Bushveld Minerals Limited (BMN) Earnings Call Transcript & Summary

Thank you very much, and good morning to everybody, and thank you for joining us today for this half year results as well as the announcement of our financing that we announced today. I'm joined with Tanya Chikanza, our Finance Director, who will be assisting me today in this presentation. As usual, we can start with our disclaimer to remind you of its importance to this presentation. With that out of the way, I'd like to proceed then, starting with the highlights of H1 2020. Firstly, let me discuss the first half performance. As I said on the recent quarterly call that we are still feeling the effects of COVID-19, along with everyone else in the world, although it was pleasing to see South Africa move to the lowest level of lockdown in recent days. While we have faced certain challenges for the large part of this year, as a company, we've been successful in making our obligations to our customers, employees, to our local communities. And for that, we're thankful. Like all companies in South Africa, we were affected by the production halts enforced by government's lockdown and additional COVID prevention measures taken at our sites post this period, which includes social distancing, modified shift patterns. Completion of the Kiln Off-Gas project was also delayed due to the COVID-related issues at the suppliers' facility. We estimate that without the nationwide lockdown, we would have been able to produce an additional 380 metric tons of vanadium. Now to present some numbers. For Bushveld vanadium, group production is still 18% up compared to H1 last year, and this is a result of the contributions from Vanchem, which we acquired at the end of 2019. Sales were up 58% to 1,765 metric tons of vanadium, thanks to higher sales in Vametco as well as inclusion of Vanchem sales. Despite the increase in production and sales, our financial performance, however, was affected by the subdued vanadium price, which was less than half the level of H1 2019 at around $24 per kilogram V. This low price environment is carried on into the third quarter of this year. Due to the low price environment, our revenue was down by about half to $43 million compared to the first half of 2019, and -- meaning that we recorded an EBITDA loss of $1 million and an operating loss of $9.9 million. Importantly, despite all the disruptions we maintained a strong safety record with 0 fatalities and total injury frequency rate at Vametco of 18.8%, which is 11% down on the previous comparable period as well as a total injury frequency-related Vanchem of 0.009. As at the end of August, we had 36 confirmed COVID-19 cases at our operations. I'm pleased to announce that all of the individuals have recovered and are back to work. Now with respect to Bushveld Energy, our electrolyte plant got the green light for construction from the South African government. In addition, we received funding approvals for equity and debt from the Industrial Development Corporation. We also made significant investments in Invinity Energy Systems in the post merger entity found by Avalon and redT, where we currently hold an 8.71% shareholding. This is part of our strategy of encouraging the development of manufacturing capacity for [indiscernible] technology and deployments. At the Vametco mini grid project, we signed a sublease agreement and the properties agreement and [indiscernible] financing term sheet. And today, we separately announced a $30 million production financing agreement with Orion, one of the largest mining-focused investment groups with more than $6.2 billion under management. Under a separate agreement, Orion has also conditional agreed to subscribe for a minimum of $10 million and a maximum of $20 million of convertible loan notes and a $35 million convertible loan note instruments. We intend to introduce [indiscernible] subscribers for the balance of the total. Also today, we announced that Duferco, the previous owner of Vanchem has agreed to accept an early repayment of $11.5 million of their $23 million convertible loan note issued, in terms and according with the acquisition terms that we announced in 23rd October 2019 for Vanchem. The funding today is exciting, as it puts us on track to achieve our growth targets as well as to refinance our existing debt arrangements, and which put us in an even stronger financial position with a robust balance sheet. I'll provide more details on this later on in the presentation. From an operational perspective, our focus for the rest of the year is to achieve a robust group production target, which we announced at the beginning of the month in our H1 operational update of between 13,660 metric tons of vanadium and 3,950 metric tons vanadium. It is worth highlighting that this revised production guidance remains between 25% and 35% higher than group production in 2019. We are confident that we're in a position to achieve the revised production and cost guidance as we ramp production back up to pre-lockdown levels by May, and the Kiln Off-Gas Project is now being commissioned. At Bushveld Energy, we will focus on advancing construction of the electrolyte plant, identifying other investors to be part of the Enerox investment, consortium and advancing the Vametco mini grid that we announced earlier. Now I'd like to take a pause and talk a little bit about our