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Todays Oil & Gas Update - Bushveld Minerals: Lack of Vanadium Supply Threatens Global Construction

Todays Oil & Gas Update -  Bushveld Minerals: Lack of Vanadium Supply Threatens Global Construction

MiFID II exempt information – see disclaimer below

 

Bushveld Minerals* (LON:BMN) 38.85p, mkt cap £430m – Lack of Vanadium Supply Threatens Global Construction

BUY - Target Price raised to 87p (from 37p)

(Bushveld Minerals now hold 74% of Vametco and 84% of Bushveld Energy it’s vanadium redox battery unit)

SEE LINK FOR BUSHVELD MINERALS PDF NOTE

  • Vanadium: we have been looking further into vanadium supply and demand where we see increasing probability for significant supply shortages.
  • The supply situation looks so serious to us that we cannot see where the market will source sufficient vanadium to meet demand for strengthened steel in the global construction sector.
  • The steady rise in ferro-vanadium prices in China and Europe highlights a severe shortage of available material indicating a lack of available stock the development of a significant market deficit.
  • The few primary producers in the market appear wholly incapable of expanding to meet demand in the next two years with so much by-product, slag, production removed from the market.
  • We highlight the reasons for this in the attached note, see link above.
  • Our ferro-vanadium price assumptions rise to US$75/kgV for 2018, 2019 and 2020 and to US$55/kgV for 2021 and US$45/kgV for 2022 and thereon.
  • We cannot see how the market can supply demand for vanadium in the next two years and we feel vanadium prices should settle at a higher price level than previously envisaged in the short and longer term.
  • Q3 results: Bushveld Minerals third quarter report highlights the impact of the 16-days unofficial stoppage at the Vametco vanadium plant and seven-days of unplanned maintenance.
  • The result is that Vametco’s Q3 ferro-vanadium production was some 14.6% lower than the previous quarter at 537mtV vs 629mtV.
  • Sales: Vametco sold 1,987mtV of vanadium into the market in Q3 down 18% on Q2 and 21.5% lower yoy.
  • Management have revised Nitrovan (ferro-vanadium) production lower to 2,600-2650mtV for the year due to the stoppage and unplanned maintenance.
  • Phase 2 completed in June sees Vametco’s capacity at 3,750mtV.
  • Phase 3: as part of the operational improvement initiative, designed to enhance Vametco’s productivity, the Company is reviewing the timing and required investment to expand production capacity to 5,000 mtV.
  • Production costs rose 11% unsurprisingly in the quarter to ZAR298/kgV (US$21/kgV) vs Q2 with unit costs guidance revised to ZAR250/kgV and ZAR255/kgV for the year.
  • We expect unit production costs to fall significantly from here as throughput rises and grades recover assuming no further unplanned stoppages.
  • Some slippage in production has also been seen as a result of grade control in the Vametco mine and the team completed 13 drill holes to increase geological confidence with the aim to improve grade control in the plant feed. Vametco will publish an updated mineral resource estimated in the new year.
  • Bushveld bought a further 16% of Vametco through the purchase of Sojitz’s stake taking Bushveld’s stake to 74% in the quarter. The deal now means that Bushveld have acquired 74% of Vametco for US$48m, a remarkable feat given the company had relatively little spare cash when it agreed to buy its initial 23% stake in Vametco for $4.7m.
  • Tailings: Vametco is expanding its tailings facility to maintain capacity. Our modelling includes expenditure for tailings work
  • Off-gas: project work required to meet stricter regulations and  increase kiln output.
  • Brits Vanadium Project: Results from 26 drill holes are shown in the report with the simple average of the grades presented is 1.55% in 43.4% magnetite.
  • Valuation: Our valuation for Bushveld Minerals rises to US$1.6bn assuming an 8% discount rate and a long term exchange rate of ZAR14/USD or 87 pence per share on our new vanadium price assumptions.
  • We have yet to add value for Bushveld Energy which is 84% owned by the group and is working to deploy vanadium redox flow batteries in grid as well as industrial applications in South Africa. The company is also working with the Industrial Development Corporation of South Africa to build an electrolyte manufacturing plant in South Africa, to be located at Vametco and the East London Industrial Zone..
  • There 63 VRFB projects globally with 77% under construction and 17% operational highlighting strong growth in grid battery capacity.

Conclusion: Our research into the supply / demand for vanadium leads us to raise our forecasts for vanadium prices and therefore for Bushveld Minerals.

We reckon the market will see through the expected slippage in the Q3 numbers due to the overriding impact of the vanadium price.

We expect Vametco to report a better final quarter and to continue to grow into the new year.

 

Vametco plant assuming 100% ownership

2017

2018

2019

2020

2021

2022

2023

 

Price V2O5

$/lb

 

6.4

20.2

17.7

17.7

12.8

              10.33

             10.33

 

Ferro Vanadium

US$/kg

 

32.6

85.0

75.0

75.0

55.0

              45.00

             45.00

 

Vanadium sales

kg

 

2721

2600

3750

4370

5000

              7,500

          10,000

 

Sales

US$m

 

82.0

204.2

259.9

302.8

254.1

           311.85

          415.80

 

Operating costs

US$m

 

58.2

95.2

86.5

102.0

107.7

           150.30

          196.65

 

Operating costs

US$/kg

 

21.4

36.6

23.1

23.3

21.5

20.04

19.66

 

Operating profit

US$m

 

23.7

109.0

173.3

200.8

146.4

           161.55

          219.15

 

Pre-tax profit

US$m

 

23.5

108.0

172.0

198.8

140.5

           151.97

          209.49

 

tax

US$m

 

6.7

30.8

49.0

56.7

40.0

              43.31

             59.71

 

Post-tax profit

US$m

 

16.8

77.2

122.9

142.1

100.5

           108.66

          149.79

 

EPS

US$c/s

 

1.5

7.0

11.1

12.8

9.1

              9.790

          13.496

 

PE

x

 

25.2

5.5

3.4

3.0

4.2

                  3.9

               2.82

 

EV/EBITDA

x

 

17.8

3.9

2.4

2.1

2.9

                  2.6

                 1.9

 

EBITDA

US$m

                     -  

            23.74

                    108.99

        173.35

        200.83

        146.43

           161.55

          219.15

 

Free Cash Flow

US$m

                     -  

            23.49

                      95.19

        163.70

        187.61

          83.22

              98.33

          205.94

 

Attributable Cash Flow

US$m

74.00%

            17.38

                      70.44

        121.14

        138.83

          61.58

              72.77

          152.39

 

  SP Angel forecasts: Figures based on 100% of Vametco plant. Bushveld now hold an effective 64% of the Vametco plant

  *An SP Angel mining analyst and nomad have visited the Vametco in South Africa.

 

  *SP Angel act as Nomad and broker to Bushveld Minerals.

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