Sylvania Platinum — Stellar production, guidance beaten

Sylvania Platinum (AIM: SLP)

Last close As at 22/05/2024

GBP0.72

0.80 (1.12%)

Market capitalisation

GBP189m

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Research: Metals & Mining

Sylvania Platinum — Stellar production, guidance beaten

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.

Metals & Mining

Sylvania Platinum

Stellar production, guidance beaten

Annual results FY23

Metals and mining

14 September 2023

Price

78p

Market cap

£209m

US$1.25/£, ZAR19.20/US$

Net cash (£m) at end FY22

124

Shares in issue

263.1m

Free float

78.9%

Code

SLP

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.9

(2.3)

(19.8)

Rel (local)

7.2

(1.0)

(20.6)

52-week high/low

112p

65p

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

Q124 results

October 2023

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

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*
(US$m)

EPS*
(c)

DPS
(p)

P/E
(x)

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.

General disclaimer and copyright

This report has been commissioned by Sylvania Platinum and prepared and issued by Edison, in consideration of a fee payable by Sylvania Platinum. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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This report has been commissioned by Sylvania Platinum and prepared and issued by Edison, in consideration of a fee payable by Sylvania Platinum. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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London, WC1R 4PS

United Kingdom

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Utilico Emerging Markets Trust — Emerging market growth opportunities at a discount

Utilico Emerging Markets Trust (UEM) is managed by Charles Jillings, together with deputy portfolio managers Jacqueline Broers and Jonathan Groocock, at specialist investor ICM. Jillings is frustrated by the trust’s wide discount, which he believes does not accurately reflect UEM’s strong past performance and future growth prospects. The fund has a consistently low beta and has outperformed the MSCI Emerging Markets Index over the past one, three, five and 10 years due to successful stock selection. Jillings and his team are investing in the growth potential from four megatrends: energy transition, digital infra, global trade and social infra. They seek undervalued real assets with robust growth profiles, strong cash flow generation and attractive dividend yields. Since inception in 2005, UEM’s NAV has compounded at 9.3% per year.

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