Can electric vehicles drive vanadium demand?

Chris Berry: Vanadium is an element that is pervasive, but a lot of people haven’t realized just how pervasive it is. Vanadium is used in varying degrees in several applications. One is as a strengthener of steel and an alloy with titanium. It is also used in the emerging field of lithium-ion batteries (LIBs) for electric vehicles (EVs), both the four-wheel or two-wheel type. I think this usage is one that shouldn’t be relied upon in the near term. Vanadium has also come to be used in what’s known as the vanadium redox battery (VRB)—a large-scale battery used for alternative energy storage.

Over 90% of vanadium produced today is used as a steel strengthener. In 2010, according to the U.S. Geological Survey (USGS), 56,000 tons of vanadium were produced globally (U.S. figures are not reported), so obviously the majority of this is used in the buildout of infrastructure that is occurring disproportionately in countries such as China. One company in particular, Denison Mines Corp. (TSX:DML; NYSE.A:DNN), which is thought of as a uranium producer, produced about 1,000 tons of vanadium last year as a coproduct of its uranium mining in the western United States. Aside from that, vanadium is mined mainly in China, Russia and South Africa.

The use of vanadium in LIBs for EVs is not significant yet, but could eventually become important as the transportation sector electrifies. One of the real challenges surrounding LIBs is settling on the most effective battery chemistry. In other words, what battery chemistry allows for the greatest number of charge recycles, depletes its charge the slowest and allows us to recharge the fastest? Today, based on my research, lithium-vanadium-phosphate batteries appear to offer the highest charge and the fastest recharge cycle. It seems that the lithium-vanadium-phosphate battery holds a great deal of promise, offering a blend of substantial power and reliability. I am watching for advances in battery chemistry here with great interest.

I am actually reading a book now titled “Bottled Lightning: Superbatteries, Electric Cars, and the New Lithium Economy” by Seth Fletcher. The debate over the “best” or “optimal” battery is not a new one and the book discusses the history of this argument well.

In our research at House Mountain, we focus on several macro themes, one being accessibility to cheap and reliable energy. It’s no secret that increasing GDP and access to cheap energy go hand-in-hand. Energy storage is going to become more and more important and this is where the VRB can play a significant role. I wouldn’t call VRBs an emerging technology because they were actually developed in the late 1980s, so the idea of using vanadium to store electricity has been around for a number of years. VRBs just haven’t been in mass, widespread use. Growing economies in countries like China and India and even in continents like South America are becoming accustomed to an increase in the quality of life. In my opinion, to maintain and increase that quality of life, you need access to energy—cheap and reliable energy. The electricity grid has been described as the only supply chain without storage capacity. VRBs can address this.

TCMR: To alleviate the stress on baseload power.

CB: Exactly. Baseload power from utilities will be generated from a number of different sources—renewables, coal, oil and gas, for example. VRBs allow for the smooth transition of electricity into the grid at times of peak demand. Renewable sources of energy such as wind turbines generate electricity that can be stored by a VRB and released at peak times. This ability to effectively store electricity and manage the flow of this electricity into the grid as the demand for electricity ebbs and flows promises to become critical and offers an additional avenue for future vanadium demand.

TCMR: You said VRB technology has been around for a while. Is this market going to grow?

CB: I think it will, based on my comments above. VRBs are being used commercially in a couple of different places, though they have not been adopted widely on a commercial scale. As demand for electricity increases, VRBs will definitely play a role. You can’t have countries like China with its emerging middle class even approach Western living standards (and the electricity demand that comes along with that) without the ability to put affordable electricity into the grid on demand. You can’t have a global population of 7 billion citizens many who want a higher quality of life—a population projected to grow to 10 billion by the year 2085 based on estimates in The Economist—without that ability. It just can’t happen.

TCMR: In a research report, you referenced Byron Capital Markets’ estimate of how much storage would be required for 1 megawatt of energy. You wrote that it would require 50,000 liters of electrolyte which equates to 10.1 tons of vanadium. But as you said, in 2010 only 57,000 tons of vanadium were produced globally. So looking at numbers like that, I’m thinking that even a small amount of growth could exponentially increase the amount of vanadium needed.

