Bushveld Minerals Limited (BMN) Earnings Call Transcript & Summary

Good morning to everyone, and welcome to our operational update for Q4 2022 as well as for the full year ended 31st December 2022. Thank you very much for dialing in. Apologies for the delayed start, which was caused by some technical challenges. Now over the course of 2022, Bushveld has seen a record level of production with 3,842 mtV, which is only slightly below our lower end of guidance of 3,900 mtV. This minor deficit was the result of the extended unscheduled load shedding in South Africa. This ramifications seen particularly at Vanchem, where our calculations show that over 200 mtV was lost in the second half of 2022 alone, due to load shedding. Vametco, however, we exceeded the upper end of production guidance of 2,650 mtV for the year, delivering 2,705 mtV for the year. At both Vametco and Vanchem, we approached to report quarter-on-quarter increases in production with a record 1,184 mtV for the group in the last quarter of the 2022 financial year. This performance is a reflection of work -- a lot of work that has gone into stabilizing and optimizing operations, particularly at Vametco, which over the past 18 months is now demonstrated fairly stable operations. Group production cash costs for the year averaged at $27.7 per kilogram vanadium up from 2021. The increase is due to higher energy and raw material costs, partially offset by higher production volumes. However, in Q4, the group production cash cost was $25.10 per kilogram V. This was $4.20 lower than Q3 2022, just emphasizing and underscoring the impact of increased production throughput at both operations. Despite the continued logistical challenges experienced worldwide during the year, which have resulted in relatively high stocks of material being in transit sales for the year. Sales for the year were up 8.1% at 3,584 mtV. We are confident and plan to sell all the stock, which is approximately 250 mtV, that was not sold in 2022 during the course of 2023. Looking forward, to the year ahead, and the Bushveld's production guidance, we anticipate a total figure between 4,200 mtV and 4,500 mtV, with volumes weighted towards the second half of 2023. And while we continue to maintain our target of a production run rate of 5,000 mtV to 5,400 mtV per annum as noted in previous quarterly reports. The current load shedding situation in South Africa has meant that we need to be more conservative in our expectations for production. And as such, we have adopted this conservative view. This is particularly the case at Vanchem, where the load shedding in Q3 and Q4 severely impacted our efforts to optimize Q3 processing performance. In November, Bushveld and the Emalahleni municipality agreed a load curtailment solution, thus aimed at preventing Vanchem from experience in total power loss during scheduled load shedding. Vanchem, as we have mentioned, has experienced most of the import of load shedding. While we still envisage some impact, this arrangement, we expect will reduce the effect of the power outage and enable Vanchem to continue to ramp up towards steady-state production. With a country-wide electricity price hike of 19% coming into effect in April 2023, as well as inflationary factors on several inputs like raw materials, we anticipate a group production cash cost of between $26.10 and $27 per kilogram V. This guidance also reflects the further impact of increased load shedding in the country. Construction at the Bushveld Electrolyte Company BELCO, the electrolyte manufacturing plant is well underway, and we expect to be operational in the first half of 2023. This plant is a targeted annual capacity of 8 million liters of vanadium electrolyte. And it will provide a further product platform from which we anticipate to enter new markets. And BELCO is currently undergoing qualification process with several VRFB manufacturers to use their electrolytes. Progress too has been made by Vametco where we are constructing the hybrid mini-grid. We will provide the market with further updates on these 2 projects in due course. On the capital investment front, in 2022 we completed Vanchem's Kiln 3 refurbishment. Importantly, as a result of completing this