Sylvania Platinum — Stellar production, guidance beaten

By Q224, all SDOs will be running on MF2 processing plants and we think, therefore, that the guidance of 74–75koz 4E for FY24 is conservative, but fits in with management’s philosophy of under-promising and over-delivering.

Valuation

Our valuation of Sylvania is 135.4p based on the PGM price forecasts we made in our August Q423 update, which are shown in Exhibit 2.

The valuation of 135.4p per share includes a value of 17.2p per share for the New Thaba JV announcement as valued in our report of 29 August 2023, a value of 104.4p for the company’s producing assets and 13.8p per share for the exploration assets.

Valuation method

We calculate our valuations using a dividend discount model for Sylvania at a 10% real rate of return, using our outlook for PGM prices as shown in Exhibit 2. Sylvania has two exploration projects, the group’s Volspruit and the Far Northern Limb PGM opportunities, which we currently value at directors’ value. During FY24, a new mineral resource estimate (MRE) is expected to be completed for the Volspruit South Orebody. Further metallurgical test work will be done on the 10 large diameter drill hole cores with the aim of increasing recoveries. The metallurgical test work results are expected in the third quarter of FY24. An updated preliminary economic assessment (PEA) is expected in the same quarter that will include the updated mineral resources of the North and South Bodies with the addition of rhodium. The Far Northern Limb Projects, Hacra and Aurora, will see a technical study done on the continuity of the newly discovered T-Zone whereby 40,230m of core will be re-logged to identify the high-grade zone in the drill cores. Furthermore, the Hacra North underground target has provided for some significant drilling results. Work continues to evaluate the underground potential with a technical review of the project expected to be completed during the first quarter of FY24. We will value these projects when the preliminary feasibility study and PEA reports are published, using the discounted cash flow method.

Financials

Our updated financial forecasts are shown in Exhibit 3.

Earnings and cash flow outlook

Historical earnings growth was stellar, but with the lower PGM price outlook, we see earnings per share falling from 17.0c in FY23 to 10.7c in FY24, but increasing again in FY25 to 12.8c per share and further to 16.7c per share in FY26. With the first full year’s contribution from the Thaba JV being in FY26, we see a healthy 22.6% jump in revenue and a 28.0% rise in EBITDA.

Operating cash flow fell to US$78m in FY23 from the previous year’s US$92m, and we forecast US$32m in operating cash flow before tax in FY24. This is a fall of 59.0% y-o-y, mainly because of our lower rhodium price forecasts, but we expect it to rise to US$45m and US$62m in FY25 and FY26 as PGM prices recover and the JV begins to contribute.

Balance sheet

The balance sheet is impressively strong. However, we forecast the closing net cash of US$124m in FY23 (Exhibit 3) to fall to US$96m in FY24 because of our lower PGM price forecasts as well as the company’s investment in the Thaba JV. First production from the JV is expected in H225 and therefore we estimate closing net cash of US$110m in FY25 and US$113m in FY26. (Please see Edison’s Sylvania JV report dated 29 August for details of the JV.)

We forecast no long-term borrowings but other long-term liabilities/leases of US$20m, US$21m and US$20m in FY24, FY25 and FY26, which are low in comparison to the closing cash level forecasts cited above (Exhibit 3).

Dividends

Sylvania now pays interim and final dividends, with the new dividend policy effective from 1 July 2022. Essentially it has moved away from the special dividend payment method used before the effective date. We forecast a dividend of 3.6p per share in FY24, a 55% drop year-on-year, because of lower PGM prices, but rising in FY25 and FY26 to 4.6p and 12.8p per share as PGM prices recover and the Thaba JV cash flow kicks in.

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