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Prophecy Development (TSX: PCY) CEO John Lee Provides His Insight into the Vanadium Market

September 29, 2017

Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the Executive Chairman of Prophecy Development (TSX: PCY)(OTC: PRPCF), Mr. John Lee. John is an entrepreneur with degrees in economics and engineering from Rice University. Mr. Lee joined Prophecy in October of 2009 when Prophecy was trading at $6 a share on the TSX Venture Exchange. By making several opportune acquisitions and raising market awareness, the company managed to trade to over $100 per share in the first half of 2011 while supporting a market cap of about $150 million at its peak. In 2017, Prophecy is returning to its M&A roots by focusing on acquiring and developing vanadium properties in North America. Prophecy Development, of course, is a Canadian public company listed on the TSX which trades under the ticker symbol PCY. The company is aiming to provide exposure and leverage to the rising vanadium prices by defining and acquiring vanadium resources in politically safe jurisdictions. That's an important point to make.

                                                      John, that was a mouthful, but thank you very much for joining me today. I thought it was important to provide an overview of the company.

John Lee: Thank you for the invitation.

Gerardo Del Real: Well John, I'd love to hear a bit more about your background and how you got involved with Prophecy.

John Lee: Gerardo, I started, I went to school at Rice University in Houston Texas. I went to work in Silicon Valley in the late ‘90s through the dot com boom and bust. I had been an investor in the junior resource space after I semi-retired in Vancouver, Canada. You cannot be in Vancouver and not be involved in the junior resource space. Up to 2009 when there's a crisis and I took the opportunity and started Prophecy to combine some of the assets that I know well through my personal investments and consolidated them into this Prophecy company. Long and short, it's been a good 8 years since I started it. Through the process we've acquired assets in Bolivia, Mongolia, and some in Canada.

As you mentioned, Gerardo, in this run up, we believe the market is bottomed in 2016 and this is 2017 we're saying, "You know what? It's time to come home to roots and acquire good projects in politically safe jurisdictions." We have an eye out for tier one projects but sometimes in these political challenging jurisdictions there a lot of things that are out of our control in terms of project development and pushing the project into production and that's why we focus number one, on Canada, United States and number two, we saw a good opportunity in vanadium and we really jumped on the wagon earlier in 2017.

Gerardo Del Real: Excellent, excellent. Now you're considered an authority on the vanadium market and you mentioned that you feel that vanadium prices have bottomed and obviously these past 12 months we've seen a rapid, rapid appreciation in the price of vanadium. Can you share your thoughts on the space? What do you see moving forward?

John Lee: Gerardo, I have been around, as I mentioned, since 2009 and even before then. I authored a lot of articles, mainly on macroeconomic trends such as commodities, such as gold, silver and copper. A bit of a gold bug just through a personal favor.

Gerardo Del Real: Absolutely.

John Lee: On this vanadium, there's a big run up on lithium which I myself missed. And I thought, hey, look, what is the next big thing? There's no question that we're into this digital space, the world's being electrified.

Gerardo Del Real: Absolutely.

John Lee: And it requires lot more specialty metals, E-metals and also there's a drive towards greener electricity, and green initiatives with the renewable energy. We did a lot of research in this space in 2016 and through this research on what is the next big thing, what is the next big E-metal, we thought that all stars are aligned for vanadium. There's a number of factors driving the fundamental supply and demand of vanadium which we can go into a bit more detail. In short, vanadium is needed in a variety of high tech applications from vanadium redox battery which is used for large scaled grid utility energy storage to high tech aerospace, super magnets, high speed alloys and also as a catalyst for pollution reduction.

Gerardo Del Real: Excellent, excellent. You mentioned that there's a lot of factors driving the vanadium space and obviously that extends to high purity battery grade graphite, cobalt, lithium, copper even. You need a lot of copper for this big change that we're undergoing in this megatrend. I truly believe we're in a megatrend for critical metals and tell me some of those. You mentioned that we can go into a bit more detail. I'd love to go into a bit more detail on some of the drivers in the vanadium space.

John Lee: Gerardo, you mentioned about lithium and cobalt. These are key ingredients in energy storage devices for mobile devices. We're talking about your cellphone up to your cars but even car is a bit of a stretch as you need hundreds of pounds of lithium stuck in the bottom of your car for it to work. Vanadium is a little bit of a different beast in that vanadium battery, the energy stored as a form of flow liquid battery, it is bulky and maybe even bulkier than lithium but the key advantages of vanadium is that you can go on 20 years without degradation or over 10,000 cycles. In terms of the lifeline of batteries versus the application it's much better because power plants, the solar plants, the windmills, they're good for 10, 20 years, which lithium batteries cannot really match. And that is why we see this specific niche for vanadium in the large scale utility deployment as an energy storage device, Gerardo.

