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March 2, 2019 3

Vanadium 2019 – Winners & Losers

It’s always very difficult to write articles based on winners and losers. We all want to think we’ve picked a winner, right? Mastermines also have a policy of not discussing specific stocks wherever possible. In addition, some information we have is confidential. Either because it was shared by the Chinese who trusted it was a private conversation. or it becomes information we share only via our consultancy work. Confidentiality is more about specifics, and we hope the information we share here will still give a well-rounded view on our thoughts.

This is a further article to the one published last month.
https://mastermines.global/articles/vanadium-2019-mastermines-expectations/

Vanadium Background

We assume that most people interested in Vanadium know the background. A series of spikes followed by lows over many years.

We do not foresee the past repeating and expect V205 98% to sit in the $15/LB-$20/LB range throughout this year. There may be upward spikes, and the occasional sell-off. However, we do not expect pricing lower than $10/LB over coming years, nor any sustained increase over $20/LB

We may see some additional supply this year from existing producers, and perhaps a little more stone coal. Also, a small amount as a bi=product of Uranium. Nothing much there that would break the structural shortages. There are other ore bodies in China that we are currently researching that may have an impact. We also believe China does have the ability to respond to any serious shortages caused by a raising of the re-bar standards.

Price Stability is Critical

We have made mention of price stability previously and the damaging effects of upward spikes. While shareholders applaud it, they should instead see warning signs. When prices increase, end users can, and do, embark upon replacing Vanadium with Niobium or other options. We saw ample evidence of this in late 2018 and it doesn’t just affect re-bar but also alloys.

How much Vanadium will be affected by substitution depends on many factors and cannot be accurately estimated. For example, increasing prices of Niobium may restrict its use and price stability for Vanadium will further restrict substitutes. Suffice to say that we see prices over $20 as the biggest threat to Vanadium moving forward.

Vanadium Processing

The Unknown Battery Story

Yes, we all know that VRB’s are a great story and there is a reality behind that story. At $10/LB it’s an incredibly compelling story. At $20/LB we do not believe VRB’s will penetrate the battery market. Sure, they will keep developing and will sell the odd batteries here and there. If we get to $30/LB they simply will not stack up. Where Vanadium sits in the scale of $10/LB to $20/LB will have a significant effect on sales.

Vanadium is a Set of Scales

We have said for some time that far from a boom or bust, Vanadium is about the best positioned metal that can withstand a boom or bust cycle.
If prices move towards $10/LB VRB’s will kick in and in a big way. They also have the capacity to soak a lot of supply. We are aware of many contracts in China that are on hold, due to the high prices of late 2018. You can be sure that these contracts will kick in very quickly at the first sign of any serious reduction in prices.

So in some ways we can thank VRB’s for price stability and expect that they will become more competitive as economies of scale, and improved engineering take effect. However, these batteries will always be heavily reliant on Vanadium prices whether on a straight sale or to a lesser degree, a leasing basis.

Existing Supplier Outlook

We believe that existing suppliers are in an enviable position to capitalise on a stable market with consistently higher prices than history shows.

In addition, the threat from new resources is low. Most minerals or metals are always at risk of the introduction of new and substantial supply in any pricing upswing. Vanadium is not. Even were a few to manage to reach production, their production is likely to be utilised quickly into a growing market. Where added production causes a reduction in spot pricing, once again VRB’s have the capacity to quickly soak that supply and stabilize prices once again.

Vanadium Rotary Kiln

New Resources

Vanadium certainly gained more than its share of attention in 2018. A natural flow through effect is that new small cap miners will immediately look for new Vanadium deposits to enhance shareholder interest. However, as we saw with Lithium, shareholders would be well advised to exercise caution.

Without delving too far into what we feel makes a good resource, we simply point out the basic rules we apply. Resources must be at or above 0.8 ore grade. Mention of concentrate grade produced by a lab is of little interest. We are singularly unimpressed with any mention of DSO. We also steer clear of resources that require acid unless proven by small batch production, with mention of acid usage per ton, along with the percentage that can be recycled. If we apply these rules, there are very few large resources that are of interest to us.

