Categories: Base Metals
Topics: General Base Metals

Jonathan Lee: Gray Metal Driving Green Revolution?

Vanadium, a gray metal mainly used as an additive to steel, could see a jump in demand as new technologies emerge in energy storage. In this exclusive interview with The Gold Report, Jonathan Lee, a battery materials and technology analyst with Toronto-based Byron Capital Markets, talks about which vanadium producers are ready to grapple with the prospect of increasing demand from the adaption of "green" uses.

The Gold Report: What are some development stories in the vanadium space that you're covering?

Jonathan Lee: Largo Resources Ltd. (TSX.V:LGO) is one of the most advanced of all the juniors. At a 1.34% grade, Largo has the highest grade deposit of vanadium that is known right now. We currently have a Strong Buy on Largo Resources.

TGR: And that's the Maracas project in Brazil?

JL: It is in Brazil. That deposit is one of the highest grade deposits in the world at about 1.34% vanadium pentoxide. We really like that story. Apparently, a lot of the banks do, too. The company already has debt financing in place. It already has an off-take agreement with Glencore International AG, the private metals trader that is planning on going public sometime this year.

Largo is currently doing an equity financing to raise the rest of the cash to build the open-pit mine. The construction is a two-year process, so the company should be ready to produce in 2013.

TGR: I guess only time will tell.

TGR: Have you met with the management of Largo?

JL: Yes, the company has a very strong management team. Mark Brennan, its chief executive, has been through the ropes before and has been successful.

TGR: He was part of Desert Sun Mining before it got taken out.

JL: Yes. The company also has Tim Mann as its chief operating officer, and Les Ford, who's overseeing much of the metallurgical work. He has worked at Highveld Steel (Evraz Highveld Steel and Vanadium Ltd. (JSE:EHS), Xstrata Alloys (a subsidiary of Xstrata PLC (LSE:XTA) and Precious Metals Australia [now Atlantic Ltd. (ASX:ATI)], and has looked at the Windimurra project, so he definitely knows the vanadium industry. He's very bullish on the Maracas project as well. The company has a lot of the ducks aligned in a row to get to production. I am not even sure it's considered an exploration firm any more. I would consider it to be a mine developer at this point.

TGR: Okay. What are the other players in the junior space?

JL: Energizer Resources Inc. (CVE:EGZ) is another name we cover, but we have a Sell recommendation on it. It's out of Madagascar and there is no question that its deposit is very large. But it's not a typical magnetite deposit. The in-situ grade is about 0.70%. Typically in many of these projects that are magnetite projects, a company would upgrade the ore prior to the heat process. There's a heating process where one has to heat it to anywhere from 700 to 1,200 degrees Celsius.

Energizer is unable to upgrade the material, so it can't increase the grade going into the furnace. If the grade is increased, that decreases the amount of material needed to be heated for three hours. Energizer’s feed grade is 0.7%, whereas Largo's feed grade is around 3.4%, so Energizer's energy costs are going to be significantly more than many of the other projects. That's one of the biggest reasons why we really don't like the story.

The second reason is that the company could have additional costs because of a lack of infrastructure. It is dependent on the Sakoa coal project succeeding by coming on-line and building out the infrastructure that will supply a lot of the energy to run Energizer’s facility and rail to transport material. The company will have to negotiate a price to use the infrastructure. With those constraints, we are unsure about the prospects of the project right now.

TGR: Are you looking to pick up coverage of any other vanadium plays out there?

JL: We are always looking at companies in this space, but we don't officially have coverage on other vanadium names. Two vanadium names out there include American Vanadium Corp. (TSX.V:AVC) and Apella Resources Inc. (TSX.V:APA; Fkft:NWN).

Apella Resources has a magnetite type much like Largo, but the grade is much lower, around 0.40%. There might be some problems with it being economically viable because the grade is lower. Apella has an iron-vanadium-titanium deposit. As a standalone vanadium deposit, it might be tough, but it might work as something more like an iron-vanadium-titanium project.

American Vanadium could be a very low-cost producer of vanadium pentoxide. It has a sedimentary deposit east of Reno, Nevada, called the Gibellini project. It's interesting because it would use a heap-leach process, which is very different from other projects. The capital costs and operating costs are significantly less with a heap-leach project.

The company currently has somewhere around 6 to 10 years of mine life depending on its production rate. It is expanding exploration to increase mine life, partly by acquiring old drill core, and are making sure the additional resource is similar geologically so it can continue using the cheaper heap-leach process. It's very encouraging that the company is able to have a low capital-expenditure project and a low operating-expenditure project.

Only time will tell. The company is expected to expand that additional resource shortly, which will undoubtedly increase the value, or extend mine life at least.

TGR: Do you have some words of wisdom for investors in the vanadium space?

JL: Vanadium is definitely tied to steel. If investors have faith in a bullish economy, increased construction, and therefore increased demand for steel, there will also be a need for vanadium. Investing in vanadium projects is almost like a call option on green technologies and clean applications that we hear so much about. I guess the sex appeal pushing vanadium is its limited downside risk. Demand for vanadium in batteries is nearly nonexistent now, so any new uses in green technologies would drive increased demand with no downside risk.

TGR: Thanks, Jonathan.

Jonathan Lee is a battery materials and technologies analyst with Byron Capital Markets in Toronto. As a member of Byron's research department, Lee applies his beliefs, skills and investment acumen to evaluate and select equity securities and then recommend investment ideas to the firm's proprietary traders and institutional clients. Lee's primary focus is on the battery materials sectors, which includes lithium, vanadium and cobalt. Prior to joining Byron in 2010, Lee had more than seven years of professional industry experience in the manufacturing and engineering sectors. He previously worked in an engineering capacity preparing feasibility studies for economic assessments and engineering designs for construction projects. Lee has an MBA from the Leonard N. Stern School of Business at New York University, BSc in chemical engineering from Tufts University, and is a chartered financial analyst Level III candidate.

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DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: American Vanadium, Apella and Largo.
3) Jonathan Lee: I personally own shares of the following companies mentioned in this interview: None. I personally am paid by the following companies mentioned in this interview: None.