Investing In Vanadium: Largo Resources And Advanced Metallurgical Group

I specialize in lesser known commodities. My thesis is that the smaller and less talked about markets are the ones where concentrated research can be most useful. As examples, see here and here. This post concerns the metal vanadium, V.

V is used as an alloying element in steel, mostly in the construction industry as reinforcing bars (rebar). The second most common use is automotive. It only takes a small amount of V to improve steel’s strength, often less than 0.1%. The majority of the new construction in the world is in Asia, mostly China. So that’s where we have to start.

Most readers know that construction is a big part of China’s economy. The vast majority of units being built are steel-framed high rise apartments. It’s also important that much of China is in earthquake zones. One would think that this would have led to a high use rate of V alloy rebar in China. But this has not been the case. Here is a table of V usage in steel:

Vanadium in total steel consumption (grams / Kmt):

USA 93

Eur 73

China 37

China’s low use is due to lenient building codes that allow the use of mild steels. This may have made some sense during the early part of China’s modernization, when the focus was on getting things built cheaply. But the focus has now shifted to quality growth. This means things like lowering pollution. It also means tighter building codes. This article explains how the new codes may increase China’s V consumption by 30%.

While China’s demand for V increases, its domestic supply is slowing. As part of the anti-pollution strategy, China is substituting high quality seaborne iron ore for lower quality domestic ore. The domestic ore contains some V. The Chinese steelmakers have been able to recover this V through the waste slag. This steel-based supply has accounted for about ? of world V supplies. Now, this supply is declining.

V has also gone through a typical commodity “cobweb” cycle. Price were very low in the post 2000 period. This led to underinvestment and the closing of a large South African mine. V is not a rare element, so we are not going to run out. However, future supply will have to come from V mines. This will present opportunities for the miners.

Here is a graph of V pentoxide price over the long term, both in current and 2017 dollars:

I believe the long decline in the real price of V that ended in 2002 was due to increased low cost Chinese production. Since then, Chinese consumption has continued to grow while production is about to decline.

Before I get on to investment names, I must mention one additional upside possibility. A small amount of V is used in batteries. The chemistry is complex, but the realization is simple. It involves a vat of V in two separate chemical states separated by a membrane. These batteries are extremely stable; they last for decades without degradation. The US Navy uses them in mines. They can also go through thousands of discharge/recharge cycles without loss of capacity. Their big disadvantage is size; energy density is much lower than lithium ion. This means we won’t be driving around in V-powered cars. However, these batteries might make sense for utility grid storage for intermittent renewable energy. Utility-scale pilot projects are now underway in China and other countries. If this works out, it would boost demand to another level. I do not know whether this is going to pan out, so let’s just call it upside optionality.

If you want to go further on V, I suggest you read the SA posts by John Lee. John is the CEO of Prophecy Mining, a junior miner with a V stake.

Ok. That’s the commodity story. How do we play it? Like most minor commodities, it’s not possible to find household names that get a substantial percentage of their income from V. This leaves small caps and junior miners. In general, I stay away from the juniors. So let’s start with the small caps.

Largo Resources (OTCQB:LGORF) (symbol LGO on the Toronto Exchange) owns a V mine in Brazil that is producing about 900 tonnes of V pentoxide a month. Largo was an exploration company that had tried to develop various mineral stakes. Their Maracás Menchen Mine (Brazil) is now running well. They market all their product through Glencore, a fairly common small-cap miner strategy. As production has grown, the company has moved from loss to profit. Here’s the income statement for the last quarter and my projection for all of 2018.

Q3 16

Q3 16

Q3 17

Q3 17

2018

2018

Lbs. V2O5 Produced

4,810,481

5,540,210

25,137,000

Memo: Implied V2O5 Price / lb.

$4.32

$9.66

$10.00

Revenue

$20,758

$53,507

$251,370

Operating Costs

-$30,165

-$29,955

-$125,000

Memo: Cash Op Cost / lb.

$6.27

$5.41

$4.97

Operating Profit

$ (9,407)

$ 23,552

$ 126,370

FX G/L

$ (1,319)

$ 3,483

$ –

Finance Costs

$ (9,552)

$ (9,636)

$ (35,000)

Other Costs

$ (4,427)

$ (3,913)

$ (16,000)

Net Income

$ (24,705)

$ 13,486

$ 75,370

Number of Shares Diluted

414,996

531,557

600,000

Net Income / Share

-$0.06

$0.03

$0.125

The 2018 net income gives a PE of (as of 1/8/18) of 10.7. That’s quite good for a growing company in a hot commodity. However, like all growing miners, they have been issuing new stock and warrants to fund themselves. I have tried to take this into account in my share count estimate, but it’s possible that I have underestimated the funds they will need. And of course, whenever a new funding is announced, the stock will normally take a big dip. Nonetheless, I like the stock, and I own it.

Another possibility is Advanced Metallurgical Group NV. (OTCPK:AMVMF) (symbol AMG on the Amsterdam Exchange) This is a Dutch company that mines, processes and engineers a host of high-tech metals. Although they do not disclose income by metal, I believe that V is one of their biggest contributors. Instead of mining V, they have long term agreements with US oil refiners to process V-containing waste from the refineries. This should be a very low-cost source of V. They also produce:

…aluminum master alloys and powders, titanium alloys and coatings, chromium metal, ferrovanadium, antimony, tantalum, niobium, silicon metal and natural graphite.

Whew! Seriously though, this appears to be a great company with a lot of embedded intellectual property and very experienced management. One caveat, however: they are opening up a lithium mine in Brazil. These guys are experienced Brazilian miners, and I believe they will be successful. But lithium is a current “hot” stock idea, and this has raised the company’s PE to about 26. So this is not a cheap stock. However, if you like the lithium story anyway, this makes sense. I do, and I own the stock.

Finally we get to the juniors. Generally, I like companies that are near to actual production. One that seems interesting is Bushveld Minerals Ltd. (OTC:BSHVF) This trades on London AIM with symbol BMN. This is also a company that has tried various things, but is now concentrating on V. It is a bit unusual in that it intends to participate in the full value chain, including mining, processing and even battery manufacture. It has a rich orebody and is in an area with existing V infrastructure. So it may work. However, the company is certainly going to need more capital. Also, there is inherent execution risk in such an ambitious strategy. So I view this as more of a lottery ticket.

Disclosure: I am/we are long LARGO, AMG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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