Thus far, we look to the Gabanintha deposits of Western Australia and some additional resources from South Africa although other serious contenders may emerge. Not a lot of new resources to get excited about and subsequently no great threat to existing suppliers.

Headwinds for New Producers

We have only a few dedicated Vanadium mines in the world and investors may ask why. Quite simply it’s a huge task to create a new mine. Largo is without doubt the hero of the new Vanadium story. Developed at a time of low pricing and demand. Management showed amazing foresight and no doubt had a little luck thrown in. Their example will be a tough one to replicate. We should also mention Bushveld minerals as an outstanding success story in 2018 and they appear guided by some excellent management.

A new Vanadium mine can be quite complex and requires very high capex of around USD 350M. In addition, as the majority of Vanadium is produced as a bi-product it remains off the radar of many investors.

Capex, Market Cap and Finance

We identified early on that we consider market capitalisation versus capex and funding required, as the biggest headwind for new resources. With many small cap miners, market caps are in the region of USD 10M to USD 40M.

These resources require substantial capex of around 350M and that is going to be a tough ask indeed. Ideally, we would like to see a capex of USD 100M-$200M prior to seeking funding and this appears unlikely. How these small resources will fund their mine build, becomes a very critical issue. It’s likely that they will either stall through lack of finance or be forced to accept substantial dilution from any funding partner.

This is the major reason we reduced our investment in Vanadium in late 2018 until recently and moved it to hard rock lithium. We intend to maintain a reasonable position as the rewards for any new entrant that is successful will be substantial. I look at it more as balancing risk while maintaining exposure.

A Tough Road to Success

Funding partners may be very wary of any form of financing at the levels required for such small players. Throwing $350M at a $40M company using debt finance appears largely unworkable.

To that end, miners will need to look at partnerships with those that see a need for Vanadium and have long-term plans to capitalise on a Vanadium future. If we look at the possibilities of such prospective partners that have the capability to finance at the scale required, they are few and far between. No more than a handful come to mind, and most are based in China.

From our perspective we can then further separate these prospects according to their business sector. Without delving into the world of China business too far, some in this small group are traditional Chinese steel mills and they will generally have very conservative management. They are what we term “old school Chinese” and we generally steer clear of them. However, I’m also very big on some of the new entrepreneurs emerging in China. Some are simply outstanding. However, in the Vanadium sector we do not see many of those personalities in management, and I subsequently believe that real and meaningful deals will be very difficult.

For those lucky enough to identify a potential partner it will require a great deal of continuing effort to reach a signing and investment commitment. The Chinese are not what they were years ago. They are fully aware that many miners arrive in China just to sign a quick deal and create shareholder excitement. We will need to see the finding of a new partner, along with a concerted effort to develop the relationship. That will not come from pressure but at a time that suits the partner and where he can see a clear vision of a real mine developing. The question is whether the time frame of any commitment will suit the time frame of the miner.

Chinese Steel Mill

In Conclusion

We see a very safe passage for the few existing dedicated Vanadium miners. They may not see the hype of 2018, although their operating profit should show the real story.

For new entrants, they would be wise to seek and nurture possible partners early in the process. They should treat the development of those partnerships as paramount and every bit as important as developing the resource itself.

At Mastermines we know all investors look for the candy and not the lemon. We also know what get’s a lot of attention and approval from all of the parties involved. Regardless, we will always write with honesty, rather than to please others.

We hope this article is not seen as a negative for Vanadium in any way. It is not. It’s simply the reality that considers the huge task in establishing a Vanadium mine. It is a situation where you need every avenue working. You need to take shareholders and partners with you on a journey with the kind of commitment rarely seen in the mining sector. Every box needs to be checked from resource quality and technical skill, and above all else, a partnership that can allow those positives to develop all the way to a working mine.

Should you find success, you will join a very elite group of dedicated suppliers of Vanadium.

Articles by Mastermines are general opinions for discussion only and not investment advice in any form. Please seek independent advice from qualified financial advisers in your country. Mastermines or its staff and affiliates may hold investments or consult to listed entities that have exposure to markets, minerals or entities mentioned in articles. Readers should consider that there could always be a conflict of interest in any and all articles by Mastermines.
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