Sylvania Platinum Limited (LON: SLP) – Continues to remain debt-free

Sylvania Platinum is a producer of platinum group metals (PGMs) including platinum, palladium and rhodium. The core business of Sylvania Platinum is the retreatment of PGM bearing chrome tailings material. It holds mining rights for a number of PGM projects on the Northern Limb of the Bushveld Igneous Complex. The Company has a lower cost of production of PGMs with low-risk exposure. The Company identifies projects that have a minimum financial and operational risk with a potential for high margins. The main focus of the Company is cash generation to maintain a regular stream of income to shareholders by generating generous shareholder returns. The Company has 570 employees, and it is listed on the FTSE AIM All-Share index.

Values of Sylvania Platinum Limited

(Source: Company website)

Growth Prospects and Risk Assessment

Sylvania Platinum has to be innovative to drive the growth and lead the industry. The Company uses disruptive technologies and acquires strong assets to drive growth. The Mooinooi optimisation project is on track for commissioning in FY21. Lannex mill, which was delayed due to the pandemic, is now completed to contribute to plant life-extension project. New secondary milling and flotation modules at Lesedi are on track. Alternative feed sources being evaluated. The progressive research and development of the new chrome/coal pelletising joint operation project are advancing, with a view to adding value to beneficiated chrome fines fed to smelters. The Company has piloted the project with two different agglomeration techniques and has narrowed down technology options as part of the process design. It is also reviewing Volspruit and Northern Limb exploration assets.

The Company remains debt-free with a positive cash balance, and it has a significant resource to fund expansion and optimisation of projects. In FY20, the Company reported a 62% growth in net revenue. The revenue of the Company has grown at a CAGR of around 33.3% between FY2016 and FY2020.

Development of Projects

(Source: Company website)

The Company faced the challenge due to covid-19 as the South African government imposed lockdown. There was retrenchment at some of the host mines due to the depressed chrome market. Load shedding and distribution interruptions and instability continued to present challenges. Intermittent rainfall and water shortage remain a key focus area with mitigatory measures implemented.

Industry Outlook Dynamics

The palladium has been one of the most accredited metals from the last five years by the World Platinum Investment Council. As more Chinese and European vehicles adhere to increasingly stringent emissions legislation would lead to palladium deficit. The bounce-back of the global economy will determine the market conditions for PGMs.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Sylvania Platinum Ltd.

Recent Developments

On 15 December 2020: The Company announced that certain employees have exercised 140,000 bonus shares (which were awarded in August 2017) under the SLP Bonus Share Award Plan and which have now been vested. The Company has repurchased 63,000 bonus shares at a vesting price of 77.0 pence. Further, 38,500 Ordinary Shares were repurchased by SLP at the 30-day VWAP (volume-weighted average price) of around 74 pence.

On 30 November 2020: SLP confirmed that the dividend for the amount of 1.6 pence per ordinary share of US$0.01 was declared and was paid on 4 December 2020.

Q1 Trading Update (for the quarter ended 30 September 2020, as on 28 October 2020)

• Despite the challenges, the Company has delivered a solid performance in the quarter, with SDO (Sylvania Dump Operations) produced 17,972 ounces (which was 98% increase compared to 9,055 ounces in Q4 FY20).
• During the quarter, PGM (Platinum group metals) plant feed tons surged by 61% quarter-on-quarter (QoQ), while PGM plant feed grade was up by 10% QoQ and PGM recovery efficiencies jumped by 12% from Q4 FY20.
• Overall, the operational performance has been stabilised from Q4 FY20 with improved PGM tons for Q1 FY20 on all ore sources, dump, current arisings and RoM material.
• Led by a sales adjustment for ounces delivered in the prior quarter (which increased by 756% for the quarter) and a combination of the 98% increase in 4E PGMs delivered, the net revenue increased by 213% to US$41.5 million from US$13.2 million.
• During the quarter, Group’s EBITDA increased by 55% year-on-year to US$29.7 million and net profit increased by 68% year-on-year to US$21.0 million, due to the increase in production.
• The Group’s cash balance increased to $60.9 million and the Company continues to maintain strong cash reserves and stays debt-free.

