Time to look at Bushveld Minerals ?
“…With a highly regarded new management team, signs of the resolution of its long running balance sheet issues, and a positive response of shareholders to new stakeholders, is now the time to look at BMN again?…”
Bushveld Minerals (AIM:BMN), the South African vanadium producer that was once one of AIM’s most popular trades, has fallen back to earth over the past few years as it has struggled to meet production targets and battled to balance its books.
The company’s share price touched 50p five years ago as the market realised the potential of its rare resource: BMN is one of only three producers of a commodity in increasing demand as an alloy for high-strength steels, and as an electrolyte for the fast evolving energy storage battery market. But with the undoubted promise of its assets as yet unrealised, the company’s value has subsided all the way to 2.5p. With a highly regarded new management team, signs of the resolution of its long running balance sheet issues, and a positive response of shareholders to new stakeholders, is now the time to look at BMN again?
Bushveld’s assets
BMN is organised into two divisions, Bushveld Vanadium, which mines and processes vanadium ore, and Bushveld Energy, an energy storage solutions provider.
Bushveld Vanadium operates a network of mines and processing plants focused on a JORC-compliant resource of 546 Mt and 75 Mt reserves. BMN is targeting an annual production rate of between 5,000 mtVp.a. (million tonnes of vanadium per annum) and 5,400 mtVp.a. Last year it was producing 3,800 mtV, approximately 3pc of the global vanadium market, serving the steel, energy and chemical sectors.
The Vametco mine has a JORC-compliant resource of 181.5 Mt, including 46.2 Mt reserves, with in-magnetite vanadium grades averaging approximately 2pc V2O5 (vanadium oxide), and an estimated life of mine of more than 30 years. The mine’s ore is processed by an in-situ processing plant, which produces Bushveld nitro-vanadium, a steel-alloying vanadium carbon nitride product. Vanchem, another vanadium processing facility, produces vanadium-based chemicals including vanadium pentoxide and ferrovanadium.
Bushveld Vanadium is developing two other prospects. The Brits project is a continuation of the Vametco strike with a maiden mineral resource estimate of 66.8 Mt of 1.58pc V2O5 in-magnetite, offering a potential extension of Vametco’s life-of-mine, and a cheap source of near-surface ore for the Vametco plant. The nearby Mokopane prospect encompasses one of the world’s largest primary vanadium resources, with a weighted average grade of 1.4pc V2O5 in-whole rock and 1.75pc V2O5 in-magnetite.
Bushveld Energy leverages BMN’s vanadium processing capacity to promote the role of vanadium in the growing global energy storage market through the advance of vanadium-based energy storage systems, specifically Vanadium Redox Flow Batteries (VRFBs).
The division is setting an example by building its own state-of-the-art VRFB solar mini-grid to serve the Vametco mine, and is also commissioning Bushveld Belco, a vanadium electrolyte production facility in which it will hold a 55pc stake, designed to take vanadium oxide from Vanchem and produce electrolyte for VRFB use. The facility will target an initial 8 million litres of vanadium electrolyte per year, scaling to 32 million litres. Bushveld Energy also has an interest in the manufacture of VRFBs through its 25.25pc stake in CellCube, a focus energy storage entity which is being prepared for listing on the LSE.
Vanadium: an unsung transition metal
BMN is positioning itself to capitalise on rising demand for one of the key energy transition commodities. Vanadium is already an essential component within the steel industry, particularly the aerospace sector, valued for its low density and capacity to retain its strength at the high temperatures required for the operation of aero-engine gas turbines and airframes.
Steel is subject to cyclical patterns of supply and demand, particularly, in recent years, within the Chinese industry, which accounts for 54pc of global production. Output has been knocked back over the past 18 months by the lingering effects of China’s zero-Covid policy, the energy crunch, the Ukraine conflict, and the higher interest rate environment consequent on surging inflation.
But the long term prospects for vanadium are robust. The intensity of vanadium use in steel is increasing, and there is rich potential for increased demand within the huge Chinese market, which still uses less of it than Western economies. The big prize, however, is the huge market opened by the rapidly developing energy storage sector. The energy transition is driving the electrification of the world economy: electricity’s share of global energy consumption has doubled from 10pc in 1980 to 20pc today, and is expected to be more than 40pc by 2050. Stationary energy storage promises an elegant solution to the fundamental issue with renewables, their capacity to generate energy only when the sun is shining or the wind blowing. VRFBs have a long lifespan, enabling them to repeatedly charge and discharge over 35 000 times for a lifespan of over 20 years, and vanadium electrolyte can be reused, creating opportunities for electrolyte rental, reducing upfront capital costs.
