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.
Companies Mentioned: American Vanadium Corp.- Largo Resources Ltd.- Northern Graphite Corporation
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 isn't a big spike in vanadium demand
because it's closely tied to steel production?
JL: Yes, but steel production has been increasing approximately 6% per
year, so that's 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
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
JL: Well, they've 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
TCMR: Is this still in the semi-experimental stage or are they already
JL: It is being used at a couple megawatts, but nothing on large
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 it's 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-ion
batteries 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
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. It's much like
lithium. It's 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 Report in 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.
has a property in Nevada. Can you give us a little update on what's 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. It's drilling right now
to increase that resource. It's the highest-grade vanadium deposit in the
world and even more so after magnetic separation. Right now, it's finishing
its financing on the debt side for construction. It has spent some money on
construction on the equity side. It's 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, it's on to construction, and it's really
just about executing on the plan.
TCMR: You're 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 what's 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 it's
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 it's just about execution
of the plan right now. Once the debt financing comes in and Glencore is a customer, it's off to the races for them.
That's 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. It's a different deposit. It's 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. It's 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, that's significantly
lower. It's 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
TCMR: So what would its yearly production be like compared to Largo?
JL: It's going to be producing different material. Largo is going to
be producing about 5,000 tpa of ferrovanadium. So
on an 80/20 basis, that's 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 it's 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.
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 that's probably about the only place people have
ever heard of graphite being used. But, obviously, there's 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. That's just the way it's 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. It's 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. There's
actually a lot more graphite in a lithium-ion battery than lithium on a mass
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 it's about 1.1 Mt./y, and it's
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, it's
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 it's in powder form,
it's 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: You've 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: It's 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 that's going to come out
is going to be large-flake graphite. Additionally, without chemical
upgrading, it's 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. That's really what we like. A lot of the flow sheet risk is removed
because it's 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. That's 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, it's pretty much China and a few smaller producers around the
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, that's 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: That's definitely one to watch if somebody's looking for
something a bit more exotic.
JL: Exactly. We're 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: That's 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
Byron's research department, Lee's primary focus is on the battery materials
sectors, which includes lithium, vanadium and cobalt.