Tharisa: An Undervalued Platinum Miner

Tharisa PLC (

LSE:THS, Financial) (JSE:THA, Financial) is an integrated resource group, dual listed in London and Johannesburg that produces platinum group metals and chrome concentrates from the Tharisa mine in South Africa. Uniquely positioned through its vertical structure incorporating processing, beneficiation, marketing, sales and logistics, Tharisa is a low-cost producer, using technology and innovation to maximize stakeholder returns through exploitation of mineral resources in a responsible manner.

The stock is undervalued because it’s likely the market is uninterested in platinum producers, given the commodity’s traditional demand from diesel cars that need the metal in their catalytic converters. The company came to my attention because it has a strong Altman Z-Score of 3.62 and a high Piotroski F-Score of 8. The GF Value Line also rates it as modestly undervalued. The stock has an attractive dividend yield of 4.6%.

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The company reported its full-year results for the financial year to the end of September 2021, reporting Ebitda of $224.3 million compared to $113.4 million in 2020. That puts its enterprise valute-Ebitda ratio at just 1.9.

Tharisa has a dividend policy of distributing at least 15% of annual net profit after tax, but for fiscal 2021 its dividend payout ratio was 18.5%.

This impressive cash generation is due to the company’s mines and processing facilities in South Africa, which are not deep, and difficult underground operations famous in the country. In addition, Tharisa has reported zero deaths at its operations for the past six years. While longer term the company has resources underground, the company is still increasing production at the surface level.

In its production results for 2021, the company reported output of 158,000 ounces of platinum group metals (platinum, palladium and rhodium), including a fourth-quarter record. It has also reached the commissioning stage for a new chrome processing plant.

The Vulcan Plant is the first large-scale plant to produce chrome concentrates from chrome ultra-fines, consolidating Tharisa’s position as a key participant in the beneficiation of chrome production. The concept of the Vulcan Plant was developed entirely by the company’s in-house research and development team to extract the ultra-fine chrome from tailings.

Once fully commissioned, it is expected to materially increase the Tharisa Mine’s chrome recoveries (how much chrome comes from each tonne of ore) from around 62% to roughtly 82%, resulting in increased chrome production of approximately 20% at low incremental unit operating costs and driving Tharisa further down the cost curve.

The miner is also diversifying with chrome and platimum projects in nearby Zimbabwe. This isn’t because its main mine is depleting. Far form it; in November, the company announced an extension of the open-pit life of mine at its flagship Tharisa Mine, increasing it from 13 years to 20 years, following an annual review of its Mineral Resource and Mineral Reserve statement.

The automotive question

It’s pretty clear that in the long term the automotive industry is moving from internal combustion engines to electric vehicles. In the medium term, tougher emissions standards and continued strength in the hybrid market give diesel engines, which need more platinum in their catalytic converters, and petrol engines, which use more palladium and rhodium, some life. However, in the short term, because of the semiconductor shortage, global car production is stalling, which has been cutting into demand. This is likely what is playing on Tharisa’s valuation.

In the longer term, potential shortages of key battery materials such as cobalt and lithium may delay the shift in the world’s auto fleet from ICEs to EVs.

More interestingly, however, for PGM miners such as Tharisa and Anglo American (

LSE:AAL, Financial) is the outlook for the hydrogen industry. Platinum is used in electrolysis, which turns water into hydrogen. Hydrogen is a clean alternative to methane. Platinum is also used in fuel cells that might be a solution to power heavy transport and other hard-to-electrify technologies in the longer term.

Platinum demand

The World Platinum Investment Council puts auto industry demand for platinum (net of recycled supply) at 2.4 million ounces in 2020, about 30% of the total, and jewelery demand at 1.8 million ounces. Interestingly, the second number is down considerably from a 2015 peak of 2.8 million ounces, which is apparently largely due to changes in tastes and spending habits in China.

HSBC metals analyst James Steel sees a platinum deficit (demand greater than supply) by 2023, and palladium remaining in deficit for the next several years at least.

Tharisa sells PGMs as a basket to processors. Its basket price in 2021 was $3,074 per ounce, up 80.4% year on year.

In its market review in the recently published annual report, the company wrote:

“Fundamentals of PGMs in the longer term are robust, driven by a healthy outlook for the internal combustion engine (in the short and medium term), investment demand, industrial demand and hydrogen fuel cell production for renewable energy. While substitution will take place over time between palladium and platinum in catalytic converters, the inability to substitute the minor metals, the major of these being rhodium, ensures that the PGM basket price will remain robust for at least the next five-years.”

Conclusion

The company has a medium-term goal of hitting 200,000 ounces a year of PGM production, including a target of 2022 production of 180,000 ounces. The strong balance sheet and the commitment to dividends and the cheap valuation and decent short-term fundamentals in PGMs mean Tharisa could be a nice income earner for the next few years. As a result, the stock is firmly on my watchlist.

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