Key Investment Highlights
 

1. Sylvania Platinum Ltd (LON: SLP) is a mining company, which is engaged in the production and extraction of PGMs (platinum group metals) from arisings and chrome dumps and is identified as lower unit cost and leading mid-tier PGM company.

2. The Group’s mission is to use innovative and safe processes to generate wealth for its shareholders.

3. SLP is rapidly growing, cash-rich and low-cost operator of platinum group metals, which achieved a record production of 72,090 ounces in 2019.

4. The Company is continuously exploring and examining potential surface projects and resources, which reflects opportunities for future growth. 

5. The Group has the potential to undertake capital expansion projects as the Group is operating with no debt and substantial cash reserves.

6. SLP has recently conducted major management changes as Jaco Prinsloo and Lewanne Carminati, has been appointed as CEO and CFO, respectively from 1^st March 2020. They should bring a fresh perspective to the strategy and governance in future.

7. The weakening of ZAR (South African Rand) against USD during the pandemic benefits them as they incur costs in ZAR and earn revenue in USD.

8. SLP through ECHO Project, which is based on proven operating technology and metallurgical performance, is implementing flotation at operations and secondary milling to optimise the values.

9. The Company continues to evaluate and explore potential projects and surface resources through tailing treatment deals for further growth opportunities.

10. SLP will consider for spin-offs, joint ventures, or outright disposals to maximise its shareholder’s value.

11. The Group has a robust balance sheet with decent cash flow generation capabilities to drive shareholder returns.

12. SLP is confident towards its business model and management team to tackle the uncertain times created due to coronavirus pandemic.
 

Sylvania Platinum Ltd (LON: SLP) – Cash Rich and Debt Free Organization Set to Meet the Target Production of 74,000 to 76,000 ounces of PGMs.

Sylvania Platinum Ltd. is a producer of PGM (platinum group metals) which includes platinum, rhodium and palladium. The Company operates through a distinctive line of operations – retreatment of PGM material from mines and development of potential mining operations. Predominantly, it has two projects and operations - Mineral Asset Development & Opencast Mining Projects and Sylvania Dump Operations (SDO). The SDO consists of six processing plants for chrome beneficiation and PGM, which are located in Western and Eastern Limb of the BIC (Bushveld Igneous Complex). The Company delivered 72,090 ounces of SDO production in 2019. It is listed on FTSE AIM All-Share Index and was admitted to the London Stock Exchange on 25^th March 2011.

The Company is expected to release its FY20 earnings release on 29^th July 2020. 


(Source: Company Website)

Key Fundamental Statistics




Segments at a Glance

Operationally, the Group differentiate its business into two segments:
 

1. Sylvania Dump Operations: Comprising six operational plants.

2. Exploration: Comprises two projects in exploration phase - Northern Limb and Open Cast Mining.
 

Geographically, the Group generates its revenue from South Africa only.

Progress of Non-Financial Key Performance Indicators

1. Tweefontein and Doornbosch operations have achieved seven years of lost time injury (LTI)-free, while LTI remained free for eight years in Lesedi operation.

2. SDO production for PGM increased by 1.5 per cent in FY2019 to 72,090 ounces (oz) against the 71,026 oz in FY2018.
 

(Source: Presentation, Company Website)

Significant Developments of 2020

1. 18^th May 2020:  SLP updated that it has resumed all six operations in South Africa and started dispatching PGM concentrate from the past week. However, the operations are running at a reduced but stable level.

2. 1^st May 2020:The Group repurchased 137,971 Ordinary Shares, comprising 0.05 per cent of the issued capital. Hence, it has bought back a total of 436,603 shares under the plan so far.

3. 3^rd March 2020:The Board of SLP approved a share buyback plan of 1,650,339 ordinary shares to facilitate the prohibition of share trading by small non-UK shareholders.
 

