By 2029, Increased Chrome Production Will Diversify Revenue Streams

Key Takeaways

• Development projects and facility enhancements are expected to boost production capacity, efficiency, and margins, supporting future revenue and earnings growth.
  
• Strategic diversification into chrome production and renewable energy initiatives aim to reduce costs, enhance earnings, and leverage market rebounds.
  
• Falling metal prices and rising costs are squeezing margins, while high debt and capital demands strain financial health and future earnings potential.

Catalysts

Through its subsidiary, Northam Platinum Limited, engages in the production and sale of platinum group metals in South Africa, the Americas, Europe, the United Kingdom, Far East, rest of Africa, the Middle East, Australasia, and the People's Republic of China.

• Continued development of the Eland mine and the 3 Shaft project at Zondereinde is expected to enhance production capacity and improve grades, which could bolster future revenue growth.
  
• Enhancements to metallurgical facilities, including modular expansions and improvements in recovery and throughput, are anticipated to increase efficiency and improve net margins over the long term.
  
• The completion of renewable energy projects, like the planned solar farms, aims to significantly reduce the group’s energy costs, bolstering net margins by decreasing operating expenses.
  
• The strategic focus on increasing chrome production to 1.8 million tonnes by 2029 provides diversification and additional revenue streams, which could enhance overall earnings.
  
• The gradual inventory destocking plan, combined with expectations of a market rebound and a growing supply deficit for PGMs, positions the company to capitalize on future price recoveries, potentially increasing earnings.

Northam Platinum Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northam Platinum Holdings's revenue will grow by 16.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.0% today to 15.5% in 3 years time.
• Analysts expect earnings to reach ZAR 7.4 billion (and earnings per share of ZAR 18.04) by about March 2028, up from ZAR 1.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 35.0x today. This future PE is greater than the current PE for the ZA Metals and Mining industry at 8.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.43%, as per the Simply Wall St company report.

Northam Platinum Holdings Future Earnings Per Share Growth

Risks

• Continued weakness in metal prices, particularly in platinum and palladium, has already impacted revenue, resulting in a 3.1% decrease in sales revenue, which could further impact future revenue and earnings if prices do not recover.
  
• Increased costs from salary and utilities inflation, as well as rising cash costs per 4E ounce by 7.7%, have led to a squeeze in operating profit margins down to 7.5%, which could impact net margins if not managed effectively.
  
• The company's significant capital commitments and expenditures, particularly for projects like Eland Mine, Zondereinde, and the 3 shaft project, coupled with increased net debt to ZAR 6.1 billion, could strain financial health and limit future earnings, especially if metal prices remain weak or further decline.
  
• Production challenges such as rebuilds (e.g., #2 furnace) and building inventories due to operational constraints could result in lopsided revenues if not addressed, potentially impacting short-term revenue realization.
  
• Risks related to competition for skills and reliance on continued investment in large-scale projects might increase operational risks and costs, affecting both revenue performance and net margins.

Valuation

• The analysts have a consensus price target of ZAR130.0 for Northam Platinum Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ZAR145.0, and the most bearish reporting a price target of just ZAR105.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR47.4 billion, earnings will come to ZAR7.4 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 19.4%.
• Given the current share price of ZAR135.0, the analyst price target of ZAR130.0 is 3.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.