Source: Brian Sylvester of The Gold Report 01/24/2011
In this exclusive interview with The Gold Report, Chris Berry, the founder of House Mountain Partners, and Michael Berry, publisher of Morning Notes and Discoveryinvesting.com, drop by to discuss some promising vanadium plays in North and South America. Vanadium is mostly used to strengthen steel, but as the Berry's suggest, the metal is poised to become "the next big thing," as its properties are ideal for use in mass energy storage devices and the lithium-ion batteries now being used in electric cars. Several companies are already aboard the vanadium train—and the Berrys divulge their favorites.
The Gold Report: You both follow emerging micro-cap or small-cap stories in the metals and precious metals spaces. Chris, in a recent edition of Morning Notes you speculated that vanadium could be the next big thing. You compared vanadium to metals like lithium and rare earth elements (REEs) and discussed the three main uses for vanadium. Please briefly go over those for us.
Chris Berry: The three primary uses for vanadium are as a strengthener of steel, its potential to be combined with lithium-ion batteries in electric vehicles (EVs) and in vanadium-redox batteries (VRBs), which are used for mass energy storage.
There's no doubt that vanadium can be the next big thing. Huge amounts of research dollars are going into cleantech energy storage and power generation. Vanadium is a green, or cleantech, metal to be sure. If you're a believer in the possibility of an EV revolution in the years to come, then vanadium could be key. If you're a believer in mass energy storage associated with wind and solar generation, then VRBs, as they're known, are vital. One of the knocks against clean power generation like solar and wind energy is that it's very uneven and can't be stored easily. VRBs are the answer in the sense that they allow for the mass storage of energy for use during both peak and off-peak demand times.
Coming back to the main use of vanadium—it's predominantly used as a steel hardener. In fact, at least 85% of global vanadium production today is used in this manner. Very small amounts of vanadium in alloy form can be added to rebar steel to dramatically increase its strength. It's very important for emerging markets that are building out their infrastructure.
TGR: Indeed. China recently has been encouraging companies to use iron that's naturally strengthened with vanadium.
CB: That's absolutely right. Both China and Japan have mandated that any steel used in rebar is supposed to be reinforced with vanadium. Again, the beauty of it is that you add a very small amount of vanadium in alloy form to the steel, and you get a tremendously stronger piece of steel.
TGR: But if the demand for vanadium increases, could we see steel companies shifting to other metals—niobium, for example—as hardening agents, and in turn reducing the demand for vanadium?
CB: I think the issue there is the price of vanadium. It's going to have to rise much, much higher to make its use uneconomic. Right now it's at about $7/lb. But one of the difficulties associated with vanadium is the fact that the price was very volatile in 2005 and 2006. In 2007, the price rose much higher, and niobium was actually used as a substitute for vanadium because it was more cost-effective. But during the global economic collapse the price for vanadium fell to about $3/lb. At its current price of $7/lb., it's perfectly fine. It could be substituted by niobium or another metal, but I doubt it. Global steel demand is set to increase by about 6% over the next 5 to 10 years. I'm not sure that's enough of a pop to push steel producers to look for vanadium substitutes.
TGR: You mentioned VRBs. They typically contain a remarkable five tons of vanadium each. Where are they in terms of reaching commercial production? At five tons each, that could dramatically change the ballgame for vanadium.
CB: You're right, VRBs are absolutely gigantic. The VRBs that I've seen are the size of tractor-trailers. In Asia, VRBs are already being used on a reasonably wide scale, but not so much here in North America. I'm not sure what the holdup is. The key to VRBs is really clean power generation. If you believe that our future energy demands will shift from fossil fuels to wind, solar and nuclear, then it would make sense for VRBs to become more commercialized here in the United States and in North America.
TGR: Apart from our ongoing dependence on fossil fuels, another thing that could keep VRBs from becoming more commercialized in the United States is the fact that there isn't a readily available supply of vanadium in North America. There are no vanadium mines in Canada or the United States. Most of the vanadium used to make steel in North America comes from South Africa and China.
CB: That's right. With all the hysteria surrounding rare earth elements and how China controls that market to the tune of 97% of production, vanadium is another strategic metal similar to REEs. We're 100% dependent on China, Russia and South Africa for this critical metal. The good news is that the price of vanadium has rebounded to about $7/lb., and there are a handful of juniors in North America, as well as in some other parts of the world, that are actively exploring for and planning to put vanadium mines into production over the next couple of years.
