Ironveld (AIM:IRON) developed a nasty habit of going to ground when it missed deadlines over the last year. This never plays well with investors and the latest £1.765million placement has been met with a good deal of cynicism. There is a feeling this is just another ‘keep the lights on’ deal, but according to CEO Peter Cox everything is still to play for. The company just needs to secure that last tranche of project funding to complete its purchase of the 7.5MW Middelburg smelter…
In early October 2016, Ironveld announced it had received approval from South Africa’s Industrial Development Corporation (“IDC”) for a R244million funding package (c.£13.5million at today’s exchange rate). The plan at the time was that Ironveld would mine its High Purity Iron, Vanadium and Titanium reserves as feedstock for a 15MW smelter, which it would build.
Later that month, Ironveld raised £1.8million at 4.5p. At this point the company declared it was “in the advanced stages of completing the remaining debt agreements for the Project.”
And then everything went quiet.
The funding did not materialise and investors were left guessing as to what was happening behind the scenes.
As late as 29 March this year, Ironveld was still talking about construction of the 15MW smelter commencing on “financial closure” of the IDC investment.
However, this clearly was not to be and two short weeks later Ironveld announced a shift in its strategy, with the proposed acquisition of the 7.5MW Middelburg smelter.
On 21 June Ironveld placed again, this time raising £2.1million, and it was at this point I bought into the story.
Ironveld used £1.4million of the June placing to repay an existing loan facility (£900,000) and to pay a refundable deposit on Middelburg (£500,000). This all seemed eminently sensible. Ironveld both strengthened its balance sheet and secured exclusivity to the Middelburg acquisition. Although, the 7.5MW smelter will deliver half the output of what Ironveld envisaged in its previous plan, once operational it will still have the potential to deliver up to $1million a month in free cash flow.
Those maths remain extremely compelling.
The problem, though, remains that for whatever reason Ironveld has still not yet managed to secure the R150million (£8.2million) it needs to complete the Middelburg acquisition and refurbish the smelter. According to last week’s RNS “the company remains in advanced discussions with a number of funding providers” to complete this transaction, but this deal was meant to be completed a few months ago.
I put this to Peter Cox.
“From a technical perspective we cannot make this project anymore secure. We have a process that we have proven, reliable capital estimates to the best level of accuracy and a regional market crying out for our product. Our 5-year offtake agreement remains in place, meaning our commercial model remains robust, and we still have the exclusive right to acquire Middelburg.
The challenge has been navigating a complex funding environment, balancing the differing needs of various parties, while also adjusting to fluctuating exchange rates. None of this has been easy, but I remain confident we will prevail. Our partners are committed to seeing this project into production. They recognise the long-term potential. Our reserves are world class and aren’t going anywhere. For a project like this to thrive it is important that the terms of the final funding package are acceptable to all involved, commercially, politically and from a regulatory point of view.
This has taken longer than I would have liked, but we continue to run the company prudently with as little overhead as possible. Thanks to the recent placing we are now fully funded for the foreseeable future. Time is on our side, but I perfectly understand the market’s impatience. In the long-run what matters most is that we get this project off the ground, with the right terms in place.”
OK, but why haven’t you update the market more regularly and given more of an explanation as to the delay?
“Complex discussions like this take time and there are often unforeseen challenges that crop up. We could have provided a running commentary on these, but we believe this would have been counter-productive and may have negatively influenced some of the negotiations. We have made a lot of progress over recent months, resolving a number of issues. Fundamentally we remain on track, but the timeline has pushed out. As I said already, the important point to note is that with the latest placing the business is well positioned to see the funding deal through to completion.”
Fine words, but how are investors meant to trust the company given the number of missed deadlines and changing targets over recent years?
“I appreciate the point, but there are a number of things to consider. Market conditions were extremely challenging for a number of years when we were developing the project. Despite this we have made a great deal of progress technically. The issue we have faced has been to secure the final funding we need to see us through to production. We have responded to this appropriately, adjusting our strategy and securing the exclusive option on the Middelburg smelter and of course our ore resource which is fully licenced is world class and really underpins the value of the company
I truly believe we are now close to finalising this deal and we continue to run the company as prudently as we can. Our annual operating overhead is modest compared to many of our peers on AIM and I have to emphasise again that the latest placing means we are fully funded through to 2019.”
While the jury might be out on Ironveld, this last point of Cox’s does make sense. In the year to the end of June 2016, Ironveld’s administrative overhead was just under £500,000. The company’s next set of results is due out by the end of this month. Assuming Ironveld has been able to keep control of its Plc costs then the fundamental case for owning shares strengthens. The company should have plenty of runway to land the deal, meaning this largely becomes a binary play on funding.
If Ironveld fails to secure the investment it needs to acquire the Middelburg smelter this would spell serious trouble for the share price. However, if the company is able to secure funding this could be the catalyst for a material, positive rerate in the stock. That projected $1million a month free cash flow figure is a number that has potential to get the market very, very excited.
I remain a believer in Ironveld and personally participated in the latest placement, via the Teathers App.
The author of this piece owns shares in the company mentioned.