In Value Trap or up you snap last week I wrote about the drop to 1.95p. Pleased to see 2.2p offer today but I felt I had more to say around BMN.
Vanadium Price: Interestingly the spike in price followed a clearing of surplus supply from (2011-2013) and there was 3 years of falling prices followed by a spike. Since 2019 the production has levelled off and there’s been over 2 years of consumption outstripping supply. Looking at these graphs it would appear we are on the cusp of another vanadium price spike. Compared to the market surplus 2005-2010 look at the years of surplus 2019-2020. It took 7 years of deficits post 2010 to drive a price spike in 2017/2018.
But more than just a deficit, we know steel making in China has been affected by Covid, slower Construction demand - from which vanadium is produced. We know Russia has had quality issues with its vanadium, we know only too well that BMN, too, has had challenges with its production so there’s impacts on supply in 2023 from multiple sources.
Historically, growing demand for Vanadium has been through increased steel consumption (area in blue, below). This is forecast to slow in the years ahead. However high-strength low alloy steel demand is increasing - it’s stronger, greener, cheaper. Adding 0.2% vanadium to steel doubles its strength reduces its strength to weight by 30%. No brainer? That, plus stricter regulations explains why its use is growing, especially as building grows more complex and the number of city dwellers grow, squeezing into taller and taller buildings.
Then you have to consider VFRBs. 3.3-10 tonnes of vanadium per MWH. Forecast demand adds 10%-50% additional annual demand, on top of existing steel demand. Interestingly the penetration of VFRBs in both Africa and South America are nearly non-existent in the period to 2031 or at least dwarfed by demand in other regions. Looking ahead, growth will continue post 2031. Where will all this vanadium come from? Who can double their production when prices rise?
CellCube/Enerox:
Tucked away on Page 27 of Hannam & Partners research it speaks of Cellcube’s latest generation of product - Generation 4.2 - which offers a 30% reduction in component and assembly costs, a 10% increase in DC roundtrip efficiency and an 8% increase in energy density over Generation 4.0. It’s due for release in 2023. Generation 5.0 is pencilled for 2026 where costs halve again. So not dissimilar to Invinity’s Mistral.
Using the Price Per MW of IES (£0.67m/MW), and Enerox’s 75MW install base I arrive at £50m of sales so far. 35MW scheduled is a further £22m. Again using IES’s 30% gross margin I arrive at £6.6m and nearing break even PBT excluding investment. H&P predict in 2026 Cellcube’s production of 300MW… using my IES numbers that equates to £100m turnover with £40m gross margin and perhaps £20m net profit. On a PE of 10 Enerox could be worth £200m on a 3 year forward PE or a £58m valuation to BMN (we own 29%)…. that’s 160% today’s market price of £34m (just for BMN’s holding!). I recently contrasted IES’ market cap of £84m to Enerox’ book value of $32.5m (baesd on the $3.25m recent 10% purchase by Garnet). Both have deployed similar MWH worth of VRFBs and Mistral perhaps isn’t a USP - Enerox appear to be doing something very similar, and at a similar scale. Enerox is privately listed so I’m inferring quite a few things - but bottom line the market is valuing the 29% holding at £0 right now. Fortune was right about the logic of a spin out. Just because the Mustang SPAC fell through doesn’t mean it can’t be divested, but seems this could be a canny holding to keep and grow!
Intangibles!
Poking around in note 13 of the Annual Report there’s Lemur Holdings the Imaloto Power (Coal) Project, in Madagascar. It is at an advanced stage of development, with a completed definitive feasibility study (DFS) for the mine. £6m book value written off last year. But is it worthless? With a DFS! It just needs a FID. Even if it can only be sold for book value that’s nearly 20% of today’s market price. While the morals of coal are up for debate we still use coal. And there are people snapping up these assets - people like Daniel Kretinsky, one of Europe’s richest men: https://www.bloomberg.com/news/features/2023-04-06/daniel-kretinsky-eph-group-builds-17-billion-fossil-fuel-empire
There’s also a $53.5m PQ Iron & Titanium Project The PQ Iron & Titanium project is a multi-commodity project on the same licence area as the Mokopane project. “Progress to date has been limited to understanding the project’s economic parameters.” - does that sound like it could be worth more than zero? Theoretically, based on its past valuation, it’s worth more than today’s market cap! That $53.5m valuation will be based on a previous “fair value”. Last week I dismissed “intangibles” thinking it was goodwill or something. A coal project and an iron and titanium project is about as tangible as it gets! Even if it can’t be sold, there could be an ideal opportunity to involve a third party to develop it on a revenue share basis.