health and safety and COVID-19. Firstly, I want to update you all on how the company has taken the necessary precautions on COVID-19 and the measures we've taken to protect our employees. The well-being of our employees is, of course, a priority, and as a result, we recognized the gravity of the COVID-19 pandemic very early and most quickly to take all necessary measures to create awareness, minimize transmission risks and act safely and identify potential cases. We established a cross-function of COVID-19 touch team which includes operations, health and safety, human resources, finance, community and government relations as well as other support functions. And this has ensured that as a company we are best prepared to navigate this period. Since we resumed production post the lockdown, we have conducted a rigorous [indiscernible] regime for all employees and contractors, all development safety protocols, including social distancing, sanitizing, wearing of protective equipment, including face mask, remains in place. The health and safety of our employees is a priority, and so it is important to highlight our record here, which I'm very particularly proud of. The group [indiscernible] operational fatalities over the 6-month period, Vametco recorded 11% improvement in total injury frequency rate and through various safety campaigns implemented in 2019, we have further improved a [indiscernible] behavioral management of safety and health as a paramount importance. And similar to the trends in the country and the provinces where we operate, COVID-19 outbreak at our operations is showing signs of slowing down. As of the end of August, we had 36 confirmed COVID-19 cases, all of which have now recovered and are back to work, and I'm pleased to say that we have not had to stop operations on account of a breakout of any infections in our operations. The teams across all 3 sites continue to endure to the prevention protocols to curb further transmission and the [indiscernible] second wave outbreak. Now I'd like to go on to talk about the production financing agreement that we announced earlier today. As you will have seen from the announcement released earlier, we have a greater significant new financing package for our plant in Vametco and Vanchem. The first tranche is a $30 million long-term production financing agreement with Orion Mine Finance. And the second tranche, a convertible loan of up to $35 million of which Orion has conditionally agreed, we subscribed for a minimum of $10 million and a maximum of $20 million, with the remaining balance to be offered to interested third parties, and we are currently in conversation with a few such institutions. Importantly, this is happening with [indiscernible] dilution to shareholders with the funds rate being allocated specifically towards the Vametco Phase 3 expansion program, Vanchem's Phase 1 critical refurbishment program as well as some debt repayments to reduce our gearing levels. So step back a bit. You will note that in our full year results, we announced a review on the deferral of certain capital expenditure projects as part of workplace preservation measures brought on by the uncertainty around the COVID pandemic and certain [indiscernible] in markets. Importantly, when we announced the deferment of those capital expenditure plans, we made it very clear that as a company we still believe in the growth proposition of vanadium and where we still believe that the market fundamentals support of growing our operations. Today's financing announcement of up to $65 million puts us on track with our growth plans. So firstly, let's talk about the production financing agreement with Orion. It will provide $30 million upfront which will be paid back to the [indiscernible] client by quarterly payments. For us, this means one thing. We are fully funded to complete Phase 3 of Vametco and increase our production to 4,200 metric tons of vanadium [indiscernible]. Taken together, our spending, including our acquisition of Vametco, we have -- we will be able to achieve the 4,200 production at a significant fraction of the capital it would have taken us to build a similar project on a greenfield basis. Further details on the timing and execution of this Phase 3 will be released in coming months as we refine this plan. The long-term net of the PSA and this early repayment options caters for the cyclical nature of the vanadium market, and enables Bushveld to take advantage of the long life, high grade resources. Also importantly, we have baked into this agreement, which is that allow, for example, the company to repay as much as 50% of this financing within the first 3 years. Once Vametco receives life of mines vanadium sales of approximately 132,000 metric tons of vanadium during the term of the facility, the gross revenue rate and unit rates will reduce by 75%. In addition, on each of the safety run and [indiscernible] as indicated, we have the option to repair up to 50% of both constituents loan parts. If we utilize the loan repayment option, the gross revenue rate and the unit rate will reduce accordingly. The asset and conditions that need to still be met to close this transaction, but we do not see it taking longer than a few months to complete. At which point, we would draw down the entire $30 million. This will go towards completing the Phase 3 Vametco expansion, as mentioned, to