Bushveld Minerals (LSE: BMN) saw its share price rise nearly 500% in 2018, but the company hasn’t been able to repeat this performance in 2019. At the time of writing, the stock has fallen 45% year-to-date.
Following this decline, the BMN share price looks cheap. However, before you buy in, there are several things you should know about this business and its potential.
Bushveld is a dedicated producer of vanadium, a rare-earth metal that is used in the aerospace and automotive industries. Last year, the price of the metal hit a 13-year high, which ignited a surge of interest in companies with exposure to the commodity. Bushveld is one of the few publicly traded vanadium producers in the world, so naturally, investors flocked to the shares.
Thanks to this price spike, and production growth, Bushveld reported a net profit of $30m or three cents per share for 2018.
The small-cap miner is currently supplying approximately 3,000 million tonnes per annum, 3% of the global vanadium market. It plans to increase production to more than 8,400 mtV within the next five years taking its share of the market to around 8.4%. If the company can meet this output target, sales should expand substantially from current levels.
City analysts are also expecting the company to profit from the rising vanadium price. Reports suggest that raw vanadium prices should reach $45 per kilo by 2020, up from the current price of $36 per kilo.
It looks as if the only way is up for the BMN share price over the next few years if the company can meet its growth targets. However, as with any commodity producer, it is best to take these growth forecasts with a pinch of salt. There is just so much that can go wrong as Sirius Minerals shareholders have discovered.
Mining projects are usually delayed and come in above budget. Meanwhile, commodity prices are volatile and difficult to predict. Rising prices typically lead to increased sector output, which drives down prices and profits. That’s just how the free market works.
To try and offset some of these risks, management has diversified the business into new areas such as vanadium electrolyte batteries, and tin mining. These projects are still in their early stages, but they are progressing. According to the firm’s second-quarter trading update, Bushveld has produced its first batch of electrolyte. This has now been sent for testing at various battery producers. The group has also “delivered our first vanadium battery rental product.”
Bushveld certainly looks to be an exciting business operating with plenty of potential for growth over the next few years. Most importantly, the company is also self-sustaining.
Its second-quarter trading update reports that the business’s mining arm, Vametco, is cash flow positive providing vital cash to support the rest of the business. On top of this, the company had $44m of net cash on the balance sheet at the end of 2018 and no debt, giving the group plenty of financial flexibility.
The bottom line
So overall, if you are thinking about buying the BMN share price, it is worth taking into consideration the risks that face the business as well as its growth prospects. In my opinion, the firm’s cash generation and strong balance sheet mitigate the threats to the business model here.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.