Bushveld Minerals - Asset Valuation


With the takeover of ASX listed Lemur Resources now having reached the deadline, it's worth re-looking at Bushveld to re-evaluate exactly what the situation there is. The share price has been volatile during the final stages of the takeover, with other corporate events also taking hold such as a placing and an operations update. In my original review, I noted that there would be two scenarios that would be rewarding - a short-term bounce to the 5-7p zone, or a medium-term rise to the 7-9p zone. Despite the uncertainty that has been cast over the company over the last couple of weeks, and having done some additional resource comparisons, I will stick with those two scenarios. The short-term bounce is admittedly less likely now, but it cannot be ruled out given that Bushveld is now very much on the market's radar. Nonetheless, Bushveld has made little progress in terms of its share price which remains at 3.40p. At 3.4p, post-placing Bushveld will have a market cap of £13.2m. This will re-adjust upon completion of the takeover.

This article is a follow-on from the below post. For full context and information, read this article first:

Given how recently I covered Bushveld, the chart above is only really an update. However, the technical position of the company is a strange one given the circumstances of the drop which I'll cover in a minute. The stock is currently trading within a range which is almost 30% in width (between 3.38p and 4.25p). The first breach of this range will lead to the setting of a short-term trend. The price is trending towards the lower horizontal support, but it has held up well. If the price rebounds back above 3.60p, I would expect there to be a real test of the 4.25p resistance, and a breach.

In the first review I noted how the stock dumping that led to the share price falling away sharply was likely to be created by corporate selling rather than institutional - the reason being that it was more likely that a company would need the cash in short order. I did also note that Obtala Resources (LSE:OBT) was perhaps more unlikely to be the seller due to a statement they made in a set of results, and that BlackRock have historically undertaken mass stock sales. After confirmation from the company, it turns out that it was actually both. In fact, Obtala sold their massive stake down below the disclosable level, as did BlackRock. Given that Obtala previously had 100m shares (30.2%), that means they sold at least 83m back into the market. BlackRock initially had 6% of the share capital so it's likely they sold their entire stake.

Many investors have been saying, why would they sell at such a low share price? Well, the catch is that, had they not sold it would have remained the case that well over 80% of the share capital was not in public hands. As institutions and corporates are less likely to sell than private investors, that means the value of Bushveld will continue to have been locked up. Therefore, yes, part of the reason they would have sold would have been because they wouldn't have thought that value could be extracted in due course.

However, there were underlying reasons that contributed to the selling. Obtala commented in an RNS: "The company has taken the decision to reduce its shareholding in Bushveld Minerals Limited. This decision is based on the lack of recent transparency and our understanding of the timing and progress from Endulwini's discussions with its funding partner, in addition to the downward movement in the Bushveld share price in recent months. Funds from a disposal will provide capital for cash generative business opportunities such as this project."  In other words, Obtala wanted cash for its other projects, plus it couldn't see any value being created. Obtala did actually have an agreement with Endulwini who signalled they wanted to purchase Bushveld shares from Obtala, but that was at a much higher share price. It would make sense for Endulwini to be purchasing shares in Bushveld now, if they had the same intentions. Why did BlackRock sell? It's widely documented that BlackRock are fairly bearish on the outlook for iron ore, hence the institution have been selling down stakes in iron ore based companies, across their portfolio (to varying degrees).

All that is known is that Commerzbank had taken up a large portion of that stock - whether they are passing it onto a third party or using it to earn commission is unclear. Regardless, as shown in the chart, the liquidity here has improved significantly meaning that value is more likely to be extracted. Combined with this, share price movements are now smaller which is also good as the spread has narrowed. Whether Endulwini have been buying through Commerzbank is unknown given that no other holdings RNS' have been released.

Looking back at Bushveld's assets, I thought it would be interesting to compare the valuation of their Iron assets with those of other African based explorers. A table detailing this is below:

Figures obtained from company websites - due to the technical nature, figures cannot be guaranteed and are displayed as estimates due to rounding
To derive the comparison figure, I took the market capitalisation of each of the companies, subtracted the cash, and added back any debts. The reason is that it gives a basic valuation for what the market is attributing on a per contained tonne basis. At the upper end of the valuations is Ironveld, which ironically operates pig iron exploration in the same complex in South Africa as Bushveld. They have a ~£1.3572 figure which in my opinion is far too high - I deem them to be well overvalued. At the opposite end of the spectrum lies Bellzone Mining who have a 1.2Bt contained Iron resource. Their average grade is lower at 26% so extraction costs are higher, but even so, they are valued on £0.0249 per contained tonne. At the current level, Bushveld is valued below the median, at £0.0697, and once the 1Bt is proved up, that figure will drop to circa £0.0548, assuming a consistent grade.

