Valuation still attractive following model recalibration
The investment case for Sylvania Platinum has expanded over recent years from its
low-risk dump re-treatment operation (SDO) to include its Thaba JV operation, which
is set to become material in coming periods, and increasingly, its exploration assets,
where the company has concluded various studies in recent years. Once the JV starts
production in H225, the company is set to benefit from a healthy increase in revenues
and attractive diversification of its revenue stream to include chrome. The impact
of the JV is set to be material from FY26, contributing a quarter of combined revenue.
The ramp-up of the JV, as well as meaningful investment in SDO projects, has resulted
in a large capital expenditure (capex) drive since FY22 and meaningful JV cash costs
are set to be incurred from FY26.
Cash balance affected by capital expenditure and JV loan
Sylvania’s capital expenditure has increased meaningful over recent years, from US$6m
in FY21 to a range of US$13m to US$15m in the following three years, including US$6.2m
in JV capex (largely related to FY24). Spend accelerated even further in H125 with
a further US$10.3m spent on the JV and US$8m on projects. The company forecasts an
even larger spend in H225, lifting the total capex for FY25 to an estimated US$41.7m.
During FY26, Sylvania is expected to incur its final contribution to the JV set-up
capex (the total spend for 100% of the project is US$47m). The company will also incur
a further c US$19m on SDO projects. Its final planned project spend is for US$5m in
FY27, after which capex is set to reduce meaningfully to c 2% of revenue pa. Exhibit
1 below summarises the recent and projected capex outlay.
| Exhibit 1: Large capex ramp-up to moderate from FY27 |
 |
| Source: Sylvania Platinum accounts, Edison Investment Research |
The meaningful capex over recent periods has been funded by the company’s sizeable
cash reserves, which have reduced from a peak of US$124.2m in FY23 to US$77.5m at
31 December 2024 (H125) and are forecast to reduce further to US$55m at year-end and
US$50m at the end of FY26, before starting to increase again. The cash balance was
also reduced as a result of a US$15.7m loan extended to its JV partner, Limberg. This
loan is set to be repaid from FY27 via quarterly instalments over no more than six
years. These repayments are forecast to have a very positive impact on Sylvania’s
cash profile from FY27, reversing declines and increasing the potential for increased
shareholder distributions. In the meantime, the Limberg loan attracts interest at
the South African prime rate, which is currently 11%. We have improved our modelling
around this, which has resulted in an increase in our finance income forecasts.
Increased JV spend, depreciation and higher cash cost modelled
Sylvania is guiding for JV cash costs of c US$25m (Sylvania’s 50% share) from FY26
and we have increased our forecast to this level from US$23m, which we recognise was
too low. The company’s production guidance for the JV is also somewhat higher than
we had modelled before (specifically Sylvania’s share of chromite production of 420,000t
pa vs our previous forecast of 400,000t). We have slightly lifted our JV revenue forecast,
which has offset our more conservative cost forecasts.
We have also taken full account of the large capex in H125, as well as the large amount
still to be spent in H225 and FY26, which has resulted in an increase in our depreciation
forecasts. While the impact on our FY25 forecast is minimal, there has been a US$1m
increase in FY26 (to US$9.1m) and a US$1.5m increase in FY27 (to US$10.5m). Thereafter,
our depreciation forecasts moderate to levels c US$0.7m below our previous forecasts
(which allowed for a more spread-out capex profile). We have also taken a more conservative
view on SDO costs, especially as it relates to the impact of indirect operating costs.
Our Sylvania model has been recalibrated to more accurately reflect the impact of
the combined costs in determining gross profit as well as the finance income on cash
and the JV loan. We unpack the key contributors to combined costs and finance income
in Exhibit 2 below and the impact it has had on our forecasts.
| Exhibit 2: Recalibrated model has resulted in more conservatism |
 |
| Source: Sylvania Platinum accounts, Edison Investment Research |
Cost of sales in the gross profit calculation includes SDO cash costs, JV cash costs,
indirect operating costs (employee dividend plan and other) as well as depreciation.
Royalties tax is a further offset from revenue in determining gross profit. Our model
recalibration has resulted in a 4.1% increase in our FY25 combined cost forecast,
with increases of 8.6% in FY26 and 11.3% in FY27. Thereafter, the impact moderates
to c 8.5% pa.
Sylvania’s finance income is traditionally earned on its cash balance, supplemented
by interest on loans. With the JV loan to Limberg coming into force, an increasing
contribution to finance income is forecast to come from this source, resulting in
a healthy uplift in our forecast. We forecast a more than doubling in finance income
for FY26 (to US$5.4m) and almost double (to US$5.1m) in FY27.
The higher production guidance for the JV has resulted in our revenue forecasts increasing
by 2.0% in FY26 and 3.1% in FY27. The net impact of all of our changes is a 2% reduction
in net income (and EPS) for FY25, a 5.8% reduction in FY26 and a 7.6% reduction in
FY27. Thereafter, outside our explicit forecast period, the downgrades reduce to below
3%.
Our model recalibration has resulted in much increased forecast conservatism and modelling
confidence. In addition to this, there are two key areas of conservatism that have
been carried over from our previous model: 1) we employ a constant-currency approach,
which means that our US dollar cost forecasts do not allow for any potential benefits
that may result from rand depreciation; and 2) we maintain our conservative PGM and
chrome forecasts (as shared in our Q225 results note).
Interim results beat our pre-calibration expectations
As discussed in our 3 February 2025 note, 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. At
that stage, we lifted our FY25 production forecast to 78,711oz, which was ahead of
company guidance. However, guidance has been increased at the H125 stage to 75,000–78,000oz
for FY25 from the previous 73,000–76,000oz range. The company achieved further cost
efficiencies, with unit costs reducing between 1% and 5% and total operating costs
were only 0.5% higher in rand terms (0.7% higher in US dollar terms). While this was
lower than we had expected, we underestimated the impact of depreciation and indirect
operating costs in our FY25 forecasts, which has now been adjusted.
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
capex. We have now improved our modelling around the JV loan, which has led to a more
conservative outlook for cash levels in the near term, but results in an improved
finance income forecast and cash generation in the longer term as the JV loan is repaid
