Editor's Note: Below is a new recommendation in the vanadium space that I have been tracking for some time.
--Nick
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Vanadium is the next great “electric metal” story.
We’ve already seen the rise of lithium and cobalt.
The story you’ll hear about as the main driver for vanadium is its use in redox flow batteries — a large battery (think shipping container) that, because it uses vanadium as both the cathode and anode, is long-lasting enough to store solar and wind energy for the grid.
And that’s partly true. Vanadium redox batteries are showing promise, but it is still very early. Only a few of them have been deployed on a commercial scale to date and they have yet to be proven viable over the long-term whereas lithium-ion batteries are already widely adopted.
More accurately, vanadium prices have been rapidly rising because of their use as an alloy necessary to make steel. The more vanadium you add, the stronger the steel.
China recently increased the amount of vanadium required in the steel produced there, which increased demand and prices. The battery stuff has just fanned the flames on an already limited supply.
Vanadium prices are up some 280% since last year’s low of $5.00 per pound, and 55% already in 2018 to an eight-year high over $14.20 per pound.
Over 50% of the world’s vanadium comes from China. Another 11% from Russia. Annual production of vanadium pentoxide is 136,000 tonnes at $30,000/t ($4 billion).
The U.S. produces none of it. It is 100% reliant on foreign sources of vanadium and has no stockpiles.
The U.S. government has acknowledged this.
On December 20, 2017, Donald Trump signed an executive order "Recognizing Strategic Importance of Minerals Mining to Domestic Economy, National Security, Infrastructure,” which called on the government to streamline the mineral permitting process.
On the same day, the U.S. Geological Survey listed vanadium as one of 23 critical mineral resources of the United States.
It’s a good thing. As Bank of Montreal (BMO)
put out in a note earlier this year:
We see a situation where over the coming months Chinese exports of ferrovanadium could drop sharply on the back of increased domestic demand and raw material constraints. Chinese pricing has already moved sharply higher over 2018 to date, but we would see significant further upside to global pricing as the market adjusts to lower Chinese shipments.
Notes on the internal vanadium supply picture paint a dire situation where producers can’t fill contracts even at these high prices. From
ferroalloynet.com in late December 2017:
V2O5 flake supply is extremely tight
Date: Dec 26, 2017
Chinese V2O5 flake supply is extremely tight. The suppliers decline to sell at low price, and as some of V2O5 flake producers have signed long-term supply contracts especially when the output is small, ferrovanadium and vanadium-nitrogen producers have limited access to raw materials. V2O5 flake in Panzhihua is generally supplied to Pangang and there are few materials available for other buyers, Tranvic and Jianlong are supplying materials only for regular customers, Hongjing is seeing small output and makes no delivery, and in northern area Jinzhou Guangda and Jinxin have suspended production and have some inventories of V2O5 flake, but are unwilling to sell.
The conclusion is that China — the world’s largest producer of vanadium — is going to become net importer.
So just as with previous runs in uranium, rare earths, lithium, and cobalt… you have a metal with rising demand that’s production is controlled by few. And in this case, the largest producer needs more than even it can produce.
Enter Prophecy Development Corp. (TSX-V: PCY)(OTC: PRPCF)
Prophecy is developing what aims to be the first primary vanadium mine in North America.
I have been following this story for some time. And like I am of cobalt, was skeptical for some time that the upside in vanadium was real. But the more I’ve learned, the more I realize Prophecy provides great leverage to a vanadium story that’s very real.
It’s also undervalued relative to peers, has a head start as the project is already in permitting, and I believe has so far flown under the radar of investors.
The Project
The project — called Gibellini — is in Nevada and has already had $20 million spent on it.
A feasibility study done on the project by its previous owner in 2011 showed the project to be economic, with an after-tax internal rate of return (IRR) of 43% and net present value (NPV) of US$170.1 million.
Prophecy currently has a market cap under US$16 million.
And some things have changed since 2011. Sulfuric acid, which is the main input cost for leaching the vanadium, is much cheaper now. Fuel is cheaper now too. Taxes are also lower.
These changes are being incorporated into an updated assessment that is expected to be released in April 2018. I expect the NPV to be some 50-65% higher.
As you may have gleaned from the mention of acid — yes, this is a heap leach project. And because the ore is already oxidized, it doesn’t need to be roasted before it is processed, which saves on cost and environmental concern.
Gibellini contains 129.28 million pounds of vanadium pentoxide (V205) grading 0.294%. The current mine plan envisions producing 11.4 million pounds annually for over seven years, paying back its capital cost of US$95.5 million in 2.4 years.
I have been to site.