achieve our production of 4,200 tonnes as well as debt repayments. Now if we could move to talking about the convertible. This second transcation will see us offer up to $35 million worth of convertible loan notes. Orion has conditionally agreed to subscribe for a minimum of $10 million and up to $20 million of business under offer, and we will close the balance with other interested third-party investors. This must pay an interest of 10% per annum over a 3-year term and a convertible [indiscernible] of 130% of the 15 volume-weighted average price of 25p. The fund will contribute towards the first phase of Vanchem's refurbishment project as well as finance -- repayment and refinancing. Given the new funding structure, we are now in a position to maintain a solid balance sheet, which is not significantly geared, and Tanya Chikanza will discuss our refinancing plans in further detail. Once again, the relatively small amount of investments required for such a significant uplift in production indicates our strategy of acquiring this brownfield processing facilities over the past several years, allowing us to ramp up production quicker at a lower capital intensity than what was been required to build such capacity from scratch. And importantly at a time when we believe that more vanadium supply will be called on from primary producers in coming years. Now I'd like to just move and talk to the Vametco operations. The period under review is still one we could not have foreseen as we entered 2020. The 1 month of lost production is clearly reflected in the production numbers, and those 300 metric tonnes vanadium of lockdown-related volumes means Vametco was 13% down for H1 2020, at 1,218 metric tonnes of vanadium. Production cash cost of $720 per kilogram V was 11% lower, which is positive relative to the comparable half year last year, and this is mainly due to a weaker rand relative to the U.S. dollar. The Kiln Off-Gas Project was also hit by COVID-related delays, which affected guidance, but we are very pleased to say that this has since been commissioned, and we look forward to it contributing an improved throughput production at Vametco. As announced in the H1 operational update, due to the production losses and increase in social distance measures, production guidance was revised between 2,700 and 2,850 metric tons of vanadium, with production cash cost guidance to between $17.50 and $17.90 per kilogram V. As we can turn our attention to Vanchem operations. We have been particularly pleased how the asset has performed since the acquisition in November 2019. We have been deliberately conservative with our estimates as it is our first time operating the asset, and we are glad to see that it has exceeded our expectations. Production at Vanchem [indiscernible] 431 metric tons of vanadium, about 80 metric tonnes of vanadium short of where we should have been due to the lockdown measures. Production cash costs were $16.40 per kgV as a result of record production at set in May and June, supported by relatively low fixed cost and the weaker exchange rate for the South African rand relative to the U.S. dollar. We have not had to revise Vanchem's guidance presently and this is maintained to between 960 million and 1,100 mtV with volumes weighted towards the lower end of the range, while Tier 1 production cash cost was maintained of between $18.40 and $19 per kgV with core skewed towards the upper end of that guidance Bushveld Energy made solid progress in the period under review. It's an important part of our vertically integrated strategy. During the period, we incorporated Bushveld Electrolyte Company, BELCO, the production company for vanadium electrolyte with an initial capacity of 200-megawatt hours in East London, South Africa. During the first half of the year, Bushveld and the IDC agreed that the shareholding structure between Bushveld Energy and IDC will be 55% and 45%, respectively, and the investment commitment from Bushveld of up to ZAR 68 million through 2022, which includes capital expenditure, working capital and ramp-up support. We have as well commenced the engineering phase of the electrolyte plant. We took an 8.71% interest in Invinity Energy Systems. The measure is supported with the convertible loan between Avalon and redT and for the period under review as part of the consortium which will be controlling shareholding of Enerox. The mini grid project at Vametco also moving ahead after subleasing power purchase agreement was signed and a term sheet from a [ French ] development bank was obtained. Recently we announced the creation of the Vanadium Rental entity with Invinity with the purpose to provide vanadium electrolyte rental option to Invinity's customers and signed an electrolyte rental contract with Pivot Power, which is part of EDF Renewables. The vanadium rental construct is a very innovative solution that we have come up with, which we believe will play a significant catalytic role in the global adoption of vanadium [indiscernible] for batteries. And so we are quite delighted to see the increasing interest in this product. I'd like now to pass over to my colleague Tanya Chikanza, who will discuss the financials, after which I'll discuss some of the trends we have seen in the overall vanadium market as well as a brief discussion on our growth plan. Tanya, can I hand over to you, please? Thank you.

