Making Sense of Vanadium

For the past few years, vanadium resources have become one of the toughest for investors to understand. The basics appear relatively simple. However, David Gillam flags up a number of complexities to consider.

Here are the facts as we see them, together with some insight as to why this remarkable metal both tantalises and frustrates investors. Ours is one opinion only. Not everyone will agree and nor should they. As always, we hope to provide talking points and food for thought for investors as part of their own comprehensive research.

The Basics of Demand

The vast majority of over 90% of the vanadium market finds its way to the steel and alloy industries.

From steel reinforcing to alloys used in the latest Boeing Dreamliner, small amounts of vanadium make a huge difference. It is this market that is the foundation of the industry and also one that we think is misunderstood. The industry may talk up this future growth. However, I believe there are enough existing suppliers to handle growth. For this reason, I see existing resources as coping with demand growth for some time to come.

Both Bushveld Resources and Largo are currently expanding. In addition, the high prices of 2018 encouraged more expansion within China that caused a corresponding drop in prices during 2019.

That means that in the near term, demand from steel and alloys is likely to be highly beneficial for existing producers, while probably falling short in encouraging new mines. The Real Demand Story This brings us to what’s most interesting for vanadium demand and where we see real future opportunities. While Lithium batteries have taken centre stage for battery storage, Vanadium redox flow batteries, (VRFB), appear set to gain much more traction in 2020.

The world’s biggest battery underway in Dalian City within China’s Liaoning Province.

It is this demand from batteries that has investors both intrigued and frustrated. The logic for vanadium flow batteries has always been apparent. Most investors in the space could list the advantages from memory and there are many articles available. The question they all ask is why they currently have such a small influence in the overall battery market? In answer, I would say that it requires a kickstart from governments and the corporate world. New energy is a compelling story and vanadium batteries should find their place.

Existing producers belong to an elite group in a small niche market. They are in an enviable position and their futures look assured. Even if we maintain the status quo there should be room for them to gradually increase output as warranted by new demand.

The real dilemma is for new vanadium resources. In my opinion they will need new markets such as batteries to push overall demand to levels that will justify development.

Vanadium flow batteries can soak huge volumes from the supply chain, and quickly. For this reason, we see batteries as the first crucial factor for new resources.

China Takes the Lead

With the return of vanadium price stability funding for the Dalian “big battery” has now been announced for the first stage of 100MW/400MWh.

During a November visit, we again visited the site located close to the Dalian power station. Little had changed visually from the road and negotiating security made discretely capturing images difficult. However, we were able to see that ground works had in fact begun in earnest. Deep foundations towards the rear were evident and more activity was happening just out of view to the right of the image below. In typical Chinese style, we expect rapid construction with stage one to be completed in mid 2020.

Site works for the Dalian battery began in late 2019.

Key Facts

1. The project: 200MW / 800MWh Vanadium Redox Flow Battery.

2. Stage 1: 100MW / 400MWh due for completion around mid 2020.

3. Stage 2: 100MW / 400MWh addition, completion date currently unknown.

4. Location: Adjacent to the Shakou District’s thermal power station.

5. Approval: The first large scale chemical energy storage project approved

By the National Energy Administration of China.

6. Construction alliance: Dalian local government China Electric Power Engineering Consulting Group Corporation Rongke Power

7. Finance Approved: Dalian Government. Agricultural Development Bank of China Bank Syndicates

8. Capacity: Peak shaving of approximately 8% of Liaoning Province’s peaking

capacity in 2020 when both stages are complete. Liaoning has a population of around 44 million and is heavily industrialised.

Our sources have indicated that it will also become a showpiece for Vanadium flow battery technology and visiting professionals will be welcomed.

At the time of writing our research into Chinese news and tenders has found additional planned installations including a further large 100MW/400MWh vanadium flow battery that may commence soon in Wuhan.

