one to watch

One to keep a look out for is SLV, having recently broken through long term resistance of 50c.

SLV has a 25% share in a platinum plant that is treating the tailings for one of AQP's mines (RK1). Forecast EBITDA for 2005 attributable to SLV using current PGM prices stands at 3.5million Australian moving up to 5million PA for 12 years from 2006 onwards.

With the concept now cemented and SLV making money (note that there hasnt been an announcement yet on cashflows, but there should be soon) the JV would be fast tracking development of similar plants at all of AQP's mine ie. RK2 and RK3. SLV has flagged to market that returns on these mines would be very similar to RK1.

SLV has a heap of options exercisable at 20c, with these being deep in the money SLV should get a cash injection of $6million to help fund the other developments (25% of costs). Post exercise of options SLV will have 84 million shares on issue.

Its quite conceivable that SLV could have all three mines up and running by end of 2006. This means the potential for 3 long life tailings plants throwing off $5million each or a total of $15million in EBITDA to SLV. This equates to EBITDA per share of around 18c. One thing to remember is that SLV isnt even the operator of these plants, AQP is so there is little operations risk. SLV just get to enjoy the ride and collect annuities for the next 12 years. If this is the case then SLV by the end of 2006 could be producing $15million in profit before tax, or $10million net profit. With mine lifes in
excess of 10, I would expect the market to rate SLV on PE ratio of 10 or a market cap of $100million. With 84 million shares this equates to a share price of $1.20+

Probably the biggest risk for SLV is the appreciation of the rand. All of their costs are in rand, and they are receiving revenue in US dollars, on top of that SLV has to report in Australian dollars. Maybe everything just cancels each other out.

Catalyst for further share price appreciation include
1. Announcement to market that the plant is running above schedule and they are making budgeted revenues.
2. Announcement of go ahead for RK2 and RK3
3. AIM listing
4. Left field deals, just remember that SLV is basically just a few dudes who sit at a desk twiddling their thumbs, surely they have a lot of spare time to come up with some other profitable deals.
5. Fidelity small cap fund seems to be driving the buying of shares at the moment having recently increased their stake to 6.3% (this is good company to get in bed with) I am sure they are not after a few measly percents in profit, maybe they know something that we don't. Plus since when does a fund stop at 6.3% of a company normally they want 10% or more :)
6. SLV allows exposure to platinum, the macroeconomics of platinum are very favourable, wouldnt expect the price of platinum to drop if anything it will keep going up.
7. Story isnt really well known, apparently brokers etc will only jump on once they see the concept working in RK1, this seems to be the case, although I would be more comfortable once they say so to the market. When they do maybe all these brokers will start jumping over themselves for some shares in SLV. With a tight share register we all know what that means...
8. Small market cap and heaps of blue sky. No reason why they cant apply this concept to every platinum mine in South Africa....

Risks:
1. Rand appreciation (Not sure if they are partaking in any hedging)
2. Political risk in South Africa (I dont really see this as a problem, AQP makes heaps of money there and has been running these plants for ages).
3. Concept fails and the plant isnt producing at what they expect (This is probably the biggest unknown and maybe the one the market is looking for, confirmation from AQP/SLV that the plant is doing what they think it should be doing and more!!!)
4. Takeover risk (AQP will probably take over SLV in due course, this may be good in the short term, however generally means long term gains will be less for us!!!)

Thats about it. Currently the share price sits at 53c, and the options which have an exercise price of 20c expiring at the end of June are trading in the vicinity of 30c (ie a discount to their intrinsic value). For best leverage to this story I recommend buying the options. Thats exactly what I have done, with every intention of exercising them and hanging on to them until this story can really start to shine.

Cheers