Bushveld Minerals FY 2020 Review - Part 1 Mining
Well, I tried my best to take a relaxing holiday but unfortunately, negative news in what has been a fairly negative few months was destined to find me.
On 30th June Bushveld Minerals released their FY report and with it the bombshell that they were going to have to downgrade their guidance once again.
Those that recall my analysis of the Q1 results will perhaps remember that I based my assessment on the following parameters/calculations,
ZAR/$ = R14.50
Overhead cost c. $5,000 per mtV
= Full cost to produce of $30.50 per kg
However, as I said at the time the company was already indicating that several things had to go right for that production figure to hold. The reality is the company highly likely knew that they were going to report a new figure and were simply delivering the bad news in stages. Not a positive in my view.
As I said in a tweet last week the revised C1 production figures look more brutal than they are because BMN has adjusted their predicted ZAR/$ outcome from c. R16 down to a far more realistic R14.25.
What we therefore really need to compare is the ZAR cost figure. To be safe I will use the top end figure (so lowest production outcome) for comparison. Latest revised cost in brackets.
Vametco = R340/kg (R345/kg)
Vanchem = R427/kg (R444/kg)
As we can see the Vametco cost has barely moved despite production being reduced by c. 15%. At Vanchem it has been adjusted by c. 4% for a loss of c. 21.5%.
What that says is that the vast majority of the increase in C1 production costs is down to the revised exchange rate. However, I remain cautious as to the validity of the adjustment attributed towards actual physical production reductions.
That aside, what that means is that we have an average C1 production cost of c. $26.50 per kg at 3,400mtV production. That result is just $1 higher than my own calculations from part 2 of my Q1 review. Be it that I employed a slightly weaker ZAR/$ exchange and a higher production output.
Where things begin to differ is with the additional overhead costs.
My previous calculations employed the latest figures available which were from 2019 and involved some subjective guesstimates. What we now have from BMN is a breakdown of these costs such that we investors can make a far better assessment of their full cost to produce.
What we see is that in 2020 a direct production cost (cost of sales) of c. $19,100 per mtV led to a total reported cost including sustaining capital of c. $29,000 per mtV (actual calculated figure = $28,760 per mtV) when the total sales = 3,842mtV.
Looking more closely at this overhead figure we see that sustaining capital in 2020 was $5.38m. In 2021 it will be closer to $4.4m. Professional fees mainly associated with the Orion transaction were $6m and I can see a good chunk of that being removed this year, be it Cellcube may have an effect.
On the downside, the idle plant cost of $4.2m for a c. 21-day shutdown will likely rise given we have had upwards of 42 days this year. Additionally, the stronger ZAR/$ exchange rate will factor into some of these costs for 2021.
If nothing else what all of that says is that the c. $10,000 overhead cost from 2020 is relevant and applicable enough to be employed (for now) in 2021 if BMN goes on to sell the same levels of vanadium this year (3,842mtV). Profitability is clearly tight and in Q1 BMN already sold 100mtV of inventory. Therefore, for now, I can see enough inventory being sold to at least match the 3,842mtV and so am happy to retain this figure until proven otherwise
So as a starter for 10, when BMN sells 3,842mtV and the ZAR/$ exchange is R14.25, we would have a direct production cost of c. $26.50 per kg + c. $10 per kg = $36.50 per kg ($36,500 per mtV). Worst case scenario.
As far as I can see that places the company at roughly breakeven year to date which unfortunately increases the near term risk profile for a company that has made significant financial commitments to expansion which right now are delivering limited effect.
In assessing the reasons for the reduced guidance I see two very different elements. Unfortunately, despite their efforts which included an expensive (costs and loss of production) 35-day shutdown, the plant hasn't essentially gained anything. The work has merely returned the plant to the sort of levels it was capable of in 2019.
What that means is until BMN management can gain confidence in the consistency of the Vametco plant its expansion plans are effectively on hold. This message was clearly set out by CEO Mojapelo in his 2020 overview page 13 with Vametco reported as 2,800mtV by the end of 2022.
Of course, what that says is that the only way is effectively up because as far as I can see that guidance is conservative.
