Bushveld Minerals Limited (BMN) Earnings Call Transcript & Summary

Thank you very much and a very good morning to everyone. Thank you very much for joining us today as we present our quarterly update call. I am going to be assisted as usual today with -- by Tanya Chikanza, our CFO, Group CFO. I'm very pleased to report a strong start to the 2022 financial year with another solid set of quarterly operating results notwithstanding the challenges at the beginning of the previous year, 2021. I'm pleased that we have successfully produced 4 quarters of consistent performance, particularly at Vametco where we've been building on the operational improvements and enhanced safety initiatives. Before we get into the production numbers, I'd like to first highlight some further improvements in our safety statistics, where the total injury frequency rate of 5.38 represents a 37% improvement on the comparable quarter last year. This improvement was a result of a focus on hazard identification awareness; continuous risk assessments ahead of performing tasks; planned task observations; and increased visible, felt leadership, something that we expect and intend to continue going forward. In addition, I am pleased to report a marked decline in COVID-19 cases at both operations, with one case per month recorded at Vametco only. Vaccination rates have also increased to levels above 66% in Q1 2022, something we're particularly pleased with and congratulate the employees who have responded so positively. Now let's talk about operational numbers for the quarter. Group vanadium production was 972 mtV, which was 1% higher than the fourth quarter of 2021. Importantly, this stable production level provides the platform to support growth and sustainable volume increases going forward. You'll remember that, after Q1 2021, we made a particular effort to focus and prioritize stability in our operations. I'm pleased that quarter-on-quarter we have demonstrated the results of this focus. Addressing the operations individually. Vametco's Q1 2022 production of 749 mtV was a 90% improvement compared to the same quarter in 2021, but we must note that 2021 was affected by a 35-day planned maintenance shutdown at the time in Q1 last year. The first quarter C1 production cash cost of $22.10 a kgV was 17% lower than Q1 2021, also a result of the higher production volumes in 2022. An 11-day unscheduled kiln refractory repair was performed in January 2022 at Vametco. And the now-reduced planned annual maintenance shutdown for this year is now scheduled for 26 days in June 2022. Production guidance for the year has been maintained at between 2,450 mtV and 2,550 mtV, and production cash cost guidance remains unchanged. Moving on to Vanchem. Recoveries were negatively affected in the quarter due to the refractory condition of Kiln 1 in the period. That repair during March is expected to help maintain production as we transition to the larger Kiln 3, which comes online in May of this year. Vanchem's Q1 production at 224 mtV was also affected by the ramp-up issues of the Upper Seam project, which have since been resolved in February, as well as load shedding, which negatively affected plant stability in the period. Despite this lower production and the increased costs in Q1, the commissioning of Kiln 3, its increased production and the resultant dilutive effect on fixed costs means we are able to maintain Vanchem's production and cost guidance for the year at between 1,750 mtV and 1,850 mtV, with costs of between $27.70 per kgV and $28.40 per kgV. From a sales perspective, challenges in the domestic and international logistics chain persisted during this period. However, with an anticipated shutdown in June, we anticipate that these elevated inventory levels should be supportive of us meeting our client obligations during the period of the shutdown. Despite this, group sales of 857 mtV were 9% higher than the previous year -- than the previous quarter for the previous year, but there was still a marginal inventory buildup of 25 mtV, with finished products cumulative inventory now at 850 mtV, located throughout the logistics chain. The commissioning of Kiln 3 has already commenced. And we are on track to significantly increase the group's production run rate to between 5,000 and 5,400 mtV per annum by the end of this year. This will be a significant increase from the total production of 3,592 mtV recorded in 2021 and demonstrates the growth potential of our assets. This reinforces our confidence to pursue further growth through the exploitation of our massive resource, the portfolio, which is one of the largest high-grade primary vanadium resource bases in the world, with many decades of mining potential. Post quarter end, you will have noted the recent disastrous floods in KwaZulu-Natal. And this has severely affected operations at the port of Durban, with shipments being delayed by between 14 and 21 days. To mitigate this, Bushveld is in the process of diverting exports through alternative South African ports, including Cape Town. The current elevated stock levels throughout the logistics chain are cushioning the negative effects this natural disaster may have on group sales. Looking at the vanadium market. And listeners will no doubt have seen vanadium's strong gains in the period under review, with FeV prices averaging $46.10 per kgV in Q1 2022, about 33% more than same period a year ago. Demand for vanadium in major markets remains buoyant. Prices across 3 major markets, North America, Europe and Asia, are expected to converge around Asian benchmark prices over the remainder of Q2 2022. We have seen, however, significant divergence in prices between the different markets with the U.S. registering around $75 per kgV while Asia reported in the mid-40s. We expect this divergence, however, to taper down as we move forward. And a point of significance is that this is another example of volatility that characterizes the vanadium market. Now while the higher prices are welcome and we appreciate them, we remained focused as a company on driving our costs low to ensure that we are margin positive even when prices are south of what we are seeing today. We also note that there seems to remain a consensus around increased infrastructure spending and the outlook, [ which you'd expect ] to continue supporting demand. The fundamentals remain sound from a demand perspective. The growing recognition of long-duration energy storage will continue to support demand upside. We are pleased to see that Sumitomo has now delivered its second VRFB installation at 51 megawatt hours, which is another example of the growing momentum behind VRFB adoption. We are also pleased to see initiatives, like the establishment of the Long Duration Energy Storage Council, which we think will drive quite a number of systemic levers in the marketplace for long-duration energy storage. And accordingly, we remain relatively bullish about the demand outlook for vanadium which remains anchored in steel production, which we see continuing to support demand robustly with the significant upside from applications in the long-duration energy storage, as I've just explained. We think that supply will continue to be faced with constraints going forward, particularly with core producers, as we have often mentioned. The stronger prices in 2022, of course, had a positive impact on Bushveld's cash flow generation. Unaudited cash and cash equivalents were $12.7 million as at 31 March 2022, with positive cash generation from operations which, however, was impacted by, among other things, capital expenditure, loan repayments and increasing working capital requirements. We are about to enter an exciting period with the commissioning of Kiln 3 and the expected step change in production growth that comes with it. And for this reason, our production guidance is weighted towards the second half. And we look forward to reporting to you on the progress in the coming weeks and months. Finally, you will note that this update is focused exclusively on our vanadium production operations. And I do note that, at our last production update, we did mention that we will provide a separate Bushveld Energy update. While I apologize that this has not yet been provided, it is by no means an indication of lack of progress across the different operations of Bushveld Energy. Indeed there is progress, and we will in due course be providing an update to the market in this respect. I thank you very much for your time. And I would like to pause now to take questions. Thank you very much.

