Sylvania’s Q224 and H124 results were overshadowed by a lower PGM basket price, which resulted in a 10% reduction in revenue. With the delay in the PGM price recovery we expected, we have pared back our forecasts, particularly for platinum and rhodium. This, combined with Sylvania’s weaker-than-expected Q224 results, has resulted in a 30% reduction in our FY24 EPS estimate to 7.4p, with cuts of 23% and 14% for FY25 and FY26, respectively. Our new valuation is 118p/share, down 13% from our previous 135p/share. With exploration assets valued at book value and conservatism in our Thaba joint venture (JV) valuation, our valuation offers upside as projects graduate from exploration to production over the coming years.
Q224 results pressure due to decline in basket price
Q224 revenue faced pressure, due to slower holiday season production and a lower PGM basket price, but recorded a 6% increase after a positive quarter-on-quarter change in sales adjustment. With operating costs well controlled, EBITDA was up 57.5% q-o-q but off a very depressed Q124 level and well below our expectation for a recovery in the quarter. Sylvania (LON:SLPL) remains set to achieve full-year 4E PGM production of 74,000–75,000oz. We have cut our PGM price forecasts due to increased supply from recycling in China. However, our outlook is neutral as Chinese electric vehicle sales are strong.
Near-term forecasts cut, but long-term upside
Due to the lower PGM basket price for Q224 and a delayed recovery, reflected in our new forecasts, we have cut our FY24 EPS forecast by 30% to 7.4p, FY25 by 23% to 9.2p and FY26 by a more moderate 14% to 13.5p. These forecasts conservatively allow for the Thaba JV to ramp-up to full production in FY26. We have not yet made any allowance for Volspruit, the Far North Limb and Hacra North projects to move from exploration towards production, although we expect meaningful progress from preliminary economic assessment to preliminary feasibility study over coming months. These projects offer upside not fully captured in our current forecasts and valuation.
Valuation: 118.1p/share; SDO down 15.5% to 88.2p
We value the Sylvania Dump Operations (SDO) at 88.2p/share, which is down 15.5% on our previous valuation of 104.4p/share on the back of lower PGM forecasts. We have also reduced our valuation for the Thaba JV by 6% to 16.1p/share, with chromite dependence limiting the PGM downgrade impact. We continue to carry exploration assets at book value of 13.8p/share, but flag that the completion of the PFS could result in upside.
Delayed recovery in PGM prices
The investment case for Sylvania Platinum (Sylvania) is mainly based on a low-risk dump retreatment operation to which we ascribe the bulk of the company’s valuation. It also has exploration assets in the northern part of the Bushveld Igneous Complex of South Africa. A preliminary economic assessment (PEA) is being conducted for Volspruit, following an updated mineral resource estimate (MRE), recently released. This will be followed by a preliminary feasibility study (PFS) over coming months. In August 2023, the company announced a Thaba JV with Limburg Mining Company (LMC), which will diversify Sylvania’s production to include chrome concentrate from H225.
Quarterly results below our expectations
Our Q224 forecasts were overly optimistic on production and the platinum group metals (PGM) basket price, offset by lower-than-expected operating costs.
Exhibit 1 shows the quarterly results and the differences between them and our prior forecasts.
- Q224 production was lower than Q124, with both plant feed and PGM plant feed 4.5% down, affected by mine closures during the festive period, which resulted in lower current arisings and feed materials as well as lower grades. Q124 production was also slightly overstated due to production held as work-in-progress at 30 June 2023.
- Combined with a slightly lower feed grade, this resulted in a 9.6% reduction in total 4E PGMs to 18,232oz and a 9.5% reduction in total 6E PGMs to 23,105oz. We expect an improvement in recoveries over coming quarters, driven by Lannex and supported by Mooinooi.
- Our optimism for PGM basket prices in Q224 was not delivered, with the actual basket in the quarter undershooting our expectation by more than 20% (and also 2.9% lower than Q124).
- 4E revenue was 33% lower than our forecasts (11.4% lower than Q124), but thanks to 17% higher than forecast by-product revenue (the company has been receiving a higher-than-expected share of the 2E basket price over recent quarters), the combined impact was for total revenue 29% lower than our forecast (5.8% higher than Q124 due to a reversal in sales adjustment).
- Operating costs were well controlled, ending the quarter 2.5% lower than Q124 in US dollar terms and 6.5% lower than our forecast.
- While EBITDA was up a strong 57.5% on Q124, this was off a low base and at US$4.4m, missed our forecast of US$11.9m by a wide margin.
- Cash levels remained strong at US$107.2m, despite dividend and tax payments amounting to US$21m over the period.
Changes to PGM price forecasts
Following the recent weakness in platinum and palladium prices, together with the lack of and expected recovery in rhodium prices, we have reduced our PGM forecasts across the board, except for iridium, which has held up well.
