Sylvania Platinum — Low risk option on PGMs, stellar dividend payer

Sylvania Platinum (LN: SLP)

Currency in GBP

Last close As at 26/01/2023

GBP1.07

1.50 (1.43%)

Market capitalisation

GBP280m

Research: Metals & Mining

Sylvania Platinum — Low risk option on PGMs, stellar dividend payer

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.

Metals & Mining

Sylvania Platinum

Low risk option on PGMs, stellar dividend payer

Annual results

Metals and mining

12 September 2022

Price

87p

Market cap

£232m

US$1.15/£

Net cash (£m) at end FY22

121

Shares in issue

266.0m

Free float

78.9%

Code

SLP

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.3

3.3

(5.7)

Rel (local)

5.6

5.7

(5.3)

52-week high/low

111p

77p

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

Exploration report

September 2022

Q122 results

October 2022

Analysts

René Hochreiter

+44 (0)20 3077 5700

Lord Ashbourne

+44 (0)20 3077 5724

SylvaniaSylvania Platinum Platinum is a research client of Edison Investment Research Limited

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
(US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(p)

P/E
(x)

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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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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