Bushveld Minerals Limited (BMN) Earnings Call Transcript & Summary

Good day, and welcome to the Bushveld Minerals Q4 operational update conference call. At this time, I would like to turn the conference over to Fortune Mojapelo. Please go ahead, sir.

Thank you very much. It's a good afternoon from where I'm sitting in Johannesburg in South Africa, and good morning to the guys who are -- to the folks that are in the United Kingdom. And I'd like to welcome you all to our Fourth Quarter and Full Year 2021 Operational Update Call. Thank you very much for making time to listen and engage with us. I am joined on the call today by our Finance Director, Tanya Chikanza, who will be assisting. I'm pleased to report another solid set of quarterly operating results as our focus on stable, achievable production levels on the back of operational improvements and enhanced safety helped us to reach the upper end of the full year production guidance that we gave of between 3,400 and 3,600 mtV. Specifically, group production for the 12-month period totaled 3,592 mtV, marginally lower than the 2020 12-month production figure of 3,631 with production in the second half 28% higher than in the first half. And the higher throughput in the second half helped lower results and lower unit costs. At Vametco, specifically, production cash cost for the 12 months 2021 was $24 per kgV, which was in line with the guidance of between $23.70 and $24.20 per kgV. Vanchem production cash cost, C1, for the 12-month period, same 12-month period, was $30.60 kgV, which also was in line with the guidance of between $30.3 and $31.1 per kgV. These results demonstrate the progress from the work that we have done as part of the ongoing operational improvement plan to overcome operational issues that we experienced at the beginning of 2021, and the investments we have made and continue to make in sustaining and growth capital at our assets to achieve stabilized production and unit costs at a rebased level. We're also happy to report further improvements in our safety record with a total injury frequency rate in this quarter of 8.57. South Africa continues to head towards normal operating conditions again despite the surprising emergence of the Omicron variant late last year. While there was an increase in the number of COVID-19 cases at the company during the reporting period compared to Q4 of 2020, and this owing to the transmissibility of the Omicron variant, I'm pleased to say that all affected employees have recovered. Now talking about sales. For the 12-month 2021, group sales were 3,314 mtV and this was below the production volumes that we reported. And this was on account of continued logistics challenges associated or arising from the COVID pandemic as well as the well-reported unrest in South Africa during the month of July, which resulted in some disruptions at local ports in the months of July and August. The result of these lower sales compared to production is that we had a buildup of finished products inventory of 278 metric tonnes of vanadium. I'm pleased to say that volumes, sales volumes, have started to recover in Q4 2021 as drawn-down warehouse stocks in the target markets are being replenished. We certainly are quite encouraged by what we observed in the overall vanadium market with demand remaining robust, and we're comfortable that our sales will catch up with our production. The vanadium price also reflected the stop/start nature of the global economic recovery during the course of the year, trading in a fairly broad range. Pleased to see that in the final quarter, vanadium traded at an average price of about $35 per kgV, which is some 32% higher than the previous year. And this year, so far, we've seen average FeV prices of approximately $35 per kgV across all markets in 2022, which we see as very encouraging signs -- or pointer for the year ahead. We ended the year with cash and cash equivalents of $15 million subsequent to the paying down of certain debt obligations, the ongoing capital expenditure during the quarter to support growth as well as operational stability. Cash was also impacted by the lower sales as reported and the consequential higher working capital from the inventory buildup that I just talked about. Now looking at the year ahead, 2022, and what we can expect from a guidance point of view. We are quite excited about the year ahead as we head towards the commissioning of Kiln 3 at Vanchem in Q2, which is expected to more than double annual production run rate at Vanchem from about 1,100 to 2,600 mtV by the close of 2022. This will simply help to reduce unit costs at Vanchem even further. Production growth is key to unit cost reduction and margin expansion as reflected in the guidance for 2022. The full production benefit of Kiln 3, however, will be realized in 2023. Overall, we expect group production of between 4,200 and 4,400 mtV in 2022 with volumes weighted towards the second half as Kiln 3 is ramped up towards the 2,600 annualized level by year-end with lower production cash cost, C1, of between $22.70 and $23.50 per kgV at Vametco and between $27.70 and $28 -- I beg your pardon, between $27.70 and $28.40 per kgV at Vanchem. Production guidance at Vametco is between 2,450 and 2,500 mtV; and at Vanchem, it's between 1,750 and 1,850 mtV. From a capital expenditure point of view, we anticipate investing approximately $17 million or ZAR 260 million. Of this amount, ZAR 78 million, or in dollar terms, about $5.1 million will be allocated to Vametco; and ZAR 127 million, which is about USD 8.3 million will be allocated to Vanchem; and the rest towards the Mokopane feasibility study and the output for Energy division. I am quite proud and pleased to report the numbers for the fourth quarter of 2021, and they demonstrate our continued stable production as Bushveld heads towards another level of volume growth off a solid production base. As we indicated when we rebuilt our production, that our focus in 2021 was to achieve stability in our plants, consistent and predictable production levels. I look forward to updating our shareholders and stakeholders as we continue to advance our growth strategy, aiming for a run rate of between 5,000 and 5,400 mtV by close of 2022. We continue to invest in sustaining and growth capital to maintain stability and provide the platform for growth to support the volume increase that we have planned for 2022. And I'd like to take this moment to thank you all for your patience with us. We had a difficult start to 2021. I am very pleased to see that -- to say that we have turned the corner. We have had 3 solid quarters of production. We do certainly hope and expect to continue that into 2022 as we grow our production. And I believe that we couldn't be doing this at a better time in terms of the vanadium market as demand continues to strengthen and strengthen in a way, which we believe is well suited for primary producers like ourselves. And we certainly would hope that we are well positioned to take advantage of that market opportunity as it develops. Thank you very much for your time. I'm going to pause and take questions at this point.

