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Research: Metals & Mining
Sylvania Platinum reported excellent production results offset by weak PGM prices. The platinum group metal (PGM) basket price dropped 28% y-o-y because of recessions in Europe and economic turmoil in China. This has resulted in low demand for PGMs especially from China, which is the world’s biggest consumer of PGMs, and de-stocking by Western OEMs. However, Sylvania has been able to limit its FY23 EPS decline to 17.5% through increased production and has kept its dividend payout of 8p per share. Sylvania entered into a JV (Edison report of 29 August), which will see it process PGMs and chromite from chrome ores and will for the first time see Sylvania receiving a chromite concentrate revenue stream on its own account. The 8p/share dividend declared, a ~10% dividend yield, was in line with our forecast. Basic EPS at 17.01c/share was ~6% lower than our forecast. The stock is inexpensive relative to our valuation, especially because of its low risk, in our view, in terms of safety, lower execution risks, labour component and its overall low-cost operating model relative to its peers. Entry into the chromite market could add significant upside if current historically high prices continue.
Written by
Rene Hochreiter
Sylvania Platinum |
Stellar production, guidance beaten |
Annual results FY23 |
Metals and mining |
14 September 2023 |
Share price performance
Business description
Next events
Analysts
SylvaniaSylvania Platinum Platinum is a research client of Edison Investment Research Limited |
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Sylvania Platinum reported excellent production results offset by weak PGM prices. The platinum group metal (PGM) basket price dropped 28% y-o-y because of recessions in Europe and economic turmoil in China. This has resulted in low demand for PGMs especially from China, which is the world’s biggest consumer of PGMs, and de-stocking by Western OEMs. However, Sylvania has been able to limit its FY23 EPS decline to 17.5% through increased production and has kept its dividend payout of 8p per share. Sylvania entered into a JV (Edison report of 29 August), which will see it process PGMs and chromite from chrome ores and will for the first time see Sylvania receiving a chromite concentrate revenue stream on its own account. The 8p/share dividend declared, a ~10% dividend yield, was in line with our forecast. Basic EPS at 17.01c/share was ~6% lower than our forecast. The stock is inexpensive relative to our valuation, especially because of its low risk, in our view, in terms of safety, lower execution risks, labour component and its overall low-cost operating model relative to its peers. Entry into the chromite market could add significant upside if current historically high prices continue.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
06/22 |
152 |
81 |
20.6 |
8.0 |
3.8 |
10.2 |
06/23 |
130 |
67 |
17.0 |
8.0 |
4.6 |
10.2 |
06/24e |
114 |
39 |
10.7 |
3.6 |
7.3 |
4.6 |
06/25e |
137 |
49 |
12.8 |
4.6 |
6.1 |
5.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Good operating performance
Sylvania Dump Operations (SDOs) reported 4E production above the upper end of guidance and achieved record safety statistics in the process, with the Doornbosch plant achieving an incredible milestone of 11 years without a single lost time injury. However, PGM basket prices fell 28% compared to FY22, due mainly to lower demand from China, which resulted in the lower EPS performance.
Strong cash generation
Closing net cash is forecast at ~US$100 over the next three years despite capex spend on the Thaba JV, which is planned to boost cash flow from H225. The JV will see full production from FY26 for 10 years.
Valuation: 135.4p/share
Our valuation is unchanged from previous levels at 135.4p/share. Inflation pressures may present some downside risks to our valuation, but guidance at 74–75koz 4E for FY24 provides comfort that the 46% trading discount to our valuation could narrow in the medium term, especially considering Sylvania’s performance last year, when it exceeded its upper-end guidance of 75koz 4E by 469oz.
FY23 results and updated forecasts
Financials: In line with our forecasts
Even though our basic earnings per share (EPS) forecast of 18.1c for FY23 was close to the 17.0c reported for the year, Sylvania did not escape the cyclical downturn in global economies and the recessions in Europe and China. The US may still see a recession thereby causing a further weakening of PGM prices. This together with high mining inflation across the industry saw a 20% drop in group EBITDA. Consequently, reported EBITDA of US$66.0m was about the same as our forecast.
4E revenue declined 18% because of lower PGM prices and came in at US$116.6m, or 1.0% lower than our US$117.8m estimate. The reason was our slightly higher PGM price forecasts. Total operating costs of US$61.8m were close to our US$59.6m estimate.
