ceptingBushveld Minerals Ltd (‘BMN’ or ‘the Company’) is a diversified mineral development company with projects in Southern Africa and Madagascar. Its portfolio contains tin, thermal coal, iron ore, titanium and phosphate; but it is the Company’s world-class vanadium assets – and its strategy to develop a global leading vertically integrated vanadium platform – that is the cornerstone of the investment thesis for BMN. In particular, the Company is on the cusp of completing the acquisition of a controlling stake in the Vametco vanadium mine and plant on the Bushveld Complex in South Africa. Vametco represents one of only three currently producing primary vanadium mines in the world and, owing to a stroke of genius (and to an extent fortune), BMN’s management agreed the deal in principle with the vendor, global steel producer Evraz Group S.A., early in 2016 when vanadium prices were at historic lows and every single producer in the world was lossmaking. Since then, the deal has been progressed and, in tandem with the progression, the vanadium price has approximately doubled – as management openly predicted.
BMN has continuously stated over the years that it strongly believes in protecting the interests of existing shareholders, especially with regard to equity dilution. On a number of occasions in the past, management has demonstrated through its actions that it truly does believe this. It therefore came as little surprise to us that BMN has arranged financing for the acquisition of the stake in Vametco (amounting to $16.47m) in a split of 85% debt, 15% equity.
However, it took the market over six months to appreciate the scale and significance of the deal. Last year, we were trialling early versions of www.aimchaos.com: on 5 September, we published the below note as an introductory piece to the Company, with the intention of publishing a series of follow-on notes. At this point in time the Chaos Investments fund and the Chaos Trades fund had not yet been launched.
As the note states, on 5 September the Company’s share price reached a (then) all-time low of 1.375p, which gave BMN a market capitalization of £8.66m. As at market close today, the Company’s share price is 7.325p, equating to a market capitalization of £53.70m. It is our opinion that the completion of the Vametco acquisition could represent only Stage 1 of BMN’s growth story: management has ambitious plans to become a leading player in the energy storage space – specifically with regard to vanadium redox flow batteries (‘VRFB’). As the media is increasingly picking up on in the wake of the market’s hysteria over lithium’s role in energy storage, the VRFB space is already undergoing explosive growth.
However, we highlight this note not to talk of the investment thesis of BMN, but to reiterate our belief that the wider market often gets it wrong. Thorough research would have indicated that BMN’s management had a very convincing case when it stated that the vanadium market would rebound; and thorough research would have revealed that Evraz sorely did not want to sell its Vametco operation, but were forced to for a number of factors.
A major reason for the market frequently getting it wrong is due to a lack of interest in the lowest reaches of AIM demonstrated by the majority of institutional investors. There are numerous causes for this, but the primary ones are lack of liquidity, sub scale investment opportunities (a fund with a unit size of £5m can hardly take a stake in a company with a £9m market capitalization) and risk profile (be it geographical, operational, etc.). A dearth of institutional investment invariably results in lack of professional research on the company in question; and simultaneously in day traders and short term investors dictating sentiment around the stock. Especially with regard to microcap stocks, sentiment has a very significant impact on share price. If positive sentiment around a stock is replaced by negative sentiment, for example, the stock can be oversold drastically, with buyers of value not having the firepower to drive the share price back up to what would usually be considered fair value (by professional investors). As such, deeply suppressed valuations can endure for abnormally long periods in the lower reaches of AIM. To quote from a previously published note on AIM Chaos:
“When this situation occurs to a business listed on AIM, the market’s (predominantly short-termist) investor base tends to forget what fair value for the business actually is. The business’ (in many cases substantially) suppressed valuation becomes the new ‘norm’, as traders sell out on what they consider to be ‘spikes’ in the share price – whereas in reality the spikes could simply be investors beginning to realise that the business has become inherently undervalued.”
In our opinion, companies that are enduring these prolonged slumps can represent phenomenal investment opportunities. Although such slumps can prove inexplicably drawn out, we find that eventually value does prevail – BMN being a perfect example. However, for investors wishing to take sizeable interests in illiquid, microcap AIM companies, John Maynard Keynes’ famous phrase is especially pertinent:
“The market can remain irrational longer than you can remain solvent.”
AIM is a particularly irrational beast. However, by understanding and accepting that irrationality is rife within the market, and by bracing oneself to outlast it – no matter how painful it might become – the rewards have the potential to be vast.
Neither the Chaos Trades fund nor the Chaos Investments fund owns shares in BMN. However, the author of this note holds shares in BMN in personal accounts.