The Sylvania Platinum (LSE: SLP) share price is down by 15%, as I write, after the South African metal producer revealed a 64% fall in profit during the last quarter.
Today’s slump has taken this popular small-cap back into penny stock territory, with a share price under 100p. Broker forecasts suggest the shares could now be trading at just four times earnings — potentially a bargain. Is it time to buy?
Why SLP shares are falling today
Sylvania produces platinum and other related metals — such as rhodium and palladium — using waste material from client mines. The company’s financial year ended on 30 June, so today’s update provides an insight into the likely results for the full year.
Unfortunately, the latest numbers show net profit fell by 64% to $14.7m during the fourth quarter. That’s down from $41.3m during the previous three-month period.
Why such a big slump? What’s happened is that the price of rhodium spiked to record highs in April and May but has fallen sharply since then.
However, I think there’s a second concern too. Sylvania’s production of PGM (platinum group metals) fell 6.5% to 16,289 ounces during the quarter. The company says this is because the quality of the feed it’s getting has fallen. In other words, SLP is getting fewer PGM ounces from each tonne of ore it processes.
This is bad news, as it means fewer PGM ounces and higher operating costs for each ounce it produces.
A temporary setback?
The SLP share price has also been hit by a double whammy — Sylvania’s operating costs have risen, and the selling price of its commodities has fallen.
However, I think it’s worth remembering that Sylvania is generally seen as a low-cost producer with high profit margins. For example, today’s figures show an after-tax profit margin of 30% for the three months to 30 June. That’s very high for any business.
Another positive point is that most analysts seem to think the PGM market — especially rhodium — is undersupplied. The main source of demand is the automotive industry, where PGM metals are used in catalytic converters.
Global car production is being held back by a shortage of semiconductor chips at the moment. Most reports I’ve read suggest this situation won’t improve much until next year, but it’s impossible to be sure.
SLP share price: buy now?
Despite today’s setback, I think Sylvania is a good business with some attractive characteristics. But today’s results show how factors outside the company’s control can have a big impact on profits.
I’m also a little worried that Sylvania’s management don’t seem to expect feed quality to improve much this year. That could limit production growth and lead to a sustained period of higher costs.
After today’s fall, my sums suggest that SLP shares are trading at less than five times 2020/21 profits. That’s pretty cheap, especially considering the stock has a forecast dividend yield of more than 5%.
However, last year’s performance doesn’t necessarily tell us much about the year ahead. I can see a very wide range of possible outcomes for the next 12 months. So, while I think today’s SLP share price slump might be a buying opportunity, this situation is too speculative for me. I won’t be buying.