[Operator Instructions] We will now take our first question from John Meyer from SP Angel.

It's a very interesting quarter with vanadium prices rising so much on the London metal bulletin price. I wonder if you can just talk us through a bit more about what was driving that and if you can say how well your -- the prices that you are actually receiving relate to the prices that are quoted by London metal bulletin and also if you could give us a view on what's the value of your inventory now that that's built to quite a high level.

Thank you, John. Look. I think at the -- I should highlight that, at the start of the year already, we were seeing vanadium prices start to move north, which is something that was encouraging. And a big driver of that, in our view, was that the market remained very much a tight market in terms of market balance. We've always maintained the view that demand from the steel sector will continue to be fairly robust. It has continued to be fairly robust even in an environment of subdued steel production growth. I'm very pleased to see the significant increases in VRFB installations around the world. And certainly the inquiries we do get from that sector for vanadium supply do suggest that we're starting to see good momentum in that space. And yet when you look at the production side, we haven't seen any significant increases in production. And again I think the point to make is that structurally co-producers' ability to respond to the vanadium price uptick is -- or vanadium demand increase is always going to be limited. In fact, I think one of the things we look at is what the utilization levels of these plants are; and it has been quite elevated for a while now. So that's the underlying vanadium market thesis that was already working in favor of vanadium prices. The invasion of Ukraine by Russia and that whole war there, of course, has had a marked impact. Russia, we know that is a significant supplier of vanadium, accounting for about 17% of the global market. So this war has invariably introduced a lot more uncertainty, as far as supply is concerned. Yes, it's true that EVRAZ is not subject to sanctions per se, but I think it's safe to say that production of vanadium coming out of Russia is still impacted all the same. And that's one of the reasons we think we've seen a big jump up in vanadium prices. It is notable that prices in the U.S. have diverged quite a lot from the rest of the world, with prices averaging about -- going as high as about $75 per kilogram V, whereas prices in China, for example, are in the mid-40s. We don't think that, that kind of divergence, as I said earlier on, can be sustained. It creates invariable arbitrage opportunities and we expect it to taper down, but I think those disruptions caused by the war are going to be around for a while still. And so I would expect that the pressure on vanadium prices will continue to be upwards. In terms of prices that we do realize, I just needs to highlight and remind you that, when we sell vanadium to our customers, we typically realize a price that is not the spot prices but prices that are 1 to 2 months back. So where you've got midpoint average prices in the order of about $41 for the quarter -- I mean our realized average price for the quarter has been in the order of $40, but keep in mind that prices at the beginning of the year were in the range of about $33 per kilogram V, so it's in the coming months that we expect to see more and more of these higher vanadium prices coming through and reflecting in our sales numbers. And in respect of that, the 850-odd tonnes of inventory we have, we expect it to be realizing more of these elevated prices [ that's going today ].

