outstanding (m) |
286 |
280 |
272 |
271 |
266 |
266 |
266 |
EPS - normalised (c) |
6.4 |
14.6 |
36.7 |
20.6 |
22.1 |
24.7 |
26.1 |
EPS - normalised fully diluted (c) |
6.2 |
14.3 |
35.9 |
20.5 |
22.1 |
24.7 |
26.1 |
EPS - (IFRS) (c) |
6.2 |
14.3 |
36.7 |
20.6 |
22.1 |
24.7 |
26.1 |
Dividend per share (p) |
0.0 |
1.6 |
4.0* |
8.0* |
8.0 |
8.0 |
9.1 |
Gross Margin (%) |
36% |
58% |
69% |
55% |
52% |
54% |
55% |
EBITDA Margin (%) |
43% |
60% |
70% |
54% |
53% |
56% |
56% |
Operating Margin (before GW and except.) (%) |
34% |
55% |
69% |
52% |
51% |
52% |
53% |
BALANCE SHEET |
|
|
|
|
|
|
|
Fixed Assets |
93 |
74 |
86 |
93 |
111 |
111 |
111 |
Intangible Assets |
53 |
43 |
45 |
46 |
50 |
51 |
51 |
Tangible Assets |
38 |
30 |
40 |
46 |
59 |
60 |
60 |
Investments |
2 |
0 |
0 |
0 |
1 |
1 |
1 |
Current Assets |
59 |
89 |
188 |
187 |
191 |
224 |
243 |
Stocks |
2 |
2 |
4 |
4 |
3 |
3 |
4 |
Debtors |
8 |
12 |
69 |
53 |
54 |
59 |
61 |
Cash |
22 |
56 |
106 |
121 |
124 |
152 |
168 |
Other |
28 |
19 |
9 |
8 |
10 |
10 |
10 |
Current Liabilities |
7 |
9 |
14 |
11 |
11 |
12 |
12 |
Creditors |
7 |
9 |
14 |
11 |
11 |
12 |
12 |
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Long Term Liabilities |
18 |
13 |
16 |
18 |
18 |
19 |
21 |
Long term borrowings |
18 |
13 |
16 |
18 |
18 |
19 |
21 |
Other long term liabilities |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Net Assets |
128 |
141 |
244 |
251 |
273 |
304 |
321 |
CASH FLOW |
|
|
|
|
|
|
|
Operating Cash Flow |
25 |
71 |
114 |
92 |
88 |
95 |
103 |
Net Interest |
1 |
2 |
2 |
1 |
2 |
2 |
2 |
Tax |
(8) |
(15) |
(47) |
(24) |
(25) |
(28) |
(30) |
Capex |
(8) |
(5) |
(8) |
(16) |
(22) |
(7) |
(6) |
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Financing |
(1) |
(18) |
(4) |
(20) |
0 |
0 |
0 |
Dividends |
(1) |
(3) |
(20) |
(23) |
(37) |
(34) |
(52) |
Net Cash Flow |
8 |
41 |
39 |
20 |
5 |
27 |
16 |
Opening net (debt)/cash |
14 |
22 |
56 |
106 |
121 |
124 |
152 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Other |
(0) |
(7) |
12 |
(5) |
(3) |
0 |
0 |
Closing net (debt)/cash |
22 |
56 |
106 |
121 |
124 |
152 |
168 |
Source: Company accounts, Edison Investment Research. Note: *Excludes windfall dividend.
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Research: Real Estate
Target Healthcare REIT’s Q422 report showed a continuation of consistently positive accounting returns since IPO. Subsequent asset management will significantly improve rent collection and generate recovery gains. For tenants, fee growth and increased occupancy are mitigating the impact of inflation. For Target, indexed rent uplifts, improved rent collection and selective portfolio investments are all positive drivers, but insufficient to offset the impact of higher capital costs. We expect continuing growth, but at a slower pace than previously, with DPS maintained but cover taking longer to achieve.
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