Demand for PGMs dropped last year and has remained low because of increased recycling of PGMs, particularly in China. Chinese vehicle sales for the first time topped 30 million in 2023, which included around 10 million EVs. It has also become the biggest consumer of palladium and rhodium for autocatalysts for the last c 8 years. As a result of being scrapped after an average life of about eight years, the large number of cars together with the high volumes of palladium in their autocatalysts are now likely to result in an increase in recycled palladium and rhodium. This recycling is the main reason behind the fall in demand for palladium and rhodium in China, which has been the primary consumer of newly mined palladium and rhodium up until now. This is unlikely to change if China continues to recycle metal for most of its needs particularly if EVs make further inroads into that market at the expense of internal combustion engine cars. EVs are likely to see an increase in China this year and this combined with the recycling is likely to be negative for palladium and rhodium demand for 2024 at least. Demand for PGMs from the rest of the world is likely to also be muted in 2024, as inventories remain high for most PGMs with the exception of iridium.
Our updated commodity forecasts are given in Exhibit 2.
In the longer term, we see significant headwinds for EVs in most countries except China, particularly in North America, which in the last two years has become the largest consumer of palladium and where EVs are still shunned. European consumption of palladium and rhodium will likely increase with EURO 7 for heavy duty vehicles beginning in 2025, and limited EV penetration because of high purchase and insurance costs and rapid depreciation. Import duties on Chinese EVs may also see those EVs having to be sold internally. The rest of the world only accounts for 10% of total EV production and with stringent gasoline emissions legislation being implemented from 2025 to 2032 all over the world, PGM demand is likely to rise and therefore prices should follow over this period.
Forecast revisions
Our forecast revisions are shown in Exhibit 3. We have cut our FY24 plant feed forecast by 4.3% and PGM plant feed by 0.8% on the back of the lower than forecast production in Q224. Due to an expected improvement in recoveries, we have lifted 4E PGM production modestly.
The biggest change to our FY24 forecasts results from the downgrades to our PGM forecasts, with our FY24 basket price now expected to be 22.4% below the previous level. This translates into a 22.5% lower 4E revenue, which is partly offset by an increase in by-product revenue (we have increased the forecast share of 2E basket price that Sylvania receives to be more in line with the strong experience over recent quarters). Total FY24 revenue is now forecast at US$91.4m, which is 18.6% lower than our previous estimate.
Thanks to good cost control during the first two quarters of FY24, we have pulled back our operating cost forecast for the full year by 5.1%. Despite this, we now forecast a gross margin of 23.9%, down from 30%, and a 29.6% lower EPS. Our cash balance is forecast 3.1% lower at US$85.7m, with the net profit impact moderated by a more favourable working capital result, as was demonstrated during Q224.
In FY25, we forecast an improvement in revenue to US$109.8m on the back of higher basket prices, resulting in a recovery of gross margin to 30.1%, but still well below recent history. We forecast an EPS of 9.2p, which is 23% lower than our previous forecast of 11.9p.
We forecast a strong revenue uplift in FY26 (see Exhibit 5), partly due to an increased PGM basket price, but mostly due to the Thaba JV going into full production. We forecast a further improvement in gross margin to 33.6%. Our new EPS forecast of 13.5p is 14% lower than our previous estimate of 15.8p.
Cash is forecast to decline during FY24 as a result of the capital injection into the Thaba JV. It remains very healthy though and following a lower-than-expected dividend trajectory for FY24 and FY25, we forecast a return to 8p/share in FY26, with potential sufficient headroom to declare a windfall dividend again in FY26.
Exploration assets steadily moving towards production
Sylvania has published an updated MRE for its projects on the northern limb of the Bushveld Igneous Complex. The results include revised MREs for the Volspruit North and Volspruit South ore bodies, including rhodium and ruthenium, both of which had previously not been assayed. The MRE is in line with the Joint Ore Reserves Committee (2012) standard.
For the Volspruit North project, the new MRE represents a 10% increase in the indicated tonnage from the previous MRE report of October 2022. A more defined geological model has also resulted in a 4% MRE grade increase with the addition of rhodium grades improving by 7%.
The MRE for the Volspruit South project is the first one completed since the mineralised zones have been redefined and, as expected, it reports approximately a third of the tonnages at almost double the grades previously reported by Sylvania’s consultant, Integrated Geological Solutions in 2012.
The company has embarked on a PEA of the Volspruit Project to assess what value the addition of the Volspruit South resources, and the rhodium and ruthenium resources, might add to the overall project. Metallurgical test work is being undertaken on fresh core that was drilled during CY23. Based on the results of the scoping study and metallurgical test work (expected Q424), a decision will be made on progressing the project to a PFS phase during FY25.
While these developments could result in upside potential for exploration assets, long-term production and our valuation, Sylvania has not yet implemented any changes to the book value of its exploration assets and we have opted to take a similar conservative approach in our valuation.
The Thaba JV is on track for commissioning in Q325.
Valuation
On the back of our lower PGM price forecasts, we have moderated our EPS forecasts, which has resulted in a 12.8% reduction in our valuation for Sylvania from 135.4p/share to 118.1p/share. Our valuation is made up of an SDO valuation, a valuation for Sylvania’s 50% share of the Thaba JV and a value for its exploration assets (carried at book value).
Our PGM forecast changes have resulted in a 15.5% reduction in the SDO valuation to 88.2p/share, with a lesser impact on the Thaba valuation (6.3% lower at 16.1p/share) due to its high exposure to chromite, where no forecast changes were made. The exploration asset carrying value has remained unchanged at 13.8p/share.
While the implied forward P/E multiple of our new valuation has increased based on FY24 and FY25 EPS forecasts relative to our previous valuation, the FY26 forward P/E is largely unchanged.
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