Bushveld Minerals Limited (BMN) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Bushveld Minerals 2022 full year investor and analyst call. Thank you all for your participation and for dialing in. My name is Michael Kirkwood. I'm the Chairman of Bushveld Minerals. Presenting today on the call are Fortune Mojapelo, the co-founder of Bushveld and as you will have seen from the announcement made this morning, the departing CEO. Additionally, we have our Finance Director, Tanya Chikanza and I'm pleased to say that Craig Coltman, our incoming CEO, is also attending today's call. So without further ado, we will have questions after the formal presentation. I will now hand over to Fortune and to Tanya to present the 2022 operational and financial performance.

Thank you, Michael. And thank you all for joining us on this call. It's a good morning and good afternoon for some of you. Let's get straight into the overarching numbers for the full year 2022. And could I ask you that we fly to Slide #4. Bushveld saw production of 3,842 metric tons of vanadium during 2022, and this is an increase of 7% from 2021. With total sales for the group of 3,584 mtV, which resulted in a revenue of $148.4 million, an increase of 39% in 2021. I'm pleased that our underlying EBITDA was a positive $22.3 million, which is also an increase of $29.8 million from a loss of $7.5 million in the previous year. And this is owing to improved realized prices of vanadium that we realized during 2022 of $41.40 per kgV as well as higher sales volumes. We reported impairment charges of $24 million, which Tanya will speak to, and reported a net loss of $35.4 million. In terms of free cash flow, we generated $14.6 million, which was used to pay down debt and partially fund the business, other initiatives. And we ended the year with a cash balance of $10.9 million and net debt of $79.5 million. If you exclude the Orion Production Finance Agreement, the net debt position at the end of the year was $44.4 million. Last month, we announced that we had entered into an unbinding agreement with Orion to refinance the $35 million convertible or not. I'm pleased to say that we have made significant progress with the legal documentation of the restructuring and completing this is amongst our key priorities. Other important deliveries for the group are to meet our operational targets that we've set for the year: to progress the work across the various Bushveld Energy work streams, including the Bushveld Energy carve-out that we have shared with the market in the past. If we could move to Slide #5, and I would talk more around our production performance and our 2023 update. For the year 2022, we produced, as I indicated earlier, 3,842 mtV. This was lower than the revised guidance of 3,900 mtV to 4,100 mtV that we had issued. We also realized a weighted average cash cost of $27.70 per kg of vanadium. For the year ahead, we maintain our production guidance of 4,200 mtV to 4,500 mtV, supported by the load curtailment solution that now is in place between Vanchem and the local municipality as well as the securing of third-party low silica feed for Vanchem. Both of these initiatives will support more stable production rates at Vanchem, while we expect Vametco to continue maintaining its operational stability and achieve further efficiencies. The net result of this increased throughput we expect to be an improvement to our unit cost performance. As a consequence of that, we anticipate a much lower cash cost of between $26.10 per kgV and $27 per kgV. Let me move to Slide #6. I will provide some update around Bushveld Energy. As announced previously, we have begun the process of carving out Bushveld Energy from Bushveld Minerals in order to deliver stronger margins and further growth. The carve-out will simplify Bushveld's organizational structure, while also retaining our vertically integrated business model. It will also ensure that the Bushveld Energy business can stand on its own, in a position where it can attract energy-focused investors, which is critical in terms of its success going forward. To that end, we have entered into an agreement to sell our entire interest in CellCube to London-listed Mustang Energy plc, of which Bushveld will hold about 21% to 23% interest. We commenced construction of the Vametco hybrid mini grid in Q1 of 2023, and it is expected to be in operation during the second half of 2023. The mini grid will account for just under 10% of Vametco's electricity supply. But importantly, it is a good commercial pilot demonstrating the business case of renewable and VRFB solutions for commercial and industrial customers. Further to the mini grid, we have commenced commissioning of BELCO's 8 million-liter electrolyte plant, which will be in production later this year. We are also in conversation with various offtake partners and we'll provide an update to the market on the progress made in due course. At this stage, I'd like to hand over to Tanya, who will present the financial results. Tanya, over to you.

