Bushveld Minerals - Take Advantage of the Price Collapse

http://www.bushveldminerals.com/

Bushveld Minerals Logo

I did have one very prospective company ready for a review today, but that has now been shunned for a very good reason. AIM listed Bushveld Minerals (LSE:BMN) flashed into view today in light of what has been a very sharp price decline over recent days. The decline exceeded 50% and prompted a 'Share Price Movement' RNS. However, rather than stating offering up a reason for why shareholders would have wanted to dump stock aggressively, the company noted that 'The Company is unaware of any operational developments that would cause the share price movement." Furthermore, the company announced it is now attempting to identify which of the large shareholders has been flooding the market with stock. This was a very unusual case, as the selling continued after the RNS. That seems true as there was only a very small price rise when looking at the whole picture. The vast majority of those buys were absorbed by the seller - the question is, who is the seller, and why? The company operates in the North-East of South Africa within the Bushveld complex where it has both iron ore and tin operations. Having listed just last year, at the current share price of 3.38p, the company has a market capitalisation of £11.84m through having ~351m shares in issue. At this level, the company looks a steal.


The sheer rate of decline in Bushveld's shares leads me to the opinion that a strong re-bound is highly likely to take place over the next few trading sessions. The current market cap looks way too low when you compare it to the assets the company has. The RSI and MACD both show Bushveld to be very oversold also. Solely on a short-term basis, this looks a very good trading opportunity, especially since the liquidity has improved in light of the price decline. The 'no reason for price movement' statement in the RNS is also important in this scenario, as it covers off a lot of potential issues. The company has noted that there are no operational issues, so there is no imminent risk of dilution or any known problems at the South African operations. If there was, the company would be obliged to reveal that. Bushveld was spun out of Obtala Resources (LSE:OBT) last year.

The important question as alluded to earlier, is, who is selling out? The major shareholders (as per the website - valid of June 2013):


Based on this, and the volumes, it is still hard to know which third-party was responsible for the selling. What is clear is that it was not only sustained, but the party involved was desperate to dispose. That is proved by the fact that even after the RNS, the selling was maintained. I am therefore skeptical over whether it was an investment fund that was selling, as opposed to an actual company (such as Obtala, Acacia or Coal of Africa). It is unlikely to be Obtala once you read their Half Year Report as they seem upbeat upon the company. It makes more sense for it to be a company rather than an institution, as the need for money immediately is likely to be higher. However, I have absolutely no certainty in that statement - BlackRock have also mass-dumped stock in other companies in the past. The selling does seem peculiar though, especially seeing as the valuation of the company is very low. Seeing as the share price failed to move materially after the RNS, the seller is probably still selling, but should volumes be maintained through tomorrow, the seller will likely exhaust their interest meaning that upward movement can prevail. The short-term technical picture is therefore bullish as there the chances are there will be a swift recovery. I have consequently based my price target (defined later) for the short-term scenario, rather than anything in the long-term.

Bushveld is currently headed by CEO Fortune Mojapelo. Mojapelo has started up several mining companies including New Horizon Minerals. There is plenty of experience across the board, including Non-Exec Ian Watson who has been CEO of various mining companies and is on the board of UK listed Shaft Sinkers.  However, any downsides of Mojapelo not having any huge companies on his record, are offset by the fact that he has a seemingly strong relationship with Executive Director, Anthony Viljoen.

Both have co-founded Bushveld, but beyond that they have also co-founded New Horizon Minerals and are on the board of Lemur Resources, and that is where I will start. Bushveld recently announced its intentions to take over Lemur Resources. Obviously, Mojapelo and Viljoen will have substantial knowledge about Lemur prior to the deal, but Lemur operates across a range of coal projects - I am not particularly bullish about coal prices, but I suppose it does add some diversity to the portfolio, and if anyone can unlock that value it will be them. Lemur operates in Madagascar where it has a 136Mt thermal coal reserve. Lemur is listed on the ASX, and has had its share price perform very poorly over the last couple of years with the share price shedding over 75%. At the time of the offer Lemur was valued at a hefty discount to their cash reserve as well. 

