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As long as there is nothing fundamentally wrong with the company itself, then with any leveraged play on commodity prices, which is basically what many producers are, the time to be buying is when the price of the underlying commodity is near the bottom of a cycle. It is usually hard to judge exactly where the bottom is going to be but, when it comes to platinum, I think we are nearing that area.
I have been a fan of Sylvania Platinum (SLP) for some time now and remain bullish on it going forwards, especially now that Project Echo has got underway, as prior to that I’d some concerns about the lifespan of the Sylvania Dumps and whether the current, impressive, levels of production could be sustained.
The most recent operational update for the quarter up to the end of March showed production of over 17,000 ounces and keeps the company on track to meet its full year guidance of 63,000 to 65,000 ounces. During that period both the basket price received and revenue increased by 8% and 10% respectively, and EBITDA for the quarter increased to $4.1 million, resulting in a cash build of $3.9 million and cash in the bank at March 31 stood at $16.6 million.
Capital expenditure has been low recently, but is set to increase as Project Echo gets underway, with around $12 million required over the next four years and this will be funded internally.
Echo will produce at under $300/oz, and this will keep Sylvania amongst the world’s lowest cost operations, with an overall cost for all operations, including capex, of a little over $500/oz going forwards. Total production over the next few years is expected to be in the 55,000 to 60,000 ounces per annum range.
In terms of profitability, even at current spot prices, the company is still expecting pre-tax profit in the $10-15 million per annum range, and any rise in commodity prices could dramatically increase that. The last set of interims showed a net profit of over $4.5 million for the six month period, and general running costs for the company remainED low at just $875,000 odd for the period – a 27% reduction compared to the same period in 2015.
Net asset value stood at a little under $100 million, and given the amount of cash that forms part of that, and the fact that the company is debt-free, the current market cap of circa £28 million is very low, certainly compared to similar sized operations.
The one negative that I can see here is that despite the amount of cash being generated, none has been returned to shareholders in the form of dividends, and I suspect that is largely why this is trading at what appears to be such a discount to net asset value.
It is true that a fair amount of cash is now needed to be invested to sustain operations at current production levels, but I do expect that moving forwards the company will reach a stage where surplus cash is distributed amongst shareholders, rather than just being used for capex purposes.
It is also worth remembering that there is further possible upside in Sylvania from its Grasvally chromite project, and the adjacent Volspruit open pit mine, even though both are on hold at the moment – the former has been marketed for a potential sale, and the latter until market conditions improve.
I have been a fan of this company since the 6-7p share price area and hold shares myself, and whilst it has recently seen a pullback to the current level of just below 10p, I would view that as a buying opportunity. It is certainly hard to find a cheaper play of its type on AIM, and any sort of commodity price recovery will offer large upside here in the coming years.
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