Thank you, Fortune. Slide 7. Good day, everybody. As Michael and Fortunate have currently mentioned, I'm Tanya Chikanza, the Finance Director, and I'll take you through the financial performance for 2022. The 2022 financial results show an improvement on the prior year in a number of line items, although overall, we remain in loss-making. We recorded an underlying EBITDA of $32.3 million with an adjusted EBITDA loss of $1.7 million. While an operating loss of $20 million was incurred, this was a $9.2 million positive change from the 2021, primarily owing to the higher realized price of vanadium and the higher sales volumes that we realized. The operating loss also included the impairment of $24 million, of which $17.2 million related to Vanchem. I will expand on this on the next slide. Moving to next slide, Slide 8. Moving on to the group total cost. The cost of sales, excluding depreciation for the year was $90.3 million, an 8% increase year-on-year, which was primarily due to the rise in costs at both Vametco and Vanchem. The increase in costs included increase in raw materials as a result of inflation and increase in energy costs due to the increase in oil and diesel prices and increase in the diesel usage owing to the load shedding that we experienced at our operations. We also had higher personnel costs at Vanchem with the commissioning and ramp up of Q3. As we had anticipated the ramp-up, we -- capacity group Vanchem in anticipation of that ramp-up. Other operating costs increased by around $27 million due to a significant increase in the impairment loss that I just alluded to of $24 million. $17.2 million of this was the impairment of Vanchem. We took a look at Vanchem and realizing the slower-than-anticipated ramp-up that we've seen post the commissioning of Q3, we took an impairment -- applied an impairment to that particular asset. You will remember that we previously recognized a budget purchase of $60.6 million gain in 2019, which reflected the difference between the fair value of the consideration that we paid and the fair value of the assets that we actually acquired as well as the liabilities. We have, in 2022, also impaired an additional $5.1 million recognized for the Imalato core projects as we're not planning any further expenditure on this project as well as a further impairment loss of $1.6 million recognizing property, plant and equipment that we identified as being no longer in use. There was an increase in cost of $3.3 million in hydro plant costs due to unplanned stoppages that we see at Vanchem as well as $2.9 million increase in selling and distribution costs. We continued with our cost reduction measures, as previously announced and realized savings of $1.5 million owing to the procurement initiatives for the 2022 financial year. We reestimated the projected savings for 2023, in light of inflationary pressures, the lingering product shortages that we have experienced, wage escalations as well as the shipping challenges and surging commodity prices to $1.3 million. The total expected savings would be $2.8 million over the 3-year period, which is still within the $2.5 million to $4 million range cost saving target we had previously communicated. This is despite the negative impact of factors outside our control such as inflation. While production volume growth is expected to contribute the most to reducing costs, we will continue to see broader cost saving opportunities to improve the group unit cost performance even further. These efforts are focused on procurement, payroll, admin costs and maintenance. Moving to Slide 9. In 2022, the group generated cash flow from operating activities of $21.2 million, an increase of some $33.3 million from the previous year, primarily driven by the improvement in adjusted EBITDA. Cash used in investing activities included sustaining CapEx of $19.6 million was primarily driven by the capital expenditure on property, plant and equipment of $18.2 million and an equity investment into the Vametco mini grid that Fortune mentioned earlier on of $1.2 million. 2022 marks the end of the substantial capital investment phase during which we undertook extensive refurbishment and optimization of Vanchem, constructed the BELCO electrolyte plant amongst others. Following the commissioning of Vanchem Q3 in 2022, we expect capital expenditure rate for 2023 to half compared to 2022 as spend has been limited mainly to sustaining capital. Capital used in financing activities of $5.3 million comprised the repayment of the net bank revolving credit facility, including interest of $5.9 million, the repayment of finance costs on the Orion PFA of $2.9 million and repayment of lease liabilities of $0.7 million, partially offset by the proceeds we received from borrowings of $4.2 million, primarily from the IDC in respect of BELCO. You will recall that IDC is our JV partner for the BELCO project. Next slide. Looking at debt, our net debt increased by $10.6 million compared to the prior year. Due to the increase in the capital -- capitalized interest of $3.4 million on the Orion preventable loan debt, you report that this is for a coupon of 10%, an increase in lease liabilities of $2.8 million due to additional leases and extension of lease terms and the decrease in cash and cash equivalents balanced by $4.6 million. The PFA is accounted for in accordance with IFRS 9, which requires the amortized cost of the liability to be calculated by discounting the contractual cash flows using the original effective interest rate. This results in the accounting finance costs capitalized to the carrying value of the liability being greater than the calculated interest payments in accordance to the agreement. The net impact of this accounting treatment is an increase in the PFA liability. So you can expect that PFA liability to just continue to creep up. But the actual -- in essence, we are actually paying that down. If I turn to the next slide. As Fortune mentioned, we entered into a nonbinding term sheet with Orion to refinance the convertible loan note. In a nutshell, the -- around $45 million odd has been restructured into 4 components: $4.5 million will be converted into equity at a share price of 6p; a new convertible loan note of $18.5 million with the redemption in June 2028 for which we have got an option to redeem 50% of it in June 2026; a 3-year term loan of $27 million, repayable escalating in couple of months, which is attracting a coupon rate of 12%; and a supplemental production financing agreement at no more than 0.22% of gross revenue, which will reduce by 80% when the loan matures. The closing of the transaction is subject to certain conditions, including South African Reserve Bank approval, shareholder approval at the general meeting for the issue of shares, for the conversion of the second conversion. And we're encouraged -- we will be encouraging our shareholders to support this as well as the finalization of the definitive binding documentation. We are making significant progress with the legal documentation of this restructuring. Thank you. I will now hand back to Fortune.