Gibellini is essentially a big hill full of vanadium starting at surface. There is layer of oxide ore at the top, then a layer of transition ore with a high-grade core, and then a sulphide layer. The ore will be blasted and scooped from the top of the hill and trucked downhill to the processing plant.
The processing is being led by Michael Drozd, a former chief metallurgist at Barrick with 40 years of experience and a holder of patents gold and vanadium recovery.
The Chinese Partner
It’s at this point I need to tell you about the Chinese partner.
On the same site visit I went on, there were several representatives from Northwest Nonferrous Mining Group (NWME), one of the largest mining companies in China. They are the third largest lead and zinc producer in China, and operate 12 mines including the largest black-shale vanadium project in the world.
Their project in China is similar to Gibellini, and they were there at Prophecy’s request to check it out.
Even with the language barrier, I could see their heads nodding as they glanced at each other during Michael’s technical processing presentation. They clearly saw merit in the project.
When we were out at site, they gathered several hundred pounds of samples — that I helped carry back to the trucks — to be sent to China for their own analysis.
Two weeks after the trip, Prophecy put out a news release that Northwest Nonferrous had entered into a technical advisory and cooperation agreement to advance the Gibellini project. And they may become an equity holder.
The owner of the world’s largest black-shale vanadium mine with years of experience in vanadium production likes this project enough to come on as a partner. The scope of work for NWME includes technical design and engineering of vanadium ore processing facilities to recover vanadium pentoxide at Gibellini with the goal of producing a high grade vanadium pentoxide commercial product on site.
So they’ve got an economic mine (with even better economics forthcoming) and they’ve got an experienced partner with deep pockets.
The Expedited Permitting
There was significant baseline and feasibility work carried out by the previous owner, including a scoping study.
And as I mentioned, vanadium has been identified as a critical resource by the U.S. government and the current administration is indicating it will streamline new projects. Being in Nevada is obviously a plus.
A pre-plan of operations and development of a final plan of operations has already been completed and reviewed and administratively accepted by the Bureau of Land Management (BLM). All environmental baseline data has been collected and submitted to the BLM for review.
Meetings with the BLM and State of Nevada are ongoing and the permitting process has been restarted.
Because of all this, a permitting process that would typically take until late 2021 is expected to be significantly shortened with approval and construction start in late 2019.
The permitting risk is that the Feds or state want some of the existing data updated, which would slow the process a bit. But it will be faster than starting from scratch in any case.
To get through this process, Prophecy has brought on John Young as its Permitting Consultant. John was previously Environmental Manager at Barrick and Kinross, and has successfully taken several projects through the permitting process in the western U.S.
What have I missed?
The Share Structure
The company only has 7.47 million shares outstanding, 10.87 fully diluted.
Chairman and CEO John Lee owns 17% of them, or 26% on a fully-diluted basis, having put $3 million of his own money in the company to date.
Another ten investors who are close to the company own 30%.
The company has C$3.5 million in cash and currently trades at C$2.57, giving it a market cap just under C$20 million. With so few shares out it is a bit volatile and can swing 10-cents from trade to trade. Consider that when placing bids.
I expect the upcoming updated independent economic study to show the after tax net present value of the Gibellini vanadium project to be north of US$200 million, meaning Prophecy is trading at a significant discount to its project value.
Couple this with the fervor in vanadium that is expected to continue, including China becoming a net importer, and the sector is ripe for increased valuations from which I believe Prophecy will benefit.
Plus it has the additional benefits of an experienced Chinese partner, an oxidized black shale ore that doesn’t need roasting, and a streamlined permitting process with the tailwind of a newly-supportive government.
Shares have been as high at C$5.00 in the past year but now trade at ~C$2.57.
We are buying Prophecy Development Corp. (TSX-V: PCY)(OTC: PRPCF) below C$3.00.
I should also note that the company has a silver mine in Bolivia that is on hold pending government approval. It contains 36.7 million ounces of silver, 122 million pounds of lead, and 187.9 million pounds of zinc. Bolivian politics are delaying the decision. The project has had US$28 million spent on it to date. This is should be viewed simply as a bonus to the investment in Prophecy. We’re in it for the vanadium.
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Company Website
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Presentation
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Recent Interview with John Lee
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John Lee's Articles on Seeking Alpha
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BMO Note on Vanadium
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Best-Performing Battery Metal of the Past Year Isn't Cobalt - Bloomberg
Call it like you see it,
Nick Hodge
@nickchodge on Twitter
Nick is the founder and president of the
Outsider Club, and the investment director of the thousands-strong stock advisories,
Early Advantage and
Wall Street's Underground Profits. He also heads
Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including
Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.
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