[Operator Instructions] Our first question today comes from John Meyer of SP Angel.

I'm sure it's been a tough year, so there's a lot to discuss. I'm not going to ask -- I've got quite a lot of questions, but I won't ask too many. And I'm sure everybody wants to see stability and improvement in the operations. And at the risk of sounding Chinese, everybody also wants stability as well as common prosperity, particularly from a shareholder perspective. So I wonder if you could just tell us a bit more about the COVID situation in South Africa, how you see the rand moving because, clearly, it has an impact on your costs and you may not want to try and forecast that, I guess. Can you talk a bit through about the problem with the kiln at Vanchem and how that -- and what you're doing with the Upper Seam to fix that with the silica content. Can you also talk us through the reasoning for expanding Vanchem, which has higher costs -- higher operating costs over expansion of Vametco, which currently has much lower operating costs. And I'll leave it at that for now.

Thank you, John, for the questions. I'm going to take them in order. Let's start with the COVID situation. I think that, one, we did see a spike in cases from the Omicron variant. But I think the good news there is that it did not translate into a lot of debt, and part of that is a function of the greater levels of vaccination that has taken place. And I mean, if you look at today, our new cases are down to, I think, 23 January number was sub-2,000 new cases reported in the previous 24-hour period. So I think that barring the emergence of another variant and we sincerely hope that, that doesn't occur and with continued focus on vaccination, I'd like to think and hope that we can start to return to some level of normalcy on that front. So we -- I guess we can only hope, right, in a very broad sense. But the numbers we are seeing have been very encouraging. I mean, as I said, the increased vaccination rates are also very encouraging. And we hope that soon we get to a point where COVID is like the flu and doesn't pose a significant risk to the lives of individuals and also to our operations. You asked a question about the currency. I'm always wary of making predictions around where the currency is going to go. But I would say a couple of observations. The kind of rates that we're seeing at the moment in exchange rates have been weakening. So if I give you just some numbers. In 2020, we saw an average exchange rate of about ZAR 16.40. In 2021, the average exchange rate that was realized was about ZAR 14 -- in mid 14 compared to the U.S. dollar. Today, we're seeing an exchange rate of about ZAR 15.40 to the USD. What is the direction of travel? It does seem like we are looking at -- I think if you look at market consensus or analyst consensus, that we are seeing a rand that may well be weakening further during the course of this year. For purposes of our budgeting, however, we still try to keep a very conservative view on the exchange rate. And we have worked with exchange rates that is stronger than the current levels that we are seeing, which means that if the current level persists throughout the year or if the exchange rate weakens, all of that we expect will have positive benefits for our cost position as well as for our revenues. There's a third question you asked around the Kiln 3, if I heard it correctly. Look, we are anticipating -- we are on track with that project in terms of commissioning it in Q2. It does mean that we will require increased feedstock volumes. We started the Upper Seam project with a view to ensure that we provide support to Vanchem. And the whole project, I think the start will invariably have some teething problems and which are largely resolved and we are confident that we will be in a position to support Vanchem or its requirements. But the Upper Seam project is not the only source that we're looking at for Vanchem. There are other sources. We will be updating the market on that as we go. So I'm not worried that Vanchem will, one, not be able to get -- to have the feedstock that it requires at this elevated level of production. But it's not only about the feedstock, it's about also making sure that we've got that feedstock in the right quality in a consistent basis so that it does not create disruption in terms of the operational parameters of Vanchem. And talking to your question around the Vanchem expansion versus Vametco. We've made the point before -- there are 2 points I would make. The first one is that we did -- operating Vanchem at 1,100 mtV was never the intent. We were always clear that we will need to refurbish the plant. As you push more volume throughput in Vanchem that you start to see improvements in the cost of production of Vanchem. Certainly, the improvements we see in 2022 are a result of the volume ramp-up. But keeping in mind that we are only commissioning in Q2, you will appreciate that the full cost/benefit of those higher volumes will come through in 2023. Beyond that, so once we have Vanchem operating at an annualized rate of 2,600, which takes us to a range of 5,000 to 5,400 mtV per annum, the next question then becomes what are we going to prioritize for additional volume growth between Vametco and Vanchem. The answer to that question is really down to, number one, what is the level of CapEx required at Vametco or Vanchem in terms of getting that additional kilogram of vanadium produced; and secondly, what impact will that incremental production have in terms of the operational cost or the production cost at Vanchem and at Vametco. All of that is the subject of the feasibility studies that we've been doing in terms of our growth initiatives. I have mentioned -- we have mentioned before that initial or the preliminary indications from the work we have done suggests that it will be cheaper from a CapEx point of view to increase production at Vanchem than at Vametco. I mean all of the detail -- the precise detail of that, as I said, will come with the feasibility studies. But that's the driver of that decision point. And we will not be prioritizing Vanchem over Vametco if it, one, from a CapEx point of view, doesn't have advantages; and two, from a cost dilution or production cost impact, it also was not accretive. So those 2 will be key considerations for us beyond 5,400 mtV.

