This is part 2 of our update to our alerts on battery metals from late 2017 (October 2017, cobalt) and early 2018 (January 2018, vanadium) where we will update you on vanadium and introduce hydrogen.
As discussed in part 1, we’re combining all these themes into one: Battery technology.
The essence of combining all these individual commodities/technologies into one theme is firstly that the firm is macro oriented and in that context we believe that battery technologies as a whole offer huge growth and asymmetry.
Where we’re not so certain, and therefore unwilling to speculate on, is which technology will experience the greatest upside.
When internet search first came about, who could have known that Google would take the crown? Likely not you, and certainly not I. What was fairly clear though was that the ability to search and retrieve information rapidly and efficiently was gold to whoever could get it right.
In other words, it was a space or sector that you needed to be involved in.
But back to battery tech. They all have their merits and, frankly, all appear to offer huge potential asymmetry.
Perhaps they all experience significant growth. Perhaps it is one or two that provide really exceptional growth or one takes the crown for industrial level storage and another for transportability and retail deployment. We don’t know, and even the folks with white coats poking about building this technology can’t agree. As such, we believe we need to be involved (like internet search) and nimble. We don’t want to miss out on the technology that really excels and that means being invested now.
In an ideal setup we would like to buy just one security that included all the stocks listed below (an ETF). But since one doesn’t exist, we have to create our own basket. Just as you would with an ETF, you should focus on the theme and not the performance of individual counters.
In part one of the battery metals update we discussed cobalt and nickel. We increased our exposure to nickel with four Australian miners: Western Areas, Mincor, Panoramic Resources, and Poseidon Nickel.
In Part 2 we will cover vanadium.
And then, in part 3 we will discuss hydrogen
Our existing positions remain unchanged:
- Largo Resources (LGO.TSX)
- Australian Vanadium (AVL.ASX)
- King River Resources (KRR.ASX)
Exposure is also achieved via uranium miner Energy Fuels (UUUU.N) due to the high vanadium credits at its uranium operations.
Since we posted our vanadium alert in January last year the price of vanadium rocketed higher, at one point up some 300%.
The rise isn’t due to demand for vanadium in battery technology but rather due to China changing its specifications to rebar — adding vanadium to reinforcing steel to improve earthquake resistance.
The changes implemented last year will drive higher use of vanadium and, although the amounts involved are small, the cumulative impact will be to increase Chinese consumption by around 10,000 tonnes per year — the equivalent of around 12% of global vanadium production in 2016.
We cannot see any reason why China would change course and decide that. No, actually steel that goes into their buildings and bridges is perfectly fine when it shears and fails causing said buildings and bridges to collapse killing people.
They may be tone deaf to human rights abuses and a number of similarly “unusual” things. But the CCP fully understand that when their citizens die and the finger points to them, it can stoke social unrest — something that the CCP are particularly wary of.
Nope, it’s more likely the requirement to incorporate vanadium into rebar is like incontinence in an old persons’ home — here to stay.
This demand boost is happening just as China is weakening its own supply capacity as part of its drive to introduce more environmentally friendly policies. Again those policies are due to the fact that the CCP are acutely aware of increasing social unrest surrounding poor air quality. Not to mention the cost this brings to the healthcare system and ultimately the economy.
Vanadium is largely produced through the processing of magnetite iron ore, with around 73% of output coming in the form of slag generated in the steel production process.
The steel mills that produce it are not the same ones that consume it. Rather, they have historically been the higher-cost, lower-quality operators feeding low-grade magnetite iron ore into their alloy mix — precisely the sort of material that is being used less by China’s steel producers as they favour higher-grade ore to maximise efficiencies and reduce environmental emissions.
Just to compound this evolving supply challenge, Beijing has also banned the import of four types of vanadium slag, cutting off around 4,500-5,000 tonnes of annual supply from Russia.
Another potential source of supply from stone coal (anthracite) is also being restricted by China’s war on smog. Chinese regulators are refusing to issue permits to existing anthracite producers and although there is a collective attempt to upgrade processes to achieve lower emissions, the short-term effect is to reduce even further China’s vanadium production capacity.
