Year end 30 June Sales (US$m) Pre-tax (US$m) Normalised net (US$m) EPS (US¢) PER (x) DPS (US¢) Yield (%) EV/Sales (x) EV/EBITDA (x) 2006A 431.5 192.1 85.6 100.9 26.9 24.0 0.9 5.1 9.5 2007E 648.6 349.1 143.0 169.0 16.1 59.1 2.2 3.4 5.6 2008E 751.0 437.3 186.0 219.7 12.4 109.9 4.0 2.9 4.6 Source: Seymour Pierce Limited full year forecasts C o m p a n y N o t e 8 M a r c h 2 0 0 7 M e t a l s & M i n i n g Aquarius Platinum Going platinum Aquarius Platinum has grown quickly to become the fifth largest platinum producer in the world. The company has four operations in South Africa and one in Zimbabwe and expects attributable production to grow by over 50% in the next three years. With metal prices expected to remain above long-term historic averages, Aquarius should generate substantial cash flows enabling the company to make acquisitions, or become a significant dividend payer. As we believe that the group’s expansion prospects are not fully reflected in the current share price, we initiate coverage with a Buy recommendation. Thanks to record platinum group metal output of 277,156oz and strong metal prices, Aquarius has seen half-year profits to December 2006 triple to US$85.4m, all but equalling the profit for the full financial year 2006. We expect the strong financial performance to continue through the second halfof FY2007 and for FY2008 to bring further record earnings as production increases. Aquarius is well underway with its aggressive growth strategy at its existing operations. This will see attributable production rise by 57% to just over 700,000oz of platinum, palladium, rhodium and gold in the next three years. The company has reiterated its ongoing efforts to identify a suitable acquisition target, but opportunities within the South African platinum sector are limited and expensive. However, ongoing strong metal prices are changing the perspective on the value of these opportunities. If a suitable target can not be identified, the company has pledged to return excess cash to shareholde rs. We believe that the shares still have considerable upside potential despite the marked rise in recent months , coinciding with strong half-yearnumbers. We have valued the company using both our long-term forecasts for metal prices and the current spot prices. Overall, our valuations range between £14.29 and £21.17/share. From this range, we take £17.86/share as our target price. BUY. BUY 1465p LSE AQP.L No of shares (m) 84.57 Market cap (£m) 1,239.0 Net cash (£m) 54.13 Enterprise value (£m) 1,184.87 (%) 1m 3m 12m FTA relative +6.4 +28.5 +102.7 12 month high/low (p) 1585.0/602.0 Next news Q3 FY2007 production results Business Platinum mining in Southern Africa www.aquariusplatinum.com Price and price relative (2y) AQUARIUS PL AT INUM 8/3/07 M A M J J A S O N D J F M A M J J A S O N D J F 200 400 600 800 1000 1200 1400 1600 PRICE PRICE REL. TO FTSE ALL SHARE - PRICE INDEX Source: DATASTREAM Source : Datastream Contacts Charles Kernot Research Analyst 020 7107 8069 [email protected]Asa BridleResearch Analyst 020 7107 8034 [email protected]
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Source: Seymour Pierce Limited full year forecasts
C o m p a n y N o t e
8 M a r c h 2 0 0 7
M e t a l s & M i n i n
g
Aquarius PlatinumGoing platinum
Aquarius Platinum has grown quickly to become the fifth largest
platinum producer in the world. The company has four operations in
South Africa and one in Zimbabwe and expects attributable production
to grow by over 50% in the next three years. With metal prices
expected to remain above long-term historic averages, Aquarius
should generate substantial cash flows enabling the company to make
acquisitions, or become a significant dividend payer. As we believethat the group’s expansion prospects are not fully reflected in the
current share price, we initiate coverage with a Buy recommendation.