TGR: But with a relatively low price per pound it doesn't seem that the margins to mine it would be all that generous unless a company had either a high-grade deposit or a very low-cost operation. What constitutes a high-grade vanadium deposit? And what sort of cost per ton would be considered low?
CB: I've seen grades from about 1.3% down to 0.3% vanadium. In terms of operating costs, I would say they average about $3/lb. If you're selling into the market at $7/lb., you're looking at a $4 profit. The vanadium market is a little murky, though. You've really got three producers: Russia's EVRAZ Group S.A. (LSE:EVR; OTCPK:EVGPF); Panzhihua Iron and Steel Group Co., Ltd., which is based in China, and only produces vanadium as a byproduct of the iron it's mining; and Xstrata PLC (LSE:XTA), which we're all familiar with. These are the primary producers. It's tough to get an average grade and price from them because they're involved in so many other metals, as well.
TGR: You touched on something noteworthy when you mentioned that deposit in China being a vanadium and iron deposit. There really aren't many pure vanadium deposits. How many companies are out there trying to find these kinds of deposits?
CB: Vanadium does not occur alone, typically. It generally occurs with iron ore or uranium. But when the price dropped to $3/lb. a couple of years ago, I think companies stopped looking for vanadium deposits. Now all of a sudden it's economic, and companies are sniffing around again. There are a number of deposits in Canada, the United States and even Brazil. They're not ready for production, but the idea is to get the metallurgy figured out, determine the cost of production and have them producing vanadium over the next two to three years.
Michael Berry: American Vanadium Corp. (TSX.V:AVC) has a pure vanadium deposit.
TGR: How close is that to production?
CB: Well, American Vanadium has a pretty aggressive timeline. The company wants to be in production by the end of 2012. It has three deposits in Nevada, but it's really only focusing on one—the Gibellini project in central Nevada. The plan is to produce 14 million lbs. (Mlbs.) of vanadium pentoxide per year. In addition to producing vanadium, American Vanadium ultimately wants to get into the vanadium battery business so that they can set up a supply chain and capture value along its different parts.
TGR: This was the company previously known as Rocky Mountain Resources?
CB: Yes, the shareholders recently voted to change the name. They changed it to American Vanadium to better reflect the company's mandate. I like this company for a couple of reasons. Number one, there's an NI 43-101 technical report with an indicated resource of 18 million tons (18 Mt.) of vanadium at a grade of 0.33% for a total of 122 Mlbs. of vanadium pentoxide. American Vanadium also completed a scoping study that indicates the deposit could be mined as an open-pit, heap-leach operation with a stripping ratio of 0.2. The operating costs work out to $2.96/lb. I don't care what metal you're talking about, whether it's vanadium, gold or uranium, the lowest-cost producer always wins. That low-cost production is one of the main reasons I really like this company.
TGR: Has it done any metallurgical testing to see how easily the vanadium is recovered?
CB: It's actually in the process of doing that right now. All indications at this point are that any uranium there is minimal.
TGR: You talked about American Vanadium becoming an integrated vanadium company, much like Great Western Minerals Group Ltd. (TSX.V:GWG; OTCQX:GWMGF) is trying to be on the rare earths side. Tell me about American Vanadium's battery-making strategy and how it plans to implement that.
CB: I think that's something the company is still getting its head around. It doesn't want to be a one-trick pony. By the time 2012 rolls around, American Vanadium wants to be set up to take full advantage of the fact that it's producing vanadium. Then it'll go from there.
MB: Actually, we see a lot of these things now; for example, Talison Lithium Ltd. (TSX:TLH) supplies 75% of China's lithium. It's going to take the next step and produce lithium carbonate. One of the trends in these critical metals, of which vanadium clearly is one, is that we import 100% of our vanadium and 100% of our manganese. A lot of these companies want to develop a value chain, a sort of industrial infrastructure. Even Molycorp Inc. (NYSE:MCP), in the rare earths space, is going to have to integrate forward to produce product—not just mine rare earths. The mining game itself is actually changing because we import 80%–90% of metals like tantalum, niobium and lithium, and we're beginning to see not only China but several other countries declare these "strategic" metals and minerals and, therefore, limit exports. In the case of vanadium, you're going to see more companies try to develop an industrial infrastructure. I think American Vanadium may be the first one to attempt to integrate vertically.
