New position25 Feb 2020 11:59
Had my eye on this for while and after the recent drop decided to do some research. Decided that this could be one of those under-researched and underestimated opportunities for the following rationale:
As noted by Berenberg, I think that the consensus expectation for this stock severely underestimates the value of the PGM output, in particular the rhodium contribution (which is similar to SLP splits). PGM revenue is more than half of my forecast 2020 revenue yet expectations have been declining to flat, probably reflecting the reduction in chrome prices, and do not reflect the uptick in PGM prices over the last few months.
Consensus revenue/EBITDA for 2020 is 418/97. However my calculations based on YTD and spot prices are 511/151. The additional cash flow means that they can fund their 2020 capex ( circa 110m) and not go into a net debt position. 2021 will the big year with large increases in output across all metals from the contribution of the vulcan plant and the full year impact of the PGM operational improvements, which are primarily focused on grade and should see a substantial reduction in costs and margin. I have conservatively modelled EBITDA at 180m in 2021 which gives an EV/EBITDA of < 2 and a huge amount of free cash flow.
On the downside the lack of cost controls and the huge amount of investment in Karo over the next 3-4 years makes me a little nervous. Admittedly, chrome is not in a good place but I feel like the market may have focused on this too much. Therefore small position for now until H1 results or a recovery in chrome prices warrants an increase. Unlike SLP Tharisa only publishes operational data each quarter so will need to wait until April for H1 financial information but per the Q1 report:
"The co-product model remains robust and we continue to enjoy the benefits of record PGM basket prices as we ramp up production in both PGM and chrome concentrates."
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