Platinum Australia Poised For Better Times

This story features PACIFIC LIME AND CEMENT LIMITED. For more info SHARE ANALYSIS: PLA

By Chris Shaw

Platinum Australia ((PLA)) delivered a mixed result for FY10, the group's loss of $16.3 million being a little better than Citi had forecast, but a little worse than the estimates of Macquarie and Goldman Sachs. The latter noted this was partly due to higher administration, exploration and other costs.

The result also confirmed a slower than anticipated ramp-up of production at the Smokey Hills mine, where output for FY10 came in at 37,700 ounces against a target for production for the year of around 95,000 ounces.

The issues at Smokey Hills were two-fold, with some unexpected problems arising during the year including a pot hole in the ore body, industrial action and power outages. As well, the mining contractor delivered slower-than-agreed production levels. This means the ramp-up to full production at the project has now been delayed by around 12 months.

Full output is now forecast to be achieved in the March quarter of next year, which implies annual output of around 96,000 ounces. Production should also be more profitable as Platinum Australia has installed permanent grid power, meaning there will no longer be a reliance on generators.

This change is estimated to cut annual costs for Platinum Australia by around $0.5 million per month or $6 million in annual terms. Macquarie sees this as material given the expected production at Smokey Hills.

Shorter-term the issue for Platinum Australia is cash flows, as the delays to ramping up output at Smokey Hills means the company's cash position is tightly balanced. As at the end of FY10 the company had cash of $12.4 million and net debt of $16 million. June quarter cash flow was also negative, so Macquarie suggests a swift reversal in this trend is needed for Platinum Australia to avoid any requirement for additional funds.

Taking a longer-term view there is solid growth potential in the stock in Macquarie's view, as along with the Smokey Hills project Platinum Australia continues to advance both the Kalplats and Rooderand projects.

A definitive feasibility study for Kalplats should be completed shortly, while a similar study for the Rooderand project should be finalised later in FY11. Macquarie's numbers imply a higher value for the Rooderand project and lower capex requirements, so to maximise value it is possible this project will be developed first.

As production at Smokey Hills ramps up and the new projects come on stream Platinum Australia should enjoy solid earnings growth, with brokers expecting a swing to profitability from FY11 (this year). Macquarie is forecasting earnings per share of 4c in FY11 and 10.5c in FY12, which compares to the negative 5.3c reported in FY10.

Citi has more conservative numbers and expects EPS of 0.9c in FY11 and 3.1c in FY12, while Goldman Sachs is forecasting EPS of 1.2c and 9.0c respectively. Consensus EPS forecasts for Platinum Australia according to the FNArena database stand at 2.0c in FY11 and 7.5c in FY12.

No ratings have been changed post Platinum Australia's FY10 result, the FNArena database showing two Buy ratings and one Hold. For Macquarie, which rates the stock as a Buy, the key is Platinum Australia offers exposure to the attractive platinum group of metals, with longer-term upside also coming from the group's range of greenfields projects.

Citi also sees value, pointing out Platinum Australia has underperformed relative to other gold and precious metal plays. Even allowing for conservative assumptions with respect to increasing production at Smokey Hills, the broker sees enough value in the stock at current levels to justify a Buy rating.

Goldman Sachs agrees the platinum group metals exposure theme remains valid as a mid-to-late cycle beneficiary of an economic recovery, but near-term the broker suggests investors remain cautious on the direction of the global economy.

Soft global auto production data are holding back prices for platinum group metals and this is in turn holding back Platinum Australia's share price in Goldman Sachs's view, so post the result the stockbroker retains its Hold rating.

According to the FNArena database the average price target for Platinum Australia is $1.00, unchanged from prior to the full year result. Over the past 12 months the stock has traded in a range of 61.5c to $1.29.

Today Platinum Australia shares are stronger and as at 11.00am the stock was up 1.5c at 68c. This implies upside of better than 42% to the average price target in the FNArena database.

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