The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
Thats right W/e47, a bleak, pessimistic view of intrinsic value as opposed to an asset-based valuation which would of course take into account, cash.
I`m hopeful that such pessimism will not materialise as are we all - hoping for the best, but expecting the worst as the song says.
S
Hi Mark
My 156p certainly was not fair value! It was derived from an (assumed) tanked Rh price of 17k with the other 6Es average prices taken over the last Quarter (to date) to give a (pessimistic view) basket of $3,000.
Using that, I then multiplied this basket price by the full-year target production oz. of 70,000 to arrive at a gross revenue number. From this gross revenue number I calculated a conversion ratio (of 55%) to arrive at a net revenue number. It is unclear to me in SLPs quarterlies how they get from the gross to the net number and I have asked for guidance.
From that net revenue number the net profit is easy to calculate (approx. half) and that net profit figure formed the input into the DCF. To reiterate, this is very conservative because I did not add back depreciation and other non-cash expenses.
I assumed low growth over the next 5 years (around about current inflation derived from the delta between the USD 10 year T-bond rate and the USD 10-year TIPS rate) and even lower for the next 5 and discounted back at 10%. I added a terminal multiple of 8 - again, quite conservative. So, there is a lot of pessimism with this model. And that was deliberate because I wanted to build in a margin of safety. Of course, SLP might not hit 70,000 oz, their plants might flood or workers go on strike like the bad old days of a decade ago. All of that is possible.
If growth numbers are plugged in to take into account the Hydrogen Economy - fuel cells - and how this plays out with SLP then the fair value is much, much higher.
S
Sure no worries! the reason I asked was because I was trying to find the relationship between (A) the basket price, multiplied by (B) production oz. to give (C) and how much of that "converts" to (D) revenue (from there, the net profit is easy as it is approx. half).
In Q3, A = 4,576, B = 23,618 which gives (C) 108,075,968. The revenue (D) is 59.2m. D/C = 55% conversion. I used that 55% ratio to get my 6E revenue (and corresponding net profit) for my pessimistic valuation which ignores depreciation which of course needs to be added back but I deliberately omitted as I wanted to paint as black a picture as I could to gauge how the market sees this. But I think we all know that and you more than anybody!
Will do the same with Q2 and Q1 to see how that "conversion" ratio comes out and report back!
S
El "Stud" - wondering how you get to a $35m (middle) estimate? genuinely interested.
Q4 prod est. = 16,245 (assumes full 70k target is reached)
Your basket of $5,053
= $82,085,985
How did you convert that to revenue?
However you did it, if we call that number "X" - if you half X, you get the (approx.) net profit.
Your net profit middle est. of $35m, if doubled implies = $70m revenue?
I`m wondering how you got from $82m to this $70 (in your model). Hope that makes sense...
Muchas gracias!
S
Hi All
So I took the last Q3 with a basket price of 4,576.
Recovered 6E PGM ounces: 23,618.
Multiply = 108,075,968 (X)
6E Revenue = 59,200,000 (Y)
Revenue to Basket: X/Y = 55%
Net Profit Margin = 50% (rounded down)
Then I worked that up into an annual position by assuming 6E prill split as per last Q3 with full year 70,000 feed capacity and applied that to a pessimistic scenario that Rh tanks to 17,000 and took the other 6E at their (average) prices for 20/21 Q4 (to date)
Rh Price (assumed): 17,000 (split: 9%) 6,300 oz. $107.1m
Pl price: 1,215 (split: 47%) 32,900 oz. $39.97m
Pd price: 2,851 (split: 17%) 11,900 oz. $33.92m
Ir price: 6,250 (split: 5%) 3,500 oz. $21,87m
Au price 1700 (split: 0.2%) 140 oz. $238,000
Ru price 475 (split: 21%) 14,700 oz. $6.98m
Basket Price: $210,095,900/70,000 oz. = $3,000
Pessimistic scenario with a basket price of $3,000
Recovered 6E PGM ounces: 70,000
Multiply = 210,000,000 (X)
6E Revenue = (X/100)* 55[%] = 115,500,000
Net Profit Margin = 50%
Net profit = $57,750,000
Using this (pessimistic view) net profit of $57.75m (excluding non-cash item such as depreciation) I plugged it into a 10 year DCF with years 1- 5 at growth no higher than 2.5%. Years 6-10: even lower at 1%. I assumed a terminal value with a low PE of 8 equivalent and a discount (required return) rate of 10%. After all that, SLP under those assumptions is 156p.
According to Metals Daily: https://www.metalsdaily.com/live-prices/platinum/
The Rh price today is: 24,500.
Hopefully this demonstrates that even with a 10% fall today SLP is still undervalued. Take into account more optimistic assumptions and the true value is much higher.
S
And in breaking news: a tsunami hit the eastern and western limbs of SLPs PGM facilities causing massive disruption and damage...it`s share price was off by 9%! er....no.
Mr Market again....so the Chinese think they can control supply and demand over commodities whilst at the same time take all of the upside (and no downside of a western-style economic model). (Comical.)