At the bottom of the value, I have input a value of £0.12. I believe that is the base case for a valuation of the iron assets. The reason is that Zanaga and Bellzone's projects both require huge amounts of CAPEX due to their location and asset size. Bushveld on the other hand, has a low CAPEX route opportunity - a strategy that only requires CAPEX of $126m, which is low in the industry. As a testament to this, Bushveld released a scoping study back in April. The study examined 12% of the net 460Mt P-Q deposit. The results of the study showed that the low CAPEX route importantly didn't rely on third party infrastructure, and had an Internal Rate of Return of 34.2% which is very attractive. The cautious iron ore outlook means that actually, these smaller projects are more favourable, if the IRR is sufficient. That is the case for Bushveld. Payback through this is just 2 years. At the scaled-up project, the IRR rises up to 39% and the payback drops to 21 months. Furthermore, this scenario excludes the exploitation of the Vanadium rich magnetite layer (MML). Credits can be obtained through the sale of byproducts.

CEO Fortune Mojapelo commented: , "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."

Perhaps the closest comparison to Bushveld at the moment is Baobab although Baobab is further down the timeline having secured numerous valuable agreements. Nonetheless, Baobab are currently valued around £0.2034 per contained tonne which is almost 200% higher than Bushveld valuation. Therefore, to keep a conservative, and realistic figure, £0.12 is fair for now. That values the iron asset at £19.9m. If the 1Bt resource is proved up and the pathway to production made clearer, then the asset could start to be valued around the same level as Baobab's Tete project - that would mean the contained resource could be valued at £42.24m by the market.

It was much more difficult to complete a similar comparison for the tin assets - the reason being that many companies who operate in tin, don't do it solely hence they have multiple other assets that are difficult to value. Nonetheless, a comparison with companies who mainly operate in tin, is below:

Figures obtained from company websites - due to the technical nature, figures cannot be guaranteed and are displayed as estimates due to rounding
Clearly, 4 companies is not a sensible sample size. The companies shown as also small which once again is down to the larger companies having non-tin assets. The result is that a spread of comparison values are retrieved. Being conservative and taking a value of £80 gives a current value of Bushveld's net share of just shy of £1.1m. After the touted net resource from Marble Hall, that valuation rises to £1.6m. Of course, taking a £160 figure just means you double the valuations and so forth. Bushveld plans to increase their net resource organically as well with only 2 of 5 exploration sites having been assessed to date. It is important to note though that there is a significant gulf between tin explorers and tin producers, with the latter having much more favourable valuations. Given that Bushveld is targeting early production opportunities, the implied worth could be towards the upper end. It is worth noting though that the tin price has been fairly resilient compared to other metals. The price has dropped significantly from the highs, but the outlook is stable given that tin supply is falling. The plan with regards to the tin, is to have a series of satellite tin projects that can be exploited chronologically.

The final asset that will be owned under the Bushveld group structure is Lemur's thermal coal asset. It's incredibly difficult to try an ascribe a value to this asset, not least because under Lemur, it was not valued at all (market cap was less than cash). Therefore Bushveld need to prove up some value for that first. There is no doubt that the asset has some intrinsic value, but until there are real figures to work off, it remains difficult to place a valuation. The cash that Lemur has will be absorbed into Bushveld's group structure although it will remain under the subsidiary unless Bushveld can get 75% of votes. Given the takeover effort finished last Friday, that is unlikely so how that cash will be used is also unclear. However, Bushveld have the say over how it's used at Lemur given their majority stake, so they can direct it as necessary. That should add value and Bushveld have touted that the money will be used to pick up distressed assets that are either pre-production or producing.

