Bushveld Minerals - value trap, or up you snap?

BMN has dropped 8% today - what to do next?

Where do you begin with BMN?

1. Well for a start following today’s drop to 1.95p put BMN on a market cap of £30m while it has net tangible asssets of £40m. So buying BMN today is buying:

   - A profitable, cash generative going concern (albeit indebted)

   - 2 (largely) refurbished processing facilities, Vametco (74% owned) and Vanchem (100% owned) plus plant & equipment

   - 40% share of a Solar Energy Farm

   - 55% share in Belco a vanadium electrolyte facility (for making the stuff which goes into flow batteries)

   - 100% share of Vametco vanadium mine containing 546MT of vanadium ore (JORC-compliant)

   - 74% share of Brits Mine

   - 64% share of Mokopane Mine 298MT (Jorc-compliant)

   - A share in Cellcube a vanadium flow battery business

2. “Net” means after debt. So as a new shareholder you stand to make at least a 33% return, even after all debts are paid, because if they shut the doors tomorrow, at least book value for the assets would be realistic. Book value is what the mine was bought. It was bought cheap. You couldn’t build a new mine and 2 new processing plants for £40m. Perhaps not with £400m. So if you disbelieve the £40m value you’re nuts frankly. Notice also I’m assuming the “Intangible Assets” (on the books for $53.5m) are worth nothing.

3. New CEO Craig Coltman. Could be seen as a good or a bad omen. For me the way he handled the Q2 results presentation I had a good sense of his character and ability to cut through to the key issues. Clearly highly experienced and successful career. In my mind a huge positive compared to his predecessor the misfortunate Mr Fortune.

4. The Orion deal. It’s not signed but could it be said to be sealed? Personally I think so. Why? Orion want their pound of flesh. If the deal goes through do they get that? Yes absolutely. If the deal falls through, Orion lose out. Using Hannam’s numbers it’s worth putting in context the value of the flesh. Forecast cumulative free cash flow (FCF) 2023 to 2030 (to the non-accountants FCF means operational cash profits after you pay the cash bills but not considering non-cash stuff like plant wearing out) is $250m. The debt is $83m. Some of that debt will turn into shares. Yes reader, you will be slightly diluted. But that’s instead of debt. So $180m minus about $70m of debt repayments leaves well over $100m of cash - 2.5x today’s market price. That’s just the cash remember reader. Not the assets, not the mine, etc. Just the future cash pile. The forecast debt break even point is just over 2 years away too. Orion through its PFA (Production Financing Agreement gets a longer term tickle, and its 12% interest and all the rest is like the below clip. Orion get the sprinkles but you get the Sundae. But Orion gets the cherry if BMN prospers and succeeds…. and that’s why this deal will go through in my opinion.

5. From Russia with rejection

   

   Interestingly vanadium produced in Russia is being rejected as contaminated. (https://investingnews.com/vanadium-forecast/)

   This is highly significant: Remember BMN is 1 of just a handful of primary vanadium mines - and one of a few in “friendly jurisdictions”. Russia, and South Africa have pretty much all the primary vanadium mines. China produces the most vanadium but only as a by product of Steel making where they get it from the slag. What’s happening with China’s property market readers? Yes it’s in trouble. Less steel means less vanadium produced. Less vanadium supply means higher prices? Brasil and the US produce a little bit. So supply can’t easily flex as demand grows (other than BMN can up its production to 8,000 tonnes with more debt/investment). Now that’s a good business to be in. The competition is weak and getting weaker, the threat of new entrants virtually non-existent. We’ll talk about demand in a minute. BMN has what Buffett would call a moat.

6. When will VRFB demand raise vanadium prices? Total demand for VRFBs is forecast to grow from 2.1ktV in 2021 to 38.3ktV by 2030E, according to Hannam & Partners estimates, which would require significant step-up in supply with each MWh of storage capacity requiring almost 10t of V2O5 at present. If you look at IES’s order book & forecasts and Cellcube’s too (35MW), while read about China’s VRFBs and others around the world there’s a a long term deficit rapidly arriving in vanadium supply to support higher prices. Cellcube isn’t even the biggest VRFB provider (yet!) and already their current order book equates to about 10% of BMN’s annual production.

7. BMN’s 29.04% interest in Enerox/CellCube also provides direct exposure to VRFB demand through the sale of scalable, modular VRFBs. CellCube has supplied 45MW of battery capacity so far, with 35MW scheduled for delivery over the next year, including a 16MW facility in Australia.

8. ARC publish a very insightful graph showing the BMN sensitivity to the USD/ZAR exhange rate and the vanadium price. In the worst case it smashes BMN from 9p to 3p. In the best case it elevates from 9p to 38p. We saw this before when Vanadium price shot up. We already know the the Rand is on the ropes so 11p of the 35p of that continuum is already in our favour. But what about Vanadium prices? Lots of web sites predicting Vanadium to increase in price.

9. Stability. More than anything what’s needed going forward is stable production. There are reasons to be hopeful here too. SA are tackling their rolling black outs and finally investing in Eskom the SA electricity provider, tackling the back log of maintenance. Meanwhile solar power and new power agreements alleviate this issue. South Africa does come with a level of risk. However Craig’s leadership and focus on this area means that past investments made and present focus should bear fruit and should stabilise progress.

To conclude, with that operational focus, with the refinance closing, with steady state production there’s many reasons to be hopeful. Even excited. And worst case, the market price is now below a reasonable firesale number in my opinion, so feels like a can’t lose scenario. As a large holder in BMN myself, I’ve averaged down at these prices. Write your own rationale as I’ve done here.

Your decision - my decision - is (was) whether you believe the story of the sprinkles and the sundae. Whether you believe and trust in the new leadership. Whether SA as Africa’s richest country is doomed or will muddle through. Whether VRFBs along with global demand support the price and provide a tailwind. Whether Vanadium prices will rise - and keep rising. The sum total of that belief makes your investing decision clear. Good luck all.