project, notwithstanding the optimization work that is still underway, the capital expenditure budget for 2023 of $9.2 million to $9.7 million is primarily related to sustaining capital with most of that CapEx being denominated in South African rands. We see the vanadium market for the year ahead remaining relatively buoyant, particularly in the aerospace and specialty chemical sectors, including the electrolyte space. And as such, we are looking to optimize ourselves to ensure returns from these high-value markets, particularly in North America. That being said, we continue to maintain a global footprint with a presence in all markets. Our agreement with Orion Mine Finance, which included a $35 million convertible loan note with a 10% coupon over a 3-year term, which financing was secured to support the critical refurbishment at Vanchem. This agreement reaches maturity in November of this year. And with this approach in Bushveld has commenced discussions with Orion and other potential funding partners on the refinancing options available. In order to determine a sustainable capital structure, in relation to the group's operations and long-term ambitions for growth, we will, of course, provide further updates to the market once a decision has been reached. There continues to be factors that we cannot control such as national load shedding, which impact our production levels and cash costs. However, we have invested capital in the refurbishment and optimization of our operations to ensure consistency. And we are pleased to note the progress that has been achieved in our pathway to further growth. The work we have put in to achieve this stability is now being reflected in our production numbers. We are committed to building Bushveld into sustainable cash generative, low-cost production and processing platform, and I look forward to updating Bushveld shareholders and stakeholders on our progress at the end of the coming quarter. Before I conclude, I just want to end off with just an important strategic reflection. We have spent substantive long-term capital over the last 5 years. As we have built our asset base, and as a consequence of which we have -- as we have often said, 2 of only 4 operating primary vanadium plants in the world. This period of extensive capital investment and refurbishment, optimization of Vametco as well, has resulted in Vametco operating consistently and producing at a steady state, while capital refurbishment at Vanchem means that Vanchem is increasingly positioned to increase production significantly as well. I'd like to just make the point that in spite of the challenges that we have experienced in the few years in the past, including COVID which appears like a distant memory. The company has weathered this storms and is in a good position looking forward. The strategic focus of the group will continue to be on building a sustainable cash generative, low-cost production and processing platform that supports the steel, chemical and energy sectors. We will particularly be focused on this year on ensuring that we meet our production targets. We recognize the significance and importance of being a low-cost producer, and focus will continue to be on ensuring that not only do we contain but we reduce our costs. Our limited capital spending this year mainly on sustaining CapEx as indicated, will support the company's cash generation efforts. We anticipate resolution on the Orion convertible loan note as indicated, which we would see elimination of the near-term debt pressures. This on top of significant movements already in the course of 2022, where we paid down the RCF, that was dealt to Nedbank, as well as dealt with other liabilities associated with the Vanchem acquisition. Finally, the cover to Bushveld Energy, which is anticipated in this quarter, should lead the company with a fairly crisp clear investment proposition around our upstream houses, while the downstream houses are located in a stand-alone vehicle that we believe will be able to attract the necessary support both from the capital markets in general to ensure the success of the downstream business. I'd like to pause here and thank you all very much for your time. And I would like to take your questions.

