Platinum Group Metals Ltd.: Probably Not For Us

seekingalpha06-21

Platinum Group Metals has an interest in the Waterberg project which is in the development stage in South Africa.The technical study provides an NPV figure, which has remained substantially unchanged ...

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(NYSE:PLG) is an interesting development stage PGM play that can be valued on an NAV basis thanks to the Stantec technical study, albeit from 2019. Adjusting the assumptions from that study to today's new macroeconomic context, we have concerns around NPVs given the declines in Palladium prices in particular, especially as negative narratives around PGMs solidify in the wake of the BHP Group Limited (BHP) offer for Anglo American plc (OTCQX:NGLOY). Compared to then, it's unclear whether the proposition looks less or more appealing. It would seem that the outstanding performance of some of the more marginal products, specifically gold and nickel might offset the weakness since the 2019 analysis of palladium especially in dollar terms, even taking into account post-2019 inflation assumptions, discount rate assumptions, and so forth. Nonetheless, we don't think the valuation is better than fair based on a crude analysis of a very sensitive model, considering also Lion Battery Technologies. Directionally, we're also not that keen on PGMs due to the trading narrative around the commodities. PLG Brief PLG has a majority interest in the Waterberg JV, which is their only mining project in the development stage. They are pre-revenue. Ownership in Waterberg (Featured Presentation) The technical studies are mostly finished, and they are coming to the end of the pre-construction stage, which will then lead to the construction stage which is expected to last five years. It might be around seven years after that until they are at a commercial scale. Timeline (Featured Presentation) They are in a low-cost region for mining PGMs, in South Africa, and the cash costs should be relatively competitive, quite in line with Anglo American Platinum Limited (OTCPK:ANGPY). There are not too many major outstanding options in the company, either by other interests like Impala Platinum Holdings Limited (OTCQX:IMPUY) or within the executive compensation schemes. Dilution outstanding at this point is only around 5%. Provided NPV Model We can jump right to the NPV model which is the meat of the case and helps us understand the EV of the Waterberg Project. Of course, it's an area that is quite rich with PGM resources, meaning platinum, palladium, rhodium, and others that are essential for use in catalytic converters used to limit exhaust in cars. Most of these minerals, with the exception of platinum, have more than 70-80% of their end markets just in catalytic converters. Platinum is more like 40%. Gold, nickel, and copper also appear from the mine as co-products. These automotive end markets are theoretically in decline as EV is supposed to take over. We are less certain than many of these facts, but it is the reason also for Amplats being snubbed a little in the Anglo American bid. It is also the reason Anglo American is interested in spinning off Amplats, bid aside. Nonetheless, a clear precedent for these assets not being wanted is something that we are taking into consideration for the trading case. The independent technical study has all the information an investor would need to build a model. They have actually built the model themselves, so we will use the outputs to come to some conclusions. They are DCF models, so extremely sensitive to inputs. All analysis is therefore quite tentative, which is to be expected anyway for a development stage company. The key to know is that the study was finalised in 2019. Therefore, the inputs reflect 2019 assumptions about cost, commodity prices, and also discount rates, which are among the most important elements. They have made two assumptions as far as prices go for the commodities within their NPV model, which we need to get to a NAV figure. They have taken spot prices from then and another scenario based on trailing averages. We will compare the assumptions then with spot prices now to get an idea of how off their NPV calculations might have been. Note also that the ZAR/USD exchange rate is also different.  After-tax net present value of R5.62 billion (US$333 million) at an 8% discount rate [three-year average price US$931 per oz Pt, US$1 055 per oz Pd, US$1 930 per oz Rh, US$1 318 oz Au, US$2.87 per pound Cu and US$5.56 per pound Ni, US$/South African Rand (ZAR) 15.95]. • After-tax NPV of R14.7 billion (US$982 million) at an 8% discount rate (spot prices 04 September 2019 - US$980 per oz Pt, US$1 546 per oz Pd, US$5 036 per oz Rh, US$1 548 per oz Au, US$2.56 per pound Cu and US$8.10 per pound Ni, US$/ZAR 15.00). • After-tax internal rate of return (IRR) of 13.3% (three-year trailing average price). • After-tax IRR of 20.7% (Spot Prices 04 September 2019). 2019 Stantec Technical Study  The sensitivity analysis gets us where we need to go. Below are the ranges they used. Inputs and Scenarios (2019 Technical Analysis) We are going to compare to the trailing average assumption. Below shows the sensitivity to the different factors. Pd prices are down compared to then, by around 12% from the assumed values. Platinum is up by 5%. Gold has almost doubled. Nickel is up by roughly 50%. Platinum and palladium matter the most for the sensitivity analysis. The other important factor is the discount rate. A gold project from more recently just used a 5% rate. A country risk premium for South Africa might be around 4.4%. Used in the analysis here was an 8% discount rate. In the new rate environment, something like 9.4% would be more appropriate, equal to 4.4%+5%, and close to the worst-case scenario of 9.6%, which is the discount rate we'd want to use for the project. That's around a 20% increase from the previous assumptions. Finally, the US$/ZAR rate is around the \"high\" case as provided by PLG. Starting from 5.62 billion ZAR, crudely we have around a -1.4 billion ZAR effect from the new palladium reality. Discount rate the full -2.42 billion ZAR impact from the worst-case scenario. Nickel and Gold might have around a 3.5 billion positive effect even though they would have been expected to be more marginal, also because of just how much they've both risen. Copper which has also almost doubled may be, generously, a 1 billion ZAR effect to NPV. The issue is things like the project CAPEX, and the sustaining CAPEX, both of which are likely higher with inflation which has picked up. Then there are things in OPEX like utilities, labour, and materials. These are all areas to which the model is sensitive. While there may even be a net positive effect from commodities, clear inflation since 2019 possibly means worst-case scenarios for CAPEX and OPEX as far as the provided NPV model goes. We think it's maybe a net -3 billion ZAR effect from CAPEX and OPEX taking full global inflation effects into account. Then the ZAR depreciation has been nice for the model since all the commodities are USD denominated, another +3.2 billion ZAR or so. The net effect, close to 1 billion ZAR better than the provided figure including inflation, and based on what has happened since then. In USD, in which the denomination of PLG, the NPV is more like $310 million, so a slight decline in dollar terms. Sensitivity Analysis (2019 Technical Study) Bottom Line While it was a crude analysis, a fair multiple is something around a 0.6-0.3x for development-stage assets. 1x is closer to what already operational mines might trade at. Since Waterberg is a JV, also there's not enough debt to contend with, it would look like the P/NAV here is closer to 1x. Ultimately, it's a sensitive model since it's DCF, although there is a clear margin to say that the project is probably going to be positive NPV which is good enough to be value accretive for shareholders. We might have even been generous though, depending on how commodity prices develop. We've always liked the hydrogen angle but when there is talk of supply cuts at Amplats, we're just not that sure of the trading dynamics for the stock or for the commodities, which could trend down over time.  There is the matter of Lion Battery Technologies, which is their other business. The presence of this is why we'd say that the PLG valuation looks a little more fair. Lion is jointly controlled by Amplats. The book value is only in the several millions from contributions to accelerate investments into lithium battery technology using palladium and platinum. There is some data supporting that batteries using Lion's patents degrade slower. This probably all has some value, we just aren't sure what, so it's a fudge factor, but it might be enough to get PLG to an unexciting fair value.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2445223736"}