Thank you very much, Tanya. If we can move to Slide #12. What you will see is that Bushveld is trading at a significant discount to our peers and to brokers' target prices, whether you're looking at price multiples or EV multiples. We are comfortable and confident that we have led the foundation for this business from which to build and achieve voice data targets and particularly as we see operational performance improve going forward, one would expect that there will be improvements to these multiples, which should result hopefully in a rerating of our share price. What this slide does suddenly make is a case for significant upside in our share price. Slide #13 then summarizes the investment case of Bushveld Minerals. We have a green future-focused commodity that has very attractive fundamentals. As we have often said, with demand that is anchored in the steel sector, where it is expected to increase at a CAGR of about 3% through to 2030. And suddenly, we are seeing a significant increase in demand from VRFBs that are expected to grow at a CAGR of about 41% through to 2031. In 2022, particularly, we're pleased to see that vanadium demand from VRFBs exceeded 5% of global vanadium consumption for the first time. Our mission to become a leading vanadium company, as one of only 3 operating primary vanadium producers with 2 of the world's 4 operating primary vanadium processing facilities with a diversified vanadium product portfolio and significant interest in downstream vanadium-based energy storage platform. We have invested, over the last 5 years, a significant amount of capital, which positions the company well towards its target of a sustainable production run rate of 5,000 mtV to 5,400 mtV in the near term. This will certainly support the business as it seeks to lower its cost to improve its earnings at the same time. The resource base within the group is substantial and will support growth going forward and also the simplification of our group structure, we expect, will lead to a much simpler investment proposition that is easier to understand for investors and also provides a clear pathway for energy-focused investors into energy, while the upstream business retains a very clean and crisp investment proposition. Of course, we've built all of this with significant reliance on debt capital markets. The restructuring of the rand convertible loan note will certainly help to reduce the overhang on the stock from potential dilution and, all in all, will support an improved capital structure. All taken together, we believe will position the business very well going forward as it delivers on its operational potential. I'd like to pause here and hand over back to Michael. Michael, over to you.

Thank you, Fortune, and thank you also, Tanya. As he's sitting in on this meeting, I think it's entirely appropriate that I should introduce and welcome Craig Coltman, who takes over officially on the 1st of July as CEO of Bushveld Minerals. If you have seen the announcement this morning, you will note that he has extensive experience of the mining industry through his 32-year career at De Beers Consolidated Mines in both operational and financial roles, which I know will be an enormous benefit to the company as we proceed with unlocking and realizing the intrinsic value within the group. So on behalf of the company, I'd like to welcome Craig to the team and give him a moment to just say hello. Craig?

Thank you for your words of welcome, Michael. I'm really excited to be joining the Bushveld team. I have a passion for the mining industry and its people. I've recently learned how the company has evolved over the years, and I'm very pleased to be joining this inspiring South African story. I had this opportunity to thank Fortune for bringing the company to this point. I look forward to leveraging the talent within the organization to enable Bushveld Minerals to operate in the most efficient and effective manner possible. My immediate deliverables will be to complete the transactions that are currently underway, including the Orion restructure and, of course, improving the operational performance at our operations. I look forward to working and engaging with all of you, and I'm particularly looking forward to putting on my safety boots and getting out to the operations as soon as possible. Thank you. I hand over to you now, Michael.