We will now take our next question from Nick Chambers (sic) [ Nick Chalmers ] from Alternative Resource Capital.

Just following on from John's question there on inventories. Your inventory is obviously at an elevated level, compared to previous periods, due to the logistics constraints. How do you see that unwinding over the year-end? What should we be thinking of as a sort of normalized inventory level as a percentage of annual production? And therefore, how should we be thinking about sales volumes for this year relative to production?

Thanks, Nick, for the question. So I will -- and I'll have Tanya assist me with this question, particularly in talking about what sort of inventory levels one would expect or should expect to work with on a normalized basis. Just an overall comment, [ though ], is that we have a shutdown coming up in June. And yes, it's important that during that period -- which is going to be about 26 days, during which we want to be producing at Vametco. The inventory levels that we do have will come in particularly handy then. So this is one point I would highlight, that yes, we have these [ logistics ] challenges that have had an impact, but I think the flip side of it is that it's helping us to ensure that we can meet our customer orders during a period when we are in shutdown. In terms of -- I mean obviously the situation in Durban is going to normalize. We expect it to, hopefully, normalize over the next month or so, but the other point we do mention is that the supply chains as a result of COVID and -- the impact of COVID on supply chains, let me put it that way, is still with us. And I think that's something that we needs to sort of understand and accept. The impact of that is going to be on our inventory holdings. And so where you might have worked with and comfortable to hold, say, months worth of inventory, we're going to needs to be a lot more comfortable with higher levels of that. And in terms of our modeling, I'll ask Tanya to just come in and perhaps just comment on what we see as sort of normalized levels of inventory that we'd work with. Just keep in mind just maybe as a general guide that you're talking about average of about 8, in some instances 12, but I'd say about 8 to 10 weeks perhaps in terms of the time lines for getting product to customers. So if you work sort of with those sort of guidelines, you can kind of do a back calculation to [ say ] what sort of inventory levels you would want to work with, but Tanya, do you want to maybe add to my comments?

All right, thanks [indiscernible]. I think you see the basics of it is right. I think, in terms of our inventory buildup, there has been a deliberate buildup with the expectation of Vametco's planned maintenance shutdown in June. So in a way, the buildup will start to reverse post June. However, if we do have this -- what we see is a short-term buildup as well from the Durban situation which is unfolding. On -- so in a way, if you like, we will sort of build up towards the end of the year, [ also like ] for the beginning of the year. Depending with where we will [ map on ] shutdown, we can have [ the stop ] to supply, again adding in this point around the time line how long it takes for us to get our product to the end customer. On a steady-state basis, I think for now I'm assuming a buildup in maintenance -- sort of a stock of around 600 mtV is a sensible number to work out on an average basis but obviously taking into account the points I've just met around the buildup and then a slow, yes, but steady decline.

Sure. And just one more question...

Sorry. I think it's just -- Sorry, Nick. I think [ that we'll say ], if you think about our value chain, that stock is there in different parts of the value chain from a stock perspective. [ Some of that boarded -- won't board ships yet ]. Some of it is [ popping up and down ] on the ships. And then some has obviously reached the -- to the end customers having landed in the different jurisdictions. Thanks.