Bushveld Minerals - High-Impact News Pipeline


2014 has so far continued to be unforgiving for the junior mining market. Many companies have hit yearly lows amid funding difficulties and declining commodity prices, which have seen investors switch into safer options. Bushveld Minerals (LSE:BMN) has not been shielded from these effects, with the company's share price drifting in recent months to the current 3.85p level, at which Bushveld is valued at £17.5m. Despite making appreciable progress during the first half of the year so far, the company is suffering from weak sentiment, partly as a result of missed timescales, but also as a result of a funding arrangement with Darwin. However, the potential news pipeline remains rich and this could see positivity return during H2 as investors begin to recognise the underlying value of the Bushveld portfolio of assets.

The technical position of Bushveld is not surprising given the wider mining market weakness. The shares have fallen through multiple support levels during a very long drift that started in April and has yet to really end. The drop has been consistent, and ultimately has been caused by weak sentiment. Unfortunately, that forms a vicious circle as the weak sentiment leads to further weakness until a fundamental low is found. I reckon that fundamental low is at around 3.75p. The shares currently lie above a zone of strong support that was formed back in late 2013 - this should limit the downside barring any change in fundamentals, so is reassuring in that sense. Bushveld currently has 455m shares in issue, with a modest ~2.5% spread between 3.80p and 3.90p. The site doubled up its stake in Bushveld earlier in the year at around 4p, meaning the average is circa 4.78p.

Over the period, Coal of Africa (LSE:CZA) has supposedly disposed of their entire holding in Bushveld to another party, raising $1.8m. That suggests that the price they achieved was around 5.5p. However, there has not been an RNS to confirm this, which is peculiar, but backs up the thought that the shares were directly transferred to another party, and perhaps helps explain the lack of an RNS. If the shares were sold to another party, but were kept within Mirabaud Investment Management, then an RNS would not have been required. This seems the most likely scenario, and the lack of any RNS since suggests the acquiring party was not intent on immediately disposing of the shares.

It cannot be understated that one of the key drivers of the downward move has been the market condition. Many junior companies across both base metals and precious metals are hitting multi-year lows, as a result of a very restrictive funding environment on the back of falling commodity prices. Furthermore, that downward pressure hasn't just been restricted to the smaller end of companies - even large caps like Antofagasta, Anglo American and BHP Billiton has severely underperformed the wider market indexes despite strong equity markets for most sectors. For precious metal miners, gold and silver prices remain weak having declined substantially over the past year to circa $1250/oz levels. This figure is around the average cost of producing gold, so this has deterred exploration, but also seen many gold companies having to take up expensive debt packages in order to fund their loss-making operations, pending a recovery of the price.

There is a similar situation with the iron ore price, which has recently spent time below $100/t, levels not seen for years. To put it into perspective, iron ore prices average $135/t during 2013, so it is a major fall, and this is what has catalysed falls across the boards. Given that Bushveld's key platform is in iron ore, there is clearly this underlying driving force that the market has been taking note of. No doubt, had the iron price been rallying, the Bushveld share price would have shown increased strength. Importantly though, Bushveld has some key differentiating factors, which should see it much better positioned that most. Notably, even though their indirect interest in the Imaloto coal platform continues to be hurt by low coal prices, they should stand to benefit from strong vanadium and tin prices, which form their other two platforms.

The iron ore price weakness has not simply been the result of falling demand in China (indeed, recent Chinese figures for iron demand were strong), rather the falling prices have been catalysed by excess supply within the market, which has yet to be met with high demand. As an example, mining major Rio Tinto (LSE:RIO) has been pushing up supply to 290Mt per annum at its key Pilbara mine in Australia. Rio Tinto has production cash costs of circa $20/t and with all other costs included, the company is still profitable at an iron ore price of $50/t. Of course, that does not mean that they are intent of driving down the iron ore price - that would almost certainly result in lower profits, which is undesirable. Rather, the boosting of output is because the company is bullish about long-term iron ore prices. Rio expects to further increasing production capacities to 360Mt per annum by 2017. That said, Goldman Sachs expects iron ore prices to stabilise at around $80/t over the next year or so. If this transpires, early stage exploration will become much less desirable.

