South Africa-based Ironveld (IRON:AIM) believes it has made a breakthrough in its quest to become a metals producer after striking a deal to buy a 7.5 megawatt smelter.

The company hopes to start production early next year of high purity iron, vanadium and titanium. It just needs to clear one more hurdle which is to raise cash to help fund the acquisition, do refurbishment work and provide a buffer for working capital.

The decision to buy a smelter means Ironveld no longer has to raise a chunk of debt finance in the immediate future. That money was earmarked to buy a 15 megawatt smelter.

The aforementioned acquisition is for something half that size and will be funded by shares and phased cash payments.

The eventual plan is for Ironveld to use cash flow from the first stage operation to help fund an upgrade to 15 megawatt capacity. This is the amount of energy it is confident that state utility Eskom can provide to the operation.

Longer term it wants to build a 300 megawatt smelter, but that may not happen for at least five years as it is dependent on Eskom building new power capacity.

Desperate need for cash

Although the debt financing pressures have eased, Ironveld now has another financial worry – can it raise more funds? It hasn’t explicitly stated that cash is required, but it doesn’t take too long to work out it needs a top-up.

Half-year results published on 29 March warned it only had enough money to last until mid-2017.

Ironveld has already secured offtake agreements for its three metal streams. However, the new smelter will also give it optionality to market its high purity iron direct to customers.

Potential buyers would want certain specifications, which Ironveld would be able to certify as a result of doing the mining and smelting itself. The company therefore believes it could get extra money for the product.

The small cap also plans to produce water atomised iron powder which sells for a significant premium, according to chief executive Peter Cox.

This is used mainly in the automotive industry to make gear components and complex metal parts. Demand is also growing from the 3D printing market.

As for its other products, vanadium and titanium are used in the battery, pigment and alloying industries.

Linking to mining assets

The smelter is located 300 kilometres along a main road from its mine. It is not operational at present due to strategic problems with its two previous owners, rather than technical issues.

Cox says the acquisition opportunity presented itself when initially enquiring whether the smelter was free to process Ironveld’s material.

He believes the operation will be immediately cash generative and will be cash flow positive within the first year.

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