Bushveld Minerals Limited (LON: BMN), the AIM listed, integrated primary vanadium producer, with ownership of high grade vanadium assets, has today announced its half year unaudited results for the six months ended 30th June 2019.
Key Highlights
H1 2019 Group financial highlights
· Revenue of US$78.0 million (H1 2018: US$83.7 million).
· EBITDA1 of US$41.0 million (H1 2018: US$42.8 million).
· Profit after tax of US$30.8 million (H1 2018: US$28.5 million).
· Free cash flow2 of US$23.3 million (H1 2018: (US$16.4 million).
· Net cash balance of US$66.1 million at 30 June 2019 (31 December 2018: US$42.0 million).
· Earnings per share of 1.92 cents (H1 2018: 1.57 cents).
· Ferrovanadium price averaged US$56.3/kgV in H1 2019 (H1 2018: US$65.5/kgV).
§ Year to date average ferrovanadium price of US$48.2/kgV3.
- EBITDA comprises operating profit plus depreciation and amortisation.
- Free cash flow comprises net operating cash flows less net investing cash flows.
- London Metal Bulletin year to date average as at 20 September 2019.
H1 2019 Group operating highlights
• On 1 May 2019, the Company announced the conditional acquisition of Vanchem for a consideration of US$68 million. The transaction is expected to be completed on 31 October 2019.
H1 2019 Bushveld Vanadium operational highlights
Vametco
· Transformation programme successfully delivering, with Q2 2019 production being the highest quarter for production in over two years.
· Production for H1 2019 was 1,392 mtV, a two per cent increase relative to H1 2018 (H1 2018: 1,360 mtV).
· On track to meet 2019 production guidance of 2,800 mtV to 2,900 mtV.
· On track to meet 2019 unit cash cost guidance of US$18.90/kgV to US$19.50/kgV.
H1 2019 Bushveld Energy operational highlights
Electrolyte Plant
· The Environmental Impact Assessment (“EIA”) for the proposed plant in East London, South Africa, has passed the public participation stage and is on track to be completed this year.
· The first batch of electrolyte was successfully produced using Vametco’s feedstock, with the samples being sent to vanadium battery companies for testing.
Vanadium electrolyte rental model
· Implementation of the first rental contract was announced with Avalon Battery Corporation and its customer, Sandbar, in the United States.
· Negotiating larger rental agreements in Africa, Asia, Europe and North America.
· Negotiations in progress with external commercial debt providers to support the structure.
Eskom Vanadium Redox Flow Battery project
· The vanadium redox flow battery (“VRFB”) installed with Eskom was commissioned and now operating fully.
Vametco based Solar Mini-Grid Project
· Commenced a number of activities including an Environmental Assessment, a grid connection and geotechnical studies. Procurement for the project commenced in Q3 2019.
Group events post 30 June 2019
Vametco
· Successfully completed the wages and benefits negotiations with the Association of Mineworkers and Construction Union (“AMCU”) for the three year period from 1 July 2019 to 30 June 2022.
Vanchem acquisition
· On 28 August 2019, unconditional approval for the acquisition was received from the Competition Commission of South Africa.
· The transaction remains on track to be completed on 31 October 2019. The outstanding conditions precedent, namely, the cession of specific commercial agreements and South African Reserve Bank approval, are expected to be satisfied.
· The Company is making good progress with local banks for debt facilities and remains confident of completing the transaction without relying on equity capital markets. Further updates will be provided as appropriate.
Group Outlook
· Execution of the transformation programme at Vametco to increase production rates to 3,400 mtVp.a. during the course of 2020 and then to 4,200 mtVp.a. during 2022, remains on track.
· Develop a production platform of more than 8,400 mtVp.a. with a nameplate capacity of 10,000 mtVp.a within the next five years.
· On completion of the Vanchem acquisition, the Company will offer a diverse product offering for the steel, chemicals and energy storage markets.
· Continue to reinforce Bushveld Energy’s position as a leading energy storage solutions provider.
· Invest in the vanadium supply chain individually or through partnerships.
· Progress workstreams for the Johannesburg Stock Exchange (“JSE”) listing.
Appointment of joint broker
· Appointment of Peel Hunt LLP as joint corporate broker to the Company with immediate effect.
Fortune Mojapelo, CEO of Bushveld Minerals Limited, commented:
“I am pleased to report that Bushveld Minerals has continued to build on firm foundations in the first half of 2019, enjoying progress across the Group and establishing new platforms for further future growth.