Recognising that weakness, it is not surprising that Bushveld's share price has drifted. There are of course two sides to every coin, and the picture is not all bad - whilst predictions are that iron ore prices could fall to $80/t, they could equally easily rise to $120/t again, and there are many investment businesses forecasting that outcome. One of the reasons given is that Chinese miners tend to operate higher up the industry cost curve, as a result of geology, compared to South Africa, Australia and Brazil. Macquarie has in fact guided that iron ore production in China has tumbled by a fifth already this year, in light of lower prices, and that squeeze will continue is prices continue to weaken. That should provide natural supply and demand equilibrium - as prices fall, supply will fall. All this considered, it is important to appreciate that companies with developed platforms and those with clear plans have not been hit as badly. Many large cap companies' share prices are showing signs of bottoming, and even small caps (further down the progression chain) such as Baobab Resources (LSE:BAO) has held up better than most.

Ultimately though, there are good reasons as to why Bushveld's iron ore platform is better than most. Not only does the company have experienced management, but its resource and operations have certain characteristics that should, in the medium-term, shield the company from the worst of any price downturn. Other small companies will not be so fortunate, thus most other small cap iron ore producers are worth steering clear of.

The first key attribute of Bushveld's P-Q platform proposition, is that it can be guided to be low CAPEX (capital expenditure). In an environment of tough funding access, that it crucial. The second key attribute is geological. The iron ore within the company's deposit is in the form of titanium magnetite, which is preferable for Chinese producers following the introduction of restrictive legislation on steel products. With in-situ grades over 10%, and through to 15%, this gives Bushveld a natural advantage, and explains the company's MOU with CREC10 back in H2 2013. Looking back over the 2013 preliminary scoping study, estimates were that operating costs would be $51/t, falling to $6/t when factoring in possible titanium and vanadium credits. Domestic rail and overseas transport costs were estimated to hover around the $50/t mark. Essentially, this means that the project could resist materially low iron ore prices, albeit the economics are inevitably diminished with a declining iron ore price. What is likely is that $80/t iron ore prices are unlikely to be maintained in the long-term. A range of $90/t - $120/t is more probable. This scoping study was also only based on less than 15% of the current iron ore strike. Grades have increased since, which opens up selective mining opportunities for the company - taking advantage of the highest-grade zones during any period of depressed prices.

Of course, there is no certainty that Bushveld will actually steer the project through to completion. With the joint pyrometallurgy tests being progressed alongside CREC in China, there is a material chance that, should the results come back positive, that either:
- CREC will fund the project through feasibility studies and into early production, taking a majority non-operating equity stake
- CREC take a majority operating equity stake and fund the project through the feasibility studies
- CREC outright buy the project off Bushveld and its partners
Each of these scenarios would be value-accretive for the company, and a significant stepping-stone in making real, tangible progress in light of a tough operating environment. It is highly unlikely that CREC have signed up to the tests without having some end game in mind. If the iron ore confirms it meets their requirements, then the low cost nature of the assets should prove attractive.

That is underscored by the results of the rough 2013 scoping study. A 5mtpa scenario gave estimates of a robust 34.2% internal rate of return (IRR), using just £75m of upfront CAPEX (a sum attainable through debt financing). The payback on such a profit is just 2 years, with only $2.5m of annual CAPEX required to sustain operations. At 7mpta the IRR is 39% with upfront CAPEX of £91.5m and payback of 21 months (on a life of mine of 13 years). These numbers are all attractive, although realising that scoping studies can be inaccurate (given the early stage nature of input numbers) is important. The feasibility studies go into far more depth. Importantly, rail, port and power facilities within South Africa are all undergoing expansion, so this should see the potential for scale to be built, thus it will be more attractive to any major (like CREC).

If anything, following the exploration of extracting the phosphate and vanadium resources, there is potential for boosted economics. Notably, the phosphate resource was deemed waste material in the 2013 report. This means that costs were incurred in disposing of the material and project economics were suppressed. However, the phosphate layer overlies the iron resource, yet is geologically distinct meaning that is can be extracted. A scoping study due to be released by the end of Q3 2014 should shed light on the economical value of the resource, and how it could actually be mined profitably. A resource estimate for the phosphate is also in the news pipeline, with it set to be released by the end of Q3 as well - preliminary estimates are for a resource body was large as 200Mt. Assay results released in May showed that concentrate grades of around 35% could be achieved, with recovery levels at 53% through a flotation process. This concentrate will allow it to fetch a "premium market price".

