Platinum Group Metals appear to be underrated.AGPPF is delivering improved performance year-over-year.Competitor analysis indicates AGPPF is the clear winner.The problem with platinum mining industry and AGPPF's margin of safety.
Anglo American Platinum (OTCPK:AGPPF) (OTCPK:AGPPY) (OTCPK:ANGPY) is part of the Anglo American Group (OTCQX:AAUKF) and is involved in mining of PGM (read: Platinum Group Metals); a group of PMs (read: precious metals) whose market prices generally trades close to or in some cases greater than the prices of gold as identified below:
Now there are two reasons for writing this article. First and foremost is that I believe platinum stocks are under-rated by the investors and represent a PM that promises immense growth opportunities in future. I will discuss this reason in some detail later in this article. The second reason; when I recently wrote about AAUKF one reader pointed out the need to identify in-depth coverage of platinum business of Anglo American Plc. I quite agreed with the reader except that this PM represented an entirely different business segment denoted by a separate ticker; hence the need for a separate article.
In this analysis, I will uncover the Y/Y improving performance of AGPPF and how things could improve going forward. Moreover, since I believe and will duly discuss that PGMs are an underrated part of the PM mining space, their market outlook will improve going forward due to their secure and certain market. This is one factor that is neglected by the investors at the moment, and thus presents a valuable growth opportunity for the future.
Platinum Group Metals appear to be underrated:
Here's an interesting fact; I found that platinum stocks and ETFs had far less followers on Seeking Alpha compared with gold and silver stocks and ETFs. This gives a projection of the fact that investors (and the market) does not give adequate weight to this PM. I have tabulated few notable stocks/ETFs and their followers; for all three categories of metals below:
[Prepared by Aitezaz Khan for Seeking Alpha.]
This table shows that platinum stocks/ ETFs are generally underrated by the investors despite the fact that platinum prices at ~$800/oz are about 2/3rd of gold (at ~$1200/oz).
Platinum prices maintain stability in PM market crash: During the past 1 year, platinum prices have remained comparatively stable. They have not dropped significantly despite the fact that PMs (including gold and silver) have lost significant value during the past couple of months due to US-China trade tariff war.
Platinum looks cheap despite certain market:
The following chart shows that platinum is mainly used in the auto catalytic converters and for making jewelry. The importance of both industries cannot be undermined.
However, to indicate the secure future of this metal I found it appropriate to define a catalytic converter. In terms of Wikipedia:
A catalytic converter is an exhaust emission control device that converts toxic gases and pollutants in exhaust gas from an internal combustion engine into less-toxic pollutants by catalyzing a redox reaction (an oxidation and a reduction reaction).
Since the auto industry will greatly transform and shape the future, it's a no-brainer to see why platinum demand can be expected to significantly enhance in future.
Moreover, the demand from jewelry industry may also experience flat growth. However, I should add that the recent drop in platinum prices was due to a slight excess of supply over demand but this situation will quite likely reverse in the future. Have a look at the demand and supply numbers below:
Source: AGPPF-Integrated Report 2017
The reason why I believe platinum is cheap at current prices is that it nearly halved in value during the last five years (dropping from ~$1600+/oz to ~$800/oz). This is shown in the 5-year price chart below:
Source: Infomine
Given the certain demand of this PM in future and the expected growth in its industrial use, it may be expected that this PM would easily move back to the range of $1,000/oz soon.
AGPPF is delivering improved performance year-over-year:
Given the significance of platinum as a PM, it's relevant to mention that AGPPF is the world's largest platinum producer that is continuously en route to improve its financial and operational performance. Have a look at the following key takeaways from the company's H1 2018 results:
Half-yearly production rose from ~2.48 Moz (read: million ounces) in 2017 to ~2.6 Moz in 2018.While in H1 2018, AGPPF reported a net debt of R1.8 B, it reported net cash of ~R0.5 B.EBITDA margins increased 6% Y/Y (from 15% in H1 2017 to 21% in H1 2018).Free cash from operations increased from R1.0 B in H1 2017 to R1.3 B in the same period this year.During the H1 2018 the company declared dividend of R3.74/share, however it had not declared any dividends in the same period last year.
