HISTORICALLY Sylvania Resources has moved ahead in fits and starts. However, now it has focused on platinum and stands to be a producer in quick time courtesy of a very clever deal. By Michael Weir - RESOURCESTOCKS
Sylvania Resources RK1 project, South Africa
Few market players realise Sylvania Resources will be Australia's next platinum producer. The relatively quiet West Perth-based company has slipped under the radar screen of many brokers and market analysts in the past few months as it has gone about building its corporate position.
Yet, at the moment Sylvania is the only small-cap exposure to platinum mining on the Australian Stock Exchange. Full stop.
There are plenty of other junior platinum hopefuls out there, and some with quite big mineral resources, but none can boast being only months away from first production. But Sylvania is not about to stay quiet for long.
Having secured the company's future and delivered on the goals he set, managing director Grant Button is keen to start telling the story.
He is keen to get out and tell the market that Sylvania has a 25% stake in a project that will start by producing at a rate 20,000oz of platinum group metals (PGMs) a year by the end of this year.
He will explain how this production will generate an income stream for Sylvania of $3-3.5 million a year. And that income will come from a relatively risk-free investment of about $2 million.
When Button starts promoting the stock, there is a good chance the Sylvania share price will not remain sitting at its current level of about 30c, which gives the company a modest market worth of $15 million.
"There is just no one out there that knows the story," said one Perth broker. "But when they get out and start talking about it a bit more, there will be lots of people who will see the potential upside. And there is just no exposure otherwise to the platinum market, unless you buy one of the majors, or you buy Aquarius Platinum, which is a high value share with less leverage."
Aquarius Platinum has been one of Western Australia's greatest mining success stories in recent years. What started as a modest junior company has now developed three platinum projects in South Africa and has a market capitalisation of almost $560 million.
Aquarius just also happens to be Sylvania's partner.
Platinum mining has traditionally been the domain of the big players. The likes of Impala Platinum, Xstrata and Anglo American are some of the world's biggest mining companies.
Even Aquarius has become a serious player with its mining expertise and ability to turn relatively small-scale resources (by world standard) into profitable projects.
In March this year Sylvania struck a deal to take a 25% stake in a modest tailings re-treatment project being put together by Aquarius.
The idea was to treat old dumps and current tailings streams derived from the beneficiation process used by neighbouring chromite miners in the Kroondal area of South Africa.
After mining of the chromite bearing ores, chromite miners upgrade the quality of their chromite ores for chromite content, producing a tailings stream, which contains the majority of low-level in-situ PGM content derived from the mining process.
When Aquarius was setting up its Kroondal mine it acquired title to the PGMs in some of the old dumps and chromite reefs in the area.
A local private entrepreneurial company, GB Mining and Exploration, had the rights to other PGMs in the area and brought to Aquarius the concept of combining the current tailings stream and old dumps to create an economic resource.
Sylvania secured its position by agreeing to fund GB Mining into the project by paying $2 million toward capital costs and issuing Victoria Global with six million shares.
The consortium is now in the middle of building a treatment plant, next door to the Kroondal project, which will have the capacity to process up to 30,000 tonnes of chromite tailings a month.
Commissioning of the $8 million project is due to start in mid-November with full commissioning by the end of December.
RK1, as it is known, is expected to produce 20,000oz of PGMs in the first year, increasing to 30,000oz in the second year.
The tailings and dump material, because of its fine particle size, can be fed directly into the new facility's flotation process and there are no shortages of potential feed for the plant in the mining rich region.
PGMs will be recovered by conventional flotation and the resulting concentrate will be processed under off-take agreements with Aquarius' existing smelter partners.
"With little mining cost, no crushing and no milling costs, the economics of the project can be described as extremely robust," Button said.
"Operating costs, including a management fee to Aquarius, are estimated at R92 a tonne in the first year, reducing to R80 after that. At an exchange rate of R7/$US1, that equates to an operating cost of $US170 per PGM ounce in year one, reducing to $US145 per PGM ounce after that."
With platinum prices, for example, currently sitting around $US860/oz, the margins are self explanatory.
"The project economics have been conservatively modelled and are very robust over a broad range of metals price and exchange rate assumptions," he said.
"An after tax internal rate of return of 72% is generated at a basket price of $US521/oz for PGMs with an exchange rate of R7/$US1.
"An after tax internal rate of return of 40% is generated at a basket price of $US389/oz for PGMs and with an exchange rate of R6/$US1."
The concept sounds so simple it begs the question, why hasn't this been done before? Button said there was a simple explanation.
He says the partnership with Aquarius is a central plank in making the project economically feasible.
Aquarius' existing off-take agreements mean the partners will be able to get a much more favourable price for their concentrates than a new market entrant might expect.
Where Aquarius gets paid 80% of the contained value of the concentrates it sells to the smelters, a new player could expect about 50%, which makes a huge impact on the revenues and profitability of the project.
The other key aspect is being able to leverage off Aquarius' existing operations.
A normal plant like the one being built would cost three times as much if were being built on a stand-alone basis.
Both Sylvania and Aquarius have been able to capitalise on the existing Kroondal infrastructure including power, water, environmental management, and staffing levels - some Kroondal staff have been able to dedicate some of their time to RK1 operations.
"This is such a great business model," Button said. "It is a relatively small investment by us, the risk is extremely low, but the returns are very robust indeed.
"Obviously the key then is to replicate the idea. The more of these we roll out the better our return will be."
Already the consortium is working on RK2, based on Aquarius' nearby Marikana platinum mine, and talks are under way for RK3.
With RK2 up and running on top of RK1, Button said Sylvania could be looking at income of $6-$7 million a year.
The company is currently well funded following a recent placement and there is also a good chance it will receive an additional $6.4 million in June next year from the exercise of options.
Sylvania has 30 million options exercisable at 20c a share, and with the price currently around 30c they are already well and truly in the money.
SLV Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
