🕐27.10.11 - 15:54 Uhr
APELLA RESOURCES INC. - GRAPHITE AND VANADIUM TO BENEFIT FROM BATTERY MARKET GROWTH
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Jonathan Lee: Graphite and Vanadium to Benefit from Battery Market Growth
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The Critical Metals Report
Category: Investment, Gold, Mining
Source: Zig Lambo of Critical Metals Report
October 26, 2011 (Investorideas.com Mining stocks newswire)
Graphite and vanadium may be relatively obscure materials, but these commodities
could get a jolt from developing battery technology.
In this exclusive interview
with The Critical Metals Report, Jonathan Lee of Byron Capital Markets explains
how graphite and vanadium play critical roles in rapidly growing battery markets,
as well as in the steel industry, which is experiencing healthy growth.
Both vanadium
and graphite have limited production sources in North America, and the companies
he discusses look poised for major supplier status.
The Critical Metals Report: At Byron Capital, you look at different battery-related
materials as well as rare commodity products.
Can you give us a little overview
of these lesser-known products, like vanadium and graphite?
Jonathan Lee: About 85%-90% of vanadium usage is as an alloy to increase the tensile
strength of steel.
It also has other alloying applications such as in titanium
alloys.
People are trying to commercialize its newer applications in redox batteries
and lithium vanadium phosphate batteries.
TCMR: So, at this point, there isnt a big spike in vanadium demand because its
closely tied to steel production?
JL: Yes, but steel production has been increasing approximately 6% per year, so
thats still a pretty healthy growth rate, higher than gross domestic product
(GDP) growth.
We expect continued growth in the vanadium industry as higher amounts
of vanadium are produced.
TCMR: Is new technology on the horizon that calls for the use of vanadium?
JL: People are contemplating using the vanadium redox battery as a portion of power
grid storage.
Whether or not that takes hold is yet to be decided, but one distinct
advantage is its long life, given that vanadium is on the anode and cathode side
of the battery.
It is a fairly unique technology, and if it could be commercialized
on a larger scale it would definitely increase demand for vanadium significantly.
TCMR: Who is developing that technology and how close is it to commercialization?
JL: Well, theyve done it on a couple of pilot scales operating in Japan and Europe.
Some of the companies involved in vanadium redox are Prudent Energy and Cellstrom
GmbH and I believe Sumitomo Corp.
(8053:TKY; SSUMF:OTCPK ) is looking at it.
TCMR: Is this still in the semi-experimental stage or are they already in use?
JL: It is being used at a couple megawatts, but nothing on large scale.
TCMR: How far is it from commercialization on a larger scale?
JL: We think there is potential, but some of it comes down to government interaction
with utility companies regarding energy and grid storage and how those laws and
policies develop.
TCMR: Would that involve government subsidies or licensing?
JL: It comes down to a couple of things.
The government is mandating that certain
percentages of electricity production must be sourced from renewable energy.
So
its really determining how those policies will ultimately be implemented because
other technologies are competing with vanadium redox.
Within the redox, zinc bromide
battery and lithium-ionbatteries for grid storage are competing for market share.
At this point, the biggest storage form is pumped hydro.
Determining the scalability
of these technologies, and the price differential between peak and off-peak pricing
are key concerns.
A slew of different government policies will determine whether
vanadium redox can actually go forward.
TCMR: What are the main sources of vanadium and who dominates the market?
JL: China has a big piece of production.
Russia has a big piece of it, as well as
South Africa.
TCMR: Is this somewhat of a negotiated market between supplier and user, or is there
a trading market?
JL: Everything is negotiated on a contract basis.
Its much like lithium.
Its
traded over the counter because the market is roughly 60,000-70,000 tons per annum
tpa.
There is no London Metal Exchange market.
TCMR: So what is it selling for these days?
JL: Roughly $26-$27/kg.
vanadium.
TCMR: In about the same range as moly?
JL: More expensive than moly, but cheaper than, say, niobium.
TCMR: The last time you spoke with The Energy Reportin April, you talked about several
companies that were developing vanadium deposits.
Those included Largo Resources
Ltd.
(LGO:TSX.V), which is in Brazil; and American Vanadium Corp.
(AVC:TSX.V),
which has a property in Nevada.
Can you give us a little update on whats happened
with these companies in the past six months?
JL: We have a "Strong Buy" on Largo, and a "Speculative Buy" on American Vanadium.
Largo is progressing nicely at its Maracas project, where it already has a significant
reserve.
Its drilling right now to increase that resource.
Its the highest-grade
vanadium deposit in the world and even more so after magnetic separation.
Right
now, its finishing its financing on the debt side for construction.
It has spent
some money on construction on the equity side.
