Bushveld Minerals (BMN) continues to buck the trend among resources stocks, after investors this week bought into a robust third-quarter trading update from the miner. Chief among the report’s highlights was news that the third phase of expansion at the group’s 74 per cent-owned Vametco mine has now started, and that nameplate capacity is set to expand by a third to 5,000 metric tonnes (mt) of vanadium a year.
Tightening market conditions for the steel strengthening additive are also helping. In the three months to September, the average ferrovanadium price climbed by 24 per cent quarter on quarter to $85.80 (£66) per kilo. The jump more than offset the impact of industrial action and unplanned maintenance in the period, which caused a 15 per cent drop in output and has led Bushveld to downgrade full-year forecasts by 10 per cent to 2,600-2,650mt.
Arguably, output could fall further and sentiment towards Bushveld shares would remain buoyant. According to Metal Bulletin, the ferrovanadium price averaged $114 per kilogram (kg) in October, as shortages of the material have been exacerbated by the market’s newfound inflexibility.
Historically, when prices rose dramatically, buyers could count on Chinese slag processors to sell vanadium as a by-product. But much of that secondary output has been shuttered, just as China has raised its rebar standards for steel manufacturing – a move that increases demand for vanadium.
Naturally, should Chinese steel demand drop or contract, then it's altogether possible that vanadium prices could sharply decline. According to Katusa Research, as much as 40 per cent of global vanadium demand correlates to the Chinese rebar market.
SP Angel, Bushveld’s broker, now sees declining vanadium inventories and market tightness as a potential threat to global construction growth. “We are struggling to see how the market may supply demand for vanadium in the next two years and we feel vanadium prices should settle at a higher price level than previously envisaged for the longer term,” the group’s analysts wrote last week. After lifting their long-term vanadium price and production forecast, those analysts also raised their price target for the stock to 87p – which also applies a slim 8 per cent discount rate to Bushveld’s equity.
Another doubling in the shares would be in keeping with Bushveld’s recent ascent: the stock has quintupled this year, after a rise of nearly 250 per cent in 2017.
During that time, one of our major reservations about the company has had nothing to do with the vanadium market. Specifically, and considering the group’s push to explore the potential for vanadium’s role in energy storage, we have failed to understand its parallel strategy to develop a $200m thermal coal project in Madagascar, via its stake in Lemur Holdings.
That may be about to change. Asked whether its shares might attract a premium if it dropped its exposure to coal, the company told us the following: “Whilst continuing to support Lemur Coal with its power and mine BFSs [bankable feasibility studies] and its funding discussions ahead of construction, Bushveld sees its long-term relationship with Lemur Coal as non-core.” The group added that it would support Lemur in its efforts to become an independent company.
