Bushveld Minerals Vanadium Leasing Structure Accelerates Value Creation

Bushveld Minerals Ltd (LON: BMN) Mkt Cap £269m – Vanadium rental / leasing structure to accelerate value creation. Vanadium forecasts adjusted.

SP Angel have announced that they are adjusting their valuation in Bushveld Minerals Ltd following its review of value offered by the new Vanchem business, Bushveld Energy and the other business units.

We are adjusting our valuation in Bushveld Minerals following our review of value offered by the new Vanchem business, Bushveld Energy and the other business units.

We have also adjusted our assumed vanadium price forecasts to account for the recent price correction.

Bushveld Minerals recently announced it is to acquire the operating Vanchem vanadium business in South Africa, a move which should bring low-cost expansion and greater flexibility to the group.

Bushveld agreed to pay US$68m to acquire the Vanchem plant and facilities to be settled in two stages. US$6.8m was paid on 30 April 2019, US$61.2m will be settled no later than 31 October plus a 12 month period after completion of the Transaction. A further US$0.5-1m will be paid to VVP, which provided services to Vanchem.

Vanchem is currently producing around 80mtV of vanadium per month but is also in Business Administration in South Africa. This is similar to being in Administration in the UK though the process appears to be more helpful to the longer term operation of businesses than our own medieval system.

Vanadium price assumption:

We are pulling back our Ferro-vanadium price forecasts for 2019 to $50/kgV from $60.4/kgV in response to the fall in ferro-vanadium prices to around US$36/kgV FOB China. For 2020 we assume $45/kgV and we maintain out longer term price forecast at $45/kgV.

We still see vanadium demand and prices rising in China in response to better compliance with the legislation introduced in November last year.

Demand for vanadium electrolyte for Vanadium Redox Flow Batteries VRFBs should also come into the market to support our estimate price assumptions.

While demand for vanadium for electrolyte may be price sensitive we see the invention of new lease finance structures for the vanadium in VRFB’s as enabling the financing of VRFBs at higher vanadium price levels going forward.

Bushveld Energy: Bushveld’s vanadium rental financing service should accelerate the planning and ordering of new VRFB systems to support South Africa’s power grid.

Critically it should reduce the cost of financing and spread the cost of the vanadium in the electrolyte over a longer period rendering the cost of vanadium less critical.

We are raising our valuation for Bushveld Energy to US$149m as we see the ‘VRFB’ business as offering a practical solution for the storage of growing solar and wind power in South Africa. This assumes a relatively low margin on electrolyte sales for VRFB batteries and a more normal project finance type cost for VRFB unit sales.

While there are other battery solutions on offer, many of these suffer from high parasitic losses, high component renewal costs or increased risk of outright failure leaving VRFB’s as the preferred grid-scale storage solution for power utilities.

ADROIT market research forecast CAGR growth of 8.3%pa for grid power storage in Europe to hit $1.11bn by 2025 with VRFBs expected to account for 83.8% of the total market share.

Bushveld Energy aims to participate in 1,000 MWh of opportunities in Africa by 2020 and there is sufficient current demand in the market for vanadium electrolyte to support the installation of a 200 MWh capacity facility in South Africa.

We have cautiously assumed a more modest market of just 300,000MWh in 2021 and for Bushveld to be involved in the development of around half the VFRB instillations and electrolyte sales.

Bushveld’s current VRFB jv is being trialled at ESKOM should have a peak output of 450kWh as a single unit. It should be relatively simple to roll out multiple units to support the rapid growth in wind and solar farms being installed in South Africa as ESKOM moves to supplement its ageing coal-fired infrastructure.

Valuation: we value Bushveld Energy at US$149m representing 8.8 pence per share to our valuation on Bushveld Minerals. We have added 7.93p/s for Bushveld’s other assets, cash and subsidiaries including Lemur and the P-Q Iron and Titanium project. Our revised ferro-vanadium price forecast adjusts our valuation for the Vametco-Vanchem vanadium business to £801m representing 72 pence per share.

Conclusion: Bushveld is extraordinarily well placed to participate in the high-tech Vanadium Redox Flow Battery business. The integration of the business to produce vanadium electrolyte from its in-house vanadium feedstock gives its security of supply, while the new and innovative lease-finance model for the vanadium in electrolyte should make the financing of VRFB’s less sensitive to spot vanadium prices. We see this as a major advantage for Bushveld placing the company at the very centre of this valuable growth market.

Bushveld’s location in South Africa should also help in the participation of a World Bank funded ESKOM renewables Support Project which is designed to facilitate accelerated development of large scale renewable energy capacity in support of the long-term carbon mitigation strategy of South Africa.