[Operator Instructions] We will now take a question from Nick Chalmers of Alternative Resource Capital.

I've got 2, 3 questions, if you don't mind. Firstly, on Vametco, looking at the second half performance of last year, it put you on a run rate of closer to more around about 3,000 tonnes a year annualized rather than guidance, which is some way below that. Are you just being conservative with guidance? Or is that annual target for this year factoring in that there will be some maintenance downtime at some point throughout the year? And at Vanchem, I'm just touching on your comments previously. Can you confirm whether that operation is being 100% fed by the Upper Seam project now? Or is there still stocks of third-party material that you're feeding into it? And what do you see as the key risks associated with the ramp-up and -- commissioning and ramp-up of Kiln 3?

Nick, to your question about -- thanks for the question around the guidance we're providing for Vametco. I think the answer I'll give you is that when we did the rebasing last year, one of the things we indicated was that we wanted to focus on putting in place the systems and the tools, the operational discipline to ensure a consistent production base. That means, among other things, being very strict in adherence with our plant maintenance program. And so in some sense, yes, you could be -- you're right in saying that there is a certain level of conservatism in the way we set our guidance. But you'll recall that there's a philosophy we outlined last year, where we said that we're setting our monthly production levels at Vametco at about 240 mtV. And that is backed by a fairly detailed metallurgical balance with a set of metrics around things like how many tonnes we expect to mine, what sort of vanadium grade we anticipate to feed into the kiln, the recoveries, the online time for the kiln, et cetera, et cetera. There's quite a detailed [ met bal ] that backs up that number. Now are there opportunities to improve on any of those? There are, and we're exploring that always. But until that we have banked any improvements consistently for a period of at least 90 days, we think it's dangerous to put those kinds of improvement opportunities into your guidance number. So it is, I think, a very healthy approach in terms of guiding our production levels even if we do believe that there are opportunities to improve across the production chain. Alongside that, I think one of the lessons from 2020, granted that the COVID outbreak, which has resulted in us losing production for a month and to try and catch up with that lost production, the level of maintenance that we did create some risks for us in the plant. And I think in a world in which we want to absolutely make sure that plant integrity is maintained, that focus requires us to ensure that let's continue producing at the levels that we are doing on a sustainable basis. Let's find the improvement opportunities, which there are. And only when we have banked them sustainably, consistently over a period, as I said, of about 3 months, can we look at revising our guidance to reflect those improvements. And three, let's make sure that we adhere to our maintenance -- planned maintenance program. It is absolutely critical, particularly when you're dealing with the plant of the age of Vametco and Vanchem. In respect of your second question, talking to the supply for -- or to Vanchem. We are currently supplying material from the Upper Seam project, and that's -- we want to ensure that we have a consistent supply from there. But it is not the only source. We are also looking at some supply of concentrate from Vametco. The upper upstream part of the Vametco plant does have capacity to support with some concentrate supply to Vanchem. We are exploring ways to even to improve even further this crop of concentrate supply from Vametco to Vanchem. The issue is not the orebody at all. I mean we've got a large resource base that can support that. It will be a matter of making sure that the concentrate production capacity is optimized. There are still some third-party sources that we do look at. But I think you made a good point when you point out that in all of this, it's important that we're providing consistent feed in terms of quality. But it may all be vanadium bearing, or -- and in fact, it can all be carrying vanadium grade of about 1.6% or 1.7% V2O5. But there are all these other elements like your silica content and your calcium content, et cetera, et cetera, which is important in terms of how you tune your plants to operate optimally. So the team's focus is ensuring that we get that right in terms of the mix of the feedstock and do it in a way that we can sustain that throughout the year. So that's the approach. And again, as I said, between the Upper Seam project, between the concentrate production at Vametco and 1 or 2 other sources, which we will talk about in due course, as we have indicated that, that part is a part of our strategy, we're comfortable that we'll be able to provide that consistent base of it at a relatively consistent quality level.