Thank you, Fortune. Good morning, ladies and gentlemen. I'm pleased to give you an overview of the company's interim financial results for the 6 months to 30 June 2020. To start, I will remind everyone that Bushveld Minerals completed the acquisition of Vanchem on 7 November 2019 and assumed control of the business from that date. As such, the results of Vanchem have been fully consolidated in Bushveld Minerals' financial statements for the first time for the 6-month period under review. To summarize the first half of 2020 from a sales point of view. The period started with a recovery in the vanadium price from the low seen at the back end of 2019. However, this recovery was short lived as first China, then the rest of the world began to aggressively tackle the coronavirus by implementing nationwide lockdowns, which saw prices retreat. The net result was that Bushveld Minerals reached the revenue of $43 million, representing a decrease of 45% relative to the prior corresponding period due to a 65% decline in the average realized price. The decline was partly offset by a 58% increase in group sales volume as a result of higher sales volumes, which we saw coming from Vametco and the inclusion of the sales from Vanchem for the first time. The increased sales volumes also meant an increase in cost of sales to $39 million from $23 million in the first half of 2019. The cost of sales, it's worth noting, includes depreciation on the Vanchem assets. And you will recall that when we announced the Vanchem transaction, there's a fair value amount in there, which included $60.5 million over the amount that we paid, and this has resulted in additional $4 million of depreciation being parched in the current period that we're reporting to compared 0 in the previous year. Ultimately, these depressed market conditions resulted in an EBITDA loss of $1 million and operating loss for the period of $9.9 million, mainly due to the continued weakness in the commodity price driven the period. And one can see that looking at the waterfall chart on the right, just how much the decline in prices and hence, revenue, has influenced our profitability in the period. From a sales mix perspective, we increased our sales to China in order to take advantage of the higher pricing in the country relative to other regions. As a result of this strategy, sales to China represented 18% of first half sales book, relative to 3% from the corresponding prior period. There is an additional benefit of the China sales and the -- increase in that region in that our selling costs optimized because we do not have to pay commission for these sales. As mentioned on the previous call, we expect this mix to continue to shift over time as the additional Vanchem offers the group diversification of product and income stream, whilst maintaining the relatively low cost production profile the group has successfully established. Looking at the balance sheet, during the period, property plant and equipment were $155 million, which includes the Vanchem. This is a reduction of $30.7 million, however, relative to 31st December 2019, reflecting the devaluation of the rand rate on the 30th of June 2020 of around 20% when we compare to the December 2019 rate. As of 30 June 2020, total noncurrent and current liabilities were [ $71.8 million ] and $19.3 million, respectively. The noncurrent liabilities include the Nedbank debt facilities of ZAR 375 million as interest, which is around $22 million as well as the Duferco convertible loan notes of $23.7 million. The group's cash and cash equivalents as at 30 June 2020 was $24.6 million relative to $34 million as of 31 December 2019. As Fortune mentioned, we announced this morning, happily announced that the long-term production financing agreement of $30 million and a separate agreement, a convertible loan note instrument of up to $35 million. In addition to executing our plans with Vametco and Vanchem, the financing will allow us to refinance current borrowing arrangements. As such, we are in discussions with Nedbank on the outstanding term loan and revolving credit facilities, including discussions on the potential prepayment of the outstanding debt facilities on completion of the production financing agreement. The outstanding balance of the Nedbank facilities, as I said, is currently around $22 million. Also today, we announced that Duferco, the previous owner of Vanchem, has agreed to accept an early repayment of $11.5 million of that $23 million convertible loan notes. $6.5 million of this will be paid through the issue of new Bushveld shares. And in addition, $6.5 million -- $6.15 million, being $5 million loan notes, plus interest of $1.15 million, will be settled as a cash payment. The production financing agreement, the convertible loan notes and the refinancing of our current borrowing arrangements, will allow us to reduce our gearing levels and strengthen our balance sheet, which is important given the nature of the sector and the uncertainties that we are seeing. Turning to the cash flow. Due to the subdued pricing environment, the net cash outflow from operating activities was negative at $2.7 million relative to $34.7 million from the corresponding prior period. The decline was principally due to lower prices. The investing activities of the business resulted in an outflow of $5 million, a reduction of $6.4 million from prior period. This is in line with the group's cash