Thank you, Craig, and welcome to the company. We'll now pause to take questions. For those of you who are online, I'd be happy to take all and any questions related to management and people, while, obviously, Fortune and Tanya will address the operational and financial questions. So with that, Marianne, can we commence the Q&A session?

[Operator Instructions] We will take the first question from Marina Calero from RBC.

I would like to know if you could give us a bit more color about the reason behind the change in management? And maybe also a question where the challenges and opportunities is in the business and where will be the key priorities for the next 12 months?

I think I heard you say what were the reasons for the change in management and what are the key priorities going forward. Is that correct?

Correct.

Yes. Well, the -- obviously, Fortune has given a decent chunk of his life to inventing and developing Bushveld to its current level. And I'm delighted to say he is still a young enough man, that he has many other opportunities before him. The -- with the close of our 2022 accounts and with the company now about to be sort of really refocused on being a pure vanadium producer with an underlying equity carry in the Energy business, which is a passion of Fortune's, it just seemed a good time to him and indeed to the Board to put a change into place. And we can only thank him for what he has done to bring us to this point. In terms of priorities going forward, I think Craig alluded to those. We absolutely want to conclude the transactions that are currently underway with Orion and with the carve-out of the Energy business. And the other critical priority, of course, is going to be to get Vanchem operating to its full potential. With Vanchem operating at full potential and Vametco continuing to do well, it will transform the financial performance of the group and that is what we are focused on. Do you have any supplemental to that or does that answer your question?

That's all I have.

We will take the next question from Sergey Raevskiy from SP Angel.

Just operational question. How do you see like, again, the case with the load changing on the ground? And is there any -- related to logistic problems last year, is there anything similar that you see this year? And on financial side, do you expect any changes in the Orion deal conditions, any changes to the terms of the deal announced?

Well, I think Fortune would be best placed to address that.

Indeed, thank you. Thank you, Sergey, for your question. I'll answer the first part, and then Tanya will talk to the Orion question. Your question was in respect of load shedding and what the experiences and the outlook for that looks like and the second one had to do with logistics. We have announced before that we have successfully been able to shift Vanchem away from a contract with the municipality that left the operations vulnerable to load shedding and we've moved to a curtailment contract. While this is not directly with Eskom, which remains the first price, this has certainly been helpful. I think it's fair to say that Vanchem has not had to deal with load shedding since. Yes, there may have been the odd power trip here and there, but load shedding is not something that we have had to deal with at Vanchem. We expect that to be the case going forward still in terms of there not being load shedding. I am encouraged that we are already in winter, and we have not seen the sort of doomsday scenarios that some people in the past may have feared just in terms of the grid in South Africa overall. Our expectations is that in the medium term, as the different projects under construction come through, overall, there should be improvements to the power situation in South Africa and which in assembly is going to be positive for our operations overall. Then the question in respect of logistics, yes, I think it's fair to say that we still deal with longer logistics time lines than we used to in the past. It has not gone worse, but it has not yet also improved materially, and that's something we have to take into account when we look at our working capital provisions for the company. Tanya, can I ask you perhaps to talk to the question on Orion terms? I think the question was whether in the negotiations currently underway, do you see any changes to the terms that we announced in the past?

Thanks, Fortune, and thanks, Sergey. As I said, we are making good progress with the long-form documentation of the nonbinding terms that we announced. Clearly, there are some hoops in terms of some CPs we have to complete and making sure that we can do that timely around the sub approvals, for example, and just getting also documentation really because, as I mentioned just now, in the conversion would require shareholder approval for the issuance of shares in readiness or the provision of share of business for that convertible -- for that second convertible. But we're making good progress and have come a long way. So when we have it in final form, we will be releasing it to the markets.

We will now take the next question from John Meyer from SP Angel.

It's been a tough period for anyone producing vanadium with prices coming off. But the great thing is you've got Vanchem, which produces value-added chemical products. Can you run us through a bit more on the benefits of that -- of those products that you're selling into the market and anything about the premium prices that you might be getting for those products in the U.S. as opposed to China, for example?

