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Apella Resources: Developing North America’s largest Vanadium Deposits?

Scratch at the surface at either of Apella Resources’ major vanadium/titanium/iron projects in Quebec and just a few centimetres down, under the moss and topsoil, you will find vanadium-titanium-iron mineralisation. Five and a half billion pounds of Vanadium alone at the Lac Dore deposit which is majority-controlled by Apella, according to a previous (though non 43-101 compliant) resource estimate, which makes it the second largest known deposit in the world behind Highveld in South Africa. Yet Apella believes that its claims covering a Northeastern extension of the Lac Dore Deposit could be even bigger, and its Iron-T project, some 3 hours west, bigger still.  Consider too that these open-pittable projects are located in mining-friendly Quebec with significant infrastructure already in place, that the prospects for vanadium demand are becoming ever more interesting as new uses are developed, and that the projects will also benefit from iron and titanium credits -  and the Apella story becomes more intriguing.


Vanadium

Apella took the decision to move into vanadium in 2007.  It was attracted both by the commodity itself – its demand prospects, relative rarity and uniqueness - and by the opportunity presented by the Lac Dore project which became available for staking in Apella’s home turf; the company already held a large land package and had a number of ties in the Chibougamau region of Central Quebec.

Apella had a number of reasons for optimism about the outlook for vanadium. The first was that Apella considered that the traditional primary use for vanadium -  as an additive to steel and titanium alloys - was likely to exhibit reasonably strong future growth.  A small amount added to steel doubles the strength of the alloy, improve its ductility and make it more corrosion and abrasion resistant, so it is widely used in construction, cars, pipelines, high-speed tools, surgical instruments and the like.  Meanwhile vanadium/aluminium/titanium alloys offer one of the highest strength to weight ratio and the presence of vanadium improves the alloy’s performance at high temperatures hence its use in aircraft and rockets (and golf clubs).  Although there is some possibility of substituting ferroniobium for some of the steel applications this only becomes economic at very high vanadium prices and it compromises the strength of the alloy, so forecasters generally assume that vanadium demand will grow ahead of world GDP growth and at least in line with steel demand, though probably faster as requirements for high strength steel increase.
 
Reason number two for Apella’s optimism was that the supply outlook is somewhat constrained.  Although vanadium is found in some 65 different minerals and in fossil fuel deposits such as crude oil, coal, oil shales and tar sands, it is never found in a pure state and is only rarely found in economic concentrations.  Primary production, generally from vanadium-bearing magnetite or uranium ores, is mostly confined to three countries with China, South Africa and Russia accounting for 98% of the total world production of 54,000 tonnes in 2009 according to US Geological Service estimates.  But these sources have been constrained recently with China effectively stopping its exports as it needs all the vanadium for its own use while South African production has been hit by the power crisis.  Although there is some secondary production and recycling from wastes such as oil residues and spent catalysts these sources tend to be both limited and expensive.

But it is reason number three – the potential new uses for vanadium in alternative energy and clean technology - that really excited Apella.  Adrian O’Brien, Apella’s director of business development, waxed lyrical on the subject in an interview with Proactive Investors. There are several new uses, he says, which could significantly boost the demand for vanadium. The first of these is vanadium redox (reduction/oxidation) batteries which can be used for storing massive quantities of electricity and so could have important load-levelling applications for wind farms, solar farms or even for conventional fossil fuel power stations and sub-stations. Vanadium redox batteries almost never lose charge – allegedly you can put one on a shelf for a century and it will still have maintained a full charge – they can be charged and discharged instantaneously, they can be recharged for 10,000 cycles or more without negatively affecting the life of the battery, there are no emissions, no disposal issues, they are the only battery that can be connected directly to a power grid, and they offer almost unlimited energy storage capacity just by increasing the size of the storage tank (though the disadvantage currently is the size of the footprint). Vanadium can also be used in rechargeable lithium batteries – both the smaller ones such as those used for example in cell phones and laptops, and in electric car batteries to improve safety and to generate higher voltages and higher energy levels.  The addition of vanadium for example to the Subaru G4E car has enabled the range to be increased from 40km to 200km. Vanadium has also begun to be used as an anti-corrosion agent in some rare earth magnets. Then there has been the recent development work into vanadium dioxide which turns from a semi-conductor into a metal at temperatures of 68°F (20°C) and which can be coated as a thin film on glass to reflect infrared heat away.  This product, known as “vanadium blue”, could become important in reducing air conditioning requirements in hot climates. 

For the moment the metallurgical uses are the backbone of vanadium demand accounting for 90% or so of total consumption.  But there are plenty of vanadium bulls besides O’Brien and Apella who believe that the future for vanadium is remarkably bright.  The American science magazine, Discover, to cite one example, ran an article on the metal in October 2008 entitled “the Element that could change the world”.

Apella’s Vanadium Portfolio


Apella currently owns 2 major vanadium projects, the Iron-T Project, and the Lac Dore Project.  It began acquiring the claims on the north eastern extension to Lac Dore in spring 2007, while the Lac Dore deposit itself was staked on 21st August 2007, exactly 30 days after the previous claims on the project expired. During the process a competitor, the Quebec-government owned exploration company SOQUEM also staked 21 of the same claims, some of which cover the Lac Dore Deposit, and in September 2009 the Quebec Ministry awarded 9 of the claims under contention to Apella, 2 to SOQUEM and the remaining ten are still to be decided.  These 9 claims give Apella a controlling interest in the 102 million tonne, 5.5 billion lb Lac Dore Deposit. The company owns 100% of the claims covering the Northeastern extension of the deposit which they believe to be much larger than the original Lac Dore deposit, and currently have an application filed for the balance of the claims staked by Soquem.

