SYLVANIA PLATINUM LTD

AIM Chaos – Sylvania Platinum Ltd 07 July 2016 SYLVANIA PLATINUM LTD Flash Note Current price: 8.00p AIM Chaos’ fair value: 20.00p In this brief fla...
Author: Malcolm Holland
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AIM Chaos – Sylvania Platinum Ltd

07 July 2016

SYLVANIA PLATINUM LTD Flash Note Current price: 8.00p AIM Chaos’ fair value: 20.00p In this brief flash note we provide a basic analysis of the production profile of the Company. Subsequently we provide rationalisation for why we consider that at the current price of 8.00p and market capitalisation of £23.4m, the Company is significantly undervalued. Finally, we explain why we believe that this undervaluation has come about: given that our primary rationale is corporate (i.e. stock related) and not operational in nature, we conclude that the suppressed valuation is only temporary. Compounded with operational improvements and rallying PGM prices, we are anticipating a re-rating of the share price in the near term. Sylvania Platinum Ltd (‘Sylvania’ or ‘the Company’) is a South Africa-based producer of the platinum group metals (‘PGMs’), namely platinum, palladium and rhodium. Its operating assets comprise the Sylvania Dump Operations (‘SDOs’) – which are seven fully operational chrome tailings processing complexes spread across the western and eastern limbs of the Bushveld Igneous Complex located in the north of the country; and a 25% stake in the Chromite Tailings Re-treatment Plant, which is also located on the western limb of the Bushveld Complex. On average, the PGM spilt from the processing operations are around 65% to 65% platinum; 20% to 25% palladium; and 10% to 15% rhodium. Gold (up to 0.5%) is also present in some of the dumps. Furthermore, the Company possesses a number of exploration targets in South Africa that could be developed into open-cast pits for mining PGMs.

We emphasise that for the purpose of this flash note, the only value we attribute to Sylvania is for the SDOs. All of its other exploration assets therefore represent further upside to our base case valuation.

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AIM Chaos – Sylvania Platinum Ltd

07 July 2016

In order to forecast output from the SDOs, we have analysed the past eight quarterly results spanning FYs 2014, 2015 and 2016.

FY ‘14 Q4

Q1

Q2

FY ‘15 Q3

Q4

Q1

FY ‘16 Q2

Q3

PGM production Gross bask. pr. ($/oz) Revenue ($'000)

15,435 1,013 14,208

16,639 904 14,540

14,701 893 12,981

12,778 1,049 10,501

13,468 1,032 10,013

13,729 879 8,817

15,791 785 9,662

14,905 860 10,092

Cash costs EBITDA ($'000) EBITDA margin

634 4,658 32.8%

540 5,495 37.8%

610 3,890 30.0%

641 2,283 21.7%

638 1,159 11.6%

532 1,492 16.9%

420 3,024 31.3%

399 4,133 41.0%

233

780

1,013

581

560

332

383

370

679 3,014 21.2%

570 4,895 33.7%

691 3,207 24.7%

716 1,366 13.0%

672 531 5.3%

571 1,250 14.2%

454 2,293 23.7%

420 3747 37.1%

2,205

894

1,140

754

837

388

447

385

5.3

6.8

7.8

8.8

8.4

6.8

5.1

7.2

SDO LEVEL

Capex ($'000)

GROUP LEVEL Cash costs EBITDA ($'000) EBITDA margin Capex ($'000) Cash balance ($m)

The key line we are drawn to is the SDO cash costs line. Throughout the course of FY 2016, management has been successful in implementing a cost control programme and reducing cash costs significantly. This success enabled the Company to remain profitable even as the price of platinum (‘POP’) tumbled in the second half of last year, culminating in a seven-year low reached in January this year. Moreover, since the beginning of the year and the commencement of the rebound in the platinum price, we have witnessed the EBITDA margin – at both the SDO and the Group levels – improve considerably. Given the acceleration in the recovery of the POP since March (we anticipate a gross basket price for Q4 of a little under $1,000/oz), we envisage this margin only further improving going forward: provided management can maintain its impressive production cost controls, the increased revenue driven by the increase the POP (currently at $1,089/oz at the time of writing) will fall directly through to the bottom line (in effect, surplus cash for distribution to shareholders). Our internal financial model forecasts EBITDA for the SDOs in FY 2017 of $17.2m, and Group EBITDA of $15.0m. As at end June 2016, we estimate that the Company had $9.0m net cash. The key driver in our model is the POP, which we have assumed to be a flat $1,000/oz throughout FY 2017.

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AIM Chaos – Sylvania Platinum Ltd

07 July 2016

At the current share price of 8.00p and Cable rate of 1.30, Sylvania has a market capitalisation of £23.4m, and an enterprise value of £16.5m. On our forecast NTM Group EBITDA of £11.5m, the Company is trading on an EV/EBITDA multiple of only 1.4x. Having analysed other junior precious metals miners listed in London, we feel that a fair value NTM EV/EBITDA multiple for Sylvania – given its size, quality and location of operations – is 4.5x. Trading on this multiple would equate to a market capitalisation of £58.8m. With the current 292.54m shares in issues, this translates to a share price of 20.12p. Accordingly, we see fair value for Sylvania’s shares at 20p.