Fortune, I think, again, that's one for you.

Indeed. Yes, John, it's -- vanadium market is an interesting one. I think if you look at the last year, it's interesting to note that actually the market was in a surplus. And the reason for that is that demand from the steel sector was lower. I think we understand the reasons for that. There's been a lot of volatility in the global markets, which affected the steel market. But it was good to see that with the steel market demand dropped, demand from the energy storage sector closed that gap quite effectively. But I think the point I would emphasize, however, is that overall, while there was a marginal surplus, we didn't see vanadium prices tank to sub-$30 levels. If anything, we've seen them stabilize above $30 with some encouraging signs in the recent weeks. The fundamentals, as I said, I think, remain fairly strong and good going forward and one hopes that we will see that reflect in an improving vanadium price for the rest of the year. In terms of the product suite, of course, with the kind of broad range of products we have, I think it's a very positive thing to have. Between Vametco and Vanchem, we produce ferrovanadium, nitrovanadium, vanadium chemicals, high-spec vanadium, pentoxide powders, which is typically used in the aerospace industry. There, we are seeing very good levels of growth. And I think it's safe to say that with increased defense spending, one can expect to see that there will also be further growth going forward. So for the basket, we think that the outlook is actually quite positive. I mean the margins will differ quite widely between the different high-grade products. There are some chemicals where you'll find that you can get in excess of $100 per kilogram V, but the volumes will be very, very small. And -- but on a net basis, as a basket, the company is in a very good position. You mentioned the U.S. market. It's been encouraging to see the prices in the U.S. market continue to hold and to maintain the premium that they have to prices in China and in Europe. And I think there has been, in the past, concerns or perhaps fears that we'll see that gap closed down. It really hasn't. And I think if you look at the U.S. market, the fundamentals will continue to support positive prices there. So long answer to your question, but I think in terms of where we see the opportunity for this company with the kind of flexibility we have, across the various products, I think it's unique. You'll be hard-pressed to find somebody with that kind of flexibility from a product perspective.

We'll now take the next question from Nick Chalmers from Alternative Resources Capital.

Firstly, welcome Craig, congratulations on the role, and I look forward to hearing more from you in the future on these calls. And Fortune, best of luck in whatever you're going to do next. I think you deserve a huge amount of credit for taking the company from an explorer to one of the world's few primary vanadium producers. Just a general question for me really. Last year, the company laid out plans to grow production over the longer term to an ultimate target of around 8,000 tons V. Is that still an ambition of the new management team and if so, what are the sort of next steps that need to happen there? Obviously, the company said before that, that will only happen once. Production at current levels is bedded down and financing is in place. But is there any more study work that needs to be going on in the background in order to get to a position that we're funding in place that button can be pressed?

Nick, thanks for that question. I'll give you a sort of quick answer and then perhaps Fortune could amplify. I mean, obviously, the potential of our 2 plants with all the kilns up and running is certainly at that 8,000-plus mtV. And the primary constraint there, obviously, is going to be the investment required to get those plants capable of producing that level of vanadium products. But Fortune, do you want to refine that response?

Indeed. Thank you, Michael. And thanks, Nick, for the question. The short answer is, is the aspiration to get to 8,000 mtV still there? And I'll answer the question the following way. The world will require a lot more vanadium, number one. And number two, primary producers with already existing operations that can grow that production on a brownfield basis will be best placed to answer that need for more vanadium going forward. So therefore, it's certainly a significant opportunity for the company in terms of growing towards that 8,000 ton production. However, it does require capital, as Michael has said, and it's something that I imagine the company will only commit to when that capital is in place. The good news is that with the production -- with the refurbishment work that we have done to date, bringing in kiln 3 at Vanchem, between the 2 operations, we have a base that can produce 5,000 mtV to 5,400 mtV. We've always said that, that's a level that we expect our operations to be sustainable, to be profitable through the cycle. And that certainly is the near-term focus and priority to demonstrate that and to deliver that, I imagine, before -- beyond that going towards this additional increases. We did present before when we announced to the market that we had done the studies for the growth to 8,000 mtV. Many of them at a previous stability study level. At the time that the company decides to take those forward, of course, they will need to be updated. And I imagine further studies will be done at that point.