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Tharisa – ridiculously cheap, High Rhodium Price means a likely PE well under 4 – Deep Value Investments Blog

In recent months I have been investing more in natural resource co’s. Focussing on Uranium (URNM, KAP, YCA (now sold for more URNM). I bought copper via COPM and CAML as well as gold/ silver via metals holdings and AAZ (free mines following the Azerbaijan/Armenia war) as well as TSG and a few others….

Now my portfolio is c48% natural resources with 10% gold/ silver metal. I bought Tharisa a few weeks ago to add to this replacing my holding in JLP, as I think this is better…

There has been disruption in production due to COVID , but the main reason I am in is (in the main) due to developed world money printing. I believe this will be inflationary so resources that can’t be printed are a good place to be. Think about it like this, if the stock of money increases (say) 25% then any fixed quantity in the economy should also increase by at least this. Of course, reality is not that simple as demand/ production increases / decreases. I believe this printing is not like that which occurred around 2010 as that was to recapitalise the banks so just sat on their balance sheets so wasn’t inflationary whereas this will get out into the ‘real’ economy.

Coupled with this Mining has been an out of favour sector since the early 2010s arguably before. This chart on mining investment arguably proves the point, though its hard to get definitive figures.

Recently there have been price rises in a number of metals, particularly Tin, Rhodium, Copper. It’s difficult to know if this will be sustained, is it under-investment catching up with the world, a covid induced spike or speculation-related? I don’t know but I suspect it is a mix of all 3. If the world had plenty of resources we wouldn’t be seeing these wide spikes.

Rhodium is used in catalytic converters to convert Nitrogen Oxide in car exhaust gases to reduce smog. China (amongst other countries) has recently mandated stricter emissions standards which is likely to lead to increased demand. It can be worked around (somewhat) by reengineering the catalytic converters but this is not easy to do and manufacturer’s have been hit by emissions scandals so will be very careful in doing this, only small amounts are in each converter. Supply seems very stable, at prices <800 oz ( until recently) there isn’t much incentive to develop new mines.

Tharisa is interesting as it’s a platinum producer which has a production basket / likely future revenue as follows: (my estimates 2021 – highly dependent on the Rhodium price)

160000 Oz
Revenue (M USD)
14.40% RU 385 8.9
4.30% IR 6000 41.3
55.40% PT 1163 103.1
16.20% PD 2593 67.2
9.50% Rh 8000 121.6
0.20% AU 1738 0.6
There is also a 15% refining margin, company is looking at moving this in-house.

The 160000 Oz is from company projections (Link). Maybe they achieve this, maybe not. Crucial point is the rise in the rhodium price. This went from under $11600 in 2020 (average) to pushing $30k now.

Hard to say how long this lasts, but for as long as it does we get >$1.0 m (total)per day. That’s just on Rhodium. The difference between a $30’000 Rhodium price and a $8000 price is an extra c$330m a year in revenue, much of which will drop through to the bottom line. Of course we are only in March and don’t know exactly how long this will last / when exactly they are selling the Rhodium / exactly how much will be produced. My preference would be to forward sell and not risk a price fall, I believe the management thinks prices will go higher so won’t do this.

EDIT (23/3/2021 I got the basket wrong (now fixed) – mixing 3E. 6E up, Details used on Page 5 of the slide here. Basically this isnt the blog you want to be reading for detailed financial numbers, I am very much big picture, its still cheap.)

This company has a market cap of $546m, no debt. The share price is under double what it was in Feb last year and not much over 2019 highs. I believe it has been held back by institutional selling by Fidelity, they were at 9.87% in October, down to 4.9% now. It doesnt worry me too much why / if they have been selling. The mine has a life of 40 years with possibility for extension (p2) so it isn’t down to depletion.

And let’s not forget they also produce Chrome, which has also risen in price… Company states:

Average metallurgical grade chrome price for Q1 FY2021 of US$136/t (ZAR2 114/t), vs Q1 FY2020 of US$145/t (ZAR 2 120/t) and Q4 FY2020 of US$142/t (ZAR2 376/t). The current market price is US$145/t to US$150/t

I recon they will make c$220m from Chrome. But don’t trust me on these numbers, I am not really into producing detailed forecasts. I prefer finding really cheap stocks where any idiot could make money, then being that idiot…

What concerns me more is the shareholding structure – they have a controlling 39.15% shareholder Medway, never a positive for me, I prefer a more balanced structure. They are buying an exploration asset from them, we will see if pricing is fair. There is a lack of free float here – possibly the cause of the opportunity but it equally means any re-rating may be eye-wateringly rapid.

I am also concerned that this is South Africa based. I am not terribly happy about investing in resource rich countries where the ‘natives’ recently took charge. There is a tendency for these states to rapidly degenerate into kleptocracies. South Africa is showing many of these tendencies and is one of my least favourite countries to invest in. Still, this is cheap, if it was based in a ‘better’ country without such a large controlling shareholder I would be comfortable holding more.

I bought in at 136 recently at a 3% portfolio weight. Since my move to more mining co’s I have cut my individual stock weights considerably. It’s too easy for these stocks to have flooded mines, deaths and other geological mishaps so I want to manage my risk. I am heavily invested in an area which is pretty new to me so I want to be careful with each individual idea..

The upside on this even if we only have a few quarters of these high prices is significant. I believe we make a significant fraction of the market cap. If we fall back, to me, it’s likely the share price only falls 30/40%, at the very worst case with an upside far in excess of this if prices are maintained / rise. I believe the market is pricing this stock as if this is a *very* temporary spike in resource prices, when it may well not be.



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