Its in the midst of finalizing
the debt portion and getting an installation license, which is much like a construction
license.
It still expects to start producing in 2013 and, given that it already
has a pay off-take with Glencore International (GLEN:LSX) for all of its production,
we think this is a big development story that has a lot of legs in the near future.
Once it finalizes that debt, its on to construction, and its really just about
executing on the plan.
TCMR: Youre calling that one a Strong Buy basically because you think it has all
the right ingredients here to make it big?
JL: Yes, it has a strong management and technical team.
Construction financing
is about to be completed.
It is also the highest-grade deposit in the world that
has expansion potential.
Average grade is roughly 1.3%, but with physical upgrading,
it goes to about 3%.
With vanadium, there is a roasting process involved.
When
you upgrade it to 3% by doing magnetic separation, you put less material into
the kiln and reduce the operating costs.
That will definitely make it a low-cost
producer in the industry.
We look forward to it producing vanadium in 2013.
TCMR: So whats it going to cost to get into production?
JL: The capital costs are roughly about $220M.
It recently raised $115M in March
through equity financing, and its finalizing a debt financing of roughly $150M.
We think it will close fairly soon.
With the capital on the debt side and the equity
side, it should have more than enough cash to go to production.
Really its just
about execution of the plan right now.
Once the debt financing comes in and Glencore
is a customer, its off to the races for them.
Thats why we have a Strong Buy
on the company.
TCMR: It sounds like it has all the right ingredients.
JL: We also cover American Vanadium and classify it as a Speculative Buy.
Its
a different deposit.
Its a sedimentary deposit out in Nevada.
It just came out
with its feasibility study less than a month ago and showed positive economics.
It could potentially be another low-cost producer using a different technology-a
solvent-extraction technology without any roasting or grinding.
This makes the
project economic.
Its a simple heap-leach and solvent-extraction process.
TCMR: Like copper.
JL: Exactly-copper or gold.
It is still making headway to get to production as
well.
Because there is less equipment needed for this project, its capital costs
are in line around $100M.
Obviously, thats significantly lower.
Its a smaller
deposit but there is potential for expansion on adjacent hills.
Its main property
is Gibellini Hill, but it also has claims on nearby hills that have shown the same
mineralogy.
It will be looking at that to expand its resource and mine life.
With
a low capital cost, low operating cost potential, we think American Vanadium has
legs as well.
TCMR: So what would its yearly production be like compared to Largo?
JL: Its going to be producing different material.
Largo is going to be producing
about 5,000 tpa of ferrovanadium.
So on an 80/20 basis, thats roughly 4,000 tons
(t.) of vanadium contained.
American Vanadium is looking to produce about 11 Mlb.
of vanadium pentoxide a year.
Those are the numbers that they are targeting right
now.
They are two different products, both containing vanadium, but one is in the
form of vanadium pentoxide, and one is in the form of ferrovanadium.
TCMR: Is the pentoxide more of a chemical-type product vs.
the ferrovanadium, which
is more of a metal?
JL: Ferrovanadium has the iron.
Typically, because its in a magnetite, there is
iron associated with that product and ferro is the iron portion of the vanadium.
TCMR: And the pentoxide is basically an oxide of vanadium-vanadium bonded to oxygen.
JL: Exactly.
TCMR: So, generally, there is ongoing growth and demand for vanadium and the big
catalyst here might be a good viable battery application, which might kick the
demand up stronger.
JL: Yes.
We like to think of the battery applications as a free call option with
strong underlying demand from the steel industry.
TCMR: Switching to the other area that you cover-hardly anyone uses pencils anymore
and thats probably about the only place people have ever heard of graphite being
used.
But, obviously, theres a bigger market for it.
Where is graphite used these
days?
JL: When you felt graphite as a school kid, you noticed it was very slippery.
Thats
just the way its structured.
It is sheets of carbon.
That is useful in lubricants,
which are actually a big portion of graphite use.
Another big portion is refractories.
Because the melting temperature of graphite is over 3,000 degrees Celsius, it can
be used as a crucible in steelmaking to hold the liquid steel.
Those are the main
uses.
Its also used in various other applications such as brake linings and in
batteries.
The graphite-to-lithium ratio in lithium-ion batteries is roughly 10:1.
Theres actually a lot more graphite in a lithium-ionbattery than lithium on a mass
basis.
TCMR: So, basically, increased graphite demand is going to be relatively proportional
to the demand for lithium batteries.
JL: We believe so.
You can use synthetic graphite, which is made from petroleum
coke, but because the melting temperature is so high and you have to restructure
the configuration of the carbon molecules at a higher temperature, it is a more
expensive method of producing graphite.
TCMR: How big is the annual market for graphite?