Top Shareholders Statistics

 

Resumption of Operations and Easing of Restrictions

On 18^th May 2020, Sylvania Platinum released an update on the measures taken by South African Government to combat the impact of coronavirus and status of the SDO (Sylvania Dump Operations) as government ease restrictions on mining companies. As per the strict restrictions of government, the SDO reduced its operational performance on 1^st May 2020 and management has faced difficulties to maximise production and ramp up of activities. The Group has managed to run all six operations at reduced capacity, but with stable output and during last week it started dispatching PGM concentrate.

Financial Highlights – Improved Financial Performance in Q3 FY2020 (31^st March 2020)


(Source: Quarterly Report, Company Website)
 

1. In the third quarter of the financial year 2020, the SDO (Sylvania Dump Operations) reported production at 19,968 4E PGM ounces as against 19,206 4E PGM ounces in Q2 FY2020.

2. Driven by increased production and increased USD basket price, the net revenue surged by 56 per cent to USD 43.6 million in Q3 FY2020 from USD 27.9 million in Q2 FY2020.

3. The EBITDA surged by 83 per cent from USD 17.4 million in the second quarter of the financial year 2020 to EBITDA of USD 32 million in the third quarter of the financial year 2020.

4. Reflecting strong revenue and EBITDA growth,the net profit increased by 123 per cent to USD 25.4 million in Q3 FY2020 versus USD 11.4 million in Q2 of the financial year 2020.

5. The group as per its buyback scheme bought 5,173,632 shares of $0.01 at a price (average) of 47.40 pence/share.

6. The Company’s cash balance increased to USD 45.3 million in Q3 FY2020 versus USD 33.8 million in Q2 FY2020.
 

Financial Ratios – Strong Profitability Margins versus the Industry Median 
 

(Source: Refinitiv, Thomson Reuters)

The reported Gross Margin, EBITDA margin, Pretax margin and Net Margin stood at 58.2 per cent, 62.10 per cent, 57 per cent, and 40.5 per cent, respectively, for the first half of the financial year 2020.  Reported profitability metrics were higher against the industry median. The Return on Equity of 17.3 per cent in the first half of the financial year 2020 stood higher than the industry median of 3.1 per cent. On the liquidity front, Sylvania Platinum Ltd’scurrent ratio was significantly higher than the industry median of 1.69, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the assets-equity ratio of the Sylvania Platinum Ltd’swas 1.19x, which was lower as compared to the industry median of 2.32x.

Share Price Performance


Daily Chart as on 27^th May 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On May 27, 2020, at the time of writing (before the market close, at 11:05 AM GMT+1), Sylvania Platinum Ltdshares were trading at GBX 49.74, up by 1.72 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 67.00/GBX 24.00.

Bullish Technical Indicator

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price/Earnings (NTM) Approach



To compare Sylvania Platinum Ltd with its peers, Price/Earnings multiple has been used. The peers are Chamberlin Plc (NTM Price/Earnings was 4.25), China Nonferrous Gold Ltd (NTM Price/Earnings was 2.93), Serabi Gold Plc (NTM Price/Earnings was 5.17), Hummingbird Resources Plc (NTM Price/Earnings was 4.84), and SidMa Steel Products SA (NTM Price/Earnings was 3.33). The Average of Price/Earnings (NTM) of the company’s peers was 4.10x (approx.).

Method 2: Enterprise Value/Sales (NTM) Methodology

 

To compare Sylvania Platinum Ltd with its peers, EV/Sales multiple has been used. The peers are Anglo Asian Mining Plc (NTM EV/Sales was 1.72), Shanta Gold Ltd (NTM EV/Sales was 1.25), Hummingbird Resources Plc (NTM EV/Sales was 1.06), Griffin Mining Ltd (NTM EV/Sales was 0.96) and Chamberlin Plc (NTM EV/Sales was 0.25). The Average of EV/Sales (NTM) of the company’s peers was 1.05x (approx.).