The group had a strong cash balance of US$124.2m at 30 June for capital expansion and the announced JV, process optimisation, safety, exploration project capex and dividends.
In Exhibit 1 we compare the numbers published in our August update to those reported for FY23.
Exhibit 1: FY23 results and updated forecasts
|
FY23 |
FY23e |
FY23 vs FY23e |
FY24e |
FY25e |
FY26e |
Production |
|
|||||
PGM plant feed (t) |
1,372,936 |
1,372,936 |
0.0% |
1,353,085 |
1,393,103 |
1,536,027 |
PGM plant feed grade (g/t) |
3.06 |
3.06 |
0.0% |
3.11 |
3.12 |
3.06 |
Total 4E PGMs (oz) |
75,468 |
75,468 |
0.0% |
75,003 |
76,630 |
83,511 |
Total 2E PGMs (oz) |
20,496 |
20,496 |
0.0% |
22,261 |
24,882 |
30,226 |
Basket price ($/oz) |
2,086 |
1,926 |
8.3% |
1,756 |
1,996 |
2,029 |
|
|
|
|
|
|
|
Financials (US$m) |
|
|
|
|
|
|
4E revenue (US$) |
116.6 |
117.8 |
-1.0% |
102.4 |
119.3 |
134.5 |
By-product revenue (US$) |
13.3 |
13.7 |
-2.6% |
11.6 |
12.5 |
13.1 |
Total revenue (US$) |
130.2 |
134.1 |
-2.9% |
114.0 |
136.9 |
167.9 |
Total operating costs (ZAR) |
1,059.6 |
1,059.6 |
0.0% |
1,287.1 |
1,458.1 |
1,740.4 |
Total operating costs (US$) |
61.8 |
59.6 |
3.7% |
68.1 |
77.2 |
92.3 |
Group EBITDA (US$) |
66.0 |
66.5 |
-0.8% |
37.1 |
49.7 |
63.9 |
Basic EPS (USc) |
17.0 |
18.1 |
-6.2% |
10.7 |
12.8 |
16.7 |
Dividend (p) |
8.0 |
8.0 |
0.0% |
3.6 |
4.6 |
12.8 |
Cash cost (ZAR/4E oz) |
13,685 |
|
|
17,160 |
19,028 |
20,840 |
Cash cost (US$/4E oz) |
771 |
|
|
908 |
1008 |
1105 |
Average ZAR/US$ |
17.8 |
18.0 |
-1.2% |
18.7 |
18.9 |
18.9 |
Cash balance (US$m) |
124.2 |
125.0 |
-0.7% |
96.1 |
109.6 |
113.4 |
Source: Sylvania Platinum accounts, Edison Investment Research
A good year; total 6E production up 12% y-o-y
All the SDOs except Lannex are now running on mill-float-2 (MF2) plants, which means that the milled ore or dumps that are fed through the concentrator recovery plant go through a flotation process twice. With the Lannex MF2 plant the last to be commissioned in Q124, recoveries at all the SDOs are likely to improve. PGM feed grades decreased by 5% y-o-y, affected by a lower grade feed source being mined at Lesedi, while recovery efficiencies increased by 5%. This significant recovery improvement was enabled by successful optimisation and commissioning of the Lesedi MF2 and Tweefontein MF2 circuits, respectively, during the year, while Mooinooi also saw an improved performance as flotation stability and run-of-mine (ROM) ore quality improved.
By Q224, all SDOs will be running on MF2 processing plants and we think, therefore, that the guidance of 74–75koz 4E for FY24 is conservative, but fits in with management’s philosophy of under-promising and over-delivering.
Valuation
Our valuation of Sylvania is 135.4p based on the PGM price forecasts we made in our August Q423 update, which are shown in Exhibit 2.