CB: That’s exactly right, and that’s the key. One of the things that I like about vanadium is that you have a couple of different, but potentially significant, demand drivers. You have the fact that vanadium is used as a steel strengthener. So that’s a play on emerging market growth. I don’t think that China is going to continue to grow at 9–10% indefinitely, but there are other countries that are experiencing significant growth rates themselves that are behind the curve. India is an example. It has a huge need for infrastructure, and increases in vanadium-based steel production will be a part of that. As another avenue of demand, renewable energy will continue to be a minority of the energy produced globally, but, again, even if a fraction of the vanadium produced had to be diverted to energy storage, you are looking at a potentially significant supply-demand imbalance.

Another significance of vanadium is that it is very rarely mined alone; it’s typically mined as a byproduct of other metals, uranium being one of them. Two of the three largest producers of vanadium in the world right now are Evraz Highveld Steel and Vanadium Ltd. (JSE:EHS), based in Russia, and Panzhihua New Steel & Vanadium Co. Ltd. (SZSE: 000629) in China. At both of these companies, vanadium is a byproduct of steel slag production. If, for whatever reason, they cannot increase capacity to produce more steel, or if steel demand slows, they would be looking at producing less vanadium. There appears to be a direct relationship between the amount of steel they produce and the amount of vanadium they produce. If there is any sort of a hiccup there, again, you could potentially be looking at an interesting supply-demand imbalance in the vanadium market. I’m not predicting that this will happen. I am just pointing out that much of the vanadium produced is dependent on production of other metals.

TCMR: Are there any producing vanadium mines in Canada or in the U.S.?

CB: The only one that I know is Denison’s White Mesa project in Utah. It is mining uranium in the U.S. and is producing about 1,000 tons of vanadium per year as a coproduct. After this, however, the question becomes, where are the near-term producers? In other words, who is next? In North and South America, there are several. The one that I have focused on most closely is American Vanadium Corp. (TSX.V:AVC). It owns the Gibellini deposit in eastern Nevada and has an NI 43-101 resource estimate of 18 million tons (Mt.) of vanadium pentoxide, grading 0.33% on the deposit. There are several other properties the company owns in the immediate vicinity of Gibellini that are not included in this resource estimate, so there exists the potential for expansion of this resource based on additional discovery. The company has a stated plan to be in production of vanadium pentoxide by 2013 and also has the potential to produce vanadium electrolyte which is used in VRBs. Producing two products provides potentially two revenue streams, which I like to see in a project.

This project is unique in that it will be an open-pit, heap-leach operation with a low capital expenditure. As I mentioned before, vanadium is usually found with other minerals, which requires metallurgical and separation expertise and can complicate the mining process and drive up costs. According to the company, only trace amounts of uranium appear in this deposit. It seems to be pretty clean. If vanadium pentoxide currently trades in the market for $7/lb., American Vanadium believes that it will be able to produce at a cost of $2.96/lb. based on an independent preliminary economic assessment the company had completed. When production really ramps up, the goal is to be producing 14 million pounds of vanadium pentoxide per year. The grade of the deposit is low, but you can do the math. If you are selling at $7/lb. and mining and producing at a cash cost of $3/lb., that is a $4/lb. margin on a resource that is growing in size.

TCMR: Any near-term catalysts?

CB: The immediate catalyst for this company will be to release an updated resource estimate and also a prefeasibility study, which I anticipate before the end of the year. They also recently announced that they have produced both vanadium pentoxide and vanadium electrolyte on a pilot scale.

TCMR: The size of the vanadium market is not easy to discern currently, is it?

CB: It’s really not and this is a challenge for all junior vanadium exploration companies. Most people default to what the USGS says on the size of the vanadium market, so we say it is 56,000 tons currently. There are a number of different end products created from vanadium ore like vanadium pentoxide, electrolyte or ferrovanadium, which cloud the true demand in this market in my opinion. The market for vanadium is currently in balance from a supply and demand perspective, but this could change on the back of increased demand from the applications we mentioned above.

Many of these minor metals like vanadium and lithium have a real issue with price transparency and hence volatility. It’s easy to look at a metal like copper or gold—where there is a futures market and a spot market—and get an accurate price, but it’s not the same with vanadium or lithium. These are all negotiated contracts between supplier and end-user. Vanadium pentoxide is worth $7/lb. currently, but this is can change more drastically than other metals based on the relatively small size of the market, fluctuations in demand from end-users and supply restrictions from other countries.