“The Group’s EBITDA of US$41million and free cash flow generation of US$23 million achieved in the period highlights the mine’s robust nature as a low-cost, highly cash generative operation, and was achieved in a period of weaker vanadium prices, which averaged 14 per cent less than a year earlier. Even with this strong result, we will be focusing our efforts at Vametco on further refining processes to maintain cost control.
“Operational performance has been improved through our transformation programme at Vametco, which we started to implement at the beginning of the year. Execution of the transformation programme is ongoing throughout the rest of this year and into 2020, during which we will reach a steady state of production of 3,400 mtV per annum.
“In August, we were pleased to receive approval from the Competition Commission of South Africa to acquire the Vanchem assets, without conditions, which was a key milestone in closing the transaction on 31 October 2019. We now look forward to completing the remaining conditions precedent and completing this important transaction for the Group.
“At Bushveld Energy, the first half of 2019 has seen a broader and improved understanding of its innovative business model. The combination of the electrolyte rental product and the current vanadium price is increasing confidence that VRFBs will become a long-term feature of energy grids both in Africa and globally. We expect these events to increase vanadium consumption from VRFBs during second half of 2019 and beyond.”
Chief Executive Report
Dear Shareholder,
I am pleased to report back on a successful first half of the 2019 financial year. The Company is on track with its strategic initiatives to deliver a truly integrated and leading low-cost vanadium platform characterised by large high-grade vanadium deposits and mines; scalable, low-cost, cash generating vanadium primary processing assets and a downstream energy storage business, positioned to play a leading role in the growing stationary energy storage market.
VANADIUM PRODUCTION OPERATIONS
Bushveld has one of the largest high-grade primary vanadium resource base in the world. The Company’s vanadium resource base currently consists of three mineral assets, Vametco, Brits and Mokopane. Bushveld’s processing facilities consist of Vametco and Vanchem (conditional acquisition). The Company’s mineral resources and processing facilities are situated within the Bushveld Complex in South Africa.
Vametco (74% ownership)
At the core of this strategy is Vametco, located in Brits, Northwest Province. Vametco is a low cost primary vanadium mining and processing company which produces a trademark vanadium product, NitrovanTM, as well as Modified Vanadium Oxide.
On 22 May 2019, following a significant amount of exploration work, including a 2018 drilling campaign comprising 13 drill holes over a total of 1,506m, the Company announced a doubling of its Ore Resources and a significant increase in the total mineral resource. Vametco has a 186.7 Mt JORC compliant resource averaging 1.98 per cent V2O5 in magnetite grades (including 48.4 Mt in reserves), and a life of mine of 27 years.
Table 1: Vametco operational and financial overview
| Unit | H1 2019 | H1 2018 | Variance | |
| Vanadium produced | (mtV) | 1,392 | 1,360 | 2.4% |
| Vanadium sold | (mtV) | 1,115 | 1,403 | -20.5% |
| LMB Prices w.a. | US$/ kgV | 56.3 | 65.5 | -13.9% |
| Revenue | USD (millions) | 74.3 | 81.2 | -8.6% |
| EBITDA | USD (millions) | 42.3 | 42.4 | 0% |
| Production cash costs | USD/ kgV | 19.2 | 20.2 | -5% |
While Vametco had a stellar financial performance in 2018 (Revenue of US$183 million and EBITDA of US$108 million), the Company recognised that continued success requires improvement on several fronts, not least, lowering Vametco’s already low production costs even further, by increasing throughputs and thus production volumes, while also, ensuring a conducive working environment with a motivated workforce.
Following a diagnostic exercise in Q4 2018, the Company successfully implemented its operational improvement programme, which is starting to bear fruit. This transformation programme will complement the Company’s capacity expansion project to increase vanadium production at Vametco to more than 4,200 mtVp.a. The diagnostic review undertaken in Q4 2018 identified a number of initiatives to improve operational performance focusing on stabilising and improving production, cost and capital efficiencies and improving overall organisational health.
During this half the Company made several changes to the management structure, which were designed to build greater depth in the leadership team, improve coordination with the greater Bushveld Group and create dedicated capacity to coordinate the development and implementation of the many initiatives forming part of the transformation programme. These changes included the appointment of Ms Bertina Symonds into the role of General Manager, created from combining the CEO and COO roles into one. Bertina brings over 20 years of mining and beneficiation experience, strong leadership and a solid production and commercial background. William Steinberg, former Vametco’s Works Manager, was appointed Chief Transformation officer, to drive the Operations Transformation programme, while Mr Taff Williams, former Vametco’s COO, was appointed Group Vanadium Specialist to provide technical support to the Group’s global vanadium sales as well as supporting integration efforts for Vanchem.
