Production recovery and cost control but weaker PGM outlook
The investment case for Sylvania Platinum is mainly based on a low-risk dump retreatment
operation, to which we ascribe the bulk of the company’s valuation. However, with
Sylvania expecting its Thaba JV to start production in H225, the company is set to
benefit from a healthy increase in production from FY26 and attractive diversification
of its revenue stream to include chrome, which is currently attracting healthy prices.
An August 2024 competent person’s report for the Volspruit Scoping Study has resulted
in a significant improvement in the outlook for this exploration asset, including
an increased life of mine. While our forecasts and valuation include an updated recognition
of the impact of the Thaba JV, we remain conservative in valuing the Sylvania exploration
assets at book value, which could imply upside going forward.
Healthy Q225 improvement beats our expectations
Sylvania’s Q225 results exceeded our outlook due to 9.4% higher production and 3.5%
lower costs than expected, despite a 1.8% lower PGM basket price than expected. Exhibit
1 shows the quarterly results and the variances compared with our prior forecasts.
| Exhibit 1: Comparison of Q225 results with Q125 |
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| Source: Edison Investment Research, Sylvania Platinum accounts |
We continue to see positive momentum for the remainder of FY25. We have lifted our
production forecasts and reduced our US dollar cost forecasts (on the back of a stronger
dollar), although we have reduced our year-end PGM basket price forecast from US$1,475/oz
to US$1,423/oz in line with our new PGM forecasts (see below).
The highlights of the Q225 results are as follows:
- Q225 plant feed was 2.3% higher than Q125, but 3.7% below our expectation due to a
four-day planned maintenance shutdown at Tweefontein in October 2024.
- PGM feed grade of 3.5g/t was well ahead of the 3.0g/t we expected, due to a strong
performance from Sylvania’s Eastern operations (which include Tweefontein and Lannex,
two of its largest operations).
- 4E PGM production of 20,238oz beat our expectation by 10.1%, while 6E at 26,373oz
was 9.4% ahead. 4E production of 39,398oz year-to-date provides strong support for
the company’s FY25 target of 73,000–76,000oz.
- Healthy production, despite a 1.8% lower PGM basket price than expected, drove Q225
revenue (before sales adjustment) up 8.1% relative to Q125 and 3.9% ahead of our expectation.
A large positive sales adjustment, related to actual prices received in the reported
quarter for production reported in the previous quarter, resulted in an even larger
17.1% increase in total revenue (12% ahead of our expectation).
- Further cost efficiencies emerged in the quarter with unit costs reducing between
1% and 5%. Total operating costs were only 0.5% higher in rand terms (0.7% higher
in US dollar terms), which were lower than we expected by 6.3% and 3.5%, respectively.
- The company’s EBITDA of US$6.7m was more than double the level in Q125, and meaningfully
ahead of our expectation of US$2.4m, on the back of the positive factors above. Net
profit of US$6.3m was similarly stronger.
- Cash levels reduced from US$94.7m at Q125 to US$77.5m due to US$12.1m of capex spend
on the JV, as well as the payment of the US$3.3m final dividend and stay-in-business
expenditure.
Downgraded PGM and chromite forecasts
The platinum price has an inverse relationship with the rand/dollar exchange rate
(historically, a weak rand results in a weak platinum price in US dollars). This is
because a weak rand results in higher margins for South African producers, resulting
in continued platinum metal supply to the market, which depresses the US dollar price
of platinum. With a high likelihood that the rand could weaken further in 2025 due
to dollar strength (it has already weakened 5% since November last year), the platinum
price will struggle with gains, especially as above-ground stocks remain at around
six months annual production. Hence, we have reduced our forecasts for platinum. We
have raised our ruthenium prices sharply due to the increased demand for ruthenium-intensive
hard disk drives resulting from the large increase in data storage requirements from
AI. We have decreased our iridium forecasts because the outlook for fuel cells and
hydrogen electrolysis has stalled, we think temporarily. We think that fuel cells,
which are zero emission motors driven by hydrogen, will have a part to play in the
future as carbon emissions from internal combustion driven vehicles are ratcheted
back inexorably. Our forecasts for rhodium and palladium are little changed from our
previous forecasts.
| Exhibit 2: Edison updated PGM price forecasts (average June year-end prices) |
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| Source: Edison Investment Research, Austin Lawrence Gidon, LSEG Data & Analytics |
Chromite prices have decreased sharply to US$225/tonne (on a cost, insurance and freight
(CIF) basis) from US$320/tonne at their peak in the first half of 2024 as a result
of lower demand from China and weaker ferrochrome prices. With a weak Chinese economy
and possible higher trade tariffs from the US, we see the chrome market steadying
at current price levels. While we have moderated our near-term forecasts, our long-term
chromite forecast (beyond FY30) remains unchanged at US$230/tonne.
Forecast revisions
We have increased our FY25 EPS estimate by 1.9% to 5.2c on the back of a strong Q225
performance and lift our FY25 4E production forecast from 77,259oz to 78,711oz, ahead
of the company’s guidance range of 73,000–76,000oz. We have also reduced our US dollar
costs for the remainder of FY25 to account for the cost control shown in Q225 and
a 5% stronger US dollar compared to 4 November 2024 when we last updated our forecasts.
We have reduced our year-end forecast cash balance by 5.4% to US$59.0m due to a stronger
US dollar (with the cash balance held in rand and sterling).
| Exhibit 3: Comparison of FY25 and FY26 forecast changes |
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| Source: Edison Investment Research |
We have cut our FY26 EPS estimate by 6.1% to 10.1c, largely driven by lower forecast
PGM prices and a more conservative view on chromite prices, which affects our JV forecasts.
This has been moderated by lower forecast US dollar costs due to a stronger dollar.
Our forecast cash balance at the end of FY26 has been cut by 5% on the back of a stronger
US dollar.
The impact of our lower PGM and chromite price forecasts moderates in FY27, resulting
in a 3.0% cut in our EPS estimate to 11.3c.