Gerardo Del Real: Wow. You have a very large stake in Prophecy. Can you go over some of the key differentiators of the company? You obviously believe in it, you're putting your money where your mouth is. Can we talk about your stake in the company and just some of the things that you see it as setting itself apart from some of the other, what I call the want to be juniors in the space?

John Lee: First of all, I started out the company just to assemble different assets which I'm familiar with at various stages from exploration to advanced stage. All together we raised about $100 million dollars through the Toronto Stock Exchange and I myself had to put over $3 million dollars of my personal money into the company. Therefore, in this particular run up with the experience that I had both from an investor's perspective and from running a company for a number of years now and going through the permitting, community relationship, and the actual technical feasibility of commissioning a project, Gerardo, we put special attention on acquiring projects that not only look sexy on paper but actually has an exit strategy. And what I meant by exit strategy is that with a modest capital expenditure requirement which the project doesn't have any flaw, irreparable handicaps and in a political safe jurisdictions of which means that the permitting is predictable, maybe they're both slightly longer but we know we can get to the finishing line.

I was confident enough to put that much money into this new project that we've acquired, particularly the vanadium project in Gibellini in Nevada this year. I was very confident in this case, therefore when you ask about the differentiators, number one, as you pointed out, the management has a lot of skin in the game and number two that this management has experience both as an investor and also as a project operator to see that the project will get to the end and that we're capable of putting the project into production and getting cash flow so therefore it becomes a real mining company, well not so much a real company but we're still a real company now, a company with cash flow as an exit strategy. And not just merely hoping for a take off by a major down the road.

Gerardo Del Real: Excellent. Now you mentioned the Nevada project. Can we talk a bit about the plan moving forward? You mentioned near term production opportunities, you mentioned the stable jurisdiction, of course, can we talk about the Nevada project and just what the next 6 to 12 months look like for Prophecy.

John Lee: Gerardo, first of all, the mission statement that you stated at the beginning of this interview was well put together. Our original plan was just to acquire a number of vanadium assets and evaluate it and see which way the vanadium prices go and then we develop at the appropriate time. We are just extremely fortunate, Gerardo, if I had to go to Vegas and bet, it would have been like Russian roulette betting on number 36 and winning five times in a row. Because we not only acquired what we believe is the best vanadium project period, but vanadium prices also tripled in the last 12 months so what's happened to us is still, we're still coming to grip with it.

The key takeaway, Gerardo, of this Gibellini project in Nevada Prophecy acquired, which is now our flagship project which we are dedicating 99% of our resources is there's three key things to remember. 999, that's speaks for the purity of the vanadium we can produce out of Gibellini and makes very it unique. USA, it's produced out of US North America potentially. It is the only project in North America that could potentially generate, produce vanadium by 2020. There's not an active vanadium mine in North America today. And then third is 2020. Again, as I mentioned, there's no other projects anywhere near term horizon that are at feasibility stage or permitting stage that can get through all that and produce vanadium at a reasonable capital cost. So the three major takeaways are 999, USA and 2020.

Gerardo Del Real: Excellent. So you got grade, you got jurisdiction and have a clear path towards production it sounds like.

John Lee: Not so much grade but purity of vanadium and that's one quick differentiator I want to talk to you about.

Gerardo Del Real: Yes.

John Lee: Today, most of the vanadium's used as a steel hardening agent. That is, you put 0.5% vanadium in steel for construction, you double the strength of steel. All those high rises, 30, 50 floor, 100 floor, 200 floors, they require vanadium as a steel additive. It's still in very much high demand and increasing demand and consumption because of globalization and because of the rise in global economies and GDP, new high-rises are being built to fend off earthquakes and hurricane and floods as we witness in Mexico and also in Florida. With new high tech application that commits a margin, higher margin than the typical vanadium prices, it requires extreme high purity vanadium. You're talking 99.9% pure vanadium for this better installations and also for the high tech composite aerospace. These are absolute precision composites that require nothing but the purest vanadium for those applications.

Imagine the Maglev going 250 miles an hour requires absolute precision in those ingredients to make things work. There's a lot of secondary recycling vanadium from oil and from iron ore and from trash. Those are not going to cut it. That's what I meant by 999 because Gibellini has a very low of impurities which has enabled the potential to extract vanadium at the highest grade possible and command the margin that could be up to 30, 35% of the spot vanadium price.

Gerardo Del Real: Wow, that's an important point to make and that was going to be my next question, are the metals clean? And it sounds like that's the case with Gibellini, is that correct?

John Lee: Absolutely. One of the key thing is again, because there's very few other items with the deposit, we're very less than 1% in iron, less than 1% in titanium, in magnesium, in calcium. Only 2% aluminum. Some of the other vanadium mines out there have up to 50% iron, 10% titanium, 7% in MgO. The only way to get rid of these impurities for them is to put it in a blast furnace at 1,000, 2,000 degrees and then you have things coming out of the chimney and things getting discharged into the water. It's dirty, nobody wants to be associated with there.