This is because the Vametco plant is already expected to be running at an annual rate of between 2,600mtV and 2,700mtV for the remainder of the year. Plus,
"Sustaining this stability, however, requires a recalibration of Vametco’s monthly production levels and a disciplined, proactive maintenance strategy over a period of time. As a consequence, the management team has revised the monthly production targets for Vametco to approximately 240 mtV per month, previously 270 mtV."
What that says to me is that the maintenance is already baked into the 240mtV monthly target and that number even when allowing for an additional yearly main maintenance period still should come in close to 2,800mtV. It's just that it's unlikely to push higher for the foreseeable future.
On a more positive note, Vanchem is reported to be a far more consistent plant which given that it is 100% owned is nice to hear. The delays there look to be mainly outside of the company's control and if they can complete the kiln 3 refurbishment in Q1 2022, we should see a decent uplift in production there in 2022.
However, it requires some of those "downstream expansions" highlighted in red above and right now their time frames and make-up are unknown. Hence why that forms one of several questions I have raised for the Q&A on Thursday.
Two realities are for me clear. One being that kiln 1 requires refurbishment post Kiln 3 completion. The second being that kiln 3 is the biggest kiln at Vanchem capable of 50% of total output. That means when fully supported by those "downstream expansions" and a refurbished kiln 1, Vanchem should be able to run at up to 3,150mtV.
That figure is very close to the reported phase 3 figure that was presented in the BMN March 2021 presentation. Because kiln 3 has a run rate of c. 2,100mtV the goal to reach 2,600mtV by the end of 2022 demonstrates that kiln 1 must be back online at some point in 2022. Likely mid-year.
To then push on to 3,100mtV more downstream expansions look to be required which may be able to come online in phases and at more restricted cost outlays. However, kiln 1 has still got to be paid for in 2022 and cash flows will determine what that means for the business as a whole. Meaning vanadium prices in H2 are a key factor moving forward.
Another question I have asked ahead of Thursday is around the true cash position. As of 31st Dec 2020 cash on hand stood at $50.5m. As of 27th June, this had reduced down to $31m. So a drop of $19.5m.
In terms of capital expenditure, it was reported that the total outlay for 2021 was expected to be $26.8m and $8.6m had already been spent. That would then leave the gap at c. $11m.
However, the company also reported that they fully monetised their Invinity Systems holding and realised $13m. So whilst I can accept that H1 was perhaps loss-making and so will have affected cash on hand, I can't help but feel that actual-cash should be much closer to that $50m figure. So some explanation and reassurance on this would be most welcome on Thursday.
It is important to reiterate that this is my analysis and opinion only.
I have deliberately employed the lowest end production forecast because right now BMN isn't showing me that I should trust anything more than that.
I don't see the ZAR/$ rate coming in below R14.25. If anything it will be slightly higher which helps on the cost side of things. I also believe 3,400mtV is an absolute minimum and that inventory can and will play its part over the course of the rest of the year.
What is also important to appreciate is that of the c. $18m in Capex that is still to be spent this year, $4.4m is sustaining capital and that is included in my $36.50 per kg cost already. Therefore if vanadium prices remain at their current levels BMN should 'only' be looking to spend c. $13.5m of their existing $31m coffers. On the other side of the coin, the H2 full production cost should come in slightly lower than the yearly average (due to greater production/sales) meaning that at +$40 per kg BMN is making money at the EBITDA level and starting to replenish those coffers.
However, to reduce the risk profile I would really like to see vanadium prices push higher in H2. Right now we are in the Summer months which are traditionally slack for steel and its raw materials. So I take it as a significant positive that the Chinese vanadium price remains firm. Its path will surely set the tone for the other main BMN markets.
All in all, not the truly positive step forward on the mining side of things that I had hoped for but at least it comes at a time when vanadium prices can support these increased costs. If vanadium prices go on to surge higher in H2 then all the better but it's not a given.
Several questions remain unanswered not least how this expansion plan is expected to unfold between now and the end of 2022. Let's hope some of them are cleared up on Thursday.
Note - This article represents the opinion and research of the author only and the author currently holds a position in one or more of the stocks mentioned. Nothing shared in this article is to be deemed financial advice. Where possible all facts have been checked and references provided, however, it is the responsibility of the reader to check all details for themselves before making any financial decisions. Please also refer to the disclaimer policy