The offer involves a swap of 5 Lemur shares for 3 Bushveld shares. The price fall is therefore very bad news for Lemur shareholders, who have seen their potential value almost completely eroded. Lemur's independent board members informed shareholders to reject the offer. The situation gets worse for Lemur shareholders because Bushveld have acquired a majority stake in the company, a stake of 54%. Furthermore, key shareholders are prepared to accept the agreement. In simple terms, the deal is pretty much done and dusted, and Lemur have been cornered. Lemur has touted the possibility of a return of capital to shareholders, although that is being blocked by Bushveld - even if that was to happen, Bushveld would receive half of that. The takeover has been protracted, but looking at Lemur's figures, there was AUD$16m on the balance sheet as at the time of the last HY report (when excluding payables etc). That is equivalent to just shy of £9.5m which would be almost all of the current market cap for Bushveld. Yes that takeover isn't done yet, but once it is, there would be a massive boost to Bushveld's balance sheet.

The company's raw fundamentals aren't bad either. In fact, they are very good. The company is set on exploiting its iron-titanium-vanadium project entitled Mokopane, where it has a 64% working interest. The company's project within Bushveld is surrounded by companies including fellow AIM-listed Ironveld (LSE:IRON), which is valued at £37m.
 
That's compared to Bushveld's JORC-compliant resource which stands at 782Mt, with 716Mt of that at 32.6% Fe. The more important contained resource stands at 166Mt. That is a very impressive figure, and for a company of this size it's ridiculous - that JORC figure is also set to rise to over 1 billion after another upgrade that is expected soon. That will come as more of the strike length is drilled (currently that estimate is based on less than half the strike). A material point is that the resource is a magnetite resource. That means it has to be refined in order to be converted to pure iron ore. During that refinement, the other minerals can be converted to other by-products including pig-iron or vanadium.
 
However, the cash balance is only around £1m, so the takeover is imperative to the company. Without it the company will need to raise funds, but the current share price is prohibitive. 
The area in which Bushveld operates is well-built with decent infrastructure - that is an issue that affects a lot of West African mining companies. That is due to South Africa's long-running mining industry. The risk in South Africa is higher than some other African countries though, with labour problems just one of the many hurdles that miners have to face. Therefore, Bushveld will have a discount attached to it - the Lemur diversification makes sense in this respect. For this iron ore project, Bushveld announced the results of a scoping study earlier in the year. The study was only completed on 12% of the JORC figure. There points were of significance.
 
For a RoM of 5Mtpa
Low capex at US$126 million
-  NPV of US$140 million at 12.5% discount rate
-  34.2% IRR (real)
-  Payback: 2 years from start of mining
-  Project well positioned relative to existing infrastructure:
-  45 km from rail line with both port options (Maputo / Matola and Richards Bay) undergoing significant capacity expansions
-  20 km from a Kusile power station transmission line, as well as from a planned new transmission line and substation from the near complete Medupi power station

"We are delighted to present the positive scoping study results for our Bushveld Iron Ore Project in South Africa. We have chosen to adopt an initial low capex route to enable the Company to reach production and cash flows in a shorter time horizon. We believe our approach is low risk, particularly given the challenging global markets for project financing. Yet the project retains the flexibility to scale up the mining operations and the option of developing modular integrated pig iron or steel facilities. The pre-feasibility studies that are due to commence in May will investigate these options further and we look forward to presenting the PFS results in Q1 2014."
 