Fill ya boots. Sit back. Have a cold one. And wait for the next earnings report...
Nothing has changed. Fundamentals as good as ever. Net profit margins of 53%* show how good their cost control is - irrespective of Rh spikes.
*
SLP 20/21 Q1 Q2 Q3 Q4 2021
Net Profit ($Ms) 20.1 20.3 41.3 [30]?
Sales 35.60 42.40 74.20 ???
Net margin 56% 48% 56% av. 53%
S
I completely agree with both Bang and the Stud. Reading back through the history of SLP from 2004 it is obvious that these ATH Rh prices are frankly not relevant to a LTH. They are however relevant to a short term trader.
This company survived and actually did well through very turbulent markets a decade ago. The basket price (USD) from 04 to 12 was:
2004 2005 2006 2007 2008 2009 2010 2010 2011 2012
521 800 1,207 1,704 2,626 881 1,393 1,015 1,166 876
(that is as far as I have got for now.) But the Stud`s point is clear - $3k has to be seen in context and perspective. I`m buying into a great business here - long term, something to hand down to my son in 10, 15 years. If you want a quick turn of 50% good for you. That is not me but each to their own. I do keep a trading account, but SLP are not in it.
If you believe that PGMs have a bright future in the brave new world then SLP can and I`m sure will be a part of that. On a negative note I`m still reading about (2012) exploitation of the Northern Limb and nearly a decade on has anything advanced at all? I`m not sure it has and that is a concern. Management have been riding this wave and why not but soon they will need to re-assess and develop a strategy for the future. Can Jaco do that? We will see...
S
I wish another SLP would be along in a minute, I really do!
(if you find one let me know).
If you want a speculative share, take a look at SYME. SLP is about as fundamental (and non-speculative) as fundamental gets. Retail investors using phone apps with red and green flashing lights akin to colourful casino chips may view what they do as speculative. But don`t confuse that with this. No-one is speculating here (that I know of).
The fundamentals speak for themselves.
S
Don`t over-think this.
The capital equipment in the washing/recovery plants has been in place for over a decade. Of course capex is required on maintenance, but that is not a risk factor If you look at the amount of Capex and then look at the amount of depreciation on PPE they are approx. the same (2020 Annual Report)
Phil Oakley (I recommend anything he authors) suggests a simple rule of thumb: take the Free Cash Flow per Share (FCFps) and ask how much of it is built into the EPS. At 80% Phil says a "definite candidate".
SLP is 100%. FCFps = 29p and EPS (ttm) is 28.7.
Based on forecast (Q4 - 30m) 20/21 $111m net profit, $5.2m capex $5.74m depreciation
If this doesn`t scream buy, not sure what does.
S
Yes agree TBTT, Luna and the Stud(io) :) et al
I`m trying to ignore Rh ATHs and work through their 17-year historical av. basket prices to align with annuals earnings to get a ratio to input as the start of a (worst case/" margin of safety") DCF valuation which ignores the real and ATH prices.
What is required then are growth assumptions (which is anybody's guess). The fading out of PGMs in ICEs over time may be offset by expansion in/explosion of fuel cells. (I will post a link to an interesting article on that.)
For now, I will use low medium and high growth assumptions and then discount back at what for me is not a greedy rate of return - 12% to 15% with a terminal value assuming a blend of the risk free rate and GDP (again, conservative).
I have a feeling it will land at the 200p mark which is bonkers if that is the case but will see.
On a side note it is fascinating to read back over the reports and see how they started and where they are now, their evolution if you will. It is also a useful way to asses, risk.
S
Besides the growing cash pile (debt free companies tend not to go insolvent - Peter Lynch not me) even if the basket price falls leading to a -1.25% drop in earnings for next 5 years and only quarter of 1 per cent growth thereafter (next 5 years) with a terminal value of PE 5 and a rate of return matching the S&P 500, the intrinsic value is 180p.
But those assumptions are beyond conservative as to be a bit silly really. I mean why with negative to flat line growth would an investor seek a return of 10% that does not really make much sense to me. if you push it down to 7% the price is 213p
And, is negative to flat line growth realistic in the next 5 years? Hmmm....well I don`t have a crystal ball, but...
S
Was looking at what happened to Tullow last night. Paul Mc Dade from March 2006 was COO (Share Price 290p) and by the time he took over the CEO mantle, the SP had already dropped by 70%. So make out that what you will - the CEO takes the wrap not the COO.
It all started to go Pete Tong in and around May 2012. They had had bonanza finds in a couple of fields and then the well ran dry with the 1500 share price full of expectations which when they did not arise, led to deflation and exit over time. That and bad luck. This is a risky sector.
Interestingly, the CEO Aidan Heavey through all of this was not an oil man, he was an accountant. In an interview with the New York times early doors he said this " I did what I was good at and picked the best people"
His right hand man and 2IC was COO Paul Mc Dade.
S
WAISAD it matters not if it is 12, 13, 14, 15 or 16p because this is either going to fly very high in which we will all be very handsomely rewarded irrespective, or fizzle out like a damp squib.
Looking at the backing, I`m reassured that I`m in good company.
GLA
S