As a result of the initiatives undertaken in the first half of 2019, the Company has already seen improvements in all key areas, being: a) production scheduling; b) vanadium grade in the kiln feed; c) the hourly feed rate to the kiln; and d) recoveries, all contributing to improved throughput at higher grades. This resulted in material improvements in production, where the 742 mtV NitrovanTM produced in Q2 2019 was up 14 per cent on Q1 2019 and up 18 per cent on the comparable quarter last year. The Company is therefore pleased to report that Vametco remains on target to meet its production guidance for this year of 2,800 mtV to 2,900 mtV.
Vametco sold 1,115 mtV Nitrovan TM, generating revenues of US$74.3 million in the first half. Vametco’s realised price is based on the prior month’s average price, which is higher than the quoted LMB weighted average price for the period of US$56.3/kgV. These higher realised prices offset the lower sales in the period.
Vametco is in the lowest quartile on the cost curve for global vanadium producers and, therefore, enjoys robust economics and remains highly profitable even in weaker price environments. The Company is pleased to report that Vametco generated an EBITDA of US$42.3 million achieving an EBITDA margin of 57 per cent.
The Company had previously reported a first half unit cash cost of US$17.40/kgV and an EBITDA of US$48.6 million for Vametco. These figures have subsequently changed to US$19.20/kgV and US$42.3 million, as a result of intercompany costs introduced from January 2019 which should have been eliminated, however they were instead incorrectly capitalised to the cost of inventory. The impact of the adjustment increased the value of cost of sales as well as the reduction in the inventory value of work in progress and finished goods. Vametco’s 2019 cash cost guidance remains unchanged at US$18.90/kgV to US$19.50/kgV.
Looking forward, the continued implementation of initiatives identified in the diagnostic review will support Vametco in achieving a steady state production of 3,400 mtVp.a. during 2020.
The Phase III expansion programme, to be undertaken after the above initiatives are completed, will focus on improving kiln availability and increasing kiln and leach recoveries targeting steady state production of 4,200 mtVp.a during 2022.
Health and safety
Health and safety remain a top priority for the Company. I am pleased to report that Vametco recorded 5.376 million Fatality Free Shifts by the end of June 2019.
Employee relations
Good relationships between management, the Company’s employees and the local communities in which we operate are an essential part of any successful mining business. The Company is delighted to have successfully completed wages and benefits negotiations with AMCU, which represents approximately 70 per cent of Vametco’s workforce. The resulting three year agreement is an important step in bolstering the Company’s corporate social responsibility and maintaining operational excellence. Pleasingly, the costs of the agreement do not necessitate a revision to Vametco’s 2019 production cost guidance.
Furthermore, the Company has embarked upon and progressed a number of initiatives, including negotiating an Employee Share Ownership Scheme (“ESOP”) which is aimed at closely aligning the interests of Vametco’s workforce with its operational targets, as well as an Employees’ Financial Wellness Programme. Pending the implementation of the ESOP, expected in 2020, Vametco will pay during 2019 a special ESOP bonus calculated on the same basis as the ESOP payment made for the period 1 July 2018 to 31 December 2018.
Environmental
Bushveld Minerals takes its environmental obligations and responsibilities seriously. Several environmental initiatives underway include construction of a new tailings dam to prevent groundwater contamination, rehabilitation of current tailings dams to eliminate fall-out dust. Furthermore, during the first half of the year, Vametco embarked on the installation of an off-gas scrubber to reduce dust emissions. The Company’s environmental objectives are to align the Company’s Environmental Management Systems with international standards, including those of the International Finance Corporation and ISO 14001:2015 (an international standard for environmental management systems). The Company is targeting ISO 14001 certification by Q3 2020.
Brits (62.5% ownership)
The Brits Project is located in Portion 3 of the farm Uitvalgrond 431 JQ, near the town of Brits in the North West Province of South Africa and is directly along strike from the Bushveld Vametco Alloys Mine (Bushveld-Vametco). The Company announced a maiden JORC Mineral Resource on 21 June 2019 which incorporated data from the 2018 drilling campaign comprising 26 drill holes over a total of 2,967m of diamond drilling.