We cannot see China being able to relax its supply restrictions on vanadium from slag sources without screwing up their environmental issues. Xi’s promise to citizens to sort out the terrible smog issues is clearly front and centre for the CCP and everyone knows it.
China’s moves both to boost demand and limit supply have created a perfect bullish storm for the tiny vanadium market. Exports from the country have dried up, stocks everywhere are falling, and prices have been on a super-charged rally.
The market is in a significant supply deficit, and this will likely continue for sometime to come.
The increasing demand and limited supply side reaction is forecast to result in a global deficit of ~21,300t V (~37,900t V2O5) in 2025 (source: TTP Squared) assuming full resumption of Chinese stone coal production.
Unless there is a technical breakthrough (to lower pollution) in either stone coal or by-product slag processing, supply will have to come from primary producers such as South Africa’s Bushveld Minerals (BMN:LN) and Canada’s Largo Resources (LGO:TO).
Yes, there is new production in the pipeline, but these projects have long lead times. And remember, we’re talking about mining, which always, always means they are susceptible to delays, and as such there is likely to be limited increases in supply until at least 2021.
This backdrop is problematic for vanadium, which promises to play a key role in grid energy storage. As of last year, storage systems accounted for only around 2% of global demand for Vanadium.
The upside for vanadium is huge.
Current forecasts estimate that vanadium redox flow batteries (VRFB) will account for 20% of vanadium consumption by 2030 but with significant upside of as much as 50,000 tonnes if they capture 25% of the energy storage market within the next 10 years. That’s around half of current global output, even before factoring in the likelihood of falling production in China. As Trump would say, this is potentially yuuge!
Of course these forecasts do depend on the price of vanadium not going to the moon as it will render the VRFB technology less competitive. But higher prices will encourage more supply to come on stream. And markets work. Which means supply will finally come and crush the price. It’ll happen but we can’t see anything in the next few years to bring said supply, and so the road ahead looks pretty darn interesting — at least for the next few years.
I will discuss the VRFB technology further below. But for the purposes of investing in vanadium, vanadium redox flow batteries are essentially a free call option (VRFBs only take about 2-3% of global production in vanadium). In other words, we’re bullish without VRFBs taking any of the supply.
The base case scenario is vanadium’s use with steel particularly strengthening of rebar in China and the Chinese cracking down on polluting secondary production from slag.
Developments in Vanadium Redox Flow Batteries
It is probably fair to say that the future of redox flow batteries is in the hands of China.
China continues to move ahead in the use of vanadium for renewable energy storage, and this makes perfect sense from a geopolitical perspective. They’re not self sufficient in energy and about 80% of their energy currently moves through the strait of Malacca. This passage and all the goods moving through it are patrolled by the US Navy. That’s a reliance that China would dearly love to be rid off.
While the vanadium battery is gaining recognition globally, with more than 30 VRFB projects having been built or under construction since 2014 in 11 countries, China is building the biggest, as part of the country’s effort to more fully utilize energy generated from solar installations.
The biggest VRFB in China is the Rongke project. This battery is currently the largest planned chemical battery in the world and part of a Chinese government investment to spur the technology.
Rongke also has a large-scale manufacturing facility, which builds the batteries, with the project expected to come on line by 2020. Below is the Ronke factory (not the battery as it is incorrectly reported by other commentators).
The battery’s purpose is to provide power during peak hours of demand, to enhance grid stability, and deliver juice during black-start conditions in case of emergency. The system is expected to peak-shave about 8% of Dalian’s expected load when it comes online in 2020.
Newsflow on the progress with the Rongke power project is almost non existent. Initially the project was slated to come online in 2019 but this has been pushed back to 2020. Why? We don’t know, though we do wonder if it has anything to do perhaps with a lack of vanadium? We can only speculate. The reality is that it is a wait and see game though clearly it’s going ahead.
The Rongke power project is considered as a benchmark for VRFB technology for ultra-large-scale flow batteries and ultra-large-scale grid batteries in general. This is a true long-duration storage project (you could liken it to a small hydro dam). This is a very different concept from lithium ion battery projects like the South Australia Tesla battery, which is a short-term backup to prevent a grid failure.