Most IRR figures above 30% are considered attractive by the wider industry, so that will come as a boost to the company. The payback time is relatively short, and the low capex is encouraging. Some of the magnetite has 'free dig' potential meaning that it can be cheaply mined. The next step is for Bushveld to complete a Pre-Feasibility Study (PFS), which is due for completion in Q1 2014. That will further outline the economics of the operation. In addition, at a RoM of 7Mtpa, that IRR jumps up to 39%. Production has been loosely pencilled in for 2016 so forward-funding will be an obstacle for long-term investors. Nonetheless, solely on the iron resource alone, Bushveld is severely undervalued. Taking an lowly £0.30/tonne figure and using the contained Fe resource implies a valuation of the resource of £49.8m, which translates to around 14p/share. That is approximately 314% of upside. You could take a fair chunk of that out due to the South African risk factor, and the cash position of the company, but even so, it is highly undervalued.

courtesy of freedigitalphotos.net
Looking briefly at the other assets, the company announced a resource upgrade for the tin projects earlier in the calendar year. The RNS detailed the "Confirmation of a JORC compliant 12,452 tons contained Sn at an average grade of 0.11% Sn (using 0.07% Sn cut-off)". A scoping study for this is set to be released in October, and that JORC figure is likely to continue tending towards 20,000 tons. Operations post the scoping-study may be deferred slightly in light of the company's financial position and taking into account the various takeover extensions.
 
A $500k convertible loan note was taken out in order to accelerate the takeover through buying a majority stake in Lemur. The cash position does therefore remain a material risk, especially if the takeover continues to be delayed. If the takeover is completed, the position will be far more comfortable. In Madagascar, should the takeover be completed, Bushveld may seek a strategic partner to alleviate the workload and reduce risk. Aside from this, Bushveld made a decision to seek the acquisition of a 50% stake in the Marble Hall Tin project in late September. The project is also located in South Africa and is not too far from the Mokopane Tin project. The aim is to produce a maiden estimate for the zone in H1 2014.

CEO of Bushveld Minerals, Fortune Mojapelo said: "We are excited about the recent addition to the Bushveld Tin portfolio at a time of strong buoyancy within the tin market. The Marble Hall Tin Project will significantly boost the overall tin inventory of the company, adding a high quality asset with significant historical exploration conducted on it already. This is in line with our aim to consolidate more than 50,000 tons of near-surface tin assets that have potential to be brought into production in the short-term."

There are a couple of questionable decisions I feel that Bushveld have made. Perhaps the biggest is the acquisition of Marble Hall. Yes the asset is cheaply valued, but the company is constrained for cash, and in any circumstances the majority of the cash brought in from the takeover will be expended on the Mokopane Iron Ore project, and Tin project. That leads to the question of how these other projects will be funded - it will not be an easy task, and it certainly won't have been made easier by the sharp share price decrease. That has limited the chances of an equity raising being a feasible option for the company. The pursuit of the coal assets is also a strange decision considering the coal price weakness.

However, looking past that, Bushveld should be able to defer expenditure, and direct cash appropriately once the takeover is done. Therefore, even with those outlined issues, the company's valuation is ludicrous, and has been driven by one of more institutions/companies being intent of disposing of their shares as soon as possible. The market cap has thus been driven to the lowly x<£12m valuation seen today. Broker Fox Davies has a 28p target stated for the stock, but that is now looking unachievable in both the short and medium term. There are two scenarios that I would be content with. The first would be based on a short-term trade - in this scenario a very short-term target of between 5-7p would net a quick, appreciable return. The second scenario is if the shares do not rebound quickly. I would then set the timescale to the medium-term with a price target slightly higher at 7-9p. Either of those scenarios represents a material share price premium. The sheer volume of shares traded in the last 30 minutes today also bodes well. Take advantage of the price collapse. I have a Buy tag on Bushveld at 3.38p.

6 comments:

  1. A timely review. An intriguing company. Thank you institution. For dumping your shares

    CraigJ

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  2. good article - thorough and balanced

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  3. All very useful...many thanks

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  4. great report Elite. I am in OBT which actually went up yesterday! Will pick up some of these this morning. Thanks again.

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  5. you're STAR !!!

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