preservation measures announced in the Q1 operational update, to prioritize critical and regulatory capital expenditure in these uncertain operating conditions. As announced in the 2019 results, we expect to spend a total of ZAR 135 million, approximately $8 million, on capital expenditure for this full year. We will, however, continue to monitor our spending based on market conditions. We have also settled $1.68 million of the [indiscernible] deferred consideration in relation to the purchase of Vametco, in line with that purchase agreement. At the end of March 2020, we drew down on the RCF of ZAR 125 million, approximately $7.5 million, to enhance liquidity and provide financial flexibility during the uncertainty arising from the COVID-19 pandemic and the South African nationwide lockdown. COVID-19 and the economic effects of the virus remained at the forefront of our minds and in terms of how we think about the business. And as such, we continue to behave prudently and take steps to conserve cash resources in the near term, even as the year progresses. We will continue to focus operational performance, cost efficiencies and identifying synergies across the group, particularly between Vametco and Vanchem, as we seek to optimize the operating margin and grow production in a cost-efficient manner given the subdued pricing environment that we continue to see in the near term. From a capital spend perspective, with the financing announced today, we can start to think about growth again, but in a disciplined manner. As mentioned previously, we have established a capital prioritization framework to ensure our assets on the best footing for future growth. Many thanks for listening, and I will now hand back to Fortune.

Thank you very much, Tanya, for that. I want to spend the last few minutes talking about the vanadium market and talking also about the outlook in terms of our plans going forward. As far as the vanadium market is concerned, we started the year on a positive note. Given the signs of recovery in vanadium prices, which were trading at approximately $30 per kilogram V. However, this was short lived as the world began to take action to hold the spread of the COVID virus. Due to this pandemic global food demand in H1 fell by 6% to 873 million tonnes. Global construction and steel production, excluding China, was offset. However, by an increase in Chinese steel for production during the period to 499 million tons, which is 1.4% higher than H1 2019. The increase in Chinese steel production as a result of fiscal levers by the government introduced in late March to stimulate and fast track an economic recovery. These measures included increased infrastructure spending by $500 billion investment plan to encourage investment. China has emerged from the lockdown ahead of most countries with the P&L index showing that the positive stimulus is helping in its domestic recovery from the pandemic, with others marking the fourth straight market expansion, although it's good demand remains constrained. As a consequence, we've seen China as a net vanadium importer during the month of June and July. Other major countries gradually started to reopen their respective economies by the end of Q2 2020, and the European Union announced in July EUR 1.8 trillion, approximately $2.1 billion (sic) [ $2.1 trillion ] budget and coronavirus [indiscernible] funds to aid the post-pandemic economic recovery. H2 is expected to include significant infrastructure spend. Much of this spend includes sustainable energy infrastructure, marking an acceleration in the green energy transition, which serves to benefit our vertically integrated strategy and viable merits for [indiscernible] platform. The important point to highlight is that in all those recovery fiscal efforts, infrastructure spending and accelerated transition to a green energy future, a positive vanadium demand both in the steel sector as well as in the energy storage sector. So if we talk about the vanadium demand outlook. The demand from China, which has been relatively robust, is expected to continue for the rest of the year. However, export demand is expected to remain relatively low. Vanadium demand from the North American, European steel and aerospace industries declined during the period due to the pandemic and associated plant shutdowns. Demand in this region is expected to remain relatively constrained for the rest of the year due to the economic slowdown. Vanadium's -- the main characteristics is a key element for rebar production and energy storage technologies that ensures it will form part of stimulus plans that country announced in order to reset their respective economies in a post-COVID-19 world and accelerate the transition to low carbon energy future. As a company, we remain positive on the vanadium market fundamentals, and we believe that we are well placed to take advantage of the recovery in demand. We have shared before our views on the vanadium supply structure, which is concentrated -- which is constrained and even more so today with core producers in China operating at near full capacity, meaning that as demand grows, their ability to respond with more vanadium supply is incredibly constrained. And as we've always argued, this positions primary produces a very, very [indiscernible] to make this growing demand, which explains the strategy we've adopted to position ourselves with scalable, flexible production