TGR: Are we going to see offtake agreements in the vanadium space? That's happening with rare earths. An Australian company called Lynas Corporation (ASX:LYC) struck a deal with a Japanese firm for any REEs Lynas could produce.
CB: I think so. You see the same thing in the lithium space. Japan and Korea have moved aggressively on a number of Canadian and South American exploration plays to lock up supply. Companies can't leave their supplies to chance—they need to have them. I think vanadium and lithium are very similar in that respect.
MB: The answer to your question, across the board, is yes. Right now, Japan, China and especially Korea are locking up anything they can. We're seeing all kinds of supply agreements in iron ore, copper and other metals. You name it, they're looking for it. The noise you hear out there is really almost all about minerals now. Whatever the industrial giants can find, they want. Canada, obviously, is on the receiving end of a lot of the interest in offtake agreements. I think this is a concern in the U.S. because we lack a mining industry or development in that industry. We are completely dependent on foreign sources for 24 "strategic" metals and minerals.
TGR: Could we ever see utilities becoming direct vanadium buyers?
MB: There's an overriding context in a lot of these metals related to what I have called the "electrification of the world." I think that's a 50-year process. I think the roles of utilities are going to change dramatically over that period. This so-called smart grid, which is in its very early stages of development, is going to require VRBs. I think it's very possible that you'll see a lot of diversification into different aspects of energy generation, storage and metering, and utilities probably stand first in line. We have seen some recent M&A in the utility arena. So that's entirely possible. The problem in the United States is that we don't have an extractive resource policy. All of our intellectual property, for example, in the nuclear arena has gone to France and China and other countries. The same thing happened in rare earths. We supplied almost all of the rare earth intellectual property until about 1985, and then it just simply disappeared when China underpriced us. I've been contacted by people in Washington who are looking at the issue of domestic supply chain development. I think a lot of things could change; we could see a lot of new players and a lot of new roles in the industry. And it all starts with the exploration and mining of these minerals and energy metals.
TGR: But what's going to change those American policies? Necessity?
MB: Just in the last few years China declared molybdenum, tungsten, rare earths and vanadium as strategic minerals. A number of other countries have made similar moves. These changes certainly got the attention of the senators and the congressmen that I deal with. Senator Lisa Murkowski from Alaska put a bill in place to support the development of the rare earths value chain in this country. But it's a one-off. We need a much broader policy framework for the extractive industries. There's a lot of opposition. The environmental groups oppose mining copper, silver and gold and all the other metals that we have here. It's going to be very interesting to see how this all plays out over the next few years. I suspect that the overriding sentiment will cause us to seek a sensible way of developing these industries.
TGR: What are some other companies with vanadium projects?
CB: There is one in Canada called Apella Resources Inc. (TSX.V:APA; Fkft:NWN). I just started learning more about it. The company has two deposits in Quebec, one of which is the Iron-T iron/vanadium/titanium deposit. It has an inferred resource that's getting bigger as the company continues to drill. It's actually just in the early stages, putting together an NI 43-101 resource estimate this year. I'm interested to see what that will look like. But because the price of vanadium is making these projects economic, we're starting to see more of these companies poke their heads above water.
TGR: Apella's Lac Dore Vanadium Deposit is considered the second largest vanadium deposit in the world. But the geology there is somewhat different from American Vanadium's deposit in Nevada.
CB: Apella is a bit more focused on the Iron-T vanadium deposit than Lac Dore, even though Lac Dore is potentially one of the world's largest vanadium deposits. My understanding is that there's a disagreement at Lac Dore over staking, and Apella is working with the Quebec government to resolve the issues. But if that situation can be resolved favorably for Apella, this could be another one to watch.
TGR: How far is Apella from producing vanadium?
CB: The company tells me probably 36 months at Iron-T; it's got a long way to go. It needs to update the 43-101, and then the prefeasibility study, etc. But if Apella can keep moving forward and drilling, it will be one of the few companies with a major North American vanadium deposit to keep your eye on.
TGR: And there's some titanium in the Iron-T deposit, as well.
CB: Yes, Apella is billing Iron-T as an iron/vanadium/titanium deposit. I'm not sure about the grade of the titanium. I know the iron ore is about 30%, which isn't lights-out but it's nice to have. You really have two strategic metals there, which makes that deposit more economic.
