Bushveld Minerals - Review of Q1 2021 Update - Part 2
Having likely confused most readers with my review of the refurbishment plans, I would now like to spend a bit of time analysing the company's production figures and what I believe it means for profitability.
Production Costs and Profitability
Whilst the company is maintaining its upper-end cost guidance for both plants, I am struggling to concur with this.
What is good to see in this latest update is that costs are included in the two plant reports. They are as follows.
Vametco Q1 production cost (C1) running at ZAR 396 = $26.50 per kg.
Vanchem Q1 production cost (C1) running at ZAR 459 = $30.70 per kg.
That equates to an actual ZAR/$ exchange rate of ZAR 14.95 for Q1.
In their notes on the FY guidance costs for each plant, BMN report that due to production being "expected towards the lower end of guidance," both plants are now predicted to see "the higher end of its production cash cost (C1)."
The original guidance (see 8th Feb update once more ) stated the following,
"2021 production cash cost (C1) guidance of between US$20.0/kgV and US$21.30/kgV (ZAR320/kgV and ZAR340/kg)."
"2021 production cash cost (C1) guidance of between US$26.20/kgV and US$26.70/kgV (ZAR419/kgV and ZAR427/kgV)."
A quick calculation demonstrates that the expected FY 2021 ZAR/$ exchange rate would be c. ZAR 16.
Q1 remember was ZAR 14.95. At the time of writing the current rate is ZAR 14.10 and the Q2 average is currently running at ZAR 14.36. At present, a number of factors are supporting the recovery in the Rand. The two main ones in my opinion being a weakening dollar and the resurgence in the commodities sector which is South Africa's bread and butter. In that continued environment it is therefore my expectation that the ZAR 16 employed will not be achieved this year.
As an example, if we assume that all C1 production costs are rand-denominated then a revised ZAR 14.50 average would see those above "higher end" production figures revised as follows.
Vametco at ZAR 340 = $23.45 per kg.
Vanchem at ZAR 427 = $29.45 per kg.
Vametco is the biggest plant in 2021 at nearly 2 to 1. Therefore, the total average group production cash cost based on FY ZAR 14.50 average would be c. $25.50 per kg.
A big caveat needs to be added here because Vanchem product varies far more in form than Vametco. As today's update states,
"Production numbers are provided at the time of reporting, after which, based on customer demand, chemicals and flake may be further processed to the required finished product, which will result in production and cost adjustments in line with the demand profiles of the various products."
So the above is not a given but in my opinion, it's a good guide as to roughly where that C1 production cost currently sits.
To this then needs to be added all other associated costs. These are covered under note 3 under each plants Table of operational highlights. See below.
The key part being,
"Excludes depreciation, royalties and selling, general & administrative expenses and cost associated with Covid-19."
On a number of occasions, I have tried to pin down these additional costs, mainly by employing the H1 2020 interim accounts and report. My best estimate right now is around $5 per kg based on 4,100 mtV which means Bushveld Minerals would be breakeven (major investment programmes aside) at c. $30.50 per kg and ZAR 14.50 a dollar exchange rates.
Production Costs Calculations
I don't like to include any figures in these blog posts without demonstrating how I justified my conclusions. So the following section of this post is designed to do just that. I warn you now it is complicated so readers may wish to skip this section.
I arrived at this estimated figure by employing the latest set of cost information provided in the 2020 interims.
H1 2020 production was broken down as follows.
Vametco = 1,218 mtV
Vanchem = 431 mtV (c. 26% of total production)
Total = 1,649 mtV (FY equivalent 3,298 mtV)
An analysis of the difference between the stated C1 and C2 cash costs (see arrows above) demonstrates that the C2 cost includes, royalties, selling, general & administrative expenses, social expenses, sustaining capital and costs associated with Covid-19.
This amounted to an average total additional cost of $6.25 per kg produced across both plants in H1 2020 (see table above).
For reference, the average vanadium in H1 2020 was $24.60 per kg so sales commission was undoubtedly lower than it will be in 2021.
In simple terms at 1,649 mtV and $6.25 per kg ($6,250 per mtV), the above list of C2 additional costs for H1 2020 stood at a combined $10.3m.
Now some of these costs are applicable to each mtV produced and some are fixed and shared amongst all production. That makes it extremely difficult to define the actual C2 overhead cost for 2021.
One cost we must adjust is the idle plant cost which was attributable to the Covid shutdown period that according to the H1 2020 interim results started on 23rd March 2020 with "both Vametco and Vanchem commenced ramp-up and returned to pre-lockdown production levels in May 2020."
So c. 6-8 weeks disruption.
Given that Vametco has seen a 5-week shut down for maintenance this year and that Vanchem is planning to take kiln 1 offline, it is not unreasonable to maintain the $3.1m idle plant cost from 2020 but it is a one-off cost and not repeated in H2.
Therefore when doubling the cost to establish the FY figure, the total H2 figure should be $10.3m - $3.1m = $7.2m.
This would then give us a H2 additional C2 cost overhead of $4.37 per kg ($7.2m /1,649) and an average for FY 2020 of $5.30 per kg ($6.25 + $4.37 / 2) against total figurative production of 3,298 mtV (1,649 x 2).
To make things even more complicated, the general & administrative expenses (total $15.2m) then need to be shared out across any revised production figures.
At 3,298 mtV they attribute $4.60 of the total $5.30 per kg C2 expense. When production increases to 4,100 mtV this reduces to $3.70 per kg. So a saving of $0.90 per kg. This is a fine example of how the fixed cost base is affected by expanding production.
