Unloved Ironveld (LSE:IRON) is on the cusp of a potentially lucrative transformation. Yesterday the company announced a £2.1million placement at 2p a share. This on its own will not be enough to see Ironveld through to production at its High Purity Iron, Vanadium and Titanium project in South Africa. However, within the RNS there are some tantalizing clues that that particular funding circle could be about to squared.
The key paragraph reads:
“The Company is presently engaged in discussions with a number of potential providers of project finance including the Industrial Development Corporation (“IDC”), who had previously agreed a debt and equity package at the Project level for the 15MW smelter. The Board anticipates that these discussions will lead to an offer to provide funding to enable the purchase and refurbishment of the 7.5 MW Smelting Plant. The Company intends to put down R8.8m (c.£0.5 m) of the net proceeds as a refundable deposit towards the Potential Acquisition and will at that time seek to reach agreement on the terms of certain agreements relating to the Potential Acquisition including toll smelting, operating for own account with a rental or royalty fee, all subject to obtaining the necessary project finance to fund the Potential Acquisition.”
The “Potential Acquisition” Ironveld refers to is its planned purchase of a readymade 7.5MW smelter, which would enable the company to commence early production of its High Purity Iron, Vanadium and Titanium. If Ironveld is able to execute this plan, the returns for the company could be both short term and substantial.
High Purity Iron powder (“HPI powder”) is quite different from normal iron. It is an ingredient used in high tech production, such as the manufacture of specialised automotive components, magnetic materials and next generation 3D metal printing. Current global production of HPI powder is running at 90-95% capacity, with strong demand growth forecast to continue over the coming years. 3D metal printing alone is currently growing at about 30%pa. Reflecting this strength in the market, HPI powder presently sells for about $1,350 a ton and yields roughly a 40% net profit margin. For a miner, this is an excellent market to be in.
The only question for Ironveld over the last 12 months has been whether or not the company would be able to afford to bring its mine into production?
Although yesterday’s placing hasn’t fully addressed the funding gap Ironveld needs to fill, there are two strong hints in the paragraph quoted above that it could be about to secure a deal to achieve this. The IDC, a South African government-backed investment fund, looks set to step in.
This first indicator of this is Ironveld’s reminder to the market that the IDC previously agreed to provide a debt and equity-funding package for the purchase of a 15 MW smelting plant. That acquisition didn’t go ahead because the second funding partner in the transaction, another publicly owned South African organisation, pulled out because of some political changes. Despite this, the IDC has continued to support Ironveld and the directors are clearly confident that it will reaffirm its previous commitment. Since the new purchase is for a 7.5 MW smelting plant (obviously half the size of the previous one) it stands to reason that the IDC should be able to provide sufficient funding to enable the purchase to complete.
This point dovetails nicely into the second clue. Ironveld “intends to put down c.£0.5m of the net proceeds (of the placement) as a refundable deposit against the Potential acquisition”. This is very smart business from the board. The company will take an active step towards completing the purchase of the 7.5 MW smelting plant, while at the same time safeguarding the business in the event that the IDC funding doesn’t come through. That the board has negotiated a refundable deposit also suggests the seller of the smelting plant is relaxed about the transaction completing. There is no sense of rush or panic here, but rather a confident air that this should all go ahead.
Assuming that Ironveld secures the IDC’s backing and the purchase of the 7.5 MW smelting plant goes ahead, the company expects to start production in early 2018. Annual projected production is forecast to be 21,000 tons of HPI Powder, 190.5 tons of Vanadium slag (36% V) and 4,134.5 tons of Titanium slag (65% TiO2). Focussing only on the HPI powder and at $1,350 per ton with a net profit margin of 40%, this equates to c.$28million revenue and an $11.3million gross profit. Since Ironveld will have no tax liability for the first five years of the mine life, this company has a great deal of potential to throw off a significant amount of free cash flow.
To put this into context, once Ironveld has received shareholder approval for one third of yesterday’s placement (which seems a given), the company will have 479,641,278 shares in issue. At 2p a share this values the business at £9.6million. $11.3million dollars equals £8.95million at today’s exchange rate. Once we factor in additional profit from its sales of Vanadium and Titanium slag, Ironveld will generate more in free cash flow in one year the current market cap (exclusive of Plc cost).
Ironveld has in place offtake agreements for its production. According to its latest set of interim figures, its administrative operating costs are a modest £297,000 a half. Should the IDC funding package complete then Ironveld could quickly transform from unloved AIM ugly ducking to beautiful dividend-paying swan in a relatively short period of time.
The author of this piece has subscribed for shares in Ironveld through the placing described in the article.