[Operator Instructions] Today's first question is come from Marina Calero from RBC Capital Markets.

I have a couple of questions. The first one is on the impact of load shedding on Vanchem. Assuming the agreement with the municipality works as impacted, when would you expect the group to reach production level of 5,000 mtv, 5,400 mtv?

Marina, assuming that the load shedding situation at Vanchem is normalized, what it means is that we can continue with our efforts to optimize the recoveries and the yields. And we anticipate that, that would be very much, the focus of the first quarter and would anticipate that during the course of the second quarter, we will be able to reach that run rate of 2,500 mtV to 2,600 mtV. Again, I can't emphasize enough that the important thing here is to ensure that we are able to run our kilns continuously, and which would allow us then to focus on optimization efforts.

And the second question is about the convertible loan. I appreciate that the discussions are still ongoing, but can you give us more detail about how the conversations are going? Are you confident you will be able to reach an agreement with Orion or obtain funding from a third party to cover the payment?

Look, we have a long-standing, very healthy relationship with Orion. So I want to just start off with that. And secondly, make the point that our discussions with Orion, I think they've been going on in that spirit of the kind of healthy relationships that we have. We are fairly confident that we will be able to reach resolution. I think, I must also say that what gives me confidence is the fact that we're having this conversation on the back of the capital spend on the refurbishment of country. And with some stable operations coming through at Vanchem, you will expect to see an operation that is generating cash. And as you can imagine, with dedication rating operations, it just enhances our options in terms of dealing with the convertible loan note. So if you ask me the question, am I confident, that we'll reach an acceptable solution, the answer to that is, yes, we are confident.

We'll now go to Tom Mayer calling from SP Angel.

It's John Mayer. Well done on reaching a form of stability in a difficult operating environment. As you say, COVID is a bit of a long-distance memory and load shedding is, hopefully, now under some form of control. The next biggest issues for us analysts, to look at are clearly inflationary factors and pricing. And what I see when I look at prices around the world is an enormous divergence between the various prices given by the London Metal Bulletin, Orion's notes or Asian Metals. And some of this reflects, I think, pricing disparities between ferrovanadium and maybe other vanadium products and what's going on in different markets. Can you give us a bit more of a view on where you think the prices are going? And how Bushveld is going to manage that? Because clearly, you're able to set direct some more shipments into the U.S. for bigger prices there. And I guess you might be able to play around a bit with the mix of products that you're able to sell. Because there's such a big divergence in these prices, perhaps you could give a bit of a view on where you think you might be with pricing through 2023. And as a second part to this question, can you give us a view on orders for BELCO electrolytes, and how you see the vanadium redox battery market developing this year.

Thanks, John. Let me start with the first part of the question, which is the pricing diverse -- let me start with the inflationary factors. These are real, I think, across the entire industry. We have seen a general inflation in the mining industry, for example, in our -- of high teens over the course of last year. In South Africa, we were striving that, on the 1 hand, is increasing energy costs, but also is the other input costs that we've seen prices increase quite significantly. Where any of these inputs are dollar-denominated it's an issue. But fortunately, most of our input costs are rand denominated. And why is this important is because, of course, we earn our revenues in dollars, number one. But also, due to the high inflationary environment, we will pay quite close attention to the exchange rate between the South African rand and the U.S. dollar. And already, we are seeing a weaker rand driven by a number of structural factors, including these inflationary factors. And that weaker rand will come in quite handy, we believe, particularly given how conservative we are in our budgeting processes around the exchange rate. So it's a reality we have to live with, but fortunately, we do have a few things in our favor, that we can -- that will help to counter the impact of inflation. On your comment -- and on that point, again, I just want to emphasize the significant importance of throughput, as I said earlier on, when I was giving the update. Just in Q4, we saw as much as a $4 reduction in the cash costs compared with Q3. And that's just sort of the kind of impact that you can get from increasing your throughput. So as we do that, we think that's going to also help cut some of the inflationary factors we're dealing with. On the question of divergence in prices, you're right, we have seen quite a significant divergence initially just between the U.S. on the one side and Europe and China on the other side. And in fact, some people would be -- would have expected that to close that gap, we would see U.S. prices come down towards European and Chinese prices. And perhaps informing that sort of conservative view would have been a number of factors. One is the impact of the zero COVID policy in China, two is a property sector and that was under some pressure, and then three, of course, the war in Ukraine. Now what has happened since is we've seen that the Chinese government relaxed the zero COVID policy. We have seen some relaxation on some [indiscernible] positions around the property sector. Both of which have actually been quite positive for vanadium prices. So we've seen Chinese prices move to levels where today they are closer to $42 per kilogram V. So if -- and in the meantime, European prices have also [indiscernible] points. I think today, we're looking at prices in the order of about $37 per kgV. At the same time, prices in the U.S. have continued to held relatively steady, and that's notwithstanding relatively low levels of utilization of steel plants there. So when I look at all of that together, I think that going forward as plant utilizations in the U.S. increase in support of infrastructure spending. We expect to see more support to Vanadium prices. And by the way, all of this is before we factored in the influence or the impact of demand from the VRFB, which talks to your second question. I don't know if you've noticed this, but there's certainly been a ramping up of supply chain for VRFBs in -- particularly in China, and we have started to see some supply chain development in Europe as well. I always think that supply chain developments are a very good point to how China's policy is playing out. There's certainly very strong support for VRFBs in China, we've seen construction of electrolyte plants. We've seen joint ventures with the big vanadium producers that are looking at just the electrolyte production capacity. We've seen AMD announce a 6 million-liter electrolyte facility in Germany, which they're currently constructing. So what all of these says to me is to support the narrative of growing VRFB demand. And suddenly, if you also look at projects that have been announced in the last 6 to 12 months, there's a significant large [indiscernible] gigawatt scale projects, which also are going to require a lot of vanadium. What we have done is BELCO is obviously, we're busy with the product qualification process with various OEMs. And we have taken a bit of conservative view in terms of ramp-up this year. But we are seeing strong interest, which gives us a lot of confidence that we will be able to sell products, that comes out of BELCO. I hope that answers the question.

