South African vanadium producer Bushveld Minerals Limited (LSE: BMN) was the top-performing stock on the AIM market last year. The Bushveld share price rose by 350% in 2018, delivering some pretty impressive profits for shareholders.
The only problem is that the shares have halved so far this year, falling from about 40p to just 21p, at the time of writing.
The shares have been hit by a big fall in the price of vanadium. But operational progress seems good and the group’s financial performance looks promising to me.
I think this stock could offer decent value at current levels.
Vanadium – the next big thing?
Vanadium is a metal that’s used to make steel stronger. Steelmaking forms the bulk of demand for this material at the moment. However, vanadium can also be used to make a type of battery that could soon enjoy a massive surge in demand.
Vanadium redox flow batteries offer qualities that are attractive for energy storage.
Unlike lithium-ion batteries (the kind used in electric vehicles), vanadium batteries can be repeatedly discharged to 0% without damage. They can be made to almost any capacity simply by making them larger. And they can be charged and discharged many more times than other types of rechargeable battery.
Of course, there are some downsides. Vanadium flow batteries are very large and heavy compared to other types of battery. They also have large tanks of liquid electrolyte, so are only suitable for stationary applications. Vanadium is also toxic.
Despite these limitations, vanadium flow batteries appear to be well-suited for use with renewable energy sources such as solar and wind.
Bushveld Minerals has acquired and expanded its vanadium production facilities in South Africa with the aim of becoming a significant player in this market, if it takes off.
So far, so good
Last year saw Bushveld deliver its first year of profitable production. The group generated an operating profit of $95m on sales of $193m, giving an impressive 49.5% operating margin.
However, I don’t expect this profitability to be sustained.
The price of vanadium spiked massively last year, tripling between January and November. This price spike has now reversed and vanadium prices today are roughly 25% of November’s highs.
Bushveld says that it’s still generating positive cash flow at current vanadium prices, which sounds good to me. But I’d like to see the firm’s half-year accounts to see exactly how profitable it is with prices at more normal levels.
Outlook: improving?
At this stage, we don’t know whether vanadium redox flow batteries will become a popular choice or remain a niche technology. But Bushveld has a steady business supplying steelmakers and appears to be well positioned for growth, with a healthy balance sheet.
Broker forecasts for the current year suggest that Bushveld will generate after-tax earnings of about 2.5 cents per share, or around $23m. That puts the stock on a 2019 forecast price-to-earnings ratio of 10, with higher profits expected in 2020.
I reckon that Bushveld could offer good value at this level. For investors with a suitable risk appetite, I’d rate the shares as a speculative buy.