Brits has an Indicated and Inferred Resource of 66.8 Mt (100 per cent Gross Basis) at an average grade of 1.58 per cent V2O5 in magnetite for 175,400 tonnes of contained vanadium across the three seams. Pleasingly, the Indicated Mineral Resource tonnages account for 67 per cent of the total combined Mineral Resource and stand at 44.9Mt with an average grade of 1.59 per cent V2O5 in magnetite for 115,600 tonnes of contained vanadium across the three seams. Brits provides the optionality for additional ore feed for the Vametco plant, and, if required, feed for the Vanchem plant.
Vanchem (conditional acquisition)
Meanwhile, Bushveld’s strategy of growing its production platform through targeted brownfield processing assets is also bearing fruit. On 01 May 2019, the Company announced the conditional acquisition of Vanchem, a primary vanadium processing plant that includes three kilns, two ferrovanadium converters. Post completion of a US$45 million refurbishment programme, Vanchem has the potential to produce more than 4,200 mtVp.a. in the form of vanadium pentoxide, vanadium trioxide, vanadium chemicals and ferrovanadium. This acquisition, in addition to Vametco, sets the platform for Bushveld to increase its overall vanadium production to more than 8,400 mtVp.a. with a name plate capacity in excess of 10,000 mtVp.a.
The Company is delighted to have received unconditional approval of the transaction by the Competition Commission of South Africa and now look forward to completing the transaction on 31 October 2019, following the fulfilment of remaining conditions precedent.
As communicated to the market, the Company expects to fund the acquisition from its strong cash position as well as debt facilities that it is in negotiations for.
Mokopane (64% ownership)
Mokopane is one of the world’s largest primary vanadium resources, with a 298 Mt JORC compliant resource and a weighted average V2O5 grade of 1.41 per cent in-situ and 1.75 per cent in magnetite.
Mokopane is positioned to become a primary source of feedstock for Vanchem, creating a fully integrated vanadium producing business in a shorter time frame and at a lower cost, as opposed to a standalone operation. The Company engaged MSA to undertake a definitive feasibility study in September 2019 for the development of the Mokopane mine. The expedited Mokopane development, as a possible primary feedstock supply to Vanchem, does not remove the optionality of supplying ore to other primary or secondary producers worldwide, and/or to develop Mokopane into an integrated mine and processing plant.
BUSHVELD ENERGY (86% ownership)
This sound, scalable and low cost production base gives Bushveld a solid platform to implement its vertically integrated business model, through the development of a downstream vanadium-based energy storage business, Bushveld Energy. Bushveld Energy was created to establish a significant position for VRFBs in the stationary energy storage industry thereby achieving the twin objectives of a) diversifying and strengthening the vanadium demand profile and b) capturing a compelling commercial opportunity in a multi-billion dollar industry.
During the first half of 2019, Bushveld Energy made significant progress across all its key areas of focus – development of electrolyte production capacity, deployment of its electrolyte rental model, which is expected to play an important role in promoting deployment of VRFBs, development of energy storage mandates and developing a sound partnership model for VRFB assembly/manufacturing.
The Company is encouraged to see greater coverage and a broader and improved understanding by the market of stationary energy storage and the Bushveld Energy business model. Moreover, the combination of the Company’s electrolyte rental model and Bushveld’s ability to scale up vanadium production will support VRFBs becoming a long-term feature of energy grids globally.
GROWTH STRATEGY
Strategic acquisitions are a key part of the Company’s growth plans, as demonstrated by the successful acquisition of Vametco and soon to be completed acquisition of Vanchem.
Following the acquisition of Vanchem, Bushveld’s growth strategy will focus on realising the potential of its assets, focusing on production throughput, cost control and realising the downstream opportunities under development through Bushveld Energy. These opportunities will see the Company continue investing across the vanadium supply chain individually or through partnerships.
As previously communicated, the Company’s investment proposition remains primarily capital growth on the back of the Company delivering on its ambitious growth targets. The Company is nevertheless confident that when fully implemented, its vertically integrated platform will generate sufficient cash to return some to its shareholders through dividends.
VANADIUM MARKET
The Company believes that the vanadium market fundamentals remain attractive. Demand in steel making is expected to continue growing, notwithstanding a subdued steel market outlook in the medium term. This demand increase is driven by growing intensity of use of vanadium in steel, which is in turn driven largely by new regulations introduced in China. Meanwhile the momentum behind energy storage applications of vanadium continues to grow as the energy transition towards cleaner energy sources takes root.