Thanks to record platinum group metal output of 277,156oz and strong
metal prices, Aquarius has seen half-year profits to December 2006 triple to
US$85.4m, all but equalling the profit for the full financial year 2006. We
expect the strong financial performance to continue through the second half
of FY2007 and for FY2008 to bring further record earnings as production
increases.
Aquarius is well underway with its aggressive growth strategy at its
existing operations. This will see attributable production rise by 57% to justover 700,000oz of platinum, palladium, rhodium and gold in the next three
years.
The company has reiterated its ongoing efforts to identify a suitable
acquisition target, but opportunities within the South African platinum
sector are limited and expensive. However, ongoing strong metal prices are
changing the perspective on the value of these opportunities. If a suitable
target can not be identified, the company has pledged to return excess cash
to shareholders.
We believe that the shares still have considerable upside potential
despite the marked rise in recent months, coinciding with strong half-year numbers. We have valued the company using both our long-term forecasts
for metal prices and the current spot prices. Overall, our valuations range
between £14.29 and £21.17/share. From this range, we take £17.86/share
as our target price. BUY.
BUY
1465p
LSE AQP.L
No of shares (m) 84.57
Market cap (£m) 1,239.0
Net cash (£m) 54.13
Enterprise value (£m) 1,184.87
(%) 1m 3m 12m
FTA relative +6.4 +28.5 +102.7
12 month high/low (p) 1585.0/602.0
Next news
Q3 FY2007 production results
Business
Platinum mining in Southern Africa
www.aquariusplatinum.com
Price and price relative (2y)
AQUARIUS PL ATINUM 8/3/07
M A M J J A S O N D J F M A M J J A S O N D J F
200
400
600
800
1000
1200
1400
1600
PRICE
PRICE REL. TO FTSE ALL SHARE - PRICE INDEXSource: DATASTREAM
Aquarius is now a well established and significant PGM producer. The
company’s share price has increased substantially in the past twelve
months matching developments at its operations and strengthening
metal prices. We have applied three methodologies to valuing the
company, which involve both fundamental and relative valuation of the
producing assets. We have also attempted to highlight the variation in
valuation that might be expected during a PGM price cycle. Overall, our
valuations for the peak of the cycle range between £14.29/share and
£21.17/share. We take the mid-point as our target price at £17.86/share.
Summary
Assuming that 2007 will represent the peak of the current cycle, our
fundamental valuation implies a target price of £14.28p per share, which
represents a premium to the current price. Our relative valuation also implies
some upside, whilst our peak valuation, using current spot prices extended
over the longer term, gives a cycle peak value of £21.17.
Fundamental valuation
Our fundamental valuation of Aquarius looks at the value of the company
based on long term metrics. PGM prices are a key factor, and in general
terms, we expect the major PGM prices to peak in 2007 before easing to the
bottom of the current cycle in 2010. Prices should then climb steadily for theremainder of the forecast period as the next cycle begins. More detail of our
PGM and base metal price forecasts can be found later in the note, but we
regard these estimates as reasonably conservative.
Foreign exchange must be regarded as the other key factor for Aquarius,
with the majority of costs in South African Rand and Zimbabwean dollars
and metal sales in US dollars. South African producers have benefited from
a weakening of the rand in recent times, which has lowered costs in relative
terms. Our forecasts assume a continuation of this trend over the forecast
period. The hyperinflationary environment in Zimbabwe has led to a series of
devaluations against the US dollar in recent years. Future, relative
movements in the currency are hard to forecast, but we believe costs at thecompany’s Zimbabwean operations in US dollar terms should be
manageable.
The matrix below calculates the valuation of Aquarius on a number of
different bases – in order to generate indications of its peak, trough and
average share prices over the course of a platinum cycle. The multiples are
set in line with those exhibited historically. The discounted cash flow and
price/book valuations also reflect minimum levels for the shares, in order to
reflect takeover potential of the stock. It should be noted that the cash flow
model only includes those funds due to Aquarius from its South African
subsidiary as governed by its stake in the subsidiary. This is set to changeassuming the group’s BEE transaction is completed but, even though
ownership of the subsidiary is set to increase, there are likely to be more
shares in issue, reducing per share valuations back to current levels.