TGR: What are some other junior vanadium explorers?
CB: There's one focused on Brazil called Largo Resources Ltd. (TSX.V:LGO). Its Maracas project has very high vanadium grades. Some deposits there have vanadium grades of 1.3%—some of the highest that I've seen. Largo also has a very aggressive timeline to production. It wants to be in production by the end of 2012, as well. It's a big deposit with high grades and is stable geopolitically. That's another one to watch.
TGR: Largo is part of the Forbes & Manhattan Group. Does being part of a larger group of companies give it an advantage?
CB: I think maybe it does. If you already have people's attention on another company that's maybe grouped in with you, it's that much easier to get your company in front of the same sets of eyeballs. That's a great distribution platform for Largo.
TGR: In the mining business, new technologies come along that require a certain metal or commodity and all of a sudden a bunch of companies start developing projects to bring that metal or commodity to market. Are we going to have an oversupply of vanadium if all these projects reach production as scheduled?
CB: Globally, we're talking about 54,000 tons of vanadium being produced annually. If that happens, it won't be for a number of years. A lot of it depends on the "big picture" energy factors. Where is the oil price going to go? How is that going to affect clean energy development? If electric vehicles really take off, steel demand stays at its current pace or increases and the VRB market also comes into its own, then, yes, the demand for vanadium is undeniably going to skyrocket. But I understand what you're saying about a number of companies hitching their wagons to one star, so to speak. We've seen that in the rare earths space.
There are about 150 companies that are in some way involved with rare earths exploration and extraction. That market is not big enough to support 150 companies in production. If this same phenomenon happens at all in the vanadium space, it's not going to happen for some time. I really like companies like Apella, American Vanadium and Largo in the sense that either they've done the legwork or they're currently doing it, putting them far ahead of potential competitors in the space. If there is somebody to be first to production, I think it will be one of these three companies.
MB: Another aspect of this question is very important. When we first saw uranium come back to life in 2006 and 2007, we saw a huge bubble form. We saw uranium go over $130/lb. I believe oil was going for $150/barrel. At that point, junior companies started to be priced at ridiculous levels. And you see it in the rare earths space now. The REE companies that Chris talked about are being priced at ridiculous levels relative to where they are in the whole game. I believe that's true of Molycorp and I think it's true with others, too. The real question is: How will this resolve itself? In the case of uranium, it went down to $40 after it had its run. In the early stages of these metals, I think you have the potential for an asset bubble to form. We're seeing that in some of the rare earth companies now, and I wouldn't be surprised to see it happen in vanadium, manganese, graphite and a number of other energy-related critical metals. Buyer beware, I guess.
TGR: Chris, do you have some other parting thoughts on vanadium?
CB: Vanadium is a little-understood metal outside of certain circles. If you're a believer in the electric vehicle revolution, mass energy storage through batteries and the infrastructure buildout in emerging markets, then vanadium is a wise place to be going forward.
TGR: Thank you for taking the time to talk with us, gentlemen.
Michael Berry was born in Colombia and raised in Canada, but has lived in the U.S. for 36 years. A math major at the University of Waterloo in Ontario, he earned an MBA at the University of Connecticut and obtained a Ph.D specializing in quantitative analysis and investment finance from Arizona State University. While a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia (1982–1990), Michael spent considerable time with some world-renowned geologists on the Carlin Trend, and he also published a casebook, Managing Investments: A Case Approach during that stage in his career. Michael also held the Wheat First Endowed Chair at James Madison University in Virginia, and managed small- and mid-cap value portfolios for Milwaukee-based Heartland Advisors and Chicago-based Kemper Scudder. His Morning Notes publication, distributed worldwide, provides analyses of emerging geopolitical, technological and economic trends, as well as identifying opportunities for the Discovery Investing strategy he developed.
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 contends that the emerging quality of life cycle emanating from emerging markets 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 positioned to benefit from this phenomenon. Chris spent 13 years working 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.
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1.) Brian Sylvester of The Gold 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 Gold Report or The Energy Report: American Vanadium, Talison Lithium and Largo Resources.
3.) Chris Berry and Michael Berry: We personally and/or our families own shares of the following companies mentioned in this interview: Talison Lithium. We personally and/or our families are paid by the following companies mentioned in this interview: American Vanadium.
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