Shares in Sylvania Platinum, the London-listed mining group, have raced up 85% this year. While that’s not out of line with other platinum group metal (PGM) shares, given the improved pricing for platinum and palladium, there is an argument that the company remains undervalued.
According to Sylvania CEO Jaco Prinsloo, the market is not giving full value to its Thaba joint venture (JV), a 50/50 project that will add chrome to Sylvania’s production base, as well as more PGMs. Chrome prices have flown high in recent years, but the additional value unlock in Sylvania shares is removing technical risk. “If you talk about what the market is pricing in, I think some of Thaba’s benefit will only materialise the moment the production figures are reported,” Prinsloo tells the FM.
For the year to end-June, Sylvania is expected to post best-yet production of 78,000oz-80,000oz of PGM from its Sylvania Dump Operations (SDO). These are deposits from previous mining operations that it processes. In terms of its setup with the property owners, Sylvania keeps the PGM production after returning the chrome.
At good metal prices this results in a healthy business. For this year, the latter quarter is expected to show the benefits of a 48% lift in the platinum price to $1,321/oz. About 64% of Sylvania’s production is platinum and 12% is rhodium, also on a tear this year. Cash costs sit at about $800/oz, falling to as little as $600/oz in two years.
“As the Thaba JV ramps up to steady-state production, we anticipate a material step-up in the group’s production, profitability and free cash flow generation that in turn will complement the stable operating cash flows from its SDO,” says Berenberg Bank, which was recently appointed Sylvania’s adviser.
I think our current shareholders … would not like to see us blowing all our cash and betting the company’s future on a project this size
— CEO Jaco Prinsloo
UK investment bank Peel Hunt, which is not providing services to Sylvania, agrees with Berenberg that the improvement in PGM prices is not entirely factored into Sylvania’s share price. However, it makes the observation that Sylvania has “room to grow” — a factor in the business that is unappreciated, says Prinsloo.
Analysts agree that South African PGM production is expected to decline in the coming years. “We expect South African production to remain constrained due to a decline in real capex levels over the past decade,” says Arnold van Graan, head of markets research at Nedbank CIB. This is predominantly due to a lack of capital investment in the sector. Sylvania, however, has options to grow, though it will need help.
Its Volspruit PGM deposit on the northern limb of the Bushveld Complex, south of Mokopane, could be a new mine. But the company expects it will cost R4.3bn to build — nearly the same as Sylvania’s market capitalisation today. Making Volspruit attractive is Sylvania’s willingness to enter a JV as it has with its other operations.
“We’ve had some interest from people who want to partner with us where we are the processing partner and somebody else develops it,” says Prinsloo. Sylvania is also interested in an outright disposal of Volspruit, with the company retaining a royalty or processing right.
It has other options. Aurora, on the tip of the northern limb of the Bushveld Complex, is being investigated, while Hacra is likely to be sold off. Neither deposit is an immediate prospect. A feasibility study on Volspruit is expected to take another 18 months; production might be four or five years after that.
Prinsloo says the company will proceed carefully, most likely preparing Volspruit for a deal with a mid-tier company, given its size (about 28Mt-29Mt of metal-bearing ore).
He says: “I think our current shareholders, because of attractive dividend returns, attractive share buybacks and cash position, would not like to see us blowing all our cash and betting the company’s future on a project this size.”
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