In November 2017, Pu Neng (now known as VRB Energy), was awarded a contract to build China’s 2nd largest VRFBs. VRB Energy will initially build a small-scale VRFB to demonstrate the capability of using the technology to integrate a solar photovoltaic system into the energy grid at Zaoyang.
The project’s first 250kW/1MWh battery module was successfully commissioned late last year. This battery will be followed by a 100-megawatt, 500MW-hour VRFB, which is planned to be the cornerstone of a new smart energy grid in Hubei province.
Moving away from our little Chinese friends and over to our bier making and drinking brethren, we note that Germany is also moving ahead with large scale VRFB installations and VRFBs are popping up in other countries slowly.
Side note: I guarantee you that if what was already taking place in China with VRFBs was taking place in the US, every fund manager and his dog would be talking about it on CNBC, and we’d probably already have iShares or VanEck creating an ETF or something like that to flog to the retail masses.
What is encouraging from a vanadium perspective is that energy authorities are beginning to see the advantages of VRFBs over lithium ion batteries for large stationary applications. Sunedison’s decision to use VRFBs in India is a prime example.
We do believe that VRFBs will take off but it isn’t the primary reason as to why you would invest in vanadium. Investing in vanadium now is primarily based on the long-term fundamentals of its use as an alloying agent for strengthening steel. But in doing so you get a “free call option” on VRFBs gaining widespread popularity for grid energy storage.
This strikes us as a particularly good setup. Like finding a gorgeous fun girl who not only wants to be your girlfriend but one who also likes beer, sport, and sex. In other words, a keeper.
Ways to Invest in Vanadium
As we see it there are essentially three ways.
- Vanadium miners where vanadium is the primary resource, like Largo Resources (LGO:TO) and Bushveld Minerals (BMN:LO). Or you could get more adventurous and go for vanadium developers (like Australian Vanadium and King River Resources).
- Miners where vanadium is a secondary resource. Many uranium miners have significant vanadium deposits like Energy Fuels (UUUU:N), Western Uranium and Vanadium (WUC:TO), and Anfield Resources to name a few (AEC:TO).
- Vanadium redox flow battery manufacturers like RedT Energy (RED:LO) and Cellcube.
Established Pure Play Vanadium Miners
There aren’t many vanadium miners actually producing vanadium where vanadium is the primary resource. The only ones we can think of are Largo and Bushveld.
We believe that the pull back in Largo Resources is a wonderful opportunity to gain entry into the vanadium market if you hadn’t already done so. If there was “one trade” to gain exposure to vanadium, it would be Largo.
We did have Bushveld Minerals as part of the initial vanadium alert but sold it due to concerns over the political situation in South Africa. There is absolutely nothing wrong with their asset which looks stellar. It’s just “politics” we’re concerned with.
Vanadium Resource Developers
There are a number of these on the ASX and TSX. Here is a good summary of ASX-listed Vanadium resource developers.
We like Australian Vanadium and King River Resources:
Both stocks took off soon after we discussed them in our vanadium alert in January last year but they have since come off and are back to about where they were at the start of last year. This is largely due to the price of vanadium retreating from recent highs.
There is nothing intrinsically wrong with the companies that we can tell. It seems that both companies have made good progress in developing their resources over the last 12 months.
Yes, it would have been nice in hindsight to have taken profit when LGO was trading at 4.50, KRR was at 0.15, and AVL at 0.07. However, we have a long-term view and believe that vanadium will be materially higher on a 5-year view, and this is what we are holding out for. We aren’t short term traders so we just have to accept the high volatility that goes with these trades.
We do note that these miners are not that liquid so it doesn’t take much to push their stock prices materially higher… or lower. It means that you can and should be patient on entry and patient until things are flying (provided we’re right in our longer term analysis). And at that point we’ll gladly be walking away and taking our capital off the table.
Miners With Vanadium as a Byproduct
This is an interesting idea and one where we can kill two birds with one stone or at least buy uranium assets and essentially acquire vanadium assets as a cheap option.