Bloomberg estimates that global stationary energy storage installations will multiply 122-fold by 2040, rising from 17 GWh (in 2018) to 2,850 GWh, and Mercom Capital reports that corporate funding of battery storage companies is growing exponentially, reaching $17bn in 2021, up from $6.5bn in 2020, and $2.8bn in 2019. China currently accounts for 95pc of the global market, but President Biden’s Inflation Reduction Act is generating new demand in the US, and the EU continues to set ever more urgent renewable energy targets, in which battery systems feature. Last year the energy storage market accounted for 8pc of vanadium demand, second only to steel.
BMN believes Africa presents the ideal conditions for the rapid expansion of battery storage. Grid infrastructure is sparse across much of the continent, obliging many communities and factories to develop local power supplies – so-called ‘distributed generation systems’ – for which battery systems are ideal, storing the energy captured by abundant African sunlight. BMN is presenting its Vametco mini-grid project as a VFRB reference site for the mining industry, utility companies and other power users, a working showcase for the technological and commercial benefits of long-duration storage systems coupled with renewable energy.
Momentum stalled … and regained?
Dawning realisation regarding vanadium’s possibilities inspired a spike in BMN’s value prior to the pandemic. The Financial Times reported on the company at its market peak in late 2018, noting a 415pc surge in BMN’s price as vanadium prices surged, and the group reported reported H1 profits after tax of £21.1m, up from £1.1m a year earlier, while vanadium prices soared.
A few years later, however, momentum was stalling, the Investors’ Chronicle reporting that ‘Investors would be forgiven for thinking the metaphorical Bushveld Minerals bus is parked in the same spot it was a year ago.’ But although the company was posting losses in both cash profits and the bottom line, the magazine continued to issue a ‘buy’ recommendation, persuaded by broker Peel Hunt’s forecast that profits would skyrocket from £6.5m to £79m by 2022.
Yet the company’s most recent results, for the year ending 31 December 2022, continued to disappoint. Production was up from 3,592 mtV in 2021 to 3,842 mtV, but still well short of the targeted 5,000 mtVp.a. to 5,400 mtVp.a, and below the lower end of guidance for 3,900 to 4,100 mtV. BMN’s operating loss was $9.2m lower than the previous year, but still $20.1m, and its production cash cost of $27.7/kgV was higher than in 2021, and above guidance of between $22.7/kgV and $23.5/kgV. The company recorded an adjusted EBITDA loss of $1.7m.
The report’s statement by Chairman Michael Kirkwood, one BMN’s new directors, was blunt: ‘There is a natural tendency for communications such as this to dwell on the positive aspects of a company’s performance and to understate or plead mitigation on the challenges and the negatives that impact results. In my view, this approach arguably discredits the overall content, and strains the credibility of what is, after all, the most important annual communication to the current and prospective owners of a company.’
Mr Kirkwood said the figures did not represent ‘the outcome we planned for, nor is it sustainable, and this is reflected in our significantly discounted share price which more than halved in the year under review. The Board and management fully recognise this and have evolved plans to restore momentum in operational stability, revenue generation, cost constraint, profitability and cash generation.’
The company said the results were impacted negatively by a combination of external and internal factors. Externally, operations had been effected by disrupted global supply chains, and a tougher economic environment, not least in South Africa, where inflation significantly increased operating costs. Moreover, local electricity supply had been disrupted by loadshedding, and a ‘deterioration’ of government logistics infrastructure and services. Internally, the company had been dealing with issues of its own, notably operations challenges at the Vanchem plant, where ore supply from the Vametco mine was found to have a higher silica content than was optimal, obliging system clearing shutdowns.
The company said that ‘In the face of these challenges, management has and continues to undertake various initiatives to ensure profitability in the current year, to improve the Company’s capital structure, to secure a more stable power supply to support increased production, to contain costs and to crystallise value for Bushveld Energy’s assets.’
On the positive side demand for vanadium had continued to hold up in the face of broader economic conditions. Over 2021 and 2022 steel maker demand for vanadium dipped by only 0.41pc, more than compensated by a 79pc increase in vanadium demand from the energy storage sector, resulting in an overall increase in demand of 0.48pc.
