For those that missed the recent uplift in palladium and Platinum group metals, what’s an easy way in?
One company offers significant exposure, and yet has remained somewhat under the radar.
As yet, the market hasn’t really woken up to the ramifications of all this, and even before the bout of coronavirus selling, Tharisa’s share price was trading at a steep discount to broker targets.
But it won’t be long before the numbers start to do plenty of talking, because Tharisa’s production of high-flying palladium and rhodium represent a significant portion of output from its South African operations.
“Rhodium represents approximately 10% of our production and palladium 16%,” says Pouroulis.
“What that means is that we are getting nearly US$2,300 per platinum group metal ounce.”
And that in turn flies in the face of an industry famously in the doldrums because of historically weak platinum prices. In fact, platinum has been relatively stable too for a few months, so all in all the current pricing environment adds up to what Pouroulis expects to be “a significant kick to the bottom line.”
Already most of the mid-tier platinum group metals producers have started to re-rate but, perhaps because of the company’s exposure to chrome, Tharisa has lagged.
“We’re classified more in the chrome space, which is under pressure,” says Pouroulis.
“We are a co-producer, so we can’t selectively mine either metal, but our low-cost model that we have still allows us to generate a margin on the chrome and a huge one on the platinum group metals.”
Allowing for a strong recovery after the coronavirus blip, stainless steel demand looks set to stay strong, and Pouroulis says he’s “optimistic” around the fundamentals for stainless steel.
But it’s in the platinum group metals that the immediate gains will be made.
“Tharisa is a big beneficiary of the present PGM basket price,” says broker Peel Hunt.
“We would highlight if present spot prices are sustained through the balance of 2020, then the drop through from the higher basket price would more than double our base case EBITDA of US$88mln.”
On the current model, the broker is using US$1,400 per ounce as a base case basket price, but with Tharisa likely to pull in upwards of US$2,100, as Pouroulis thinks it will, then the upside is pretty clear.
On that basis Peel Hunt sets a 165p target for Tharisa, not too far off treble the current price.
What may hold Tharisa back is the perception that it’s a chrome company not a PGM company, and that lower margin chrome is the dominant force in the business model.
But, says Pouroulis, that’s not really true.
Yes, last year the balance in terms of revenues and costs was broadly even, with a split 55:45 in favour of PGMs. But this year, with the favourable pricing, the split moves much more in favour of PGMs to 70:30. And with that balance in mind, it’s hard to argue that Tharisa is anything other than a platinum group metals producer.
This year the company is forecast to produce between 155,000 ounces and 165,000 ounces of platinum group metals, of which around 10% or 16,000 ounces will be rhodium, and around 16%, or approximately 20,000 ounces will be palladium.
On the chrome side, meanwhile, the company is set to turn out between 1.45mln tonnes and 1.55mln tonnes of chrome concentrate, of which around 25% will be premium grade, known as chemical and foundry grade chrome
So, all in all, if you thought you’d missed the PGM rally think again. Tharisa is poised for an upward bound, with the fundamentals all in its favour.
Tharisa PGM Basket Price, as at 10 March 2020
Palladium US$2 460.50
Rhodium US$13 290.00
Gold US$1 674.55
Total USD US$2 272.28
Total ZAR R36 116.72