Sylvania Platinum — Earnings upside with chrome JV kicker in Q425

Sylvania Platinum (AIM: SLP)

Last close As at 26/09/2024

GBP0.49

1.90 (4.04%)

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Research: Metals & Mining

Sylvania Platinum — Earnings upside with chrome JV kicker in Q425

Sylvania reported FY24 EPS of 2.7c against our expectation of 5.8c and down 85% on the prior year due to mainly a 35% lower PGM 4E basket price. In addition, the company suffered the effects of much lower platinum group metal (PGM) prices, a delayed recovery in production and elevated levels of expense. The results included more granularity on the Thaba joint venture (JV), including accounting treatment and the outlook to FY28. However, thanks to high chrome prices and a better understanding of the price that Sylvania will receive at mine gate, we have lifted our near-term JV forecasts. We have further incorporated management guidance around higher Sylvania Dump Operations (SDO) ZAR costs for FY25. We have cut our FY25 EPS forecast by 33.7% to 5.1c to allow for the higher costs but have increased our FY26 forecast by 6% to 10.7c, allowing for more aggressive chrome price assumptions and a normalisation of SDO costs. We forecast 8.9% EPS growth to 11.7c in FY27. We have cut our valuation by 5.7% to 105.8p/share due to ZAR appreciation, affecting US dollar cost forecasts.

Metals & Mining

Sylvania Platinum

FY24 results

Metals and mining

25 September 2024

Price

45.6p

Market cap

£121m

US$1.31/£; ZAR17.64/US$

Net cash (US$m) at end FY24

97.8

Shares in issue

261.6m

Free float

88.4%

Code

SLP

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(13.6)

(23.1)

(38.6)

Rel (local)

(13.0)

(23.2)

(43.3)

52-week high/low

85.5p

43.4p

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

Q125 results

November 2024

Analysts

René Hochreiter

+44 (0)20 3077 5700

Marius Strydom

+44 (0)20 3077 5700

Sylvania Platinum is a research client of Edison Investment Research Limited

Sylvania reported FY24 EPS of 2.7c against our expectation of 5.8c and down 85% on the prior year due to mainly a 35% lower PGM 4E basket price. In addition, the company suffered the effects of much lower platinum group metal (PGM) prices, a delayed recovery in production and elevated levels of expense. The results included more granularity on the Thaba joint venture (JV), including accounting treatment and the outlook to FY28. However, thanks to high chrome prices and a better understanding of the price that Sylvania will receive at mine gate, we have lifted our near-term JV forecasts. We have further incorporated management guidance around higher Sylvania Dump Operations (SDO) ZAR costs for FY25. We have cut our FY25 EPS forecast by 33.7% to 5.1c to allow for the higher costs but have increased our FY26 forecast by 6% to 10.7c, allowing for more aggressive chrome price assumptions and a normalisation of SDO costs. We forecast 8.9% EPS growth to 11.7c in FY27. We have cut our valuation by 5.7% to 105.8p/share due to ZAR appreciation, affecting US dollar cost forecasts.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS**
(p)

P/E
(x)

Yield
(%)

06/24

81.7

13.5

2.7

3.0

22.7

6.5

06/25e

104.3

18.2

5.1

2.0

11.8

4.3

06/26e

140.9

39.4

10.7

4.5

5.6

9.9

06/27e

146.9

43.7

11.7

5.7

5.2

12.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Forecasts exclusive of windfall dividends.

Temporary increase in ZAR cash costs

Sylvania experienced higher cash costs in FY24 due to inflationary pressure, a labour strike, a stronger rand versus the dollar and a temporary rise as a result of purchasing higher-grade external material for its Eastern operations. The latter has increased costs by 10%, a situation that will continue through FY25. We have incorporated these higher costs in our forecasts, which results in cutting our EPS forecast in FY25, but allowing for a normalisation from FY26.

Meaningful uplift in revenue forecast from FY26

Sylvania provided an update on the Thaba JV outlook, which has improved visibility. Due to current high chrome prices, it expects c 75% of the JV revenue to be earned from chrome production over the next four years, well ahead of initial expectations. This more than makes up for lower PGM prices. We now forecast revenue growth of 35% in FY26 once the JV comes into full production. This drives a 6% increase in our FY26 EPS and further growth of 8.9% in FY27.

