by Travis Johnson, Stock Gumshoe | November 14, 2018 2:26 pm
Nick Hodge has been touting “next big thing” materials stocks for as long as Stock Gumshoe has been around, from rare earth magnets to graphite and uranium and lithium and cobalt and pretty much any other heavily-hyped stuff you might imagine digging out of the ground… and his latest pitch is about what is arguably the hottest commodity out there this year: Vanadium.
So what’s the story? What stock is he pitching, and does it look interesting? Let’s run through the clues in his ad for Early Advantage ($1,299/yr) and see what we can find as he promises “3,900% Gains On the Vanadium Battery Boom.”
The ad starts out with an exciting “secret,” of course…
“Secret Behind Ford’s ‘Model T’ Could Power Every Home in America
“Forget lithium or cobalt for a minute. An unusual fuel that powered Ford’s Model T over 110 years ago is now set to repeat history.”
And we also get a more mysterious tease…
“And on November 30, an unusual Chinese move will set it on an unstoppable path to global energy market domination… kicking off explosive, 40-fold gains overnight.”
Those are all references to vanadium, of course, which has been primarily used as an alloy for steel — in very small amounts (less than a quarter of a percent), it makes steel more resilient, rust resistant, and stronger, and in higher amounts (1-20%, depending on application), it makes precision tools and knives much harder and more wear-resistant.
And yes, Henry Ford was the first American industrialist to use vanadium in a meaningful way — he saw vanadium alloys being used in some race cars in Europe, and commissioned steel mills to develop new steels for his cars using the metal, so vanadium was part of what made the Model T chassis lighter and stronger. In the hundred years since then, it has gone into wide use in a variety of industrial applications… but the primary use is still as a steel alloy.
Which is what the November bit is about new construction rules in China — they are requiring that new buildings use rebar that has a higher vanadium content for increased strength and stability, and that has been all the chatter in the vanadium industry (small though it is) for more than a year. The deadline was actually November 1, I think, not November 30, but the exact date isn’t particularly important — this decision was telegraphed well in advance and coincides with the closing off of some vanadium production from dirtier facilities in China, and that combination of factors has spurred several new or restarted vanadium projects around the world this year — as well as causing profits to jump at the few actual primary vanadium producers in the world.
Vanadium is abundant in the earth’s crust, but not by itself — it’s mostly mined from vanadium-bearing magnetite in South Africa, Russia and China, and it’s also present in bauxite and coal and crude oil, so it can be produced by some refiners as well. So it’s not particularly rare, but mines that primarily focus on vanadium are rare, which means that the price is probably sometimes driven by things other than supply and demand of vanadium itself (mining and production decisions at many producing mines might not be made because of the price of vanadium, but because of the price of whatever the primary products are, whether that’s iron ore or uranium or whatever else).
And yes, the new rising demand for vanadium beyond Chinese rebar, or at least the expected rising demand, is for vanadium as a component of the Vanadium Redox-Flow Battery, which is seen as having great potential for large-scale grid storage of electricity.
But enough lecture… what other hints does Hodge drop about this particular investment? Given his history, I’m betting he’s got a vanadium miner in mind… more from the ad:
“Right now, this fuel is quietly emerging as the “hero” of the next auto revolution.
“Whereas it once powered the Model T mega-trend…
“It’s set to power not just the new electric car, but the new solar, wind, and energy wave of the 21st century….
“I’m not talking lithium or cobalt. Or graphite either — although I was one of the first analysts to deliver big wins from all those resources for investors.
“Instead, this fuel is much rarer and much more lucrative on the global markets.
“And in the battle for large-scale battery supremacy, it’s NO CONTEST….
“On November 30, a scheduled move by the Chinese government will set it on the path to energy dominance.
“If it seizes just a small fraction of the battery storage market… demand will surge by a stunning 30,000%.”
Huh, so maybe he’s talking about something to do with Chinese battery incentives instead of the rebar rules — the latter is what’s been mostly moving the price this year, and has mostly been the focus of the few mining stocks who are pitching themselves as vanadium plays, but maybe there’s something else going on, too.
Oh, wait, no, I guess there isn’t — more from the ad:
“On November 30, This Chinese Government Move Will Instantaneously Double The Price Of Vanadium
“A new Chinese law is set to dramatically improve the quality of rebar steel.
“China’s current steel is set at a much lower grade.
“In most of the world, rebar steel is set at a higher grade. One that requires two or even three times the amount of vanadium.
“The new law will make Chinese steel on par with the quality of Europe and the U.S.
“Adding up to 10,000 tonnes of vanadium demand in China.”
OK, so we know that this is the main reason vanadium has been rising in price this year, but we also know that major industries don’t turn on a dime — and they plan. The Chinese steelmakers won’t just wake up on December 1 and say, “gosh, we better buy three times as much vanadium!” They’ve been planning, suppliers have been planning, and the rise has been strong and steady and partially speculative, but there’s no reason to expect the price to double “overnight” or “instantly.” That’s just a little hyperbole for you.
