A bird in the Bushveld...BMN

Is worth two in the bush

May 07, 2024

A Lilac or Purple Roller - found in South Africa’s Kruger National Park

Dear reader

Today we learn Bushveld Minerals Limited (AIM: BMN), the primary vanadium producer, announces that it has successfully secured additional funding to provide immediate working capital relief and ensure continuity of operations.

The Company has entered into a binding term sheet with Southern Point Resources ("SPR") to conditionally sell the entire Vanchem asset for a total consideration of up to US$40.6 million, comprising an initial consideration of US$20.6 million and a deferred consideration of between US$15 million and US$20 million (the "Disposal").

The proposed terms of the Disposal replace those announced on 20 November 2023 for the sale by Bushveld to SPR of a 50 per cent interest in Vanchem. The Disposal is conditional upon shareholder approval.

Analysis - Cash Flow

Operational Cash flow:
It’s true that vanadium hit a low point of $28.4/kgV in Q1 due to Asian weakness. But is that continuing? Vanadium is partly tied to steel making. Trading economics tells us that:
Prices for 62% iron ore rebounded to $118 per tonne in May, as increasing and robust global demand was met with uncertain supply. Chinese steel exports surged by over 25% from the previous year in March to nearly 10 million tonnes, the highest since 2016. This was magnified by growth in foreign new orders for manufactured goods according to April’s official and private PMIs. Still, persistent concerns over the country’s property sector capped iron ore’s rebound. Beijing relaxed home purchase restrictions for the first time in 13 years to stimulate home buying.
Infrastructure for the green transition is accounting for higher steel demand. A single wind turbine uses 5.5 tonnes of steel.
Due to low production and 25 days downtime the Vametco cash cost in Q1 2024 was $32/KgV, Vanchem meanwhile achieved $25.3/KgV (so both mines were $28.4/KgV average). So break even on a cash cost basis but cash cost excludes depreciation, selling costs and G&A so that’s about a further $6m per quarter, or around $6-$7 per KgV.
Investment Cash flow

SPR are increasing the working capital agreement (of $25m-$30m announced September 2023) by $9m. Of that $3m was provided last Friday, $5m by the end of May and $1m by the end of June.

SPR are loaning to Vanchem $5m-$8m for working capital and essential capital. So that liability transfers to SPR as part of the sale but is technically on BMN’s books until then.

So the cash crisis in my estimate is $5m-$10m and this mini cash flow is my best estimate of the inflows and outflows since 30th June 2023 to 7th May 2024.

We know that Vametco can achieve a $24/kgV cash cost, at a 200mtV or more monthly production run rate which is about $30/kgV on an AISC basis.

Analysis - Dilution

I’ve removed the Acacia funding (the $7.5m placing reduces to $4.5m and the 200m shares reduce to 107m)

The fully diluted basis for BMN is 2.8bn shares.

Analysis - Balance Sheet and the Sale of Vanchem

Vametco was $94,998,000 of $105.6m net assets per the 2022 accounts.

Vanchem is on the books for about $45m so a sale at $40.6m is 10% less than book as at 31/12/22 (but that is 18 months ago so it’s likely to be a profit not a loss on disposal). It was bought for $68m and has had sustaining capex thrown at it, but has suffered write downs during its ownership. The purchase price as well as the wisdom or otherwise of ex-CEO Fortune is now in the past. So the $68m price tag is irrelevant along with historic share prices - going forwards is what matters.

Of course SPR have got a tremendous deal especially as they will use Vanchem alongside steelmaking so the slag will provide a reduced cost and enhanced feed. $40.6m is a bargain for SPR.

But in the 2022 accounts Vametco accounted for $94,998k of Bushveld’s $105.6m net assets according to its accounts - as shown above. Whilst its difficult to fully reconcile this figure it illustrates something I’ve maintained for a long time that Vametco is the real prize and the loss of Vanchem and the gain of 100% of Vametco a good deal for shareholders.

Vanchem is around 1/3 of the workforce (280 people) so there will be reduced costs going forwards too, post disposal.