facilities. Now before I close, I want to just discuss the group's growth plans in a little bit of detail. With the funding announced today, we are excited to be on track to achieve our production plans to 4,200 at Vametco. We will commence the required prefeasibility and feasibility studies to finance the capital expenditure [indiscernible] accordingly, if the studies have concluded. At Vanchem, we have a 3-phase expansion plan that we announced, which is expected to get us to the same 4,200 mtV, the annual production levels at Vametco at a preliminary estimated cost of $35 million. A portion of the funds from the convertible loan notes announced in the area will contribute towards the first of these 3 phases, mainly the first phase prioritizing critical refurbishment. Construction and sub supervision contracts for the waste disposal facility expansion project was finalized in August 2020, and third would commence -- work commenced at the end of August 2020. While this project is expected to be completed during H1 2021, with products associated CapEx not falling into the associated financial year, this does not compromise our expected production for 2021. At Bushveld Energy, our priorities remain to advance our electrolyte project plant with advancing our EPC of the facility in East London. We also intend to implement additional, larger electrolyte rental contracts. We will continue to progress the manufacturing aspect of this strategy, including supporting [indiscernible] companies, identifying other investors to be part of the Enerox investment consortium as well as investigating the business case for South African base here at the assembly unit. From a deployment perspective, we plan to deliver the Vametco mini grid as a funded independent power producer. This project will be particularly important in demonstrating the value proposition and business case for such systems where there is, we believe, a significant demand in the future, particularly when you take into account the announcement from the government to promote and allow for self-generation by companies that consume significant amounts of electricity with minimal regulation [indiscernible]. It's also important to highlight the developments that we have seen in South Africa with Eskom's battery procurement program that is currently underway as well as the 2,000 megawatts emergency power generation IPP that is announced recently by the government. This procurement program is expected to see contributions by various technologies from gas, renewable and storage in solution for South African energy requirements. And we believe that it presents a unique opportunity of scale for the vanadium [indiscernible] batteries to participate there in. I want to conclude by summarizing our investment proposition that by now I imagine is [indiscernible]. Despite the unprecedented global events of 2020, the proposition remains the same. We own 2 of the world's 4 primary operating vanadium processing facilities. We own large, long life vanadium projects, and our planning to almost triple it. Our 2019 production to 8,400 mtV per annum in the near future. Bushveld Energy continues to [indiscernible] a leading role in developing an exciting new demand source for vanadium of course, this vertical integration strategies were act at as a natural energy against vanadium price volatility for the company. If anything, the new world that we made post this COVID crisis will adopt clean energy and storage more aggressively as stimulus packages being announced include spend in green infrastructure. Importantly, the funding secured today allows us to pursue our growth plans with more vigor and for the business to be ready when the vanadium demand interest is picked up as we expect them to. We will elaborate clearly on our plan with Vametco and Vanchem in the coming months. I want to thank you very much for your time. and for your patience and listening to this presentation, and I'd like to now open up for questions on either the results we have presented or the financing agreement that we announced this morning.

We will now take questions from Alexander Pearce from Bank of Montreal.

Great. My question actually is on the unsecured convertible loan. So obviously, you can take up to $35 million worth. I was just wondering, you've outlined that it's really for refurbishment Phase 1 Vanchem as well as paying down some debt. But if you took the full amount, it seems like it's a lot more than those 2 items together. So I wondered, can you spend this on other parts of the business on the second phase, for example? Or indeed, other parts of the mine side of Vanchem supply going forward?

Sorry, Alex, I didn't quite get the full question. If I can just replay it back to make sure I understood it correctly. Is the question that when you take into account the convertible, the funds that have been raised through the convertible, the critical refurbishment plans that we talked about and the repayment of some debt, is your point that the refurbishment capital that is required is more than the capital that we have raised. Did I hear you correctly?

No, no. The other way. It seems like if you took the full amount of the convertible, you still have quite a lot left over. So can it -- can you use the -- can you use that amount for other parts of the business? If this refurbishment doesn't cost, it doesn't take up the full amount of the total $35 million?