Valuation: 105.8p/share, down on ZAR appreciation

Since our previous report, the rand has appreciated strongly against the US dollar and we have updated our valuation on the back of this. As a result, we have cut our SDO valuation by 7.8% to 75.1p/share. Our valuation of the Thaba JV is unchanged at 16.9p/share, with the higher chrome price impact offset by the stronger rand. Combined with an unchanged 13.8p/share valuation for the exploration assets, our valuation for Sylvania is down 5.7% at 105.8p/share.

Themes from the FY24 results

Sylvania reported EPS of 2.7c in FY24, which was 85% lower than the prior year and below our expectation of 5.8c. In our 14 August Q424 results note, we discussed the revenue pressure that Sylvania faced in FY24 due to a delay in the expected production recovery following a strike earlier in the year, as well as a much lower PGM basket price. While we also discussed higher-than-expected expenses, the FY24 results have provided further context, including a temporary element in the higher cost base.

In addition to the temporarily elevated cost base, other key themes from the FY24 results include revenue, interest income and tax impacts contributing to the earnings miss relative to our expectations, updates on the Thaba JV outlook and exploration assets, and ZAR appreciation over the past month. We consider these in turn.

Temporarily elevated costs

During the year, Sylvania temporarily purchased higher-grade external material for its Eastern operations, which contributed to a 10% increase in ZAR costs. This was due to ore from the host mines that supply run-of-mine (ROM) ore to the SDO being of low grade, which causes costs per ounce to increase and profitability to be compromised. To counter this, higher-grade, third-party dump material is sourced but comes with an associated purchase cost. Management continues to collaborate with the host mines in determining the preferred source of ROM and associated grades to sustain higher grades. This situation will persist during FY25, whereafter management expects the SDO ZAR cost base to normalise. We have updated our ZAR cost forecasts for FY25 on the back of this, which has negatively affected our EPS forecasts. We have adjusted our ZAR SDO cost base from FY26 onwards to allow for the expected reduction flagged by management, which has resulted in a 5% lower base than in our previous forecasts. The stronger ZAR (discussed below) has exacerbated the FY25 impact and moderated the FY26 impact.

Contributors to earnings miss

We updated our FY24 EPS expectations after the Q424 results, allowing for the production, basket price and costs impacts discussed in our last update note. The drivers of the company’s miss of our 5.8c forecast included lower actual revenue delivered (due to our overstatement of the sales adjustment for the full year), higher cash and administrative costs than we had forecast, lower than expected finance income and higher taxes (due to higher dividend withholding tax than expected). Much of the higher cash and administrative costs and lower-than-expected finance income impacts were due to incorrect modelling of the Thaba JV accounting, which we have corrected. The Thaba JV is accounted for using a proportionate consolidation approach.

Meaningful earnings upside from the Thaba JV

Sylvania provided an update on the outlook for the Thaba JV, which has improved visibility. Due to current high chrome prices, the company is expecting c 75% of JV revenue to be earned from chrome production over the next four years, well ahead of initial expectations. Recent chrome cost, insurance and freight prices have been as high as $300/tonne for South African producers, which could imply a price of $150/tonne or higher at mine gate for the Thaba JV. Such high chrome prices could more than make up for lower PGM prices.

We have increased our chrome price forecasts for the Thaba JV from $102/tonne to $143/tonne in the near term (until FY28), after which time we allow it to moderate to $115/tonne. We now forecast revenue growth of 35% for the group in FY26 once the JV comes into full production. This results in a 6% increase in our FY26 EPS for the group and further growth of 8.9% in FY27.

We have moderated the impact of our higher chrome price forecasts on the Thaba JV valuation by taking a more conservative view of the life of mine, with production falling off sharply after FY36.

Exploration asset update

Sylvania presented its Competent Person’s Report (CPR) on the Volspruit project south of Mokopane in the Limpopo Province of South Africa on 20 August following the mineral resource estimate (MRE) released in February 2024.