Vanadium prices have seen a 50 per cent fall during the first half of 2019. The Company believes that the price fall has been heavily influenced by largely temporary factors and retains its positive outlook on the vanadium market going forward. These factors include:
China’s rebar standard
The new rebar standards introduced in China in November 2018 were expected, when fully complemented, to see an uplift in Chinese vanadium demand of approximately 30 per cent. This uplift has, however, not been realised, mostly due to a lacklustre enforcement regime for the standards which effectively provided a “tolerance window” for the mills in relation to the new standard. A nation-wide inspection launched in July and expected to be completed in September is anticipated to drive greater compliance with the new standards and in turn support demand growth going forward.
Substitution
Increased niobium imports into China suggest greater substitution of vanadium in rebar when vanadium prices were over US$100/kgV. The majority of the substitution is price elastic. At current vanadium prices the incentive to substitute niobium with ferrovanadium is significantly diminished, as vanadium continues to have several advantages over niobium in steel applications.
Opportunistic producers
Abnormally high vanadium prices such as those seen in November 2018, will always encourage new supply, particularly opportunistic swing supply, such as secondary production or stone coal production in China. Furthermore, the increased global steel production during 2019, and the return of near US$100/t prices for iron ore amid a tight iron ore supply/demand balance as a result of the supply disruptions in Brazil, brought back to life previously marginal magnetite mines from China, increasing vanadium supply via co-production. As steel margins normalise and iron ore market returns to a balance, the Company excepts a reduction in vanadium production from co-producers.
The medium term outlook for supply, however, remains constrained. This outlook is informed by the significant hurdles to greenfield vanadium supply growth, while co-producers capacity is capped resulting in a modest outlook for sustainable new supply growth going forward.
Outlook
While the medium to long term outlook for vanadium remains positive, the Company’s low cost curve position means that it is well positioned to address the recent weakness in commodity prices. Bushveld Minerals’ high-grade, long-life and low cost assets put the Company in a strong position throughout the commodity cycle (year to date average ferrovanadium price of US$48.2/kgV[1]). Moreover, the Company’s vertical integration strategy provides a natural hedge to vanadium price volatility as well as a diversified revenue stream. The normalisation of the vanadium price is increasing confidence that VRFBs will become a long-term global feature of energy grids.
[1]London Metal Bulletin year to date average as at 20 September 2019.
FINANCIAL PERFORMANCE
In this report, Bushveld Minerals is pleased to report a strong set of financial results for the first half of the year, underpinned by operational improvements and effective cost control initiatives.
The Group generated revenue of US$78.0 million (H1 2018: US$83.7 million), representing a decrease of seven per cent from the prior corresponding period. The lower revenue reflects lower sales volumes.
The Group generated an EBITDA of US$41.0 million (H1 2018: US$42.8 million), representing a decrease of four per cent from the prior corresponding period, however the EBITDA margin was higher at 53 per cent (H1 2018: 51 per cent), as a result of the Group reducing its operating costs at Vametco.
Cash generated by the operating activities of the business was US$34.7 million (H1 2018 US$21.4 million). The investing activities of the business resulted in an outflow of US$11.4 million, with the majority relating to the initial US$6.8 million paid as part of the aggregate cash consideration of US$68 million for the Vanchem acquisition. The cash and cash equivalent balance for the six months ended 30 June 2019 is US$66.1 million (31 December 2018: US$42.0 million).
ORGANISATIONAL AND ADVISER CHANGES
The Company is pleased to announce the appointment of Peel Hunt LLP as joint corporate broker to the Company with immediate effect. SP Angel Corporate Finance LLP remains the Company’s nominated adviser and joint corporate broker, along with BMO Capital Markets Limited, which remains joint corporate broker.
Finally, I would like to make a special mention of Geoff Sproule, Bushveld’s long serving finance director, who will be stepping down with effect from 30 September 2019 and will simultaneously resign from the board of directors of the Company. Geoff has been an integral part of the team that has helped Bushveld Minerals achieve so much since starting out as a junior explorer and rapidly transforming into the significant vanadium player it is now. I wish him all the best.
The Company will be announcing the new finance director this week, the management team and the board strongly believe fulfils all the criteria that Bushveld Minerals requires for the next phase of its growth.
It has been a productive year to date and the Company is steadily executing its strategy to grow its low-cost production base and build up the Bushveld Energy business. I look forward to the second half during which Bushveld Minerals will keep strengthening its position as a leading primary vanadium producer, offering a diverse range of products for the steel, chemicals and energy storage markets.
I thank you for all of your support.
Fortune Mojapelo
