Jonathan Lee: Graphite and Vanadium to Benefit from Battery Market Growth
Interview

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 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, 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 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 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 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. 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. (AVC:TSX.V), which 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 well.

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.

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 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 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 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 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, 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.

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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.