Financial and Operational Highlights (for the year ended 30 June 2020 (FY20), as on 9 September 2020)

(Source: Company Website)

• Despite a particularly challenging H2 FY20, the SDO delivered annual production of 69,026 ounces for the financial year 2020, with higher PGM plant recovery efficiencies and higher PGM flotation mass pull.
• The average gross basket price for PGMs in 2020 was US$2,015 per ounce, an increase of 58% increase from the previous year. This increase in the overall PGM basket was mainly due to an approximate 47% increase in palladium prices and around 165% increase in the rhodium price to record highs in 2020.
• Revenue on 4E ounces surged by 71% year-on-year (in dollar terms), with revenue from by-products contributing US$6.2 million to the total revenue.
• All-in sustaining costs (AISC) was up by 13% year-on-year as a result of the higher operational costs, and all-in costs (AIC) of 4E increased by 6% year-on-year.
• Adjusted Group EBITDA increased by 130% year-on-year (excluding impairments), with a 125% improvement in net profit.
• The Company stays debt-free with a cash balance of US$55.9 million.

Share Price Performance Analysis

On 16 December 2020, at the time of writing (before the market close, at 9:50 AM GMT), Sylvania Platinum shares were trading at GBX 76.68, up by 0.89% against the previous day closing price. Stock 52-week High was GBX 82.00 and Low of GBX 24.00, respectively.

From the technical standpoint, the shares were trading above the short-term support level of 50-day (around GBX 70.17), 100-day (approximately GBX 64.80) and 200-day (approximately GBX 54) simple moving average price. Also, the MACD line is placed above the central line, indicating a bullish setup. The Company’s stock has delivered a positive return of around 12%, 61% and 138%, respectively, in the last three, six and nine months.

Based on 1-year performance, Sylvania Platinum Limited performed better than the FTSE AIM All-Share index and the FTSE All-Share Mining index. Sylvania Platinum generated a return of around 109.4%, whereas the FTSE AIM All-Share index return was close to 15.17%, and the FTSE All-Share Mining index return was about 17.11%.

Valuation Methodology: EV/EBITDA Approach (NTM) (Illustrative)

Business Outlook Scenario

The operations of the Sylvania Platinum were affected severely by the pandemic as it incurred a production loss of around 10,000 ounces. The Company also witnessed additional direct costs for monitoring, sanitisation, and increased safety campaigns. However, the Company has set operational contingency plans to monitor the short and long term impact on the operations. In FY21, the Company will explore new PGM tailings treatment opportunities, and it will also look for a potential opencast and underground run of feed (ROM) feed sources. The other focus will be to identify and evaluate opportunities to diversify commodities and geographies. Sylvania Platinum highlighted that given the uncertainty in the current market conditions, it has abstained from providing any guidance.

The capital expenditure for FY21 includes Mooinooi proprietary chrome processing and classification optimisation project and Lesedi MF2 secondary PGM flotation module, similar to other Project Echo modules. The Mooinooi chrome proprietary processing modifications and optimisation project are on track and is expected to be commissioned towards the end of Q3 FY2021 which will also improve PGM feed grades and ounces at the plant.

(Source: Company website)

Considering a decent performance in Q1 FY21, operational conditions improving towards normal levels, solid liquidity position and robust balance sheet, debt-free organisation, higher profitability margins, targeting around 70,000 ounces for FY21, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Sylvania Platinum Ltd at the current price of GBX 76.68 (as on 16 December 2020, before the market close at 9:50 AM GMT), with lower-double digit upside potential based on 2.37x EV/NTM EBITDA (approx.) on FY21E EBITDA (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*The dividend yield is subject to change as per the stock price movement.

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