A Balancing Act We understand from discussions with experts in China that vanadium batteries are highly susceptible to fluctuations in the price of V205. At over USD 10.00/LB the handbrake is slowly but firmly applied to new installations. Perhaps the hardest point for long-term investors to come to terms with is this damaging effect of higher prices. Above all else, we need price stability around or just below that mark. Once economies of scale really kick-in, perhaps there will be a time for higher pricing. In the meantime, it will be a balancing act that we always watch carefully. As prices stand right now we see little growth in H1 this year but expect an upswing in the second half.

A Question of Resource Quality China will always be the driving force for vanadium demand. They have their own substantial lower grade resources under 0.5%. For this reason, we tend to discount lower grade resources on the presumption they would favour their own resources first.

When vanadium prices hit their highs in 2018, the market responded with many new projects. Sadly, we see few that have a real chance of success.

This brings us to a point where we consider real market traction for batteries as the major driver and resource quality, as the major qualifier for new resources. Naturally, there are other factors such as jurisdiction, and progression through the various studies. Of crucial importance is early and adequate testing and qualification of test samples to potential end users.

A Big Fish in a Small Pond Herein lies the real dilemma for new resources. Any development is a balance between CapEx and OpEx. Bigger mines cost more to build and produce at a lower cost.

Last year we looked carefully at the size of the market for V205 and compared it to the estimated output of new potential mines. We also looked at how Largo and Bushveld began and slowly increased output.

Some new mines are planning production of over 10,000tpa which is much higher than we have previously seen. If we transpose such output on a small niche market, we then wonder what the effect would be. Granted the scale up would not be overnight, however the promise of a more abundant supply may depress prices precisely when reasonable prices are needed most. It’s an unenviable position for new resources.

This brings us to our third major investment point. I favour a staged approach of around 2,500 tpa increments. This would allow a lower construction cost and proof of concept without upsetting the balance of supply and demand. How logistically practical that will be remains to be seen and will likely depend on many factors. Some resources will need the infrastructure economies of scale that dictate a larger mine. I’m reminded of one of the phrases we hear most in China, “Why don’t you make it smaller and do it faster?”

Redox Batteries support a solar installation.

Financing Finally, we come to the question of financing. This is perhaps the biggest of all headwinds for new resources. We can consider a vanadium mine as both a producer of concentrate and a chemical facility. The cost of construction is high, and the potential profits are tempting.

I occasionally throw CapEx figures around. If we take a new mine of say 10,000 tpa, the construction cost could be around USD 300 million. I would probably add an additional USD 100 million for working capital and potential losses while ramping up to nameplate. That give a requisite CapEx of around USD 400 million. I then look at how it could be financed while keeping in mind that finance could also come from a combination of sources.

Looking at institutional lenders I would be very doubtful of funding. The previous price volatility of vanadium would likely sound warning bells for large lenders. They would also be mindful of such price volatility in the face of substantial additional supply. Hence, why a staged approach could be workable for a lower CapEx and more controlled addition to supply. A buy out would normally signal Chinese involvement. I also put this on the doubtful list. In recent years the Chinese have learned the hard way that buying foreign resources outright is fraught with danger. There are a few exceptions in counties like DRC where the style of government better suits Chinese ownership and a fairly robust expat mining community is already in place. Finance or involvement from an existing supplier? Once again, I would consider this doubtful unless there was a strategic reason to do so. Existing suppliers are in an excellent position and would I think be loathe to change the status quo.

As is usual these days, the real answer typically lies with the Chinese, and that is exactly where I think answers may be found.

It’s a long process of building relationships and like all countries, there are those you may consider and those you would reject outright. That minefield is far more than just the size or financial standing of a partner. It can be as much about those relationships and the quality of the people involved on both sides. Their expectations for speed and practical solutions are high. The very points that have allowed them to dominate in recent decades provide both the carrot and the stick for new resource hopefuls.

In summary, look for high grade resources that can provide a staged production approach against a backdrop of substantial increases in vanadium battery market penetration. Throw in committed management with passion to move to production and the patience to work the Chinese relationships to fruition.

Ticking all those boxes is a tough ask, although one that will be rewarded for those that get their development story “just right”.