The last time I covered the Bushveld Minerals (LSE: BMN) share price, I concluded the company might be an attractive addition to risk-tolerant investors’ portfolios. The reason? Its cash generation, strong balance sheet and growth potential.
That was more than a month ago. Since then, the enterprise has continued to push ahead with its growth and expansion plans, and we’ve also had a positive trading update too.
Bushveld’s figures for the first half of 2019 showed progress on all fronts. Even though the ferrovanadium alloy price fell during the first six months of the year, from $65.5 to $56.3, the firm managed to post improved profit and cash flow numbers. Profit after tax rose $2.3m to $30.8m, and free cash flow from operations came in at $23.3m, up from $16.4m at the same point last year.
Bushveld’s cash balance also increased. At the end of its first half, the company had $66m in the bank.
Going forward, management wants to increase the company’s output. It’s targeting vanadium production of 3,400m tonnes per annum from Bushveld’s Vametco operation, up from the current 2019 guidance of 2,800-2,900 mtV. The long term production target is currently 4,200 mtV.
To complement this growth, Bushveld is currently in the process of acquiring another vanadium producer, Vanchem. Management had agreed to pay $68m for this business, funded mostly with cash resources. However, due to market conditions, they’ve managed to push the price tag down to below $54m.
This reveals quite a lot about management, in my opinion. All too often small- and mid-cap mining companies are happy to throw good money after bad and waste shareholder funds to buy up growth. The fact Bushveld’s management is trying to push the cost of doing business down tells me they’re trying to put investors, and the company, first.
The current plan is to spend $45m improving the assets of Vanchem to take production up to 4,200 mtV per annum, putting the group on track to hit its long-term production target of 8,400 mtV per annum.
Double or nothing
It looks to me as if Bushveld has tremendous long-term potential, but I’m not so sure about the company’s valuation. At the time of writing, analyst estimates have the stock trading at a forward P/E at 15, which is a bit on the expensive side for a mid-cap mining business.
However, considering the fact management is planning to double production over the next few years, I think there’s a good chance earnings per share could double as well. This implies the stock could double from current levels if its valuation remains constant as profits surge.
That said, as with all mining companies, there’s a risk Bushveld will run into operational problems and won’t hit its growth targets. Considering what management has already been able to achieve, I think the chances of this are low, although there’s always going to be a risk of failure in any mining operation — it’s just part of the business.
If this worries you, it might be better to avoid Bushveld and seek out safe growth stocks instead.
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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.