Morgan Stanley update / downgradePiyush Sood Morgan Stanley March 21, 2019 4:03 AM GMT A deficit/rally in vanadium is now a show-me story and LGO-T is discounting steep price declines. We believe demand will slowly improve and prices will settle above the market's expectation. With bull case fading away, we are lowering our PT to C$4, aligning it with our unchanged base case. Stay OW. Lowering our PT to C$4 from C$6 and aligning it with our unchanged base case... We had originally set our PT at C$6, between our C$8 bull case and C$4 base case, as we expected vanadium prices to decline slowly, possibly even overshoot our base case, and LGO-T to trade above its fundamental value. However, vanadium prices have declined faster than we expected, already down ~40% from their peak in November, which drove a ~50% decline in LGO-T. The price decline was led by falling rebar margins in China, slower than expected enforcement of China's new rebar standards, no signs of restocking post Chinese New Year, and higher than expected substitution. Our DCF derived base case stays unchanged at C$4 and is now our PT....but staying OW as we think the market is now overly bearish on underlying fundamentals. Spot vanadium (V2O5) price is at $17/lb (down from peak at $29/lb) and we forecast it to fall another ~10% to $15/lb in 2Q19, stabilize there for the mid term (until 2022) and then settle out at ~$12/lb over the long term. That's above the $9/lb level LGO-T is pricing in and substantially above the ~$6/lb floor for some investors. We stay OW for ~80% upside, since we expect slow demand improvement from China and prices to stabilize above the market's expectations. We calculate 17% FCF yield on 2019 and see shareholder returns beginning in 2Q. The 4 key factors behind recent decline in vanadium prices- Chinese vanadium prices are down more than 50% from $34/lb in early November to $15/lb this week, and in turn, the benchmark European price is down from $29/lb in late November to $17/lb.Tightening rebar margins in China. China's rebar market accounts for ~34% of global