The rhodium content of the orebody is included in the Joint Ore Reserve Committee (JORC) compliant (2012) CPR. In summary, 28.24Mt of ore at a grade of 2.36 grams per tonne four-element PGM (g/t 4E) was declared, at a production rate of 1.8Mt per year, giving an internal rate of return of 17% at a basket price of $1,691/oz 4E.

At current PGM prices of around $1,200/oz 4E, the Volspruit exploration project is unlikely to be viable. We forecast higher PGM prices in FY25 and FY26.

At the Hacra project, an exploration target of 20–22.5Mt at 2.18–3.32g/t was set. There is insufficient information for an MRE and the targets are of a conceptual nature.

At the Aurora project, following the initial October 2022 MRE for the La Pucella target area, which represents c 12% of the potential total strike length of the Aurora project, reinterpretation of historical information has been completed. A future work programme will result in increased knowledge of the project’s entire strike length and increase the resources of the entire Aurora project. Future drilling needs will also be assessed, as well as more geophysical work and process test work.

We have maintained our valuation for Sylvania’s exploration assets at 13.8p/share, which is the book value at which the company carries these assets. We will reassess this when PGM prices recover and/or once the company releases further studies.

Strong ZAR appreciation

Since our last update note, the ZAR has appreciated strongly against the US dollar, with sterling also trending stronger. A stronger ZAR, if sustained, will have a negative impact on US dollar cash costs. At the same time, a weaker US dollar, if sustained, will have a detrimental impact on US dollar earnings and dividends in sterling. We use a constant currency approach for our forecasts and valuations for resource companies, and have rebased our Sylvania model for current spot exchange rates. As a result, our EPS forecasts have been negatively affected, which feeds through to lower valuations for Sylvania’s operations.

Valuation

In our 14 August update note, we lowered our EPS forecasts and adjusted our valuation for Sylvania downwards to 112.2p/share. On the back of the FY24 results, including further context around temporarily elevated costs, stronger near-term earnings for the Thaba JV and updated spot exchange rates, we have cut our FY25 EPS forecast by 33.7% from 7.7c to 5.1c, while lifting our FY26 EPS forecast by 6% from 10.1c to 10.7c. These changes have resulted in a 7.8% reduction in our SDO valuation from 81.5p/share to 75.1p/share.

As discussed above, the enhanced EPS forecast for FY26 is the result of stronger forecast Thaba JV earnings, which we have incorporated in our valuation. However, the positive impact of higher forecast chrome prices has been offset by the strong ZAR spot exchange rate, resulting in an unchanged valuation of 16.9p/share. Our exploration assets valuation remains unchanged at 13.8p/share. The net impact is a 5.7% reduction in our combined valuation to 105.8p/share.

Exhibit 1: Valuation downgrade on stronger ZAR

Current

Previous

Change

Combined valuation (p/share)

107.3

112.2

-4.4%

SDO (p/share)

76.7

81.5

-5.9%

Exploration (p/share)

13.8

13.8

0.0%

Thaba JV (p/share)

16.9

16.9

-0.3%

FY25e EPS (c/share)

5.1

7.7

-33.7%

Implied P/E (x)

20.7

14.6

FY26e EPS (c/share)

10.7

10.1

6.0%

Implied P/E (x)

9.9

11.1

FY27e (c/share)

11.7

Implied P/E (x)

9.1

Source: Edison Investment Research

The implied forward P/E multiple of our new valuation has increased based on our explicit FY25 forecast relative to our previous valuation, but has reduced to 9.9x based on FY26 EPS and falls further to 9.1x based on our FY27 EPS forecast.

Exhibit 2: Financial summary

US$m

2023

2024

2025e

2026e

2027e

Year ending 30 June

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

Revenue

130.2

81.7

104.3

140.9

146.9

Cost of Sales

(63.2)

(69.0)

(82.4)

(93.2)

(93.3)

Royalties Tax

(4.9)

(1.4)

(2.8)

(5.7)

(7.0)

Gross Profit

62.1

11.3

19.2

42.0

46.6

EBITDA

67.9

12.3

20.5

45.1

49.6

Operating profit (before amort. and excepts.)

