Vanadium is primarily used as an alloying agent for iron and steel. It is also used in catalysts for the production of maleic anhydride and sulphuric acid. In addition, 13-15% of world vanadium production is used via titanium-vanadium alloys for aircraft hull construction.
Vanadium occurs in deposits of titaniferous magnetite, phosphate rock and uraniferous sandstone and siltstone, in which it makes up less than 2% of the host rock. Significant amounts of Vanadium are also found in bauxite and carboniferous materials, such as crude oil coal, oil shale and tar sands.
According to the U.S. Geological Survey, preliminary data of U.S vanadium consumption increased 4% from the previous year. Think about that for a second. Growth of 4% in a year when the United States is undergoing an economic slowdown, if not a recession. Furthermore, these are simply statistics from the United States, when you include the statistics from BRIC countries; demand for Vanadium is expected to increase at a compound annual growth rate of between 7% and 8% for the foreseeable future. Among the major uses of vanadium, production of carbon, full alloy and high strength low-alloy steels accounted for 25%, 30%m and 32% of domestic consumption, respectively. In 2007, U.S. steel production was expected to be 2% to 3% lower than that of 2006. Research from the U.S. Geological Survey indicates that vanadium pentoxide prices ranged from $5.70 to $8.30 and averaged $7.40 for 2007. Ferrovanadium prices ranged from $15.25 to $38.50 and averaged an estimated $19.60 for the year, about 4% higher than that of 2006.
According to an October 2007 research note put out by Patersons of Australia:
“The global market for vanadium is currently 56,000t of contained vanadium (V) per annum which equates to 70,000t of FeV80. Expected annual growth rates for the vanadium market of 7% imply an additional 4,900kt of FeV80 consumption coming into the market each year. New supply into the market over the next two years including Windimurra totals 10,300t of V, implying the market will at least remain in balance or even deficit should any supply side issues arise (which we regard as likely).”
The world’s largest producers of Vandium are China 29%, South Africa 25% and Russia 15%. The bulk of the Chinese and Russian supply is as co-product from magnetite iron sources and its growth is linked to expansion of co-production facilities which are relatively unique. Only Panzhihua and Chengde in China are known to have expansion plans (~8kt in 2009). This growth is needed to meet forecast market demand. Closure of small high cost and high polluting operations in China and increased export taxes will partially offset any planned growth there. The power shortages in South Africa have affected the supply side of vanadium.
The following excerpt is from the May monthly review of the Sevenoaks Opportunities Fund L.P. The 2 fund managers Kyle Mckay and Neil Andrew just happen to be 2 ex-Leeward hedge fund employees. Leeward hedge funds was setup by M. Brendan Kyne, a frequent guest on BNN (Canadian Financial News Network) that recently closed its doors as Mr. Kyne decided to devote his time to managing his own money. The Sevenoaks Opportunities (Hedge) Fund L.P. is up 18.30% year to date.
“Vanadium, much like molybdenum, is used to strengthen steel. Global supply of vanadium is roughly 100k tons, with South Africa accounting for roughly 39%. Power shortages have been rampant in South Africa and, to make matters worse, they are not expected to improve until 2012. Meanwhile, there are very few new vanadium mines set to come on-line over the next few years. Additionally, the near-term supply of vanadium is also likely to be affected by delays linked to the Chinese earthquake. With the demand for vanadium expected to grow 7-8% a year for the next few years, it is becoming increasingly likely that the global supply of vanadium will fall short of demand for the foreseeable future. In short, we believe that the price of vanadium has further upside and are beginning to position accordingly.”
Largo Resources (LGO: TSX-V)
Shares Issued (Basic) – 114 Million
Market Capitalization – C$ 136 Million
Institutional Ownership – 55%
Cash – C$ 1.5 Million (as of May 30, 2008)
Convertible Debt – C$ 4.5 Million
Largo has 2 advanced projects – the Maracas Vanadium project in Brazil and the Northern Dancer Tungsten Molybdenum project in the Yukon.
The Maracas project is the highest grade vanadium deposit in the world. It is located close to infrastructure in the mining friendly Bahia State in Brazil. The deposit has a NI 43-101 measured and indicated resource of 22.5 million tonnes of 1.27% vanadium pentoxide (V2O5). The deposit includes 8.7 million tonnes of 2% V2O5 (vanadium pentoxide) that is to be milled in the first 10 years and 406 million pounds of potential of Iron vanadium (FeV) (>$14 billion in metal value). Largo already has an off-take agreement with Glencore International, one of the world's largest suppliers of commodities and raw materials to industrial consumers. The deposit had a scoping study done in December 2007 and expects a complete feasibility study to be completed in July by Aker Solutions. The scoping study outlined an open pit operation with a low strip ratio of 3.33:1 and mill throughput of 1600 tonnes per day. With a targeted annual production of 5000 tonnes iron vanadium (FeV), estimated costs of < $5/lb, recovery rates of 63.4%, the scoping study calculated a NPV of $212 million at $5/lb vanadium pentoxide (V2O5). Largo is targeting production from the Maracas project in mid 2010. 
Largo has plenty of upside solely from the Maracas project and the Northern Dancer Tungsten Molybdenum project in the Yukon is simply icing on the cake. The stock has has had a tremendous run in the short term and will probably move highger but I think time and general market malaise will allow one to pick up the stock around the C$ 1.20 level or slightly lower. I could be very very wrong about timing the stock so please do not rely on my comments. If you like the prospects for Largo Resources, Please - Please do your own due diligence.
Lastly, the stock was brought to my attention while I was watching an interview with Mr. Peter Imhof of Sprott Asset Management on BNN on June 18, 2008. Mr. Imhof picked Largo Resources (LGO: TSX-V) as one of his top picks. Click here to watch the entire interview (Fast forward to the 19 minute and 45 second mark to hear Peter talk about Largo Resources)
Investment Risks
Without limitations, some of the risks include reserves and resource risk, development risks, permitting risks, off-take agreements, commodity price risks, geo-political risks, exchange rates, weather related impacts etc.
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Last update : 20-06-2008 05:00
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