It took just over a month, but since I last covered Ironveld (LSE:IRON) the company’s share price has started to move higher. Ironveld currently trades at 2.3p on the bid, 15% above June’s placement price of 2p. This is far from being a meteoric rise, but there are signs there could be a lot more to come; not least because Ironveld might be on course to start generating $1million net operating profit a month from the start of 2018!
The catalyst for Ironveld’s rise was an extremely positive update from the company, on 24 July. Among other things Ironveld reported it was “confident of closing the funding arrangements necessary for the acquisition of the Middelburg Smelting facility”, it had taken “management and operational control of Middelburg”, it had sourced material to commence immediate smelting at Middelburg, it expected to be operationally cash flow positive in August and had repaid the Sylvania loan facility.
Make no mistake. That was a fantastic RNS.
But the market didn’t believe it.
For a full three trading sessions after the announcement Ironveld’s shares loitered at or around the 2p trading level. It was one of the strangest non-reactions to great news I’ve ever seen. It was also an absolute gift. Here’s why.
As I described in the article linked above, the predicted fundamentals for Ironveld are highly attractive. Assuming Ironveld successfully secures the debt-funding package it needs to buy the 7.5MW Middelburg Smelter and that it commences production of its High Purity Iron (“HPI”), Vanadium and Titanium reserves in early 2018, the company is on course to generate over $1million a month net operating profit. That’s a net $12million a year, for at least two years as Ironveld takes advantage of various tax shelters. For a company that still only has a market cap of £11.4million this is almost too good to be true, so why is the market having such a hard time accepting this story?
A few possible reasons spring to mind.
First is investor indifference to a company that has experienced a number of disappointments over the years. Perhaps people are tired of the story. Long-term holders in particular will no doubt be frustrated at their paper losses. The share price chart since September 2013 is certainly not a happy one. Ironveld peaked at nearly 14p, only to find itself at 2.35p today on the mid after July’s heavily discounted placing. If you are playing the AIM speculation game the tarnish of this sort of performance can be hard to rub off, no matter the fundamentals.
Second is Ironveld’s market communications strategy. Without wishing to be too critical of the company this is definitely something it needs to improve. Since the start of 2016 Ironveld has only issued 26 RNSs, of which 12 were required by regulatory rules (e.g. results, blocklisting returns and TR1s). If Ironveld is going to win back the confidence of investors it has to communicate more regularly with them, especially given what it looks like it is about to achieve.
I am very new to the Ironveld story, so I’m not carrying the baggage of yesteryear’s disappointments. However despite this, it took quite a lot of unnecessary effort for me to understand what is so good about this company and why this turnaround story is such a compelling one.
Ironveld’s prediction of being able to generate a $1million monthly NET operating profit in 2018 is based on the company’s 2014 Competent Persons Report (“CPR”). CPRs have an understandably terrible reputation among resource investors on AIM, given the widespread abuse of them. However, if we are too dogmatic about rejecting these documents we inevitably miss some wonderful fundamental plays. Ironveld could well be one of those opportunities.
The 2014 CPR was based on the company securing funding to purchase a 15MW smelting plant. It wasn’t able to do this, but is now on the verge of acquiring the 7.5MW Middelburg Smelter. The maths for projected output are quite straightforward. Simply halve the 2014 estimates.
When I asked Ironveld CEO, Peter Cox, about this he confirmed the company is “100% confident on the 2014 forecast and the ability of Ironveld to produce those numbers. It is a basic arithmetical calculation, by which you take so many tonnes of ore and apply so many electrical volts to produce so many tonnes of refined product ”. When I asked Cox about Ironveld’s likely ability to be able to sell its refined product he went on to say, “HPI is a speciality iron. Our predicted supply of 20,000 tonnes a year is less than 1% of global demand, in a market where no existing local source currently exists. Our production will be a drop in the bucket. When you factor in our offtake agreement, we don’t foresee any issue with immediately selling all we produce.”
Being a supplier in such conditions is certainly attractive, but mention of the lack of “local supply” brought us on to the subject of South Africa. Given the well-publicised instability in that country I wondered whether or not this too has been a contributory dampener to Ironveld’s share price. Here’s what Cox had to say;
“Our experience of operating in South Africa has been entirely positive. We have worked hard to ensure our mining business is compliant with the proposed Mining Charter. We have gone above and beyond in meeting empowerment expectations. We almost exclusively employ people from the local economy and have built strong community links. For example we have run a scheme that has kept 800 local young women in school. The school leaving pass rate has jumped from 12.5% to 70% during this period and the scheme costs the company only £5,000 a year. These sorts of meaningful investments have garnered a lot of grassroots support for what we are trying to achieve.
On the other side of our business, our smelting company is an industrial company, so is not subject to the Mining Charter. It conforms precisely to Government industrial policy and surpasses black industrialist and management and staffing requirements. We don’t see any legislative or empowerment risk”.
This sounds positive enough, so why does Cox think the market has yet to share his faith in the story?
“Look, we started 5 years ago on 12 August 2012. In the time since we have done an outstanding amount of work, in one of the toughest macro environments for decades. Look at mining projects around the world, especially among the juniors. Unlike so many others, we are now on the cusp of production and the potential for transformational profit generation.
We have a growth plan to build the 15MW smelting plan and ultimately our vision is to create a 300MW plant. This would be a world-class project in a country that needs that. The 7.5MW is a stepping-stone. If we secure it, the market won’t be able to ignore the fundamental performance of the business. It will be there for all to see in our financial reporting.
If our stock is currently undervalued, that is not our problem. That is for the market to decide. Our job is to secure the funding to take us on the next step in our journey and as we said in the recent RNS we are confident of achieving that.”
Bold words. If Ironveld is to live up to them, the company’s share price should head in only one direction. Much higher.
The author of this article owns shares in Ironveld