TCMR: It could be $10/lb. in one transaction and $5/lb. in another.

CB: And the price volatility, in particular with vanadium, is one thing that I think has kept more people away from the metal. Vanadium is definitely about as good as it gets as a strengthener of steel. But there are substitutes. For example, niobium has very similar qualities when alloyed with steel, but is only a viable substitute for vanadium when vanadium is at a much higher price per pound. Vanadium at $7–$8/lb. is economic, and you really get a lot of bang for the buck. However, if that spikes, then as an end-user you start looking at substitutes.

TCMR: Sounds like you are very positive on American Vanadium.

CB: I think it has a chance. For a lot of these juniors, that is all you can ask for in the tough markets we’re seeing these days. I have visited the Gibellini deposit, met with management and can see how the project could succeed. Despite the fact that the vanadium market is roughly in balance from a supply-demand perspective, and, based on my projections, it looks like for the next year or two it’s going to stay that way, I still think there is room for a company like American Vanadium as much of the supply of vanadium used in the United States comes from overseas. Based on work we’re doing in Washington D.C., it appears that our political leaders are waking up to the issues surrounding resource dependence on metals such as lithium and vanadium. American Vanadium is positioning itself to benefit from this newfound concern regarding domestic supply chains.

TCMR: Chris, are there any other vanadium companies that you are talking about?

CB: The vanadium space, such that it exists, is quite small in terms of the companies that are producing. You have Evraz, Panzhihua New Steel and Vanadium Co. and Xstrata PLC (LSE:XTA), and they control production in the vanadium market. They produce the overwhelming majority of the 57,000 tons. Another company that is particularly interesting is Largo Resources Ltd. (TSX.V:LGO). This is a Canadian company that has two different vanadium deposits in Brazil. The company’s Maracas project contains the highest grades of vanadium I’ve seen in North or South America at roughly 1.27%. It’s also a deposit of size with ample potential to expand, so here you’re combining good grades with tonnage. Another important factor I haven’t mentioned is an offtake agreement. Largo negotiated an offtake agreement with Glencore International for a term of six years. This is a huge credibility boost for Largo, in my opinion. The fact that Largo has a high-grade vanadium deposit as well as other metal deposits in the Americas makes the potential for this company quite strong going forward.

TCMR: Another one?

CB: Another one I follow is EMC Metals Corp. (TSX:EMC). It is not a pure play on vanadium. This is a company that has a couple of different assets. Its main asset is actually a scandium deposit hosted in laterite located in New South Wales, Australia. EMC is engaged in a 50/50 joint venture on the scandium deposit (called Nyngan Gilgai) with an Australian company called Jervois Mining. EMC also has a prospective vanadium deposit not terribly far from American Vanadium’s asset in Nevada called the Carlin deposit which has a resource of 25 Mt. grading 0.51% vanadium pentoxide. To be sure, there are other companies with vanadium deposits, but these are three that I’m really focused on.

So there are a number of near-term producers of vanadium, and while the market is currently balanced, I like the prospects for the metal going forward based on forecast global steel demand and potential for vanadium’s critical use in energy storage applications—two diverse sources of demand.

TCMR: I have enjoyed speaking with you very much.

CB: Thank you very much.

With a lifelong interest in geopolitics and the financial issues that emerge from these relationships, Chris Berry founded House Mountain Partners in 2010. House Mountain firmly believes that the emerging quality-of-life cycle emanating from Asia is a “game-changer” that will affect everyone throughout the world for decades. With that in mind, the firm focuses on the intersection of three topics: 1) The evolving geopolitical relationship between emerging and developed economies; 2) The commodity space; and 3) Junior mining and resource stocks are positioned to benefit from this phenomenon. Chris spent 14 years working across various roles in sales and brokerage on Wall Street before founding House Mountain Partners. He holds an MBA in finance with an international focus from Fordham University and a BA in international studies from the Virginia Military Institute. Chris is also a member of the Canadian American Business Council. He invites readers to receive a complimentary subscription to Morning Notes, which provides analyses of emerging geopolitical, technological and economic trends. Go to www.discoveryinvesting.com.

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DISCLOSURE:
1) George Mack of The Critical Metals Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Critical Metals Report: American Vanadium Corp. and Largo Resources Ltd.
3) Chris Berry: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.

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