JL: Right now its about 1.1 Mt./y, and its been growing significantly over the
last couple of years with prices also increasing significantly over the past year.
China owns 75% of the market, which is why graphite supply could potentially be
critical.
During the 1990s, China reduced prices to where other producers could
not compete.
So a lot of companies went out of business.
Because of that, most
graphite ended up being produced there.
The other big areas for graphite production
are Mexico and Brazil.
Most of them are privately owned companies.
TCMR: So it would be considered a critical material because of the limited monopoly
sourcing of the product.
What does it sell for?
JL: It varies.
Like all these other critical or minor metals, its sold over the
counter or on a negotiated price basis.
Prices range from $800-$2,500/t.
The big
pricing discrepancy is due to a couple of factors.
One is the size of the flakes
or powder.
If its in powder form, its less expensive relative to the larger flakes
of graphite, which demand a premium.
Then there are also different carbon contents.
So a lower carbon-content material, which is a less pure version of graphite,
will sell for a cheaper price than a 96%-97% carbon-content graphite.
The pricing
is variable.
TCMR: Youve come out with a Speculative Buy recommendation on Northern Graphite
Corporation (NGC:TSX; NGPHF:OTCQX).
Can you tell us a little bit about that one
and why you like it?
JL: Its an advanced development stage project that already has a large resource,
enough for 40,000 t.
at 20 years.
What we really like about the project is its
strong management team.
Don Baxter is the president of the company.
He previously
worked at Ontario Graphite Ltd., which is nearby, and he knows that deposit and
its metallurgy very well.
When it was developing the project, he had a lot of
say on how the metallurgy should work.
Looking at this project, the metallurgy is already known.
The company did additional
work this year, and it should be doing its pilot study soon, as well.
This is really
just proving up the process.
This is a large-flake deposit.
So the metallurgy right
now is to crush, grind and float to remove the graphite flakes from the deposit.
Sometimes when you crush it and grind it, you reduce the size of the graphite.
In this case, their metallurgy maintains that large flake size.
70% of the material
thats going to come out is going to be large-flake graphite.
Additionally, without
chemical upgrading, its been able to achieve more than 95% graphite content.
When
we were talking about the pricing difference between all the different types of
graphite, most of the material that Northern is going to be producing is high-carbon,
large-flake graphite, which will generate a premium on a revenue basis.
Thats
really what we like.
A lot of the flow sheet risk is removed because its been
done before.
TCMR: What kind of capital costs is it looking at and how much is it going to be
producing once it goes into production?
JL: Capital costs are roughly $70-$80M to produce 20,000 tpa.
TCMR: And it should be getting closer to the $2,000/t.
range?
JL: On most of its material, I think it can get somewhere between $2,000-$3,000/t.
Thats what we like about the story.
TCMR: That sounds like a pretty attractive deal compared to a lot of other metals
mining projects you look at that cost five times as much to get into production
and forever to get there.
Anyway, as far as competition in this business, its
pretty much China and a few smaller producers around the world?
JL: Well, Brazil has a bunch of larger private, family-owned businesses.
Of 1.1
Mtpa production globally, if roughly 70% is run by China, thats 770,000 t.
The
balance of that is in Brazil and Mexico with some smaller operations in North Korea.
There is a mine in Sri Lanka, but yes, the bulk of it really is in China.
TCMR: So Northern Graphite has a pretty good chance of establishing itself as a
decent-size producer?
JL: We believe so.
It has the ability to scale up if the market warrants it, as
well.
Its deposit is large enough for it to go from 20,000 t.
to 40,000 t.
if
the market is there.
TCMR: Thats definitely one to watch if somebodys looking for something a bit more
exotic.
JL: Exactly.
Were pretty high on that story as well.
TCMR: Do you have any closing thoughts that people should consider in looking at
the vanadium and graphite markets?
JL: What we really think is driving the graphite market is the possible explosion
of lithium-ion batteries and the use of graphite within them.
Demand looks strong
for the future.
TCMR: Thats a positive note we can leave on.
We appreciate your thoughts and your
insight.
Thanks for joining us today.
JL: Great.
I appreciate it.
Jonathan Lee is a battery materials and technologies analyst with Byron Capital
Markets in Toronto.
As a member of Byrons research department, Lees primary
focus is on the battery materials sectors, which includes lithium, vanadium and
cobalt.
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DISCLOSURE:
1) Zig Lambo of The Critical Metals 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 Critical
Metals Report: American Vanadium Corp., Largo Resources Inc.
and Northern Graphite
Corp.
3) Jonathan Lee: I personally and/or my family own shares of the following companies
mentioned in this interview: None.
I personally and/or my family am paid by the
following companies mentioned in this interview: None.
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