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Bushveld Minerals Ltd (LON:BMN) has had a productive few months, agreeing a major acquisition, increasing the resource estimate for its Vametco vanadium mine and roaring into profit.
Half-year results on 30 September delivered a robust performance in the face of weaker vanadium prices that left it in a strong financial position moving into the second half.
On revenues off modestly at US$78mln, the South Africa-focused group delivered profit after tax US$2.3mln higher at US$30.8mln for the six months ended June 30.
Free cash flow advanced to US$23.3mln from US$16.4mln at the same point last year and the company had just over US$66mln in the bank at the period-end.
The ferrovanadium price averaged US$56.3 per kilogram, down from US$65.5 in 2018.
Looking ahead, the transformation programme at the Vametco operation should see output rise to 3,400 metric tonnes of vanadium, up from the current 2019 guidance of 2,800-2,900 tonnes.
By 2022, the figure should be in the order of 4,200 tonnes.
Addition continues long-term strategy
Bushveld has doubled down on vanadium with the US$68mln acquistion of Vanchem, which has producing vanadium assets in South Africa. An up-front payment of US$6.8mln will be followed by payments between 31 July and 31 October.
The Vanchem business consists of integrated vanadium extraction and production facilities comprising including a core salt-roast processing plant that produces vanadium trioxide and pentoxide, an electric smelting ferrovanadium converter, located at the Highveld Steel & Vanadium site, for conversion of vanadium trioxide to ferrovanadium, and an alumino-thermic smelting facility, located at Highveld, which converts vanadium pentoxide into ferrovanadium.
The acquisition is consistent with the company’s long-term strategy of acquiring existing, low-cost scalable brownfield operating assets in South Africa to help with the development of its significant and high-grade resource base.
It should allow Bushveld to boost production to 10,000mtV per year, as Vanchem already produces approximately 960mtV on an annualised basis, utilising only one of the three kilns on site.
The acquisition also unlocks the potential supply of the feedstock from the company’s Mokopane vanadium project, significantly reducing the potential capital outlay and accelerating the development schedule.
By transporting a crushed, screened and dry magnetic separated ore 200 kilometres for beneficiation at the Vanchem plant, the capex bill for Mokopane is likely to be cut to US$20mln.
Vanchem processing facilities also provide product diversification as they produce vanadium oxides, ferrovanadium and vanadium chemicals in addition to the Vametco’s Nitrovan offering.
Further growth will come with the refurbishment of the plant and by bringing all three kilns online at an estimated additional cost of US$45mln. This will allow the plant to reach a 4,200mtV/annum steady state.
The total expected outlay of US$133mln in acquisition and ramp-up costs is around 45% of the required capital for a standalone development of Mokopane, according to the recent definitive feasibility study.
Accelerated production schedule
The schedule will be accelerated too, as the first Mokopane concentrate may be feeding the Vanchem plant within 12 months of the completion of the deal.
The deal secures a cash-generative asset and increases Bushveld’s exposure to a commodity supported by a structural deficit market dynamics.
Broker SP Angel remains a firm buyer of the shares, although it is currently in the process of updating its model and precise forecasts.
Analysts at Peel Hunt said the Vanchem addition provides for a production growth factor of 1.8 times over the medium term while creating a "significantly more sustainable cash flow profile", with the acquisition offering potential for "further upside".
“We believe that BMN debt of less than US$20m for the purchase gives the company plenty of room for expedited expansion works,” analysts said.
On long-term prices, they said Vanchem's longer-term potential for underlying earnings (EBITDA) is "at least equal to that of 2018".
Marking to market for changes in ferrovanadium prices, this reduces 2019 EBITDA forecast 23% to £57mln but increased the 2020 estimate 10% and made changes closer to 20% for the two years after.
House broker SP Angel reduced their assumed vanadium price to $60 per kg for 2019 and 2020 due to lesser compliance with the new Chinese regulations than expected, though they expect "punishment of Chinese officials to create better compliance this year".
But they said the Vanchem acquisition offsets these lower prices.