The way forward for Bushveld is to obtain partners for both the Iron Ore and Tin assets. There should be sufficient industry interest to get deals away that reduce Bushveld's spend given the dynamics of each of the projects. Fortune Mojapelo did indeed recently note that both assets are 'compelling propositions' in their own right, that the search for a strategic partner for the iron is 'well underway' and that they will 'demonstrate' to the market that the assets have real value, even in a lacklustre mining sector. First tin production is set to be done by 2015 which should enhance the investment proposition.

As alluded to earlier, Bushveld did undertake a small placing in late October. The placing was for gross proceeds £1.25m with the shares placed at 3.40p (the current price). The discount was fairly small and the fact there was a discount is not all that surprising - institutions will ultimately want to profit from taking part. The placing is what has caused the share price to drift from re-testing 4p for the time being. The placing also involved warrants at 5p which were issued on a 1:1 basis. That would unlock £1.8m of extra funding should the share price reach 5p. The important part of the announcement was the following: "Also, the Company anticipates that any further capital required may be provided through the introduction of strategic partners at the project level thereby reducing any further dilution to shareholders of the Company." That reassured the market and actually is positive for medium-term developments

Fortune Mojapelo commented: "I am pleased to announce the successful raising of £1.25m which will go towards developing the current assets of the Company. Once the Lemur Resources bid closes next month we will be the controlling shareholders of a Group with approximately A$16m to pursue new opportunities in a depressed sector that will invariably benefit shareholders of Bushveld given the host of opportunities available. The Board and management of Bushveld remain committed to its previously stated funding strategy of introducing strategic partners to each of the iron ore and tin platforms that will assist to unlock the significant value in these projects. They also remain confident that these platforms are sufficiently compelling propositions to attract the requisite funding for their development. Finally, the Company has a busy period during the next six months to progress its Iron ore and Tin projects and implement its strategy for Lemur in earnest".

It remains the case that Bushveld is still undervalued relative to other companies in the industry. The hurdle that the market currently sees is whether they can bring in strategic partners and fund any cash shortfall as they have stated. If they can, without losing too much of the asset, then a significant correction should be expected. Getting the tin asset into production over the next year will have a key part to play in how that pans out. Even though it is unlikely that Bushveld will have reached the 75% acceptance level, the group structure will have an additional ~£9.5m under its wings and that can be put to good use (in my opinion a fair amount should not be used on Lemur's Imaloto project). Given that there aren't many exploration companies with cash to spare, the purchasing power should be greater at the current point in time, and thus the firepower it provides should enhance the value of the group as a whole. Even prior to the acquisition, the above sum-of-parts analysis hints that the value of the iron ore and tin should be around £21m at the lowest end of expectations. With resource upgrades, and taking into account higher valuation metrics, that figure rises substantially. Bushveld will be capitalised at around £13.2m post-placing. That disparity should narrow given time.

UPDATE (04/12/13) - I have moved Bushveld from Buy to No Rating at 7.23p following a strong surge in the share price over the past couple of weeks. My initial 5-7p short term target has been exceeded. The rise equates to a 114% gain for the site - the second largest to date. The share price could ease back and stabilise - if it does so considerably, I may look to re-enter.


  1. Following our first article, I ended up buying into Bushveld and am now in it for the long term partially thanks to your insight and analysis and this follow up article is also fantastic!

    Thanks, El1te!

  2. Fabulous analysis and good comparison!


  3. Many thanks for the fully and clear picture of BMN. I am a holder and will add more with confidence.
    Your reports much appreciated - keep them coming.
    regards - John

  4. You need to calculate comparators based on their share of the asset (BZM and ZIOC for example) and their grades and JORC categorisation etc. The market tends to give zero valuation for inferred resources unless they are very large.

    1. Wow it pretty obviously says 'net resource' .

  5. thank you for your reviews of Bushveld. They've allowed me to sleep more easily and not to loosen my grip on the tree when it shook. slept very very well last night and will do the same tonight. Thankyou El1te.


    1. No problem - I hope you have done well out of Bushveld! The market cap is just above £21m which was my lower range estimate, so that is pleasing to see. I will look to re-evaluate whether to take profits or not, over the coming trading sessions. Stay tuned as the update will be put out live on the twitter feed and on the Company Reviews page

      However, whilst bullish sentiment and momentum remains, along with the pending resource upgrade, I'm more that happy to hold until that is released. El1te