Ferro-Alloy Resources [LON:FAR], the dual London- and Astana-listed mining and refinery company recently published its financial results for the year ended 31st December 2022.
The Guernsey-based company that is developing the Balasausqandiq (say that five times in succession quickly) vanadium deposit in southern Kazakhstan reported a loss of USD6.27m, up 32.6% from the year before, which was more than market expectations. The company blamed its widening losses on difficulties it had importing raw materials during the year, and an increase in the costs of reagents and fuel as a result of the War in Ukraine.
The company increased cash in the bank over the year by 54% to USD4.33m.
During the year Ferro-Alloy raised USD10m in a placement. The miner deployed the funds on its feasibility study on Balasausqandiq. Nick Bridgen, Ferro-Alloy Resources’ chief executive explained that initially the company reported a USD3.3m loss in January, however this was nosed up by USD1m as a result of a combination of negative pricing on contracts; a fall in the price of vanadium; USD160,000 of post year end stock provisions made against slow moving and obsolete stock lines held by the group at the year-end; writing off equipment that could be repaired, resold and had no future use; administrative expenses on its trading account and foreign exchange losses.
Ferro-Alloy Resources aboard the transition train
The company’s management, which boasts former treasurer to the Conservative Party and former CEO of Xstrata, South African mining executive Mick Davies, as non-executive chairman, believes it is on the right track, trying to develop the Balasausqandiq vanadium deposit as the world transitions from fossil fuels to low carbon alternatives, like vanadium batteries.
Davies has invested around USD15.5m in Ferro-Alloy through the Vision Blue vehicle, and has USD32.5m of options outstanding, callable at various phases of the project’s development. This includes a USD2.5m option to subscribe within two months of announcement of feasibility study for Phase One of the Balasausqandiq project for convertible loan notes.
The company currently operates a plant that processes vanadium concentrates brought in from the area and was recently expanded by 1,000 square metres so it could set up lines that would recover vanadium from catalysts used to demetal oil during the refining process. The processing plant, established on the site of a former pilot project, was commissioned to generate cashflow whilst the mining company is developing Balasausqandiq.
However, the plant had issues last year in getting hold of raw materials, but the company made a number of operational amendments in the year to lessen the impact of a strained supply chain, primarily in order to recover more value per tonne of raw materials. This included integrating a new resin to potentially double the amount of molybdenum and adding a third and fourth roaster to increase the maximum throughput of the plant and start recovering nickel from wastes.
The company also experimented with its chemistry, installing new lines that would covert ammonium metavanadate to vanadium pentoxide which it can sell for a higher price to commodity traders. The company also tried to make its fuel consumption more efficient, converting the roaster from diesel-fuelling to gas.
Diversifying vanadium supply contracts
Ferro-Alloy also increased and diversified the number of vanadium supply contracts in order to minimise the risk of failure of delivery of concentrates by any one supplier. As a fillip, Ferro-Allow secured funding from the Kazakh government to explore the potential of manufacturing vanadium oxides that could subsequently be used as electrolytes in vanadium redox flow batteries. Bridgen said: “The existing operation has been impacted by supply difficulties during 2022 but the plant is now fully developed and, with concentrates in good supply, we expect the existing plant to operate profitably from now on, producing a meaningful contribution to the development of the Balasausqandiq project.”
Vanadium is a very useful metal, said Bridgen in an investor’s presentation, it is primarily used in the steel industry as a micro-alloy to reinforce steel currently, “…but what we’re most excited about is the use of the metal in vanadium redox flow batteries and energy storage.” Originally identified in 1801, researchers have only recently started to realize the potential it could have in the manufacture of batteries, due to the mineral’s tremendous stability and endurance.
According to Vanitec, the vanadium sub-sector’s industry trade body, global vanadium consumption peaked just short of 120,000 tonnes in 2021. This fell back marginally last year. However, although the lion’s share is still used by the steel industry, the demand from battery producers and the energy storage sub-sector has been consistently growing over the last three years. Last year energy storage overtook demand from titanium producers and the chemicals industry (the other two significant users) to just over 5,000 tonnes.
Balasausqandiq deposit: a multi-resource asset
The Balasausqandiq deposit is a very large black-shale deposit containing vanadium and valuable by-products including uranium, molybdenum, aluminium, rare earth metals and carbon. The company recently released a Mineral Resource Estimate (MRE) for Balasausqandiq, which indicated the project had 32.9 million tonnes of vanadium at its Ore-Body 1 site. This would represent over 200,000 tonnes of vanadium pentoxide in situ, a 35.6% increase on the miners 2018 estimate. The company’s MRE also indicated that the resource could be economically exploited through an open pit operation and would have a selling price of USD9.82/lb for a 98% purity vanadium pentoxide flake.
The company is also looking at developing a carbon-silica concentrate from the site which it hopes will be suitable for making tyres as substitute for carbon black. The company said: “Based on substitution price, carbon could be a co-product of value greater than vanadium.”
“Balasausqandiq, at 96% of the NAV of the company is really the reason why we’re in this business and why we’re here,” said Bridgen.
Ferro-Alloy believes that the Balasausqandiq deposit is unique in that the geological composition of the vanadium is unlike other global deposits and can be stripped out with lower costs and greater speed than other comparable global vanadium deposits. The firm is targeting production of 10 million tonnes a year of ore, yielding 55,000 tonnes of vanadium pentoxide annually.
Vanadium is not a rare metal – in fact it is one of the commonest on earth. It usually is found in iron ore deposits, however in that form, it is very hard and expensive to extract – taking large amounts of energy and time to separate out the metal. “Our vanadium is different,” said Bridgen, “in that it is sedimentary in nature. Our ore doesn’t need roasting [at extremely high temperatures of 1,200 to 1,300 degrees Centigrade] and we can extract it with a relatively simple pressure-acid leach. This means it is a less capital intensive resource to produce [than other sources].”