61.8

7.4

14.3

37.0

41.4

Intangible Amortisation

(4.1)

(4.9)

(6.2)

(8.1)

(8.2)

Exceptionals

0.0

0.0

0.0

0.0

0.0

Other Expenses

(4.0)

(4.2)

(5.1)

(5.3)

(5.5)

Operating Profit

61.8

7.4

14.3

37.0

41.4

Net Interest

5.2

6.1

3.9

2.4

2.3

Profit Before Tax (norm)

67.0

13.5

18.2

39.4

43.7

Profit Before Tax (FRS 3)

67.0

13.5

18.2

39.4

43.7

Tax

(21.6)

(6.5)

(4.8)

(11.4)

(13.3)

Profit After Tax (norm)

45.4

7.0

13.4

28.0

30.5

Profit After Tax (FRS 3)

45.4

7.0

13.4

28.0

30.5

Average Number of Shares Outstanding (m)

266.6

262.6

261.6

261.6

261.6

EPS - normalised (c)

17.0

2.7

5.1

10.7

11.7

EPS - normalised fully diluted (c)

16.7

2.7

5.1

10.7

11.7

EPS - (IFRS) (c)

16.7

2.7

5.1

10.7

11.7

Dividend per share* (p)

8.0

3.0

2.0

4.5

5.7

Gross Margin (%)

48%

14%

18%

30%

32%

EBITDA Margin (%)

51%

15%

20%

32%

34%

Operating Margin (before GW and except.) (%)

47%

9%

14%

26%

28%

BALANCE SHEET

Fixed Assets

101.5

117.3

156.9

169.3

165.3

Intangible Assets

46.5

47.7

48.1

48.1

48.1

Tangible Assets

48.7

61.8

101.0

113.4

109.4

Investments

6.4

7.8

7.8

7.8

7.8

Current Assets

168.2

140.2

108.9

113.0

118.9

Stocks

5.1

5.7

4.2

2.7

2.8

Debtors

35.7

34.7

39.6

46.5

48.5

Cash

124.2

97.8

63.1

61.8

65.6

Other

3.3

2.0

2.0

2.0

2.0

Current Liabilities

13.9

14.1

13.0

14.6

15.2

Creditors

13.9

14.1

13.0

14.6

15.2

Short term borrowings

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

16.5

18.0

18.0

18.3

18.7

Long term borrowings

0.4

0.5

0.5

0.5

0.5

Other long term liabilities

16.2

17.5

17.5

17.9

18.2

Net Assets

239.4

225.5

234.9

249.4

250.4

CASH FLOW

Operating Cash Flow

77.7

15.0

16.0

41.3

49.0

Net Interest

5.1

6.0

4.1

2.7

2.6

Tax

(19.8)

(6.2)

(4.8)

(11.4)

(13.3)

Capex

(14.5)

(15.8)

(43.5)

(19.5)

(4.9)

Other investing activities

0.0

0.1

0.0

0.0

0.0

Financing

(10.6)

(5.2)

0.0

0.0

0.0

Dividends

(35.5)

(23.4)

(9.5)

(13.5)

(29.5)

Net Cash Flow

6.6

(27.0)

(37.6)

(0.4)

4.0

Opening net (debt)/cash

121.3

124.2

97.8

63.1

61.8

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(3.7)

0.7

2.9

(1.0)

(0.2)

Closing net (debt)/cash

124.2

97.8

63.1

61.8

65.6

Source: Company accounts, Edison Investment Research. Note: *Excludes windfall dividend.

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.

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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Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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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.

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.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Industrials

Accsys Technologies — Tricoya project to be discontinued

Accsys will discontinue the Tricoya project in Hull, England, as it has not found a financial or strategic partner to finalise the construction of the plant. The project started in 2017 and was put on hold in November 2022 after several problems during construction. Accsys will write down the remaining book value of €20m and will need €4.5m for the discontinuation and winding up of the plant. Although this is a setback for the company’s strategy to boost Tricoya sales, Accsys will continue to supply Accoya material to produce Tricoya panels. Our discounted cash flow (DCF) comes in lower at €0.92 as we have taken out the option value for Hull, which is not fully compensated for by the absence of running costs for this plant.

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