Mining for the lowest rated stock on the London market

There has been much speculation about the decline in internal combustion engine (ICE) vehicle production as the green revolution gains momentum. This has implications for miners of platinum group metals (PGMs) such as platinum, palladium and rhodium, the key components in the autocatalyst that reduces harmful nitrogen oxide emissions.

However, unless the green stimulus is targeted at purely electric vehicles rather than hybrids that require high PGM loads, PGM demand destruction is unlikely to happen any time soon. Research consultancy LMC Automotive has forecast an 11 percent drop in global gasoline and diesel vehicle sales between 2019 and 2027, but a fourfold for hybrids, leading to an overall 9 percent rise for cars. vehicles that need PGM in the car’s catalytic converter. Automakers make a higher margin on petrol cars than electric ones — about $7,000 according to brokerage Liberum — so they have an incentive to extend their lifespan.

Furthermore, although carmakers charge a premium for electric vehicles due to their lower running costs, the global rise in energy prices means that the relative savings are not as great as before. To paraphrase Mark Twain, “The death of the internal combustion engine has been greatly exaggerated.”

The Attractive Value Opportunity of Sylvania Platinum

  • Final dividend per share doubles to 8 pence, a third more than forecast
  • Extraordinary dividend of 2.25 pence per share paid in April 2022
  • Net cash of $121mn (39.7p per share)
  • Production guidance of 68,000 to 70,000 ounces for 2022/23

Sylvanian Platinum (SLP:88p), a fast-growing, low-cost, cash-rich South African producer and developer of platinum, palladium and rhodium, has announced a one-time final dividend well above analyst estimates and improved production guidance for the new financial market. year, too.

The group’s cash pile soared from $106m (£92m) to $121m ($39.6m annually) in the 12 months to June 30, 2022, fueled by a cash inflow of $ 69.6 million from the operations which allowed the board to spend $17.2 million on capital projects (see below), repurchase $9.8 million worth of stock, and pay dividends of $22.7 million. The proposed final dividend of 8 pence a share will cost $24.5 million, a small dent in the cash position.

It is true that weakness in PGM prices meant that Sylvania’s average basket price of $2,890 per ounce (oz) was 23% lower than in the previous fiscal year, production fell from 70,000 oz to 67 000 oz and group cash costs were 19% higher at $897 per ounce, so the annual cash benefit of $82.2 million was well below the record result of $144.9 million in 2021/22.

However, it remains a hugely profitable operation that generated a net profit of $56.2 million (20.6 cents per share) and will now benefit from better grades from the Mooinooi operations and the installation of milling and milling technology projects. flotation at Lannex and Tweefontein. which will help improve future PGM recovery. Management guidance is also for more production this year.

Prospects for a recovery in Sylvania’s earnings this year are severely underestimated for a number of reasons. For starters, there is a buildup of pent-up demand for new vehicles, as car production was hit by a global shortage of semiconductors that led to record used car values. Additionally, Russia’s PGM exports will shrink as lack of access to capital equipment hits at a time when potential power shortages in South Africa could affect supply entering the market, driving up PGM prices. . The country accounts for 80 percent of the world’s rhodium mining supply, Sylvania’s exposure to the metal is three times that of its mining peers. In a weaker global economic environment, the much lower initial cost of the new ICE cars could also help increase their market share.

Liberum has taken a no-nonsense approach in its forecasts, predicting Sylvania’s revenue will rebound 16 percent to $177 million in the new fiscal year to boost pre-tax earnings by more than $30 million to $114 million and increase the EPS from 20.6¢ to 28¢, or 24 pence at the current exchange rate. On this basis, about 60 percent of the anticipated net cash flow from operations of $86.3 million will be added to Sylvania’s cash pile even after taking into account generous dividend payments. This explains why Liberum forecasts net cash of $174 million (57 pence per share) by June 30, 2023, a sum equal to two-thirds of Sylvania’s current market capitalization. Effectively, the stock price is based on a possible cash-adjusted price-to-earnings ratio of one, a basement bargain valuation in anyone’s book, and that ignores the extent of a repeat of this year’s generous dividends. .

So, having recommended buying the shares at 93 pence on my Portfolio of Trading Shares 2022I have no hesitation in repeating that advice. To buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus postage and packing. Content details can be viewed at www.ypdbooks.com.

Summer promotion: Subject to stock availability, the books can be purchased for £10 each plus £3.95 postage and handling, or £20 for both books plus £5.75 postage and handling.

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