Bushveld still own 64% of Mokopane on the books at $3.7m (sale concludes August 2024 to SPR)

Bushveld held $2.22m cash as at 21st April 2024

The Vametco mine has 2P 46.4m tonnes at 0.63% so 264.6kt of Vanadium as at 31/12/22.

It also has Indicated & Inferred resources of 181.5mt at 0.77% so 1.248mt of Vanadium as at 31/12/22.

Lemur Coal Mine

Bushveld holds Lemur Coal previously at book value of $5.7m (since written off to zero). It is considering an offer which comprises:

a/ Assumption of a $2.5m liability

b/ $100

c/ 20% of EBITDA for 5 years. The power plant would initially be 30MW with a plan to grow it to 60MW. Assuming EBITDA on a 30MW plant. 500Kg of coal generates 1MW of electricity. So 30MW, 24 hours a day, 365 days a year equates to 131.4Kt of coal. Coal is currently $146 a tonne. Production costs in Australia are $70 a tonne. Madagascar, if anything, would be less. This is a $76 margin x 131.4kt EBITDA margin of $10m per year. BMN are entitled to 20% so that is $2m per year for 5 year equals $10. So when people say it is unrealistic to expect $5.7m from this asset (i.e. $3.2 net) what are they actually basing that opinion on? Besides the current $59.5m NAV DOES NOT include a single cent for this asset - it is written off - worthless.

Bushveld owns 40% of the Vametco Mini Grid at 40% of $3m is $1.2m

Bushveld owns BELCO 55% at $10m is $5.5m. Three battery offtakers have confirmed its product as suitable - will we see progress in 2024 on this?

Cellcube

Bushveld owns Cellcube 29% at a $27.5m valuation is $8m (NB Cellcube’s peer IES has a market cap of £45m making Cellcube half the price of IES at its current 23.5p share price). Because its competitor Invinity has sought additional cash it is assumed by some readers that Cellcube must therefore also require cash. Whilst it’s entirely possible that that’s the case (although they do not know this), and that Bushveld’s 29% stake might be diluted by a fund raise it is not necessarily the case that this would be severely dilutive. In IES’s case the £50m fundraise was at 23p which is approximately zero discount to its prior share price.

I notice the US Navy and Marines are recent purchasers of Cellcube VRFB.

Assuming $10m depreciation since 31/12/22 leaves Vametco worth about $70m PP&E.

Book value on a fully diluted basis (2.8bn shares) is 2.1p per share. Is that number real? It just disposed of a large asset at a zero discount to NAV remember.

Analysis-P&L

We do not yet know the 2023 out turn and I’ve left my prior forecasts where they were for 2024 on the basis of the current two mines. I’ve introduced a “Vametco only” estimate. This is where I assume for 2025 a monthly 240/mtV run rate. The long term goal for Vametco was to achieve 4,300 tonnes per annum (about 350/mtV monthly).

Assuming cash costs of $24, an undemanding $35mtV selling price, reduced overhead costs based on the disposal of vanchem an $8m net profit appears feasible. On a PE of 8 a valuation of $64m equates to a 2.2p per share valuation.

Of course if Vanadium were to revert to $50/kgV and if scaling production at Vametco can drive cash costs to $22/kgV then profits balloon to $57m and that valuation jumps to 16.3p per share (on the same PE 8 although a less compressed valuation might also apply to such a “hot” asset by that point).

But let’s not get too excited. For now, if Craig Coltman can steady the ship that is good enough. He’s achieved a great deal already at Vanchem and at Vametco. I do think today’s 0.7p ask is cheap given the news that the cash crisis is averted, and that the vanadium price is turning is positive. From both a balance sheet and P&L basis BMN is priced at about 1/3 of the book value of its assets and at about 1/3 of a reasonable assumption of profitability. It possible to see how a slimmed down Bushveld can prosper, pay down its debt and achieve stability.

Long term demand is there for vanadium. 100GWH of VRFBs announced in 2023 equates to 450,000 tonnes of vanadium - which equates to 187 years of Vametco’s production.

Many more VRFB projects are being announced in 2024 too.

The green transition is leading to an uptick in demand too. Offshore wind turbines, for example, will require hardened steel to cope in their harsh environments. The USA is only getting started with wind and many other parts of the world are rolling out wind generation still.