The combination of rapidly expanding production and strong metal prices
lead us to expect FY2007 and FY2008 to be a very significant period with
respect to earnings for the company. As discussed, the company produces
metal in concentrate and as a result does not receive the full value for thecontained metal due to refining and treatment charges. In the table below we
have attempted to estimate the basket price the company will receive for
both the 3E and 5E PGE plus gold baskets in the coming years. We have
also provided estimates of the revenue that the company receives for its
base metal output, which are also subject to charges from the company’s
refining partners.
Seymour Pierce –estimates of prices received for metal in concentrate
Year end 30 June 2004 2005 2006 2007E 2008E
Full prices
Platinum (US$/oz) 773 863 1,006 1,156 1,044
Palladium (US$/oz) 210 218 268 324 293
Rhodium (US$/oz) 640 1,119 3,015 5,146 5,124
Gold (US$/oz) 410 445 604 620 485
Ruthenium (US$/oz) 48 67 131 395 535
Iridium (US$/oz) 133 166 247 367 356
Nickel (US$/lb) 5.30 6.42 8.57 10.64 8.62
Copper (US$/lb) 1.04 1.43 2.31 2.89 2.50
Cobalt (US$/lb) 19.02 14.92 15.15 15.30 15.45
Estimated received prices3E+Au basket price (US$/oz) 1,027 958
5E+Au basket price (US$/oz) 934 891
Nickel (US$/lb) 8.83 7.15
Copper (US$/lb) 2.39 2.08
Cobalt (US$/lb) 12.70 12.83
Source: Aquarius Platinum Limited and Seymour Pierce Limited estimates
Despite a modest reduction in metal prices from their 2007 level, FY2008
should bring record financials with turnover of US$751.0m, profit before tax
of US$432.3m and attributable profit of US$186.0m.
The combination of increasing production and strong metal prices means
Aquarius has the potential to be extremely cash rich in coming years.
Operating cash flow is forecast to rise to US$446.2m in FY2008 and will
continue at a healthy rate thereafter. Best use of the funds is obviously a keystrategy point for Aquarius. The company has already stated its intention to
pay off interest-bearing loans, and we have included full payment of the
US$13.8m loan from SavCom in the FY2007 cash flow. As discussed, a
cash payment for a small percentage of SavCom’s holding in AQPSA has
also been made. Additional uses include acquisitions and exploration. To
this end the company entered a farm-in agreement with Bakgaga Mining late
last year to conduct exploration and feasibility studies over five farms on the
northern tip of the Bushveld’s western limb. We await news of any significant
acquisitions.
