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Berrys, Batteries and Burgeoning Demand for Vanadium
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Berrys, Batteries and Burgeoning Demand for Vanadium
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Michael and Chris Berry: Berrys, Batteries and Burgeoning Demand for Vanadium
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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 Berrys 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.
Theres 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 youre a believer in the possibility
of an EV revolution in the years to come, then vanadium could be key.
If youre
a believer in mass energy storage associated with wind and solar generation,
then VRBs, as theyre known, are vital.
One of the knocks against clean power
generation like solar and wind energy is that its very uneven and cant 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-its 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.
Its very important for emerging markets
that are building out their infrastructure.
TGR: Indeed.
China recently has been encouraging companies to use iron thats
naturally strengthened with vanadium.
CB: Thats 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
reduces the demand for vanadium?
CB: I think the issue there is the price of vanadium.
Its going to have to
rise much, much higher to make its use uneconomic.
Right now its 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., its 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.
Im not sure
thats 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: Youre right, VRBs are absolutely gigantic.
The VRBs that Ive 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.
Im 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 isnt 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: Thats 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.
Were 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 doesnt 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: Ive 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 youre selling into the market
at $7/lb., youre looking at a $4 profit.
The vanadium market is a little murky,
though.
Youve really got three producers: Russias 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 its mining; and Xstrata PLC
(LSE:XTA)
which were all familiar with.
These are the primary producers.
Its tough to
get an average grade and price from them because theyre 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 arent 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
its economic, and companies are sniffing around again.
There are a number
of deposits in Canada, the United States and even Brazil.
Theyre 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
its 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 companys mandate.
I like this company
for a couple of reasons.
Number one, theres 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 million pounds (122 Mlb.) 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 dont care what metal youre talking
about, whether its 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: Its 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 Vanadiums battery-making
strategy and how it plans to implement that.
CB: I think thats something the company is still getting its head around.
It
doesnt 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 its producing
vanadium.
Then itll go from there.
MB: Actually, we see a lot of these things now; for example, Talison Lithium
Ltd.
(TSX:TLH)
supplies 75% of Chinas lithium.
Its 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 were 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,
youre 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? Thats 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 cant 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.
Were seeing all
kinds of supply agreements in iron ore, copper and other metals.
You name it,
theyre 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: Theres an overriding context in a lot of these metals related to what I
have called the "electrification of the world." I think thats 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 its very possible that youll 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 thats entirely possible.
The problem in
the United States is that we dont 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.
Ive 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 whats 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
its a one-off.
We need a much broader policy framework for the extractive
industries.
Theres a lot of opposition.
The environmental groups oppose
mining copper, silver and gold and all the other metals that we have here.
Its
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 thats getting bigger as the company continues to drill.
Its actually
just in the early stages, putting together an NI 43-101 resource estimate this
year.
Im interested to see what that will look like.
But because the price
of vanadium is making these projects economic, were starting to see more of
these companies poke their heads above water.
TGR: Apellas Lac Dore Vanadium Deposit is considered the second largest vanadium
deposit in the world.
But the geology there is somewhat different from American
Vanadiums 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 worlds largest vanadium deposits.
My understanding is that theres 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; its 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 theres some titanium in the Iron-T deposit, as well.
CB: Yes, Apella is billing Iron-T as an iron/vanadium/titanium deposit.
Im
not sure about the grade of the titanium.
I know the iron ore is about 30%,
which isnt lights-out but its 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: Theres 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 Ive seen.
Largo also has a
very aggressive timeline to production.
It wants to be in production by the
end of 2012, as well.
Its a big deposit with high grades and is stable geopolitically.
Thats 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 peoples attention on another
company thats maybe grouped in with you, its that much easier to get your
company in front of the same sets of eyeballs.
Thats 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, were talking about 54,000 tons of vanadium being produced annually.
If that happens, it wont 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 youre saying about a number of companies
hitching their wagons to one star, so to speak.
Weve 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,
its not going to happen for some time.
I really like companies like Apella,
American Vanadium and Largo in the sense that either theyve done the legwork
or theyre 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
thats true of Molycorp and I think its 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.
Were seeing that in some of the
rare earth companies now, and I wouldnt 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 youre
a believer in the electric vehicle revolution, mass energy storage through batteries
and the infrastructure buildout in emerging markets, the
n 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.
HisMorning
Notes
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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visit our Expert Insights
page.
DISCLOSURE:
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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