And despite internal and external challenges BMN had generated revenue of $148.4m, and an underlying EBITDA of $22.3m. It had also generated free cash flow of $14.6m, ending the year with a cash and cash equivalent balance of $10.9m. Although the company was still not hitting its production targets, it was working to ensure ‘similar levels of operational stability at Vanchem as Vametco – centred around securing supply of suitable ore, stable power supply and improved post commissioning operations’. In particular, an arrangement had been concluded with the municipality to stabilise power supply at Vanchem, and an ore supply contract ‘had been concluded with a third-party operating in the Bushveld Complex for the supply of low-silica high-grade ore that will have a positive impact on productivity and costs at the plant.’
The company’s internal projects were progressing as planned. The Belco electrolyte plant was due for commissioning and production ‘during the second half of 2023’, allowing BMN to become a fully-fledged vanadium electrolyte producer, and the Vametco mini-grid, expected to supply just under 10pc of Vametco’s electrical energy, was also expected to be online later this year.
In addition, steps were being taken to resolve the company’s outstanding credit and balance sheet issues. A $5.9m credit facility with Nedbank had been repaid, and negotiations were underway to restructure a $35m convertible loan note (CLN) provided by Orion. Conceding that ‘with an advancing maturity date of November 2023, the convertible loan note was putting pressure on our balance sheet and creating a potentially dilutive overhang on the share price’, BMN had extended debt maturities and reduced the equity dilution overhang from the CLN. The company had also refreshed its management team, culminating in the appointment of Craig Coltman as CEO, a mining industry veteran with more than 30 years experience at De Beers, where he served as an Executive Director and Chief Financial Officer, and chaired the mining giant’s pension fund.
Earlier this month the company published an operational update reporting higher production and sales: production for Q2 2023 of 840 mtV (Q2 2022: 668 mtV), and H1 2023 of 1,784 mtV (H1 2022: 1,641 mtV); and sales for Q2 2023 of 1,068 mtV (Q2 2022: 787 mtV), and H1 2023 of 2,096 mtV (H1 2022: 1,644 mtV). Production guidance for 2023 had, however, been revised downwards from 4,200 mtV and 4,500 mtV to between 3,700 mtV and 3,900 mtV, due to operational challenges at Vametco ‘associated with the levels of the barren dam and the Sulphate Recovery Plant’, and the retooling at Vanchem necessary use ore of a different grade.
Mr Coltman said he intended to review ‘the Group’s capital allocation strategy and prioritise projects that provide higher financial benefits with manageable risk’, and noted that ‘a number of initiatives have already been implemented to address production issues to ensure we get the maximum performance from our assets’. The update also reported significant progress on the restructuring negotiations with Orion, conclusion of which will be conditional on South African Reserve Bank approval, the finalisation of definitive binding documentation, and the green light from shareholders.
During the summer the company has reported progress on other financial negotiations. In July it altered the terms of a £910,000 convertible loan note with Primorus Investments Plc, the parties agreeing in principle to vary the terms of repayment such that BMN will make the repayment in cash as opposed to shares, ensuring the company’s share price is not diluted at its present low level. And earlier this month it extended its stake in battery storage group VRFB-H, joint investment partner Mustang Energy converting its £7.1m of loan notes in BMN shares. Bushveld Minerals and Bushveld Energy will now hold 22.1pc and 50.5pc in VRFB-H respectively.
Outlook
What, then, to make of this complex picture? There are a few things we can say. BMN has a highly promising resource positioned to serve a key energy transition market. VRFB technology has exciting implications. But, as the company acknowledges, it continues to face a hard road to scale production as it wishes to, and to sort out lingering money issues. BMN’s share price is on the floor, and can ill afford further dilution.
But some market commentators sense a shift in sentiment. The cycle for steel production will come round again. Demand for vanadium electrolyte continues to gain momentum. BMN has an experienced new management team that seems to mean business. The Mustang transaction has brought in new buyers. The company’s share price spiked 11pc last week. It did so from a low base, certainly, but perhaps signals some long awaited investor confidence. BMN is not another resource small cap with little more than a dream: it has a concrete, producing mine, accessing one of the world’s scare resources. Perhaps, at this low price, Bushveld is worth looking at with fresh eyes.
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