Exhibit 2: Edison updated (June 2023) PGM price forecasts (average June year-end prices)
US$/oz |
2021 |
2022 |
2023 |
2024e |
2025e |
2026e |
2027e |
2028e |
2029e |
2030e |
Platinum |
1,089 |
993 |
1,000 |
1,110 |
1,200 |
1,238 |
1,269 |
1,323 |
1,378 |
1,500 |
Palladium |
2,400 |
2,210 |
1,711 |
1,309 |
1,310 |
1,350 |
1,388 |
1,419 |
1,429 |
1,200 |
Rhodium |
20,124 |
16,158 |
11,778 |
6,000 |
7,500 |
7,500 |
7,600 |
7,700 |
7,800 |
10,000 |
Gold |
1,786 |
1,796 |
1,868 |
1,853 |
1,850 |
1,830 |
1,807 |
1,785 |
1,838 |
2,000 |
Ruthenium |
564 |
664 |
480 |
479 |
500 |
537 |
585 |
615 |
646 |
550 |
Iridium |
5,066 |
4,661 |
4,406 |
4,670 |
4,800 |
4,846 |
4,945 |
5,031 |
5,125 |
5,000 |
Source: Edison Investment Research, Austin Lawrence Gidon, Refinitiv
The valuation of 135.4p per share includes a value of 17.2p per share for the New Thaba JV announcement as valued in our report of 29 August 2023, a value of 104.4p for the company’s producing assets and 13.8p per share for the exploration assets.
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. Sylvania has two exploration projects, the group’s Volspruit and the Far Northern Limb PGM opportunities, which we currently value at directors’ value. During FY24, a new mineral resource estimate (MRE) is expected to be completed for the Volspruit South Orebody. Further metallurgical test work will be done on the 10 large diameter drill hole cores with the aim of increasing recoveries. The metallurgical test work results are expected in the third quarter of FY24. An updated preliminary economic assessment (PEA) is expected in the same quarter that will include the updated mineral resources of the North and South Bodies with the addition of rhodium. The Far Northern Limb Projects, Hacra and Aurora, will see a technical study done on the continuity of the newly discovered T-Zone whereby 40,230m of core will be re-logged to identify the high-grade zone in the drill cores. Furthermore, the Hacra North underground target has provided for some significant drilling results. Work continues to evaluate the underground potential with a technical review of the project expected to be completed during the first quarter of FY24. We will value these projects when the preliminary feasibility study and PEA reports are published, using the discounted cash flow method.
Financials
Our updated financial forecasts are shown in Exhibit 3.
Earnings and cash flow outlook
Historical earnings growth was stellar, but with the lower PGM price outlook, we see earnings per share falling from 17.0c in FY23 to 10.7c in FY24, but increasing again in FY25 to 12.8c per share and further to 16.7c per share in FY26. With the first full year’s contribution from the Thaba JV being in FY26, we see a healthy 22.6% jump in revenue and a 28.0% rise in EBITDA.
Operating cash flow fell to US$78m in FY23 from the previous year’s US$92m, and we forecast US$32m in operating cash flow before tax in FY24. This is a fall of 59.0% y-o-y, mainly because of our lower rhodium price forecasts, but we expect it to rise to US$45m and US$62m in FY25 and FY26 as PGM prices recover and the JV begins to contribute.
Balance sheet
The balance sheet is impressively strong. However, we forecast the closing net cash of US$124m in FY23 (Exhibit 3) to fall to US$96m in FY24 because of our lower PGM price forecasts as well as the company’s investment in the Thaba JV. First production from the JV is expected in H225 and therefore we estimate closing net cash of US$110m in FY25 and US$113m in FY26. (Please see Edison’s Sylvania JV report dated 29 August for details of the JV.)
We forecast no long-term borrowings but other long-term liabilities/leases of US$20m, US$21m and US$20m in FY24, FY25 and FY26, which are low in comparison to the closing cash level forecasts cited above (Exhibit 3).
Dividends
Sylvania now pays interim and final dividends, with the new dividend policy effective from 1 July 2022. Essentially it has moved away from the special dividend payment method used before the effective date. We forecast a dividend of 3.6p per share in FY24, a 55% drop year-on-year, because of lower PGM prices, but rising in FY25 and FY26 to 4.6p and 12.8p per share as PGM prices recover and the Thaba JV cash flow kicks in.