And what is it Hodge is touting?
“I’ve identified the ultimate way to profit.
“One that has nothing to do with commodity futures or ETFs.
“Instead, there’s a small group of producers poised to soar 10 or even 100x over, driving the biggest overnight gains of the year.”
And, of course, at the heart of the tease is “one tiny stock” ….
“You see, there’s one tiny $0.50 ‘fuel stock’ sitting on what’s about to become the very first primary producing mine of this critical fuel in all of North America.
“As this fuel transforms into the go-to energy metal for large-scale electricity storage…
“This mine will become the necessary ‘go to’ for all of our demand.”
So the story is largely about China, as is almost always the case with natural resources companies and trends:
“You see, not only is China the world’s biggest consumer of steel…
“And the biggest user of vanadium batteries…
“It also produces more than HALF of the world’s vanadium. And three-fourths of its exports.
“In short, the world’s supply of vanadium is about to completely VANISH.
“All just as Trump is ramping up his military buildup and infrastructure plans.
“And America has NO domestic primary production of vanadium. Not a single primary mine produces the stuff.”
Then we get into the specific details of the miner Hodge is teasing:
“The Trump Administration Just Fast Tracked North America’s ONLY Primary Vanadium Source
“Located just 250 miles east of Elon Musk’s gigafactory is the answer to America’s vanadium shortage.
“A deposit with over 80,000 metric tons of vanadium!
“That’s nearly twice what China produces every year.”
Other clues about this “one tiny miner” that owns the project?
“Just recently, the Bureau of Land Management selected this project for fast-track permitting as part of a Trump initiative to bring more domestic resources online faster.
“That paved the way for this $0.50 company to become the owner of North America’s first primary vanadium mine.”
And they’ve apparently gotten an equity investment from a Chinese miner, too…
“… this project now has backing from the world’s largest black-shale vanadium producer!
“One with decades of experience in the vanadium space.”
And we’re told that the CEO has led a vanadium miner to riches before, taking one from $5 a share to $127 during the last vanadium price spike — vanadium is at all-time-highs in the mid-$30s/lb right now for V205 Vanadium Pentoxide Flake and around $140/kg for Ferro Vanadium, the last real price spikes came in 2005-6 and 2008-9, presumably also driven by steel demand, mostly from China.
Other clues? We’re told that the market cap is only about $35 million “because the market is ignoring the vanadium boom” … and that the deposit should be worth a lot more:
“Earlier this year a leading global engineering firm conducted an economic study on this project.
“It concluded that at today’s vanadium price, the mine has a value of $600 million.
“That’s 3,900% more than its current market value.”
OK, so yes, as you might have guessed, this is the company that is currently the most promotional of the North American vanadium juniors, Prophecy Development (PCY.TO, PRPCF), which is trying to permit and develop the Gibellini Vanadium Project in Nevada. They are the most advanced of the prospective US primary vanadium miners, they argue, because they expect to be through the permitting process within two years and have an objective of producing their first batch of vanadium pentoxide in 2022. They almost certainly won’t hit that goal, since mines are almost never completed on time, but that’s the timeline they are publicly trying to follow.
Prophecy has been around for along time, led in recent years by John Lee (who did take a previous iteration of Prophecy from about $5 to $120, according to an interview he did with Nick Hodge’s colleague Gerardo Del Real last year, though I only see a $5 to $10 move on the historical charts), and has gone through a bunch of different priority projects — for most of the past decade they’ve been a Mongolian coal mine developer and producer and, sometimes, a hopeful Canadian nickel and copper mine developer, but they refocused on vanadium starting last year and acquired several prospective vanadium projects, led by Gibellini… and they just recently brought in a new CEO to replace Lee and see them through to development of that Gibellini Project. Since that interview with Del Real last year, the timeline has already slipped, which is typical (back then Lee was saying that permitting would be complete by early 2019 and production would start in 2020, the latest update tacks on another 18-24 months to that).
That project is still not at the “reserves” stage, and doesn’t have a real feasibility study yet, but they did complete a preliminary economic analysis (PEA) earlier this year… here’s one bit of that to summarize:
“Based on Wood’s financial evaluation, the Gibellini Project generates positive before and after tax financial results. The pre-tax NPV at a 7% discount rate (the base case rate) is $411.4 million and the IRR is 56.5% (Table 1-9). Before-tax payback for the Project is estimated at 1.62 years. The after-tax NPV at a 7% discount rate is $338.3 million and the IRR is 50.8% (Table 1-10). After-tax payback for the Project is estimated at 1.72 years.”