We'll now move to Mr. Nick Chalmers from ARC.

Fortune, would you be able to elaborate a little bit on the steps you're taking at Vanchem to find a solution to mitigate load shedding issues? And does that involve putting in any backup power generation.

Thanks for the question, Nick. So to start with, just really understand the difference between Vanchem and Vametco. Vametco has got a direct contract with Eskom and in terms of which -- in terms of load shedding, all that is requested or Vanchem, together with other high-end large power users is to reduce in curtailment their consumption. That's typically that reduction hardly ever goes above 25%. So it allows plants to work around this. At Vanchem, on the other hand, because we were 1 on the municipal grid, and 2, we didn't have actually a curtailment contract in place. The consequence of which is that during load-sharing we were losing power completely, hence that terrible impact we had during the course of 2022. Our approach to resolving that has been, I'd say, threefold. On the 1 hand, we do have some standby generators -- but remember, there is a facility that uses as much as 10 megawatts of power. So you can't run a facility like that on just generator. So we've used generators only in critical areas. And of course, you're not that, that is also quite expensive. The second thing that we did is to negotiate with municipality and elect them to get onto a curtailment solution. That solution was only implemented in December. It goes a long way to alleviating the power shortages. In fact, I'd say in January, already we've seen substantial improvement. We are currently going through daily load shedding, but in our operations, we are not. At Vanchem, what we are working on is curtailment. So that's quite the -- however in reality, what we have also seen is that in terms of severe stress on the grid, some municipalities will rank behind others. And consequent to that is even with the curtailment solution at Emalahleni, we can still and being load shed, even though the occurrence of that is much, much reduced. And as I said, we have been seen that really in the month of January so far. So that alone is a huge step forward. But ultimately, what we want to get to ideally is a relationship with Eskom, like other large power users that ensures that we're guaranteed of curtailment rather than load shedding.

And we're agreeing that sort of provide a stand-alone contract with Eskom, would that be a prerequisite to embarking on any further production capacity expansion at Vanchem through further refurbishment?

It's a good question. It's certainly very, very key that you have a reliable power supply I think before you embark on any other expansion initiatives. So the answer to that is yes. But I should also just highlight that we're not leaving everything to Eskom. We have stated before that with implementing of the mini hybrid. So they have been integrated Vametco, we're able to demonstrate that you can pay renewable energy with VRFBs and actually supply power on a cost-competitive basis to our operations and on a reliable basis. Our Bushveld Energy team is hard at work to also develop the self-generation solutions, as well as -- which include application of long-duration energy storage solutions at our operations. The relaxed regulatory environment that has not been ushered in, is something we certainly do intend to take advantage of like many other mining companies. And that way at least you have the best in your own hands. So that is something that we are prioritizing going forward, especially on the back of the successful execution of Vametco mini-grid.

One final question for me. You talked earlier about sales volumes lagging production a little bit. Did I -- I think quite hear the number you mentioned was it 250 tonnes volumes behind production. Is that correct?