Aquarius Platinum Limited - Cash flow estimates
Year end 30 June (US$m) 2004 2005 2006 2007E 2008E
Operating profit 60.5 30.8 193.3 347.1 432.3
Dep'n and Amor’n 12.2 26.5 28.8 31.2 32.5
Other non-cash 0.0 0.0 0.0 0.0 0.0
Change in working cap 16.6 -17.8 -25.6 -31.3 -18.6
Operating cash flow 89.2 39.5 196.5 347.1 446.2
Net interest -8.4 -3.2 -2.1 2.0 5.1
Dividends -4.8 -5.0 -9.1 -50.1 -93.0
Taxation -3.7 -1.6 -32.0 -104.7 -131.2
-16.9 -9.8 -43.3 -152.8 -219.1
Net capital expenditure -28.5 -92.4 -102.9 -54.6 -30.0
Acquisitions/disposals 18.2 4.3 0.0 0.0 0.0
66.8 -53.5 59.5 189.7 290.0
Debt raised 4.6 28.1 29.1 -13.8 0.0
Shares issued 16.0 31.7 7.2 0.0 0.0
BEE Transaction 0.0 0.0 0.0 -46.7 0.0
Cash flow 82.6 1.4 86.7 79.2 197.1
Forex movements 0.0 -0.9 -2.6 0.0 0.0Cash at start of year 40.3 77.9 78.4 162.4 241.6
Cash at end of year 122.9 78.4 162.4 241.6 438.7
Source: Aquarius Platinum Limited and Seymour Pierce Limited estimates
The key point for shareholders remains the dividend policy the company will
adopt in coming years. Dividend payouts from the other major South African
platinum producers in 2006 ranged between 32% (Lonmin) up to 93%
(Northam) of earnings attributable to ordinary shareholders. Aquarius paid
24% in comparison. Going forward, we have assumed Aquarius will increase
its dividend rate to move into line with its producing peers. A rate equivalent
to Northam’s may be too high, but a rate of 50% would place Aquarius in linewith Impala (48%, excluding special dividends). The company has pledged
to return cash to shareholders if suitable corporate projects can not be
Our research recommendations are issued and approved for distribution within the UnitedKingdom by Seymour Pierce Limited only to market counterparties and intermediate customersas defined under the FSA rules. Our research is not directed at, may not be suitable for andshould not be relied upon by any other person. The information contained in our research iscompiled from a number of sources and is believed to be correct, but cannot be guaranteed. Itis not to be construed as an offer, invitation or solicitation to buy or sell any securities of any of the companies referred to within it. All statements made and opinions expressed are made asat the date on the face of the material and are subject to change without notice. Where pricesof securities are mentioned, these are the mid-market prices as at the close-of-business on the
business day immediately preceding the date of the research. The meanings of our researchratings, together with the proportion of our recommendations issued during the previous quarter carrying each rating, is set out on our website at www.seymourpierce.com. Seymour PierceLimited and/or its associated companies and ultimate holding company may from time-to-timeprovide investment or other services to, or solicit such business from, any of the companiesreferred to in research material. In addition, they and/or their directors and employees and/or any connected persons may have an interest in the securities of any of the companies in thereport and may from time-to-time add to or dispose of such interests. Details of the significantconflicts relating to the companies that we research are set out on our websitewww.seymourpierce.com, together with a summary of our policies for managing conflicts of interest. Seymour Pierce does not meet all of the FSA standards for managing conflicts of interest, as a result our research should not be regarded as an impartial or objectiveassessment of the value or prospects of its subject matter, though of course we will alwaysensure that it remains clear, fair and not misleading.
Seymour Pierce Limited is authorised and regulated by the Financial Services Authority, and isa member of the London Stock Exchange.
Key to material interests
1. The analyst has a personal holding of the securities issued by the company, or of derivativesrelated to such securities.
2. Seymour Pierce Limited or an affiliate owns more than 5% of the issued share capital of thecompany.
3. Seymour Pierce Limited or an affiliate is party to an agreement with the company relating tothe provision of investment banking services, or has been party to such an agreement withinthe past 12 months. Our corporate broking agreements include a provision that we will
prepare and publish research at such times as we consider appropriate.4. Seymour Pierce or an affiliate has been lead manager or co-lead manager of a publiclydisclosed offer of securities for the company within the past 12 months.
5. Seymour Pierce is a market maker or liquidity provider in the securities issued by thecompany.
6. Seymour Pierce is party to an agreement with the company relating to the production of research recommendations.
Distribution of ratingsOur research ratings are defined with reference to the amount by which we expect the absolutereturn to change over the next 12 months:
Rating Definition
Buy Absolute return expected to increase by more than 10%
Outperform Absolute return expected to increase by between 5% and 10%
Hold Absolute return expected to change by between -5% and +5%Underperform Absolute return expected to decrease by between 5% and 10%
Sell Absolute return expected to decrease by more than 10%
As at 31 December 2006 the distribution of all our published recommendations is as follows: