VSA Morning Miner
This Morning’s News
Ferro Alloy Resources (LON:FAR)
Ferro Alloy Resources (LON:FAR) has announced full year results for 2020 along with a further round of investment from strategic investor Vision Blue Resources (VBR) which has been brought forward in order to accelerate development of FAR’s main development project as it seeks to become the leading and lowest cost vanadium producer in the world.
VBR has now invested US$10.1m into FAR since the initial agreement announced in March of this year of which US$7m is announced today in the form of US$2.8m at 9p/sh. and US$4.2m as convertible loan notes equivalent to 33.5m shares which implies a price of approximately 12.5p/sh. VBR retains the right to invest a further US$2m at these entry price levels, which will likely be triggered after the completion of the flagship Balasausqandiq project, Feasibility Study. VBR then has the right to invest up to US$30m in tranches at higher share prices, demonstrating a clear marker for rerating. The announcement of the strategic investment has driven impressive share price performance YTD, up 298%, which makes the stock the top performing mining share on the LSE.
The transformational nature of the investment, technical know-how and personnel which VBR brings to FAR means that the full year results also announced today are somewhat moot with many of the questions which these results raise answered by the provision of these three items enabling the completion of the expansion and commissioning of the secondary processing facility as well as the necessary work to complete an expanded FS on the main project. Indeed, the long-awaited high voltage power connection has now been made with first delivered power expected next month while plant throughput has been increased to a multiple of the 20tpm realised in 2020.
Despite the challenges associated with constrained resources and COVID-19 FAR achieved a 56% YoY increase in production to 237t which offset a COVID-19 related decline in pricing leading to revenue of US$2.4m, up 33% YoY. However, the increase in output required the purchase of additional raw material and COGS were 19% higher YoY at US$3.8m whilst the nature of falling prices through late 2019 and H1 2020 combined with several months lead time for processing meant that procurement prices were above final sale prices. This side effect was peculiar to the price falls associated with the correction from record highs the previous year and COVID-19. SG&A was US$2.2m, up 22% YoY meaning that overall, the company’s net loss was US$3.94m compared to US$3.3m the prior year. The impact of raw material purchases on earnings performance is highlighted by net operating cashflow where losses narrowed from US$4.5m to US$1.3m in 2020 and the impact of working capital adjusted for.
Management’s decision to continue operations throughout this challenging period has been entirely vindicated as the plant acted in effect as a pilot plant for bulk sampling and proof of FAR’s ability to produce high quality vanadium products. The metallurgical data provided by the plant substantially derisked the investment decision for VBR and with the investment the company now has the resources to achieve its original aim of having a profitable secondary processing operation to provide cashflow during the development of the main project. Furthermore, with sufficient working capital we expect FAR to secure improved terms when purchasing raw materials supported by tailwinds of rising prices reversing the above effects of product procurement in the company’s favour. V2O5 prices have increased approximately 20% YTD as end markets have reopened although we note that supply chain bottlenecks are likely putting temporary upwards pressure on pricing to some extent.
Given the constraint on resources capex in 2020 was just US$1.1m, down from US$2.3m in the prior year. Nonetheless FAR achieved some significant milestones with the installation of a new pyrometallurgical processing line enabling a diversification of raw materials which can be procured and processed as well as expanding plant capacity. FAR also adapted its flowsheet to be able to produce higher value V205 rather than intermediary products and designed a process for producing high quality electrolyte suitable for use in VFB’s; the growth area for vanadium which underpins VBR’s wider investment case. Lastly, FAR also commissioned the production of calcium molybdate, a high value by-product which can be recovered from the vanadium bearing raw materials the company is currently purchasing. Year end cash was US$0.7m with investment through the year of US$2.6m in bonds and equity although the latest announcement highlights that the balance sheet has substantially strengthened since year end.
The strengthening of the current operations is likely to have a limited impact on H1 2021 financial performance given that optimisation has largely taken place in Q2 2021. However, VBR’s investment is transformational and the focus for the market should be aligned with that of VBR; on the main project where a clear pathway to development is now visible. We expect this to unlock significant value, with the project forming the bulk of our target valuation.
We reiterate our Buy recommendation and £1.70/sh. Target price.
Ares Strategic Mining (ARS CN)#
Ares Strategic Mining (ARS CN) has provided a positive update with the move to the next phase of exploration at the second mine site within the wider Spor Mountain license area. The company has received permits for drilling and trenching which will enable the company to build on recent geophysics surveys as well as mapping and sampling. Although historic workings at Bell Hill provide clear evidence for the presence of commercial quantities of fluorspar the recent work has demonstrated exciting additional potential mineralisation on a much larger scale. The prevalence of fluorspar across the license area has enabled previous operators to focus simply on outcropping mineralised pipes for mining yet ARS recent work demonstrates significant potential beyond this. Trenching will enable the company to define drilling target locations to test geophysical anomalies as well as define the near surface dimensions of mineralised zones under shallow cover.
This work is underway in tandem with the development of the industrial site whilst long lead items await delivery and railway spurs are developed. This exploration work will enable a mine plan to be designed for Bell Hill unlocking the larger scale production we have modelled in our projections compared to the initial mine plan that was released by the company which does not include feedstock for the lumps plant. ARS is therefore making strong progress towards its development ambitions which will provide vital critical minerals into the import reliant US market.
We reiterate our Buy recommendation and target price of C$2.17/sh.
Oliver O'Donnell, CFA, Natural Resources Analyst | T: +44 (0)20 3617 5180 | E: oodonnell@vsacapital.com
Paul Renken, Senior Geologist | T: +44 (0)20 3005 5011 | E: prenken@vsacapital.com
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