Jubilee Platinum - South African Platinum Play

http://www.jubileeplatinum.com/

Jubilee Platinum Logo

Jubilee Platinum (LSE:JLP) is an AIM listed Platinum "mine to metals" company that is also listed on the Johannesburg Stock Exchange. The company's prime assets are located in South Africa at its Tjate project. However, platinum mining is certainly not an easy business to be in and Jubilee's share price reflects this with it currently standing at 7.5p having been at over 80p before the financial crisis. The result is a £26m capitalised firm with 345m shares in issue.


Despite the recent spike up to around 9.5p, the chart position for Jubilee admittedly looks precarious. A floor has been established around 7.38p, but this has been tested repeatedly and current lies just above it. It would not be unrealistic to see selling pressure actually mean that the share price punches through this level in order to maintain the current long-term downtrend. A positive scenario would see the declining resistance broken through at ~10p held as support for a significant period of time. However, the failure of previous upward breakouts means that this is unlikely and unfortunately a relatively bearish movement towards ~6.5p should not be discounted.

As I often mention though, technical analysis is only one side of the equation. So what does Jubilee platinum do? As mentioned before, the company's flagship project is the Tjate project located in South Africa. Platinum has a variety of uses predominantly in jewellery and for car parts. Prior to 2009 the company was focused upon exploration, but following the financial crisis (to prevent the stagnation of the company operations [and to avert the cash commitments this required]) it converted to a mine to metals focused firm.

Due to its increasing scarcity, the company Chairman Colin Bird is forecasting that investing in high quality platinum projects at current prices could reap dividends in the future. The project was acquired in 2004 and has seen a number of resource estimated, feasibility studies and other data analysis covered. During the 2011/12 calendar year, the company "[evolved] into an operational smelting company" through the acquisition of the Middelberg Smelting Facility. In addition through acquiring Braemore Resources the company gained exclusive rights to 'ConRoast'. "Jubilee’s unique access to the ConRoast process enables Jubilee to unlock the inherent PGE (platinum group element) values in the traditional chrome ores via the extraction of PGEs and chrome from near- or at-surface platinum containing chrome reefs."

courtesy of freedigitalphotos.net

There are a number of advantages to extracting platinum through the ConRoast method. The project emits little sulphur dioxide so is consider as relatively environmentally friendly. In addition, the method is relatively safe, ensures high metal recoverability, is 'energy-efficient' and is described by the company as being flexible.

Jubilee has also recently announced its intentions to acquire Platinum Australia, an Australian company that runs a low-risk  shallow-pit mine and processing plant. Platinum Australia (PLA) owns ~66% of the Smokey Hills PGM Mine and is earning 70% and ~50% shares in two further South African projects (Rooderland & Kalahari respectively). Clearly such an acquisition is a natural fit for Jubilee who have this opportunity to expand their South African coverage and potentially benefit from an array of regional economies of scale as well as being able to use existing, fully functional plants. The planned acquisition is being proposed in all share terms with PLA holders receiving one JLP share for every 2.593 PLA shares. Should the transaction go through according to plan, after debt conversion, JLP shareholders will amount to 54.5% of total holders. The final date for this acquisition is likely to be around mid-May. Such an acquisition will help Jubilee avoid the significant risks involved with self-developing a mine including geological and engineering risks.

On a positive slant, the Tjate asset itself is likely to be worth materially more in the case of a raw asset sale. The low market cap is likely due to the market not being convinced by ConRoast and also taking a defensive stance when viewing the financial position of the company. Furthermore, future production should provide the company with decent cash flow especially if platinum prices stabilise at the current levels. Whether this will have any serious effect on the balance sheet is debatable, but as with a lot of mining projects, it often takes a couple of years before cash in can start to considerably cancel cash out.

A number of risks are associated with Jubilee not least the political risk involved. Aside from this, the recent strike at Lonmin's (LSE:LMI) platinum mine was well documented with a number of casualties. The disputes regarded low pay and poor working conditions. Whilst these do not transfer over to Jubilee's operations, it is more the presence of instability that is an issue. However, I do not consider this to be a credible threat. Perhaps more tangible threats include the chance of a potential severe energy shortage in the country that could halt operations in some locations (this is somewhat negated by the company's 70% holding in Power Alt - an electricity generation company)..

 Platinum prices are likely to remain stable around the $1450 - $1550/oz region although there is a caveat to this. If the production figures rise back to pre-strike levels, supply will increase and consequently the metal price could weaken. On the contrary, if an 'OPEC-like' South Africa-Russia trading bloc is implemented, prices could rise in anticipation of supply be monitored and tightened. The metal has already felt the tail end of the recent precious metals slide (and weakening in European demand in cars) with the price down ~7.5% over the last month. A further issue is that their 80p/share (valued by joint broker Shore Capital) Tjate project will require CAPEX well over £260m in funding. Clearly a company with a £26m market cap will not find it easy to secure debt funding especially in an unstable region so an equity scheme could be continued to provide bridge financing. The issue with this is that it is unlikely to bode well for the share price.

courtesy of WireLizard of flickr

The company released its interim results in late March for the six months ended 31st December 2012. The following points are of interest:

- Revenues increased to £2.1m as smelting operations were ramped up
- Gross profits increased to £750k, more than three times that achieved during the same period in  2011
- Pre-tax losses steady at ~£3.97m
- Cash and cash equivalents of £1m
- A negative ~£800k difference between net payables and net receivables. £17m in non-current deferred tax liabilities remain on the balance sheet as per previous years