Exhibit 3: Financial summary
US$m |
2021 |
2022 |
2023 |
2024e |
2025e |
2026e |
Year ending 30 June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
Revenue |
206 |
152 |
130 |
114 |
137 |
168 |
Cost of Sales |
(55) |
(62) |
(61) |
(74) |
(84) |
(99) |
Royalties Tax |
(8) |
(7) |
(5) |
(6) |
(7) |
(8) |
Gross Profit |
143 |
83 |
64 |
35 |
46 |
61 |
EBITDA |
145 |
83 |
66 |
37 |
50 |
64 |
Operating Profit (before amort. and except.) |
142 |
80 |
62 |
32 |
43 |
57 |
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
Exceptionals |
0 |
0 |
0 |
0 |
0 |
0 |
Other |
(5) |
(7) |
(6) |
(9) |
(10) |
(10) |
Operating Profit |
142 |
80 |
62 |
32 |
43 |
57 |
Net Interest |
1 |
1 |
5 |
7 |
6 |
6 |
Profit Before Tax (norm) |
143 |
81 |
67 |
39 |
49 |
64 |
Profit Before Tax (FRS 3) |
143 |
81 |
67 |
39 |
49 |
64 |
Tax |
(43) |
(25) |
(22) |
(11) |
(15) |
(20) |
Profit After Tax (norm) |
100 |
56 |
45 |
28 |
34 |
44 |
Profit After Tax (FRS 3) |
100 |
56 |
45 |
28 |
34 |
44 |
Average Number of Shares Outstanding (m) |
272 |
272 |
267 |
263 |
263 |
263 |
EPS - normalised (c) |
36.7 |
20.6 |
17.0 |
10.7 |
12.8 |
16.7 |
EPS - normalised fully diluted (c) |
35.9 |
20.4 |
16.7 |
10.7 |
12.8 |
16.7 |
EPS - (IFRS) (c) |
35.9 |
20.4 |
16.7 |
10.7 |
12.8 |
16.7 |
Dividend per share (p) |
4.0 |
8.0 |
8.0 |
3.6 |
4.6 |
12.8 |
Gross Margin (%) |
69% |
55% |
49% |
30% |
34% |
36% |
EBITDA Margin (%) |
70% |
54% |
49% |
33% |
36% |
38% |
Operating Margin (before GW and except.) (%) |
69% |
52% |
47% |
28% |
31% |
34% |
BALANCE SHEET |
|
|
|
|
|
|
Fixed Assets |
86 |
93 |
101 |
153 |
159 |
160 |
Intangible Assets |
45 |
46 |
46 |
42 |
43 |
46 |
Tangible Assets |
40 |
46 |
49 |
65 |
68 |
67 |
Investments |
0 |
0 |
6 |
46 |
48 |
47 |
Current Assets |
188 |
187 |
168 |
144 |
162 |
164 |
Stocks |
4 |
4 |
5 |
2 |
2 |
3 |
Debtors |
69 |
53 |
36 |
38 |
43 |
45 |
Cash |
106 |
121 |
124 |
96 |
110 |
113 |
Other |
9 |
8 |
3 |
8 |
7 |
3 |
Current Liabilities |
14 |
11 |
14 |
8 |
9 |
9 |
Creditors |
14 |
11 |
14 |
8 |
9 |
9 |
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
Long Term Liabilities |
16 |
18 |
17 |
20 |
21 |
20 |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
Other long term liabilities |
16 |
18 |
16 |
20 |
21 |
20 |
Net Assets |
244 |
251 |
239 |
269 |
291 |
296 |
CASH FLOW |
|
|
|
|
|
|
Operating Cash Flow |
114 |
92 |
78 |
32 |
45 |
62 |
Net Interest |
2 |
2 |
5 |
7 |
6 |
7 |
Tax |
(47) |
(24) |
(20) |
(11) |
(15) |
(19) |
Capex |
(8) |
(16) |
(14) |
(22) |
(10) |
(6) |
Other investing activities |
0 |
0 |
0 |
(19) |
0 |
2 |
Financing |
(4) |
(20) |
(11) |
(1) |
0 |
0 |
Dividends |
(20) |
(23) |
(35) |
(17) |
(11) |
(39) |
Net Cash Flow |
39 |
20 |
7 |
(29) |
16 |
7 |
Opening net (debt)/cash |
56 |
106 |
121 |
124 |
96 |
110 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
Other |
12 |
(5) |
(4) |
1 |
(2) |
(3) |
Closing net (debt)/cash |
106 |
121 |
124 |
96 |
110 |
113 |
Source: company accounts, Edison Investment Research.
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Research: Investment Companies
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