So that sounds pretty good for a company that has a market cap around $50 million now, assuming that the assumptions in the PEA bear out as they continue drilling and establishing reserves and get better estimates of the costs — presumably the cost will go up, since it usually does with mining projects, but with vanadium at record high prices you could certainly justify spending twice the estimated $116 million or so that they estimate it will take to build the mine.
Of course, vanadium might not remain at record high prices — the estimates in the PEA use vanadium prices around $12-13/lb, and current prices have spiked to around $33, so there is quite a bit of wiggle room… but vanadium was also below $3 just a few years ago, so there might not be a lot of confidence. I don’t know if they’ll have any trouble getting financing, but they’re a ways from that point now and commodity prices and interest rates over the next couple years will go a long way to determining how the economics of the project end up looking.
I did a little speculating on Prophecy shares a few weeks ago, mostly just because I’m pretty sure it’s going to be the most heavily promoted of the US vanadium juniors in the wake of this huge run in the vanadium prices — I don’t expect to hold it through to mine development or even permitting, but I’m speculating that all the vanadium names will continue to run a bit for the near future, at least.
The other one that I hold a bit of is the only real pure-play vanadium producer that’s easily investable, Brazil’s Largo Resources (LGO.TO, LGORF), and the other three that are likely to generate meaningful investor attention are probably First Vanadium which, just renamed itself from Cornerstone Metals to take advantage of the vanadium enthusiasm (FVAN.V, CCCCF), CellCube Energy Storage (CUBE.CX, CECBF), A vanadium redox battery company which is spinning out their exploration-stage vanadium resources at the end of this month into a new company called V23 Resource Corp., and the uranium company Energy Fuels (UUUU, EFR.TO), which is not going to be driven primarily by vanadium but might get a boost from the fact that they’re actually the only real US vanadium producer and own the only primary vanadium production — they just restarted their old White Mesa facility in Utah that had been shuttered because of low vanadium prices, and are focusing on increasing mining for vanadium-rich ores around their uranium projects.
The three US “juniors” that I’ve paid attention to (First Vanadium, CellCube/V23, Prophecy Development) are all looking to produce within the same relatively small area of Nevada where vanadium resources have been identified for decades, so they generally talk about each other in their presentations and compare the size of their deposits, all of which are probably worth mining as long as vanadium remains at elevated prices… though it seems fair to say that other than Energy Fuels’ restart of White Mesa, Prophecy has a head start on being “first producer” in the US.
That doesn’t mean it will necessarily happen — Gibellini was a project of American Vanadium until just a couple years ago (that one was a promoted teaser stock too, thanks to Byron King back in 2012), and they deemed it unworthy enough that they let the leases expire because the demand for vanadium electrolyte wasn’t heating up as they had hoped — now American Vanadium did the opposite of what these opportunistic juniors have done and changed their name to remove the vanadium focus last year, and that’s now an almost worthless penny stock called Monitor Ventures (MVI.H.V)… though they are apparently also still the sales agent for CellCube’s redox flow batteries in North America.
Junior explorers and developers are story stocks, steeped in optimism and prone to huge swings as sentiment (or prices) shift — and they usually hit lots of rough patches along the way even if commodity prices are amenable, often when they go from the “daydream about massive resources” phase to the “who’s going to pay for this and what will it really cost?” phase.
Will any of it work? My bet is that the prices will go wacky for a while longer as the vanadium story continues to gather steam, but I have no idea whether the finances of these early-stage mine development projects will work — I think Largo could be a reasonable speculation for a while if you think these vanadium prices are sustainable, since they’re a long-time producer with lots of mine life yet, and they’re very profitable and reasonably valued on current financials, but they’re also a billion-dollar company so they’re not going to go up 500% in a month like the little guys might if they get the benefit of another surge of investor mania. Prophecy, First Vanadium and CellCube all strike me as pretty iffy propositions, even though I’ve speculated a little on Prophecy — they all seem to be opportunistic junior resource promoters that have changed their names and their focus to drift to what investors might think is exciting. Plenty of mining executives have made a living at that for decades, sometimes a great living, but that trend-chasing doesn’t often result in building a strong and sustainable company.
I wouldn’t think of any of these as “buy and hold” investments, and the risk is high if China (or Russia or South Africa) has any production or consumption changes that shake up the vanadium market… or, indeed, just if steel production drops substantially. But if vanadium stays high, I expect they’ll all continue to have their moment in the sun… just keep in mind that “sell” should alway be near the tip of your tongue when speculating on commodity prices spikes, it’s really hard to know when they’re going to flip and go the other way, and it’s easy to lose 90% really fast.
I know many of the folks out there in Gumshoe Nation have been trading vanadium names over the past couple years, well before I really paid attention, so if you’ve got something to add (or correct), feel free to chime in with a comment below.
Disclosure: I own shares of Largo Resources and Prophecy Development among the stocks mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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