Besides the impressive numbers for the H1 2018, AGPPF has shown improved performance Y/Y for the last five years as shown below:
Source: AGPPF-Integrated Report 2017
Progress is also evident on the company's balance sheet numbers with improving cash balances Y/Y. This is shown in the balance sheet and cash flow statements below:
Source: AGPPF-Integrated Report 2017
In my opinion, AGPPF promises a great investment opportunity in an untapped platinum market which is poised to grow in future, and this is strengthened by the fact that the company is delivering improved performance Y/Y. This upward trend in performance may continue going forward.
Competitor analysis indicates AGPPF is the clear winner:
I will evaluate AGPPF in terms of liquidity, margins and returns and see how it compares with peers. My peer selection includes Impala Platinum Holdings (OTCQX:IMPUY), Nickel Creek Platinum Corp (OTCQX:NCPCF) and Platinum Group Metals (PLG).
Liquidity: Liquidity is considered in terms of current and quick ratios. Although a current ratio value of >1 is desirable, CR above 2 may indicate insufficient utilization of available current assets. Have a look at the following figures:
Source: Seeking Alpha
With current ratio of 1.52x, AGPPF seems to maintain adequate liquidity. It is also clear that AGPPF has the lowest current and quick ratios among peers, but as I mentioned earlier; current ratios greater than 2 are not considered healthy and denotes insufficient utilization of available current assets. Based on the numbers above, one can also figure out that AGPPF also has the greatest cash balances compared with peers. This could help payment of dividends, provide for working capital or utilized for CAPEX in future.
Margins: Have a look at the following table which denotes gross profit and operating margins for the selected companies. This table shows that AGPPF is the single PGM producer that is generating profit margins from its operations; which is another attraction to this stock, in my opinion.
TickerGP margin (%)Operating Margin (%)Anglo Platinum-AGPPF15.63%13.76%Impala Platinum-IMPUY1.44%(1.61%)
Nickel Cr. Platinum-NCPCF
0%0%Plat. Group Metals-PLG0%0%
Returns: Next in line is the peer comparison in terms of ROA (read: return on assets) and ROE (read: return on equity). Then again, AGPPF is the clear winner as shown in the table below:
TickerROA (%)ROE (%)Anglo Platinum-AGPPF6.82%13.5%Impala Platinum-IMPUY(9.98%)(15.23%)Nickel Cr. Platinum-NCPCF(6.28%)(6.46%)Plat. Group Metals-PLG(165.73%)(274.77%)
The problem with platinum mining industry and AGPPF's margin of safety:
Very recently, AGPPF's competitor IMPUY announced its plan to cut ~13,000 jobs in the wake of rising mining costs and weak recovery in metal prices. As already discussed, this PM has nearly lost half of its value since 2013 and the situation could reasonably be expected to improve going forward. However, the other main problem for this industry is rising costs.
Most of the platinum is produced from deep underground mines that increase the cost of mining and leaves deriving many competitors craving for profits. This is the reason why IMPUY, NCPCF and PLG are lagging behind AGPPF on profitability metrics like GP margins, operating margins, ROA and ROE; as mentioned above.
However, AGPPF has a margin of safety because it has a mix of underground and open-pit mining operations. AGPPF's open-pit operations are based in Mogalakwena district in South Africa. The production profile of this mining district is presented below:
Source: AGPPF-Integrated Report 2017
AGPPF's open-pit mining operations account for ~20% of its total PGM production and helps the company compete in terms of cost and profitability. Furthermore, AGPPF is increasing output from its mines (as also evident from the 2016 and 2017 production in the above table) and I believe that an improvement in PGM prices will help AGPPF's growth going forward.
Bottom Line:
Platinum is part of a larger group of PMs known as PGM. I believe that this PM is currently underrated by the market compared with gold and silver. Additionally, platinum is trading at very cheap prices and has nearly halved in value during the past five years. This supports an expected rebound in platinum prices.
Moreover, platinum miners are finding it difficult to generate profits due to rising costs and depressed prices. However, with a blend of open pit and underground PGM mines, AGPPF is different from the rest. The numbers establish that it's improving its performance Y/Y and the trend continues during the H1 2018. A competitor analysis in terms of liquidity, profit margins and ROA/ROE indicates that AGPPF is heads and shoulders above its competitors. This makes AGPPF a good investment that outperforms the market and one which is poised to grow.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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