Bushveld Minerals*
Vanchem acquisition opens door to 10,000t pa
The proposed US$68m cash acquisition of Vanchem opens a capital efficient route to Bushveld’s stated goal of growing to a 10,000t pa low-cost primary producer of vanadium while providing an expeditious development path for its substantial Mokopane greenfield resource. Moreover, whilst diversifying Bushveld’s operational base (lowering its risk profile), Vanchem will widen the group’s vanadium product mix and offers a platform to potentially develop vanadium electrolyte manufacturing capacity in-house, supporting Bushveld’s ambitions in the redox-flow battery space. We believe the deal will prove earnings and valuation accretive – the target assets generated pre-tax profit on recommencing production last year, and the US$133m gross cost of acquisition and subsequent refurbishment/development capex is substantially lower than the cUS$300m estimated capex of developing Mokopane as a standalone operation.
? Immediate growth and diversification: Vanchem offers immediate production growth and operational diversification, adding 960t of current annualised output to Bushveld’s c3,000t pa production base at Vametco.
? Capital efficient production expansion: Current operations utilise just one of Vanchem’s three kilns, equating to just 20-25% of the facility’s capacity. Bushveld believes a US45m refurbishment spend over five years could see the entire facility fully operational at a steady-state production rate of 4,200t pa.
? Fast-tracks Mokopane: The proposed acquisition will expedite the development of Bushveld’s Mokopane project (200km north of Vanchem), which over time will become the primary source of feedstock for Vanchem. Transporting an ore concentrate from Mokopane for further beneficiation at Vanchem could reduce the capex to develop Mokopane to just US$20m, versus the US$298m previously estimated to develop it as a standalone operation of not dissimilar scale.
? Diversifies product mix: Vanchem can produce various vanadium oxide concentrates, ferrovanadium (FeV) and vanadium chemicals, adding diversity to Vametco’s Nitrovan product. Its operational flexibility offers potential for future vanadium electrolyte manufacturing without compromising cost efficiency, enhancing Bushveld’s ambitions in the redox-flow battery space.
The proposed transaction is thus consistent with Bushveld’s stated strategy of acquiring low-cost, scalable brownfield assets in South Africa to expedite development of its substantial, and high-grade, resource base. Moreover, with the 4,200t pa potential of an integrated Vanchem-Mokopane added to the phased expansion of Vametco to c5,000t pa, the deal brings Bushveld’s 10,000t pa production goal into sharp focus. The transaction is subject to regulatory approvals, but the majority payment (to be funded from internal cash flows and debt if necessary) and closure is expected no later than 31 October 2019.
Valuation: We await details on opex structure and timing of the planned Vanchem-Mokopane refurbishment/development ahead of incorporating in our forecasts and valuation. However, we believe the acquisition will prove accretive to both, assuming cost structure is not dissimilar to Vametco. Bushveld is trading at an EV of just 3.3x our 2019 consolidated EBITDA estimate (after revising down our near-term V price assumptions for recent market pullback), and our free cash-flow estimate currently yields 18%.
Our current 45p valuation includes just 25% of our NPV estimate of Bushveld’s attributable share of Mokopane. We believe the NPV of an integrated Vanchem-Mokopane operation would likely exceed our current estimate of Mokopane standalone, while the acquisition would also lower development risk.