Investors seeking an interesting way to play price strength in platinum group metals (PGMs) – platinum, palladium, rhodium – should look at Sylvania Platinum (SLP:AIM). The small cap miner has underperformed most of this commodity group over the past six months, yet the business is now at a tipping point where it is forecast to move back into profit, see a dramatic increase in free cash flow and start paying dividends.

Sylvania has a much lower public profile than most AIM-quoted miners. A rare investor roadshow triggered a share price hike by a third in August, but we believe the stock remains under the radar of most investors. If you are bullish on the outlook for PGMs then Sylvania has considerable attractions. House broker Liberum has a 20p price target, more than double the present 8.25p trading level.

SLP - Comparison Line Chart (Rebased to first)

Palladium at the start of September hit a thirteen-and-a-half year high, trading above $900 per ounce. Driving the commodity price has been a mixture of production disruption in South Africa, one of the world’s biggest sources of the metal, robust demand from Chinese and US carmakers and growing investor interest. Platinum and rhodium demand has come from many of the same sources.

Sylvania processes waste material (called tailings) from chrome mining to recover PGMs. It doesn’t have the problems depressing the South African platinum sector which is a vast network of very deep mines with significant labour issues. Sylvania’s operations are all above ground and are a relatively straightforward processing operation. It has numerous plants running material from historical mining activity and tailings straight from current third party mining operations.

It has finished spending money on expanding output and now can produce 50,000 ounces of PGMs a year. Costs average $700 per ounce which is considerably lower than selling prices, thus this should become a decent company capable of churning out high levels of cash each year. WH Ireland analyst Paul Smith uses a $1,350 per ounce basket price in his long-term pricing assumptions, illustrating the potential profit margin.

Liberum forecasts a 0.13c dividend in the financial year to June 2015, rising to 0.62c in the following year, the latter equal to a prospective 4.6% dividend yield on the current share price.

The key risks to consider are heavy reliance on South African miner Samancor for feed material and a desire to get into direct chrome mining given a portfolio of exploration projects. The latter would require significant capital expenditure but Smith at WH Ireland believes the company may spin-out mining interests into a separately-listed company, as previously done with the iron ore assets that now constitute Ironveld (IRON:AIM). After all, many shareholders will have backed the company for its tailings reprocessing and could exit if Sylvania gets too involved with mining, as witnessed with gold sector peer Goldplat (GDP:AIM) whose mining efforts proved disastrous.

Issue Date: 17 Sep 2014