Evidently the company has insufficient financial resources to progress much further with its projects, so cash raising will need to be undertaken - the question within the market remains as "through which method". Any equity dilutions are likely to be at 5%+ discounts so this is not a preferable method for shareholders. Much of this would be dispelled though through the PLA transaction which would see half the PLA debt converted to equity. Positively though, a director of the company did purchase 64,444 shares at 7.5p/share on Tuesday potentially indicating that the future is bright. The truth remains though that this is a fairly small sum of money and it is unlikely to plug the share price drift. Referring to the possible PLA merger, Colin Bird commented:

"The completion of the scheme of arrangement between Jubilee and PLA will result in an Enlarged Group with excellent prospects in the smaller niche of the platinum industry. Projects being considered will generally have the use and benefits of our ConRoast license. With the exception of the Tjate underground mine, all of the enlarged Group's projects will be small with limited mine life, low cost of entry and chrome based. We believe that this specific business model presents extraordinary advantages in the mid-term, i.e. capital requirements are lower, manpower numbers are smaller and smelting issues currently being experienced in the industry can be overcome by the use of the ConRoast process. The PLA merger, whilst providing the aforementioned advantages, is driven by the early cash flow that the Dilokong tailings will be able to provide along with other possible input feeds being considered."

The sole point in Jubilee's favour undoubtedly is the Tjate asset. If it can be successfully exploited then there is no reason why the shares should stay near all-time lows. The reality is that there are far too many obstacles before such an objective can be completed so the future share price action is difficult to judge on a fundamental basis alone. The technical position is weak (possibly even targeting ~5.8p) and consequently I am reluctant to say that the current price is the lowest it will reach on a medium-term basis. In my opinion the risk here is too high and other opportunities exist in the wider market. Due to the highly speculative nature of the shares, plus the potential for sudden upside (as previously seen), I would also be hesitant to call Jubilee a sell so will place a No Rating tag on it. There is no doubting that there is value in Jubilee, not least if the PLA deal goes through - the issue is with clarity. Only when the company becomes more transparent about what the future holds for shareholders (and does not change objectives), will confidence and a rising share price be restored.

16 comments:

  1. Thanks for this unbiased review.

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  2. Super review. on my watchlist now

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  3. I fully understand your neutral stance here. I have been a holder for many years and it is difficult to see progress. A little like ANR!

    Still, these reviews to give investors more information so all are helpful

    thank you

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  4. gowerboy
    Full analysis. Been watching for a while. Political uncertainty is a factor that shoukld be considered.

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  5. A helpful review. I should mention, however, 2 things. The first is that ,in your comments about conroast, you fail to consider its most important property; namely the ability to smelt, safely, high chromite UG2 ore. Merensky ore is now becoming uneconomical to mine so the ability to handle UG2 is a tremendous advantage.
    The other point is that Jubilee are a major holder of Power Alt, a gas fuelled power generating facility which serves their smelting operation in Middelburg. It has also started selling surplus power back to ESKOM (the grid). The cashflow from this is not trivial and will first appear in Jubilee's next set of figures. The fact that you quote power outages as a risk for Jubilee indicates to me that you have overlooked this important asset and may give reason for some obervers to question your conclusions about this share.
    Jonah58

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    1. Without doubt having a major stake in Power Alt will alleviate these concerns. I certainly do not expect that any power outages would directly impact Jubilee, rather indirectly through other firma being impacted. This is a similar situation to that in Tanzania where there are frequent planned power cuts. More often than not the effect is upon the wider economy as opposed to specifix firms, but the impacts are negative nonetheless.

      Ultimately, ConRoast is certainly an advantage to the company but the reality is the market does not recognise it yet. Once revenues are sustained there is no reason why the share can't rise, but as I note it is unlikely to be in the short term, not least due to the precarious technical position.

      Best Of luck - I hope Jubilee proves successful,
      El1te

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    2. Thank you for replying to my comments. You have dealt with my points very well. I am not sure what you mean by short term! I believe this share could be very much higher in 6 months subject to 5 'ifs'
      1. If the merger with PLA proceeds without undue delay
      2. If it is confirmed that project funding is secured to re-commission the Smokey Hills mine and particularly, in the first instance, their concentrator
      3. If Jubilee can demonstrate the comerciality of Conroast by processing concentrated Dilakong tailing at Middelburg and/or proceed with their proposed joint venture with Northam platinum
      4. If Jubilee can expedite their near surface operations without recourse to issuing further equity.
      5. If the price of platinum remains at or above $1400 per ounce.

      This is a big ask, but not impossible given the current status of this company.

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  6. Very well thought-out. Your last para, starting "The issue is with clarity. Only when the Company becomes more transparent..." hits the nail square on the head! oldcodger.

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  7. They should merge with Sylvania Platinum, highly cash generating but no world class projects in the pipeline.

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  8. Hi El1te,

    Very good call on JLP when most people were bullish on this. Any further comment on this?

    Also I was thinking for iron ore project, I see you have a buy rating on BMN, I was looking into BEM as well but I cant find your review on BEM.
    Any thoughts on BEM vs BMN?

    Thanks

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    1. Hi therem

      Thanks - JLP's price action has been nothing short of atrocious since the review, with the price now circa 2.3p. I have to say that the financial position of the company is far too large a deterrent for me at the moment and it blows and positives out of the water. However, when it eventually recovers, it probably will do quickly so following its movements.

      I haven't covered BEM yet, so not in a position to comment on them or compare with BMN, but will take a look

      El1te

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    2. That will be great. Thanks.

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  9. Is this turning around?

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    1. The financials are still too weak for me to be interested. Unfortunately, that rise is small in the scale of the downtrend

      El1te

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    2. Thats true, thanks.

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  10. Is the turn here?

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