Can I just ask one more question, more of a general one. Just your thoughts on vanadium market and the outlook this year. What geographic markets are you seeing the strongest demand from currently? And where do you see co-production going? Has it maxed out? And is there a potential for that to come off this year?

Yes. Thanks for that question. Let me start with where demand comes from. As always, the steel sector continues to be the anchor. We are pleased to see, for example, new steel capacity being commissioned in the U.S. We are pleased to see progress on the infrastructure spending program in the U.S., which -- both of which will support increased vanadium demand from the steel sector from that geography. And we are seeing for example, a very good uptick in vanadium prices in the U.S., which we think is in response to that increased demand. And certainly, in terms of the orders from our customers there, it supports that view. I don't think that the U.S. will be the only market to continue supporting the demand from a steel perspective. We think China will continue to still play a role in terms of the intensity of use of vanadium in that market notwithstanding the impact of the recent issues associated with the property sector there. But again, general sense is that, that impact will be temporary and that we will see infrastructure spending in the Chinese geography, they're picking up. And indeed, I think we've seen already some announced programs from the government that are running into hundreds of billions of dollars. So the short answer to all of this being that we think demand from the steel sector will continue to grow. I think that the European market, if it does pick up, will also support that. In terms of the energy applications, again, very pleased to see the growing momentum in terms of not just energy storage, but stationary and particularly long-duration energy storage. I think the term long-duration energy storage is starting to become a common term when people are talking about energy storage. And that's good because that's exactly the space in which vanadium redox flow batteries are quite distinctive. The Chinese government has specifically made some policy pronouncements in support of vanadium redox flow batteries, which we are seeing come through in the form of, one, new projects being announced, and these projects are largely typically quite large running into hundreds of megawatt-hours. We are seeing that translate into inquiries for vanadium, particularly for conversion into electrolyte. And again, the kind of numbers we're seeing coming out of China are quite encouraging. You will have seen, I think, something we did say this last year, that focus that we should see in excess of 9,000 tonnes of V2O5 demand from the Chinese market for the VRFB sector. So that's so far as demand is concerned. And when we talk supply, I've always maintained the view that co-producers' ability to respond to growing demand is limited. One is limited by developments in the steel sector itself in terms of what happens to steel prices. Yes, when steel prices went above $1,000 with iron ore prices also running above $150, we saw co-producers maximizing their production and operating at near full capacity and also quite exclusively utilizing the vanadium-bearing ores. As the iron ore prices have come up and as steel prices come up, we expect the incentive for blending with hematite, which, of course, doesn't contain vanadium, to return in time. And we expect as a consequence of that, the level of select production in China to, if not dropping, at least we don't expect it to be increasing materially going forward, which, of course, raises the question where this incremental supply comes from. In terms of that, you can talk to secondary producers. There are a couple of parties like AMG, who are increasing their capacity. But remember that secondary producers are dependent on a third-party source of spent catalysts from the oil industry. And we think that, that upside in terms of supply growth is limited. And then that takes you back to primary producers in terms of which there is few projects, greenfield projects, under development. And we think that the space really is for existing producers to scale up production on a brownfield basis, and that's the opportunity we're angling for as a company. One other point I'd just add is, of course, the disruptions from the rainy season in Brazil has had an impact in terms of production from Lago, which has all been in the market so everybody would have seen that. And that should help to -- that should contribute, rather, let me say, to also a tighter vanadium market. Ultimately, in terms of where prices go, while we are careful not to put any particular forecast, you keep going back to -- you have to keep going back to what is the incentive price for new supply. And in respect of that, again, we think you have to be looking to incentive price for primary production because all other forms of production are going to be a lot more expensive from a CapEx point of view and from an OpEx perspective.

[Operator Instructions] We will now take a question from Chris Ward, a private investor.

I'm interested in 2 particular projects. Obviously, we're not hearing a great deal about the mini-grid Vametco. I was just wondering what the progress is on that, please.