.................................... Over the past 12 months, Sylvania’s share price has fallen 31.9%. Our fair value for shares resides some 150% above Sylvania’s current share price of 8.00p. In our view, there are two chief causes for the fall in the share price over this period: i)

Sharp decline in price of platinum over a six-month period From a high of $1,098/oz in early July 2015 to a low of $811/oz in January 2016, the POP declined over 26% in twelve months. The low set in January was in fact the lowest in over seven years, since October 2008. The cause of this was two-fold. Firstly, the US dollar continued to strengthen in the period: this suppressed most dollardenominated assets, including precious metals such as platinum. Secondly and specifically to platinum, the decline in the POP accelerated in September 2015, when the Volkswagen emissions scandal surfaced. Circa 44% of platinum is used in catalytic converters installed in diesel engines: as such, there have been fears that diesel engines – which are popular in Europe – will become less so as diesel car drivers replace their vehicles with those that run on petrol engines.

ii)

Significant shareholder selling down stake In the 18-month period between July 2014 and December 2015, investment management group Miton increased its shareholding in Sylvania by over 33m shares, taking its stake from 3.3% to 14.9% of the issued share capital. However, in February this year, a TR1 notification revealed that Miton had commenced reducing its stake. By end June, we estimate that it had disposed of circa 29m shares over a six-month period, which amounts to approximately 10% of the Company’s issued share capital. We believe that the gradual selling of the holding in the open market (as opposed to permitting the Company’s brokers to orchestrate a private block sale) has resulted in a heavily suppressed share price. The decision behind the sell down appears to have been catalysed (at least in the past two months, during which Miton sold circa 16m of its shares) by a change of fund managers at the investment house in May.

However, we feel that both points are now unfounded as reasons for the share price residing at its current levels, as we explain below: i)

Sharp increase in the price of platinum in recent weeks Since the aforementioned low of $811/oz reached in January, the POP has rebounded significantly, and early this morning reached a year high of $1,094/oz (equating to a gain of 35%). Despite Volkswagen’s problems, European diesel platinum demand

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AIM Chaos – Sylvania Platinum Ltd

07 July 2016

continues to grow, as does jewellery demand in Asia. In fact, according to the World Platinum Investment Council’s March 2016 report, the metal ended 2015 in a 380,000ounce deficit. Additionally, in the wake of Brexit platinum has enjoyed strong interest from bullion investors, as safe havens have been sought out amidst intense global market volatility. Bond yields across Europe falling to record lows in the past few days have further helped the cause for precious metals. We anticipate that the combination of the fundamentals underlying the platinum market (i.e. the current deficit) and global market volatility (notably in equity markets) will ensure buoyancy for the POP in the mid-term. ii)

Miton shareholding almost cleared Increased trading in Sylvania’s shares has driven up the share price by 25.5% in less than three weeks, on the back of the rising platinum price and the market’s realisation of the substantial undervaluation of the stock. Last week on Wednesday, Miton reduced their stake further to 4.76%: trading volumes over the past five business days since then have been strong, offering the investment management house ample opportunity to divest still further. We feel that it is probable that Miton will fall below the notifiable holding position of 3.00% in the short term, in light of the new fund manager likely wishing to start afresh. Official confirmation of this will, we believe, act as a catalyst for traders and investors watching from the side-lines to take positions at last. N.B. we note yesterday’s disposal of 1 million shares by long-term investor, Audley Capital Management Ltd. The fund manager has previously demonstrated its capacity for adding to and trimming its positions. We are confident that the trade yesterday was merely a reconfiguring of the fund’s sector allocation on the back of Brexit. The publication of the holdings RNS itself is, in our view, testament to this (had the fund intended to sell more in the near term, it would have not declared its sale until it had finished selling).

To conclude, we believe that at 8.00p, Sylvania’s share price offers excellent value, notwithstanding the ground it has already gained in the past three weeks. The share price was dragged down to a low in June owing to both the deterioration of the POP in the six months leading up to January 2016, and more significantly to a selling shareholder slowly disposing of its stake this calendar year. However, both reasons are now (or in the case of the selling shareholder, soon-to-be) null and void. Sylvania is currently trading on a forward EV/EBITDA multiple of only 1.4x. We feel that 4.5x would be a fairer (yet still conservative) multiple. Accordingly, using our internal model we attribute a fair value of 20.0p to the Company’s shares. Finally, we stress that were Sylvania able to maintain its SDO cash costs at the level attained in Q3, and were the POP to maintain its current level of near to $1,100/oz, our FY 2017 EBITDA forecast would be surpassed by a material margin.

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AIM Chaos – Sylvania Platinum Ltd

07 July 2016

Disclosure AIM Chaos is the research branch of a family office. It is responsible for generating investment ideas for the office and subsequently justifying committed investments. The assembled information disseminated in this report is intended for internal use, and is neither a solicitation to buy nor an offer to sell securities to outside parties. All information collated and utilised in this report has been sourced from the public domain. AIM Chaos has no business relationship with Sylvania Platinum Ltd or with any other company referred to in this report, and has received no compensation from any party for writing this report. The family office that AIM Chaos belongs to does currently hold shares in Sylvania Platinum Ltd. Consequently this report should not be regarded as independent research.

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