Bushveld's main update on its iron ore project came in March when the resource upgrade was finally released following a string of administrative delays through the South African government. The upgrade was the inferred and indicated resource rise up to 991Mt, just short of the 1 billion tonne target. The psychological 1Bt miss, combined with the delays (meaning the news was largely expected), meant that what was meant to be a key news item became a sell-on-news event. The upgraded resource led to a small uplift in grades across the board, which tells us that the added section was of higher than average grade. The news grades were 33.5% Fe (Iron), 10.7% TiO2 (Titanium) and 0.20% V2O5 (Vanadium). Importantly, within this large resource, there is a high-grade titano-magnetite section within. This sub-resource totalled 259Mt with average grades of 41.5% Fe, 14.7% TiO2 and 0.26% V2O5. This allows for selective mining if necessary. Further upgrades to this resource estimate would be possible through additional work on the MML layer, or increasing to cover greater depths. Crucially, the upgrade was deemed by the board to add 'cost-effective scalability'. Ordinarily, high levels of TiO2 are not desirable as they can cause issues in furnaces. However, if the levels are high enough (typically above 6-7%), then it can prove to be a benefit in terms of receiving titanium credits. As mentioned earlier, producers of iron ore with over 2% TiO2 are required to have titanium pocessing facilities. The bottom line is that in Bushveld'a case, the TiO2 can be used to boost project economics.

As above, I have re-outlined the net Bushveld contained resources (i.e. the actual in-situ iron ore). Once again, I have included 3 valuation cases at the bottom. A particularly conservative valuation would use just £0.09/t, which looks very harsh especially given the other credits that can be obtained. This would value the resource at £19.13m. The valuation I previously used (which was also cautious) was £0.12/t - this shows that using conservative numbers is always good as, despite the iron price slipping, my earlier estimations were based on sufficiently low numbers. This mid-case scenario gives an implied valuation of £25.5m. However, I have revised my high case valuation down (in light of lower iron prices) from £0.18/t to £0.14/t for now, as comparable companies have been their share prices fall. The reality is that, even at this level (which is still lower than most), the implied iron valuation is £29.75m, which is materially above the current share price. This completely discounts the vanadium potential and the cash attributed to Bushveld's 52% share of ASX listed Lemur Resources. There is also a scalable tin play as part of the assets, and the Imaloto coal project, although I still attribute negligible to this, given the numbers were based on higher than present thermal coal prices.

That said, some value needs to be attributable to Lemur. The company is looking to develop the coal project, and is seeking a partner to progress it, having not being impeded by a failed legal claim earlier in the year. The ASX market has failed to attribute value to this asset in years though, so giving the coal asset any value (as an investor) would be misplaced. Lemur is seeking either greenfield acquisitions within Southern Africa, or near-term cash-flow projects. Ordinarily I wouldn't have been convinced that Bushveld needs more projects, but given that Lemur remains a separate entity, it would be acceptable, especially if they can grow the market cap of Lemur, such that a valuation can be based on the actual market value of the shares. That said, Bushveld are not awash with cash given that the majority of warrants and the Darwin funding facility are preferable at higher share prices. I estimate that Bushveld's current cash balance lies in between £0.3m and £0.6m.

This follows an agreement with Darwin (a name dreaded in the equity markets) in March. The agreement effectively means Darwin are given 50 million shares at 5.7p, who hold them without the right to trade them. Bushveld instruct Darwin to sell the shares into the market as and when they require cash, thereby raising funds at their own discretion. The scheme is fast and gives Bushveld a high degree of control, but ultimately it has backfired given the negative sentiment associated with the company. Darwin is rewarded based on commissions - the higher the share price, the more cash Bushveld gets, and the more commission that Darwin gets. There is thus a joint incentive to drive the share price higher. Combined with over £1m in outstanding warrants at 5p, there is every incentive for the board to want to drive the share price higher. There is ample cash, at the right share price. The Darwin scheme is fully accessible, but it requires shares to be sold into the market, so it not desirable in a bear market. Bushveld has, to date, drawn over £300k from the Darwin scheme through the sale of 7.5m shares. Without doubt, the company will be looking to appease the market with good news during Q3 in order to open up funding options.

Back to Lemur, there is a separate (less obvious) option available. The company is valued on the Australian markets at just £2.56m, yet it has £8.71m in cash. It would be possible for Lemur to announce a special dividend to release £6m+ in cash in order to reward shareholders who have largely seen their cash dwindle away. There is little doubt that a special dividend would be accepted by the remaining shareholders as it would enable them to realise value, whilst also enabling them to have access to the coal play. If £6m was released, then Bushveld would net circa £3m, which would be sufficient to fund their operations for a considerable period of time. The downside is that it would see the value-accruing ability of Lemur diminished, so this is not an obvious option. On the other hand, any cash influx into Bushveld would probably lead to a material price rise, which would unlock the warrants or Darwin facility further. That said, the focus has always been on obtaining project level financing and the involvement of CREC would no doubt alleviate those pressures. Results from the pyrometallurgy test work should be expected during H2.