The way that Gibellini process vanadium is called a heap leach. It's being done in Arizona, in Nevada, it's an old technology, it's proven technology. You dissolve the ore in a very low concentration of sulfuric acid and vanadium once it dissolves in solution it can be precipitated. The other key thing here is, Gerardo, the water, there's zero discharge. The water and the acid is all recycled and the residue is then mixed with some other agents to make them benign and pH neutral which then be piled onto as tailing in Nevada, which there's plenty of land. We're undergoing this very environmentally friendly process to produce high purity vanadium for high tech use including batteries and aerospace.

Gerardo Del Real: Excellent, excellent. John, how does the share structure look like? I know you recently closed a financing, a pretty substantial one. What's the share structure and the current cash position look like?

John Lee: Upon closing the financing total over $6 million. We announced a $3 million financing and we got so much demand, the book doubled in less than one week. We had to cut people out now and cap it at $6 million. We are now $5.75 is going to be overflow by the greenshoe is going to be filled, maximum 10% greenshoe is filled completely. The financing, first transfer $4.5 million already closed last week and second transfer close next week. After the financing the company will be cashed up with just over $6 million. Share structure is total 7 million shares outstanding. Of that, insiders own close to 20% of the company.

Gerardo Del Real: Wow.

John Lee: Very tight.

Gerardo Del Real: Fantastic, fantastic. Just to summarize, John, what can we expect here in the next 6 to 12 months? It sounds like it's going to be a pretty busy end of 2017 and 2018 for you.

John Lee: The next 12 months there's two things. There are two initiatives going in parallel that we can separate the initiative as a project development versus marketing. On the project development, the project had a feasibility study done by the previous operator who had spent over $30 million. So we're going to amend the feasibility, bring the feasibility study current and the previous operator also submitted an EIS, Environmental Impact Assessment, which is the 99% of the permitting. We're going to take a look at that permitting papers, filings and amend and then provide a schedule, milestones and timeline on how we can get this project permitted. We believe that with this raise of $6 million, that can take us through complete permitting process and the timeline right now is probably sometime in early 2019 which would then lead to construction in 2019, take about 12 months and then we'll be looking at production in 2020.

On the marketing front, the story Prophecy, nobody knows about us. It's completely stealth given we have just acquired this project this year and vanadium market itself is still a stealthy market even though it is gone up 300, 400% since the bottom. We'll be doing very extensive marketing. North America, Asia, and London. At the same time, because of our tight share structure, that we are also potentially looking at upgrading or do listing in US market because after all, the project is in North America, all the renewable initiatives, a lot of them are driven in Texas, Arizona and California, again is North America. We believe that story will resonate very, very well with institution as well as US retail investors.

Gerardo Del Real: I absolutely agree. I'm based here out of Austin and I'm definitely looking forward to having you back on, John, as you roll out some of these initiatives. Thank you so much for your time, I want to give you one final opportunity, is there anything else that I may have missed here that you'd like to add?

John Lee: Gerardo, you mentioned about the dynamics of vanadium, I just want to mention again. Vanadium has had run ups and downs just like molybdenum and other cyclical commodities. Last run up was $35 a pound. Went back to $5, $4, to $5 and now we're back to about $11 and $12. In the last run up there was a lot of new supply coming out of China and which subsequently drove the price about $35 back to $5. I believe this time round the fundamentals are much stronger than the last time round in 2005 when vanadium went to $35. The reason being that the supply is restrictive on China because they're undergoing a lot of environmental crackdowns and they're serious about the business. If you exceed environmental limit and pollution or water discharge, you go to jail. This the best situation I heard from talking to Chinese mining executives. Therefore, this time around on the supply side you're not going to get all this new supply coming on stream because China is just not able to do that anymore.

On the demand side, you have increased consumption from the traditional vanadium, your surge of steel construction and at the same time, all this high tech applications are eating away that supply to the point where there's no more above ground inventory to speak of that will be able to calm the fire down. The upside of vanadium is still much ahead. I look forward to coming back maybe in 6 or 9 months to update all the progress that Prophecy makes and hopefully that some of your readers can join us in this just terrific opportunity that only comes once in a decade if not more.

Gerardo Del Real: It's definitely a fascinating story, it's a very dynamic space and I appreciate all your insight, John. I look forward to having you back, hopefully before the 6 to 9 months. As, I mentioned earlier, some of this news and some of these developments come to pass. Thank you, John, for your time today. I look forward to having you back on. Thanks again, as I just mentioned, for the insights. Very, very, very interesting story. Very fascinating space. Prophecy Development, Mr. John Lee everybody.

John Lee: My pleasure.

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