Belco - it’s TBC whether the electrolyte will be suitable/sellable, but assuming the $10m spent building a plant hasn’t been a complete waste of money (! - surely this is more likely than not?). We will know the answer to this in Q4 2023. What we can infer is that sales and rentals of electrolye will be a higher-margin product. The initial capacity of 8m litres/year can grow to 32m litres. In the Western World, AMG and Shell are also building electrolyte plants, and there’s substantial support in Australia, US, UK and Europe for VRFBs (via the IRA etc - these schemes are worth trillions).
Mini Grids, “wheeling” and Load Shedding:
BMN has a showcase solar array and battery storage providing 10% of vametco’s power, costing $7.2m to build. These kind of projects typically have an IRR of 15% so perhaps will save $0.4m/year on energy ($1m saving x 40% ownership) out of $90m cost of sale last year - seems reasonable? Given the load shedding at Vanchem one might ask (as did I) why the heck build it at Vametco? The answer is in the annual report. “Site constraints”. But I draw your attention, reader, to the little phrase “wheeling” - “excess power could be wheeled and sold to Vanchem”. So apparently there’s a way to (exclusively) share power from 1 site to another. Did you know that? Doesn’t that sound like a great way for (high value) SA industrial players (aka mines) to deal with load shedding?
BMN is also targeting captive opportunities within the Group of upto 120 MW of PV and 180 MWh of storage (vs the current 3.5MW solar/180MWH storage). These projects will also reduce the Group’s reliance on the power grid, help to contain energy costs, and reduce the carbon footprint of vanadium production, as part of a broader, long-term ESG strategy. These opportunities include a Phase 2 power plant at Vametco, where a scoping study is under way to assess output of 100-300 MW of solar PV plus a 15 MW/60 MWh VRFB to be built on site.
As well as cost reduction and increasing reliability I am drawn to the value of the mini-grid showcase. Following deregulation, the Department of Mineral Resources and Energy (DMRE) and Independent Power Producers (IPP) Office have noted stand-alone storage procurement of 513 MW in standalone, privately financed energy storage, over five sites. A further 1,231 MW has also been officially announced which is to follow…. Eskom’s battery procurement programme for 350 MW is under way. Some of that will be met by lithium ion - but the characteristics of VRFBs being a lower TCO and less dangerous lends themselves to the situation. Many other companies (including some I hold) like Sylvania, Tharisa, Jubilee have all been affected by load shedding. Seems in South Africa alone there’s a ready market for VRFBs. To put the above numbers in context 2,100MW of VRFBs (if they were all specced that way) = 21,000 tonnes of vanadium or 17% of world demand. I’m not saying that’s happening but I’m saying the opportunity is there.
To conclude, on top of my thoughts in “up you snap”, there’s other reasons to believe there is hidden value in BMN.
When Hannam, BNP, ARC all consider 7p-9p a “fair value” for BMN can be hard to see the pathway to value (amid an ocean of negativity and disappointment out in the BBs). But when you consider today’s 5 points as well as last week’s 9 points then it helps me substantiate in my mind why I’ve made this a major holding.
My posts are written for my benefit, to set out my investment rationale. I state facts and source them where possible. I also use words like “infer” and “think” which means it’s a (reasoned) opinion based on a fact. Investment requires filling in the gaps with inferences and thinking about the facts to form forecasts. I hope you enjoy what I write and find it useful in forming your own rationale.
Good luck.