This gives us a running total C2 'overhead' cost of c. $4.40 per kg. To this needs to be added additional sale commission costs. The enclosed exert from those H1 2020 interims demonstrates the sort of fluctuations that stronger vanadium prices can do to that sales commission cost. It should hopefully also help explain some of the above (complicated) thought processes on this C2 cost analysis.
However, it is clear in the H1 2020 interims wording published above that these costs can include professional fees which in H1 2020 were $2m alone. As this is extremely difficult to pin down my safe bet is that they are maintained at a similar level much like was seen between 2019 and 2020.
Given that vanadium prices are up approximately $11 on that 2020 figure, it is not unreasonable to add in a further $0.60 per kg for this. That equates to an additional $2.45m for the entire 4,100 mtV production.
Added to our $4.40 per kg figure, gives us a final C2 total cost of $5 per kg. Convenient? Just a little.
Some Caveats to These Findings.
There are of course many caveats. One is that the exchange rate does play havoc with administrative costs that are communicated in dollars but paid in Rand and/or pounds, but we have to start somewhere.
One could also argue that the commission figure could be a little higher.
However, the key differential here is those general and administrative expenses which account for c. 70% of the total cost. So that final $5 figure cannot really be all that far out if they have remained reasonably stable. The 2020 accounts will no doubt help shed more light on this next month.
These are my calculations only and I have explained them to the best of my abilities. Others may have a different opinion.
My actual costs to produce also do not reflect the cost of inventory that is sold above and beyond this year's production. A scenario that is already playing out through Q1 where 100 mtV of additional material was sold in the period.
Nevertheless, as far as I can see, the $30.50 per kg 'total' cost figure is close enough to the worst-case scenario and secure enough to be employ.
Of course, the market can't have it all its own way. A weakening dollar coupled with surging inflation and a world market in almost full rebound mode should also drive vanadium prices higher. After all, that is in part why the South African Rand is the best performing emerging markets currency right now. The market expects higher commodity prices.
Whilst BMN management chose to only include LME average prices for Q1 2021 (US$30.9/kgV), Europe was not their biggest market in 2020.
That 8th February 2021 update once more.
"Group sales geographic split for 2020 was 37 per cent to the US, 25 per cent to Europe, 21 per cent to China and 17 per cent to the rest of the World."
As we can see the US and China represented 62% of total group sales in 2020. Dig a little deeper and we see that China sales in H1 2020 were 18% (See H1 2020 interims). Meaning that H2 2020 sales were in fact 24%.
With prices in the US and China, this year continuing to operate at a solid premium to Europe it makes sense that sales there would have continued their strength. Prices today in both markets are running at around $35-36 per kg. A decent-sized premium to the reported LME figure in today's BMN update. It is therefore a shame that some indicative guidance on this wasn't included in the update.
As I have discussed on my Twitter feed prices in China look now to be pushing higher again adding greatly to my positive feeling that solid 2021 profitability (ex-major investment items) is within BMN's grasp. At $30.50 per kg total production costs, it is easy to see why for a group which should still go to produce c. 4,000 mtV.
Bushveld Minerals at c. 4,100 mtV production, $35 per kg prices and expansion on schedule is in a very good place.
In terms of where I am coming from on this, I was absolutely clear at the start of this year that 2021 is a transition year and pain was to be expected. This is driven by the need to invest both time and money into the two operating plants and clearly, that is coming with some teething problems. My core goal, therefore, is to see the business make a profit such that its expansion plans can be maintained and the future company and its greater rewards can be realised.
Under that scenario, ultimately the company is fully financed to deliver 6,800 mtV of production. Nobody should forget that. Such production delivers considerable further cost savings and profitability at the $35 per kg vanadium prices that we see today.
Right now things are about as bad as they can be cost-wise and still it looks like total costs are barely over $30 per kg. That's about as high as costs should ever get given that production is on track to continue expanding.
In dissecting the refurbishment plan I have found that there is not enough clear guidance as to what 2022 and beyond will look like.
That aside the plan looks to be intact with both plants still on schedule. This should lead to further production expansion in 2022 but greater detail is required from the company to understand what that will be and to give the market a better chance to value it.
If BMN can maintain close to their revised guidance of 4,100 mtV then at a combined 688 mtV production figure in Q1 (a period of the lowest vanadium prices this year), c. 83% of this year's total is still to come.
Q2 vanadium prices in both BMN's largest markets have so far averaged c. $35 per kg. That's creates a very healthy scenario as BMN begins to produce and likely sell the vast majority of its 2021 production.
Therefore, what I am seeing (if my figures are indeed close enough to the reality) is a Bushveld Minerals that can deliver solid profit in 2021 and support its continued expansion plans. Assuming of course that current vanadium prices are roughly maintained.
I would just like to see more detail on how their plans come together because I believe the guessing leads to some investors losing interest or holding back which is a shame because the progress and the story remain compelling.
To this, I can also likely add better vanadium prices as both BMN's main markets begin to see further price rises. These need to be monitored but even a move to $40 per kg given my conclusions on cost, would have a significant further impact on BMN's cash flow for the year.
That said, as unexciting as some may find it, simply holding the current level of pricing would be ample given that all the excitement on the mining/production side of things is really planned for the coming years.
However, as CEO Mojapelo stated today,
"As the world continues to open up, we have confidence in the demand side of the vanadium market."
Put another way, the commodities market is on a bull run and vanadium is surely along for the ride. So perhaps even on this purely mining orientated basis, the real excitement in 2021 is still to come.
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