Bushveld Minerals (BMN LN) 27.8p, £300m – Strong vanadium prices combine with weak South African rand to lift earnings expectations for Vametco
BUY – Target raised to 33.6p (from 25p)

• Bushveld Minerals have the luck of the Irish, which is an old mining expression from when Irish miners made their fortunes in the gold rush in the US in the early 19th century.
• Bushveld appear to share their good fortune with ongoing strength in vanadium prices combining with dramatic weakening in the South African rand.
• Ferro vanadium prices are a staggering $80-82/kg for 78% FeV in Europe and $80-85/kg fob in China according to the Metal Bulletin. Bloomberg report a similarish $78.80/kg for FeV 80% fob China.
Scenario 1:
• If we take the average of $66/kg through the last six months and then assume say $80/kg for the rest of the year and then do the same with the US$:ZAR currency rate we get:
• EBITDA = ~US$165m
• Attributable EBITDA = ~US$97m.
• This lifts our valuation to 34p.5/s assuming the US$:ZAR remains the same and that vanadium prices remain at our longer term assumption of US$35/kg through 2019 and beyond.
• Scenario 2:
• Valuation to 33.6p/s
• As analysts we generally try to more cautious than this in our forecasting as we would prefer to be upgrading our favorite stocks than downgrading them.
• If we assume the current vanadium price through the first seven-months of the year $66/kg is repeated through the second half and remain with the spot South African rand rate then we get:
• EBITDA = ~US$146m
• Attributable EBITDA ~US$86m
Scenario 3:
• There may be a good case for lifting our longer term vanadium price forecast based on the strength of vanadium prices so far this year.
• Vanadium prices have averaged around ~US$66/kg over the past six months and may well remain elevated in future years though restarting and new supply, such as that planned by ‘Energy Fuels’ is being attracted into the market by higher price levels.
• If we assume US$66/kg for the year + a longer-term Ferro-vanadium price of US$45/kg vs our current US$35/kg assumption combined with the current US$:ZAR rate then this takes our NPV-based valuation to 51p/s

Conclusion: Vametco is seeing extraordinary growth in its cash flow generation from much higher than anticipated ferro-vanadium prices which is further supported by a significantly weaker South African rand.
The rand is being driven by the general flow of funds back into the US dollar and ongoing bad press relating to land confiscations from white farmers without compensation in South Africa.
In valuation terms, we are raising our target price to 33.6p. This may well prove to be a base case for Bushveld’s share of the Vametco cash flow with potential for a significantly higher valuation if ferro-vanadium prices can find a higher long-term base.