Apella’s other vanadium property, its flagship project the Iron-T, was partially staked and partially acquired from a group led by mineralogist and vanadium expert Dr Mehmet Taner in exchange for C$200,000 and 900,000 shares in Apella. Dr Taner is now on the advisory board to Apella. The 43 square kilometre project is 100% owned by Apella though some of it –  the Audet Option - is subject to a 3% net smelter royalty one half of which can be purchased for C$500,000 with first right of refusal on the remaining half.

Apella’s three vanadium/titanium/iron projects are geologically similar and exhibit similar characteristics to other major vanadium deposits worldwide.  All three are ultramafic layered intrusions in which the vanadium mineralisation is associated with magnetite.  In each case the vanadium mineralisation begins just below the topsoil.  Indeed one of Apella’s first acts was to clear the moss and soil from an area roughly the size of a football pitch at Lac Dore North and the exposed bedrock clearly revealed black bands of magnetite mineralisation. Two further “football pitches” were then cleared each revealing the same.

Infrastructure at all three projects is good.  Iron-T is accessible by an all weather gravel road from the town of Matagamai which lies 10km from the property centre and has an airstrip.  The Canadian national railway line passes 15km to the South and power lines pass through the site. The Lac Dore projects are 70km south east of the town of Chibaugamou with access to Quebec highway and the rail network and close to 161kV transmission lines.

Both Lac Dore and Iron-T were originally discovered in the 1950s, though the vanadium content at Iron-T was not discovered until the 1990s, and both have been subject to previous exploration work.  A pre-43-101 feasibility study completed on Lac Dore in 2002 suggested that the deposit had a resource of 102 million tonnes containing 5.5 billion pounds of vanadium pentoxide at a grade of 0.49%. At this figure the deposit is the largest in North America and the second largest in the world. 

But early exploration work conducted by Apella on Lac Dore North, including two stripping and channel sampling programs, 10 drill holes and a surface magnetometer survey have yielded very positive results have suggested that the area is a continuation of the Lac Dore deposit and that this part of it could be significantly larger than the known deposit at Lac Dore.

Apella’s attention recently however has been focussed on Iron-T, which with a strike length of 10.5 km could be the biggest of them all.  Apella initially commissioned an N43-101 compliant technical report on the property and in December 2009 it completed the first phase of a drilling program in which the highlight from the first 13 holes included a 93 metre intersection at 0.41% vanadium pentoxide, 7.9% titanium oxide and 48.7% iron.

Apella also holds some uranium projects and copper gold projects in Quebec and will be considering how to see value for these in the future.


Future Plans


Apella’s next steps will be to take the Iron-T to feasibility study which will take 12-18 months and require in the order of $18m cash.  The company, having just completed a private placement which raised $1.1m, has some C$1.5–2M cash so will need to come to the market later this year to raise further financing, but it aims to do so at the best price possible by continuing to demonstrate the potential of the project.  At present its shareholder base is mostly retail; the largest shareholders are the management and the circle around them.  The company will be looking for institutional involvement as the projects develop,

If all goes well with the feasibility study the company will be looking to develop production, either on its own or in partnership.  It might either take the low capex option of shipping the ore as it is, or it might build a plant to crush and mill the ore on site to produce vanadium pentoxide and ferrovanadium which will generate more value added but require capex of some C$200-300m.  In parallel Apella will be continuing exploration and development work on the Lac Dore projects.


Analysis

So Apella has successfully negotiated its first three years down the vanadium road but it still has a lot further to go.  It has not yet reported any NI 43-101 compliant resources and there is still considerable geological risk.  It will require further capital to complete the feasibility study on Iron-T so there is a risk of share dilution. Further down the line could be all the risks associated with development and operations. The bright outlook for vanadium has already attracted other juniors to the market.

Nonetheless the company could have massive potential. It controls significant open-pittable vanadium deposits, possibly even be the largest in the world, and these deposits are located in one of the world’s most mining-friendly regions with good local infrastructure.  Forecasts for future vanadium demand growth range from slightly above world GDP growth if its end-uses remain mostly metallurgical, to stellar if vanadium batteries take off.  Vanadium prices, of course, will depend on the future supply/demand balance, but traditionally they have volatile though relatively high compared to other metals (vanadium pentoxide currently trades at around $7/lb).  Apella’s revenues could be further sweetened by titanium and iron ore credits.

The next major milestone for Apella will be the development of Iron-T and the release of a 43-101 report indicating tonnage sometime this year. This will be in an effort to move Iron-T toward Pre-Feasibility within 12 months. There may also be a decision form the Quebec Ministry about the unawarded claims at Lac Dore. In the meantime company watchers can monitor progress by looking at drill and other exploration results as they are published, by tracking the company’s access to capital, and by watching for further developments in vanadium technology and usage to see if it will indeed become the element that changes the world


Disclosure: no positions