Zimplats Holdings Limited

Company Overview: Zimplats Holdings Limited (ASX: ZIM) is involved in the business of producing platinum group metals and associated metals (nickel, gold, copper, cobalt, and silver) from its Mineral Resources and Ore Reserves on the Great Dyke in Zimbabwe. Impala Platinum Holdings Limited holds 87% shareholding of ZIM and remaining 13% is retained by independent shareholders. ZIM owns 90% interest in Zimbabwe Platinum Mines, which is a significant producer of platinum group metals (PGMs). Zimplats Holdings Limited was listed on ASX on 15 October 1998.

ZIM Details

Ongoing Capital Projects and Favourable Metal Prices to Foster Growth:

• Multiple Applications of PGMs: ZIM is mainly involved in the production of PGMs, which are ideal metals for a variety of industrial uses and are used in fuel cell development. Notably, platinum and palladium are important components in autocatalytic converters.
• Favourable Metal Prices: The improved financial performance in H1FY21 was mainly driven by the increase in metal prices. The company expects favourable metal prices to continue for the remainder 2021.
• Developing Capital Projects: ZIM is currently involved in the development of Mupani Mine and is targeting full production in August 2025. The Board has recently approved the implementation of the Bimha and Mupani mines upgrade and these upgrades are scheduled for completion in 2023 and 2028, respectively.

Key Takeaways from H1FY21 Results: During the first half of FY21 (half-year ended 31 December 2020), ZIM witnessed substantial improvement in its revenue and cash inflow, despite of operating in challenging conditions caused by the COVID-19 pandemic.

• Rise in Production: For H1FY21, the production of Six elements (platinum, palladium, rhodium, gold, ruthenium and iridium) (6E) stood at 288,310 ounces, up 8% on the previous corresponding period (pcp). Ore mined during H1FY21 stood at 3.7 million tonnes, up 3% on pcp, driven by improved fleet productivity and additional ore from Mupani Mine, which is under development.
• Rise in Revenue: Due to the increase in average metal prices and volumes of metal sold during H1FY21, the total revenue for the period grew by 79% YoY to US$674.9 million.
• Rise in Cash Inflows: Net cash inflows from operating activities stood at US$189.7 million in H1FY21, up from US$83.8 million reported in pcp.
• Rise in Cash Balance: As at 31 December 2020, the company had cash and cash equivalent of US$237.97 million, up from US$135.82 million as at 30 June 2020.

Net Profit Trend  (Source: Analysis by Kalkine Group)

Q3FY21 Operational Highlights:

• Marginal Decline in Operating Cash Costs: For Q3FY21, ZIM reported total operating cash costs of $95.14 million, down by 1% on the previous quarter, due to lower volumes of ore mined.
• Decline in Production: Due to the temporary closure of Ngwarati Mine, Ore mined decline by 4% QoQ to 1,746k tonnes in Q3FY21. Production of 6E stood at 137,093 ounces, down by 6% on the previous quarter.
• COVID-19 Update: During the quarter, the company reported positive COVID-19 cases. However, there was no COVID-19 related disruption to operations.

Key Metrics:  

During the H1FY21, the company saw a decent improvement in its profitability margins, driven by the increase in average metal prices and volumes of metal sold. For H1FY21, ZIM reported gross margin of 55.9%, up from 36.3% in H1FY20. EBITDA margin for H1FY21 stood at 61.7%, up from 47.1% in H1FY20. Current ratio for H1FY21 stood at 4.00x, up from 2.64x in H1FY20, driven by the rise in cash balance.

Liquidity Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 89.26% of the total shareholding, while the top four constitutes the maximum holding. Impala Platinum Holdings Ltd and Allan Gray Proprietary Limited are holding a maximum stake in the company at 87.00% and 1.11%, respectively, as also highlighted in the chart below. As per the filings on December 31, 2020, Allan Gray Proprietary Limited bought ~1.20 million shares, representing 1.25% of the total positions of 9.61 million shares.  

(Source: Analysis by Kalkine Group)                                           

Key Risks

• COVID-19 Uncertainties: ZIM is exposed to the risks and uncertainties of COVID-19 pandemic as it causes threat to the health and safety of employees and has the potential to disrupt the company’s operations.
• Foreign Currency Risk: During H1FY21, ZIM had incurred a foreign currency exchange loss of US$0.1 million. This demonstrates that the company is exposed to the risk related to the fluctuations in exchange rate of foreign currencies like Zimbabwean Dollar and South African Rand.
• Supply Chain Disruption: Disruption to the supply chain could result in the failure to meet operational supply requirements.

Outlook:

ZIM is adapting well to the current COVID-19 operating environment and is continuing its operations without disruption. It continues to work towards establishing cordial working relationships with all its stakeholders while adapting the new operating environment. Its recent exploration activities have improved geological and geotechnical confidence in scheduled production. For the remainder of 2021, ZIM expects the favourable metal prices to continue supporting the company’s financials. 

Valuation Methodology: EV/Sales  Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:  

The stock has corrected by ~15.89% in the last three months. The stock is currently trading above the average 52-week price level band of A$8.5 and A$28.75. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight premium to its peers, considering the increase in cash flows, rise in revenue, and favourable metal prices. We have taken peers like Regis Resources Ltd (ASX: RRL), Sandfire Resources Ltd (ASX: SFR), St Barbara Ltd (ASX: SBM), etc. Considering the company’s improved financial and operational performance in H1FY21, rising cash balance, improved geological and geotechnical confidence in scheduled production, and valuation, we give a “Buy” rating on the stock at the market price of A$21.00 as on July 14, 2021, 3:35 PM (GMT+10), Sydney, Eastern Australia.

ZIM Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices. 

Disclaimer

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