Bushveld Minerals - Review of Q1 2021 Update - Part 1

The scores are in on Bushveld's start to the year, so what do the judges think?

Well as far as I am concerned this year was always sacrificial so long as guidance and the expansion plans remained roughly on track. Let's start with that guidance figure.

The key message is that guidance at both plants as things stand will come in at the bottom end of guidance. That being,

Vametco = 2,700 mtV

Vanchem = 1,400 mtV

= 4,100 mtV

So FY guidance is being maintained but only just.

If achieved, that would deliver a 469 mtV improvement compared to 2020 which equates to c. 13%. That remains a respectable increase and significant operation.

My previous analysis has always employed the midpoint guidance figure (4,225 mtV) so in reality, we should be talking about a maximum of 125 mtV of lost production which isn't all that significant in itself if guidance can be maintained at that bottom end figure.

Of course, BMN may do better than that but such statements as,

"risks to this guidance exist as a consequence of Vametco's challenges in achieving consistent plant performance, the slower-than-expected ramp-up following the maintenance shutdown, the recent industrial action, as well as risks associated with the ramp-up of Vanchem's first phase refurbishment,"

naturally, place that revised figure under further pressure.

So the update is loaded up with messages that said 4,100 mtV guidance remains under threat. However, the guidance is set, so I am prepared to take that on trust and employ that figure until told otherwise.

On the more positive side of things, Vanchem operating above its 2020 capacity at 293 mtV for Q1 is great. It also managed to produce 132 mtV of V205 flake during the period and 116 mtV of Nitrovan in order "to support production at Vametco during the maintenance shutdown." An early insight into what a two kiln figuration will offer the wider business once they are both in operation.

Refurbishment/Expansion Programmes

When employing the refurbishment plan updates from the Q4 and FY 2020 Update I don't see anything that is running behind schedule, but we now have a slightly more concrete estimate on the completion of the kiln 3 refurbishment.

"The kiln-3 refurbishment project commenced in Q1 2021 and is expected to be completed in Q4 2021."

I had previously calculated this to be around September (late Q3) so it shouldn't be too far out. Given that FY guidance remains at a minimum of 1,400 mtV there has to be some worthwhile contribution from kiln 3 before the end of the year. If not then that revised guidance would likely suffer.

This then leads to the view that "the full production benefit of kiln-3 will be realised in 2022" which is what this is ultimately all about. The question is when and what does that full benefit require to be in place first in order for that to be achieved?

Now is a good time to remind ourselves of the company's phased refurbishment programme, as stated in their February 2021 presentation.

Unfortunately, we simply don't have enough detail to judge the full progress of this plan.

Phase 2 works were designed to deliver kiln 3 refurbishment and "increase capacity at the chemical plant." That would then allow kiln 1 to be taken offline for 'refurbishment.' Here are the words from the 8th Feb FY 2020 update.

There the company talked about the scoping works for the "remaining refurbishment being conducted in-house" and once kiln 3 is complete that "kiln 1 will be taken offline for refurbishment." So in line with the presentation.

However, the same 8th Feb update also said this,

"Certain maintenance has been identified for kiln-1 at Vanchem, however, this work is not expected to require any downtime as it is planned to be conducted once kiln-3 has been refurbished and brought online. Some production flexibility is provided by the plants' three-kiln configuration, with production switching from kiln-1 to kiln-3 while this work is ongoing underway with the current refurbishment programme. "

So what is it maintenance or refurbishment?

Given that FY guidance this year is in the range stated on the above presentation slide, one should be entitled to assume that phase 2 in its entirety will be completed in FY 2021. Meaning the chemicals plants too. However, it would be good to hear this rather than having to guess. Even more so when we read today's update on the Vanchem refurbishment programme and see it all fall under the title "Phase 1."

The use of such a title gives me much hope because that ties in with the title used in the 30th November 2020 RNS on the Orion financing.

There the company talks about a different phase 1 and a production figure which the Orion monies are designed to deliver and so should be more concrete. In that description, there is no direct mention of the chemical plant but the key phrasing is,

"Refurbishment of the third kiln for modular production increase leading to 2,600mtv per annum."

Compare that now to the 8th February 2021 wording,

"Kiln-3 is expected to be commissioned in H2 2021, resulting in a modular production increase, subsequent to which, kiln-1 will be taken offline for refurbishment."

Keywords being modular and leading.

The price tag set in the 30th November RNS for the full set of works which include the modular' increase to 2,600 mtV was $20.3m. We know from the FY2020 update that $15.7m of this is planned for this year. That leaves just $4.6m left. So c. 78% of the budget is due to be spent in FY 2021.

Complicated? Absolutely.

If the February presentation did not exist then as far as I can see phase 1 is now as described in the 30th November RNS with 78% of that budget being spent this year.

My previous projection was that given the limited cash outlay that remains, this revised 'phase 1' works would be completed by end of H1 2022. That would then see Vanchem producing at c. 2,600 mtV sometime in H2 2022. However, better detail should really be available from the company given we are talking shorter term production enhancement and planning.

The February update confuses things as does the use of the term maintenance and refurbishment for Kiln 1.

In simply terms kiln 1 is capable of 1,100 mtV production alone and both kilns 2,600 mtV, meaning kiln 3 when all downstream plant is online is capable of 1,500 mtV. However, it's a guess and it really shouldn't need to be.

The key to removing all of this confusion is a result of the statement made on slide 26 of the February presentation. There the company says about Vanchem,

"Refurbishment capital expenditure of ~ZAR750 million ($45m). Details on the ramp-up profile and capital expenditure will be provided once studies have been completed."

The problem is that there was no further guidance given today as to when these studies will be completed.

Over at Vametco,

"Technical studies associated with the Vametco Phase III Pre-Feasibility Study ("PFS") are progressing and are expected to conclude during Q2 2021."

Given that "details on the ramp-up profile and capital expenditure will be provided once the PFS has been completed," it is reasonable to expect further news on this front later in Q2/early Q3. However, it remains outstanding and just like with Vanchem the market will likely fail to appreciate this until it is more concrete.

All in all whilst I enjoy decrypting Bushveld Minerals, in my view, there is not enough information at this time to judge what 2022 production will look like. That it will undoubtedly be a further improvement to 2021 is for me a given but how much better is a guess at this time. I really think the company could do better on this front even if caveats are required because they should have a good idea of what 2022 looks like already. That would give the market much more to go on in a vanadium market that is clearly strengthening.

That said, 4.100 mtV is still very healthy and clearly more will come next year. In a rising vanadium market that should still create a lot of attention. The problem is the 4,100 mtV cannot be entirely trusted at this time.

In part 2 I am going to look at the production costs and try to offer some conclusions.

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


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