A number of uranium mines have significant vanadium deposits. Three uranium miners that come to mind are Energy Fuels, Anfield Energy, and Western Uranium & Vanadium. We already own Energy Fuels as part of our uranium alert.
Vanadium Redox Flow Battery Manufacturers
We are aware of only three listed VRFB manufacturers: TSX-listed Cellcube Energy, LSE-listed RedT Energy, and ASX-listed Protean Energy. But for your interest, here is a list of manufacturers of vanadium redox flow batteries:
It is interesting to read through the various company websites as you get a fair idea of deployments of VRFBs. This technology certainly isn’t “experimental” with each company having fully functional, tried and tested products that have already been deployed in various stationary grid storage capacities.
The other thing that strikes me is that there doesn’t seem to be that much of a differentiation between them.
At this stage our preference is to gain exposure via vanadium miners, either primary or secondary, rather than invest with VRFB manufacturers directly.
It is difficult knowing which VRFB manufacturer will gain competitive advantages over others (in any event, we can only invest in 3). We would rather not take specific risk on the manufacture of VRFB.
Is investing in VRFB manufacturers a bad idea?
To mere mortals like ourselves it probably is. But to well connected individuals like Robert Friedland (Chairman of VRB Energy) it probably isn’t.
In any event, it isn’t like we are blessed with 20 or so VRFB manufacturers to invest in, most are privately held companies. Others, like Sumitomo Electric and Thyssenkrupp, while listed public companies, are conglomerates of a number of different businesses with revenue brought in by VRFBs being a “rounding error” so we’re not particularly interested in that avenue.
If VRFBs gain widespread popularity for grid energy storage, then the demand for vanadium will increase accordingly. Vanadium is approximately 70% of the input cost of a VRFB, so it’s not at all like uranium miners relationship with nuclear energy where uranium amounts to a tiny percent of input costs. Thus we believe the better idea is to stick with vanadium miners.
In the unlikely event VRFBs don’t gain widespread acceptance, then this is unlikely to affect the price of vanadium because as mentioned before VRFBs only account for some 2-3% of global vanadium demand. Once again, this is a free call option on something we want to own anyway…. and one that’s really rather exciting. Remember: beer, sports, and sex on top of gorgeous and fun. Rather exciting all round.
So to recap, our existing positions will remain unchanged:
- Largo Resources (LGO:TSX)
- Australian Vanadium (AVL:ASX)
- King River Resources (KRR:ASX)
- Energy Fuels (UUUU:N) due to the high vanadium credits at its uranium operations.
At current levels you have the opportunity to get in at more or less where we did some 12 months ago. We remain confident on a long-term view that the best is yet to come with vanadium.
And for the uranium bulls out there I hear you saying, “But Chris, what if we really buy into the uranium story?”
Well, one could be concentrating on buying high quality uranium assets that have high vanadium credits. As we discussed above, Energy Fuels, Anfield Energy, and Western Uranium and Vanadium fall into this category.
Now if you said to me, “Urghh, I’m lazy, for goodness sake. Just give me one trade that covers all bases!”, it would probably be Energy Fuels.
As always, thanks for reading and being part of Insider.
Founder & Editor In Chief, Capitalist Exploits Independent Investment Research
Founder & Managing Partner, Glenorchy Capital
Unauthorized Disclosure Prohibited
The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Capitalist Exploits reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion of the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Capitalist Exploits. Capitalist Exploits reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact email@example.com.
Capitalist Exploits website, World Out Of Whack, Insider, and any content published by Capitalist Exploits is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
Capitalist Exploits and other entities in which it has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in publications or the website. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest should they arise, in a timely fashion.
Capitalist Exploits reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Capitalist Exploits paid publication/s, any infringement or misappropriation of Capitalist Exploits proprietary rights, or any other reason determined in the sole discretion of Capitalist Exploits.
Capitalist Exploits has affiliate agreements in place that may include fee sharing. If you have a website and would like to be considered for inclusion in the Capitalist Exploits affiliate program, please email firstname.lastname@example.org. Likewise, from time to time Capitalist Exploits may engage in affiliate programs covered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.
© Copyright 2019 by Capitalist Exploits