Bushveld's existing expected vanadium resource (1), plus the potential vanadium resources (1a & 1b)
would sit on par with other world class projects. The vanadium resource could either be produced
directly with iron and titanium credits, or through pig iron production with a V2O5 product
The other notable news released during the period related to Bushveld undergoing due diligence, and thereafter possibly acquiring an 87% share of, the Zaaiplats tin tailings dump. This asset would enable a low cost entry point to tin production, that would sit well alongside the company's existing Mokopane tin assets. However, it would cost circa £550k, with approximately £336k of that payable in shares if necessary. This has led to the tin scoping study being delayed until either late Q3 or Q4 2014, but should improve the economics if pursued. If not pursued, the scoping study should be ready earlier. The due diligence deadline was been extended through to June. One improvement that could be made throughout Bushveld is to tone back timing expectations. It is far better to underpromise and overdeliver than vice versa. Importantly, it is a near certainty that the key scoping studies will be released over the course of the next few months.

Bushveld therefore presents a diversified opportunity. Whilst I attribute nil value to the coal asset at the current point in time (as before), the iron asset at least covers the current share price with the tin and vanadium upside essentially chucked in for free. These two latter platforms carry economic value that should be quantified during the remainder of the year through scoping studies. Scoping studies and resource estimates are also due for the phosphate resource on the iron project, and this, combined with the results from the CREC test work, should see interest re-build in Bushveld during H2. The company's MOU with CREC positions it well despite the lacklustre iron price, and that should be appreciated by the market as further progress is made. The board has also hinted that the tin platform could be floated on AIM down the line, once more progress towards production has been made. The current market cap remains well backed by the underlying assets of the group, and at 3.85p, the company still has access to ongoing cash through the Darwin mechanism, without any dilution. Combined with the potential for high-impact news flow during H2, I have retained my Buy stance on the Company.

UPDATE (01/08/14) - In light of continued weakness in iron ore prices, I have cut the stake in Bushveld to one slot, meaning that the average site price for the remaining stake rises to 4.83p.
UPDATE (23/10/14) - Finally the share price appears to have reached a short-term base and a trade that recently went through matched the exact stake of Darwin. The site average therefore falls to 3.805p. Any news on the cancellation of Darwin would go down well and the funds unlocked would provide a bridge towards realising value from the Lemur holding. However, I have reduced expectations for now, pending a resolution to the financial situation, hence the target is breakeven.
UPDATE 2 (23/10/14) - As per the previous update, the 3.805p level was surprisingly breached and I have closed out the positions at prices of 3.81p and 3.86p for a marginal profit. The rationale behind selling is that I am looking to see clarification regarding methods of raising cash (Lemur, Darwin, Equity) before re-entering a position


  1. Thanks yet again for another great piece of research.

  2. Great analysis, as usual, many thanks El1ite.

  3. What's your thoughts around the delays announced yesterday? The 3.75p line unfortunately will be a while from being seen again.

    1. Hi there,

      Whilst the delays are obviously disappointing and sector sentiment remains weak, the assets are still in place. In particular, the scoping studies due for release this quarter are likely to show projects with large IRRs, which could re-attract investors to the company.

      The 3p-3.25p band should form new support in the interim


  4. Elite, need update in light of all the updates. There's a boulder on the share price!

    1. Appreciate that there have been positive updates. However, need a conclusion to the current funding situation before covering again, whether that be through a Lemur takeover/special dividend etc. That is likely to be what is capping the share price along with iron ore weakness, hence the phosphate scoping study will be very important.

      Hope that helps - will re-cover when the situation is a little clearer. I suspect that the management have analysed the methods of cash-raising at their disposal and are probably using Darwin to bridge requirements until there is a more permanent conclusion. The tin scoping study would likely have a material impact of the share price, even if the above are still doubts


  5. Hi El1te,

    Any guess about the rise today?


    1. I'd imagine: 25m share trade (possible Darwin signal) -> some anticipation that Darwin may have exited -> move off short-term oversold lows -> momentum gained. Share price held up well towards the end of the day. If Darwin have exited, that would be good news


    2. You were right El1te, Darwin sold 25m shares, but SP rose 30% yesterday, SP should have dropped if somebody sold 25m shares? How does it work? Many thanks.

    3. Asked to early RIVERRIDGE LTD bought those shares.

  6. New website and stock price looks like it is heading up to 4.5p this morning

  7. El1te - any view on the placing arrangement at 3p as well as Darwin being out of the picture. No more dripping pressure on the SP. Should this allow it to move north in the short term if volume and news pick up.

    1. Hi - could you email me at theel1tetrader@outlook.com using your own email or an anonymous account? Easier to talk at length without review page lengths becoming longer and longer