Valuation Metrics

                                       
(Source: London Stock Exchange)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

Sylvania Platinum LtdVs FTSE AIM 100 Index (1 Year)


(Source: Refinitiv, Thomson Reuters)

In the last year, Sylvania Platinum Ltd share price has delivered 56.48 per cent return as compared to negative 14.37 per cent return of FTSE AIM 100 index, which shows that the stock has outperformed the index during the last year.

Total Return 5 Years


(Source: Refinitiv, Thomson Reuters)

Sylvania Platinum Ltd has delivered a total return of 362.42 per cent in the last five years versus the total return of FTSE All share of 7.15 per cent for five years period.
 
Industry Outlook

As per the report from DataM Intelligence (published in April 2020), the emerging PGM (platinum group metals) market within the mining sector is projected to grow by 3.26 per cent from the year 2020 to 2027. The growth drivers for demand include – increasing consumption and production of automotive, rising vehicle sales globally and surging demand for recycling metals.

Growth Prospects and Risk Assessment

SLP can quickly start-up its operations versus traditional underground mines due to the nature of SDO (Sylvania Dump Operations). The Group has strong reserves of cash, which helps in the plant maintenance and ensure the safety of employees in uncertain times. The Mooinooi based optimisation project will help the company to improve and recover PGMs, which are expected to commission at the end of the first half of the financial year 2021. The Group remained debt-free and generated sufficient funds to support the expansion and optimisation of projects. The management guidance of 74,000 to 76,000 oz SDO production is well on track with substantially higher production in the first half of FY20 (40,003 4E PGM ounces) from H1 FY19 (34,045 4E PGM ounces). Moreover, rhodium prices have significantly increased since 2016, which directly support the growth of the Company. Moreover, the Company is advantageous of current exchange rate movements as it incurs capital expenditure and operational cost in ZAR but generates revenue in USD; hence, the strengthening of USD during the pandemic benefits them.

There are some principal risks and uncertainties which could impact the overall business of the company. Operational risks arise due to weather conditions, failure in the delivery of equipment, etc. could affect the operations of the company. Financial risks such as lack of funding and liquidity could affect the operations of the Group. The sustainability of the business is dependent on the availability of resources as the retreatment of dump material has a finite life. Moreover, the Group needs to conduct due diligence and detailed analysis before investing in any project since an enormous amount of capital is required to undertake any project. Further, all its operations are in South Africa which expose them to risk related to socio-economic environment and community unrest in the country. On the other hand, commodity prices and exchange rate fluctuations also affect the Company since metal prices are volatile.
 
Business Outlook Scenario

The Company has shown improvement in its top-line and bottom-line performance in the Q3 of the financial year 2020. The group will be able to increase its production in the upcoming financial year. Cash generation and profitability of Sylvania is linked to the PGM price and the USD/ZAR exchange rate, which are subject to high levels of volatility and are impacted by numerous factors that are outside the control of the company. The Company’s ability to raise enough capital, through debt or equity, for further exploration, investment or development is limited, and a consistently low PGM basket price or prolonged decline in the PGM price may affect the ability of the company to fund future growth. However, the Company is still independently regarded as the lowest cost PGM producer in the world and is in a great position to withstand short-term fluctuation, with an ability to continuously generate free cash flow.

Strong cash flows have enabled the group to internally fund its Project Echo and expansion projects and still increase cash held in the bank. As the South African Government ease covid-19 related restrictions on mining companies, the group has managed to run all six operations at reduced capacity, but with stable output and during the last week it started dispatching PGM concentrate.

Over the course of 3 years (FY16 - FY19), the company's revenue surged from $39.51 million in FY16 to $70.54 million in FY19. Compounded annual growth rate (CAGR) stood at 21.31 per cent.

Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 48.44 (as on 27^th May 2020, before the market close at 9:15 AM GMT+1), with lower-double digit upside potential based on 4.10x Price/Earnings (approx.) on FY20E earnings per share (approx.) and 1.05x NTM EV/Sales (approx.) on FY20E sales (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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