Bridgen added that at Balasausqandiq, Ferro-Alloy can mine the deposit on an open pit basis and the deposit is close to useful infrastructure, including an East-West main road, a rail line and a main power line.
Ferro-Alloy Resources management cautious on over-supply
Management wants to take it nice and slow; not over-supplying a nascent market and building on a sustainable modular basis, largely from funds generated from its processing operations. The company says that a two-step development is currently planned, starting at 1 million tonnes (mtpa) a year, and then ramping up to 4mpta. On production of 1mtpa, the company believes that it can refine around 5,600 tonnes of vanadium oxide a year and on ramp up to 4mpta would increase production by a further 16,800 tonnes, which it believes would remain less than the predicted growth of the market. Although Ferro-Alloy is taking it steady, the company anticipates financing for Phase One to close by 1Q24, with Phase One commissioning complete by 4Q25 and Phase Two up-and-running by 2Q28.
Equity for funding for Phase One is expected to be by the cash flows arising from the existing refinery operation and by debt plus limited equity issues if required. Vision Blue Resources has options to subscribe for additional USD32.5m equity or convertible loan notes and the current intention is that funding of Phase Two will be substantially from operating earnings of Phase One, plus limited debt.
Broker, ShoreCap has Ferro-Alloy under coverage. Sheldon Modeland, an analyst for ShoreCap said: “[The year came in at] less than expected. As previously highlighted, FY22 production was severely disrupted due to delays in the delivery of concentrates to FAR’s secondary processing plant, resulting in reduced output. […] Net loss for the period […] was greater than expected due to difficulties importing raw materials and increased costs of reagents and fuel […] To mitigate against future disruptions FAR has signed additional concentrate delivery contracts with new suppliers. With a steady supply of concentrates we expect the plant to be profitable for the remainder of FY23F and beyond.”
Modeland continued: “[We believe Ferro-Alloy is] undervalued – given primary production outlook. Our post-tax FY24F NPV (10% discount rate) valuation is GBP601m or 81p per share (fully-diluted and excluding by-products), assuming FAR successfully finances and executes its primary operation to steady state production of 22,400 tonnes of vanadium pentoxide by FY30F. Our valuation assumes FAR’s strategic partner, Vision Blue Resources, will exercise all its options and convertible notes to partially fund Phase One and assume the rest of the financing, including Phase Two will be satisfied through a debt facility.”
The company opened trading today (11 May) at 10.55p, offering a year-to-date return of -13%, and a one-year return of -52%. The shares have ranged between 9p and 22p over 52-weeks and the company has a market capitalisation of GBP46.88m.
The feasibility study for Stage One of the Balasausqandiq project is expected to be completed in the final quarter of 2023 with Stage Two to follow in 2024. The company reported that work is progressing well and continues to support or exceed the results of previous company test work that was disclosed in the 2018 Competent Persons Report, which indicated a transformative vanadium project producing some 22,400 tonnes of vanadium pentoxide per annum (over 10% of current world supply), with an operating margin of almost 80% and a project Net Present Value of around USD2bn with relatively modest capital expenditure.
Davis said: “”The management team has acted to address external pressures related to the constrained raw material supply which impacted financial results during the year. Another successful capital raise in September, followed by the endorsement of the recent mineral resource estimate, enables the company to continue its journey towards becoming an important global vanadium producer. At the same time, it is encouraging to see continuing growth in demand for vanadium serving both the growing stainless steel and battery market segments.”
The risk of over-concentration
The company’s operations are all located at the Balasausqandiq deposit in Kyzylordinskoye Oblast in the South of Kazakhstan. Although it’s good to have operations concentrated, there is an inherent risk in over-concentration – especially taking account of the past year’s events, as operating in an unstable region has its drawbacks.
Also, the company is betting on the success of vanadium and vanadium redox flow batteries in the transition story. Although the processing plant does refine and extract a range of useful materials, the main focus and the paydirt of the project is vanadium, the utility of which is still to proof and therefore it is hard to predict future demand for the metal, especially seeing that alternatives to vanadium redox flow batteries, like lithium-ion batteries are cheaper (up-front) to produce en masse and have greater applications. That said the lifetimes of lithium-ion and vanadium redox flow batteries are vastly different, with vanadium – albeit not yet having a mass consumer use – being longer-lasting than the lithium-ion alternative. Moreover, vanadium is non-flammable and can operate at any temperature. Lithium is known to be flammable and can catch fire at relatively lower temperatures and given the relative short life of lithium-ion batteries, vanadium, over the longer term, might be a cheaper alternative for utility and logistics customers.
Bridgewise rates Ferro-Alloy as ‘Underperform’. The analyst said: “Ferro-Alloy Resources has published unimpressive financial results, particularly emphasizing the shortcoming in Return on Equity Ratio (ROE) and EBITDA, Lease Adjusted, which were significantly weaker compared to its peers in the Materials sector. Additionally, being part of the Metals and Mining industry also exposes the company to additional risks like increased awareness of environmental, social and governance (ESG) responsibilities and the promotion of regulations against polluting industries, mining costs, geopolitical risks, and a decrease in demand as a result of recession and economic slowdown. Analysis of past performance in the Materials sector reveals a correlation of 60% and 22% between the results of income statement and cash flow in generating excess returns, thereby further lowering the chances of the company’s stock outperforming its peers.”
On ESG, the company noted that all the constituents of the ore and recycling operations can be sold as products and its operations will not disturb any existing arable land or settlement. The company added that the whole operation would produce less carbon dioxide emissions than other primary vanadium suppliers.
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