Largo defies economic gravity and leads the pack towards vanadium production
While others in the Vanadium space have talked about what they would do, Largo Resources (TSXV: LGO) has crept up on them (and the market) and is looking to commence production of Vanadium from its 100%-owned Maracas mine in the next week or so. The property totals 28,587 hectares and is located in the State of Bahia in Brazil. The project is roughly 250 km southwest of Salvador (capital of Bahia) and 813 km northeast of Brasilia (capital of Brazil).
Vanadium – Going from Strength to Strength
Specialty metals suffer, in many cases, from being either combined with other metals in small quantities to gain relevance or have stand-alone usages that seem obscure or humdrum. In the case of Vanadium the market is large but the sources are many, with recycling (the miner’s worst enemy) being a major source. It is also a by-product of the petroleum industry, which is very novel. The main use (for the moment, is steel and the fate of that industry dictates how Vanadium demand evolves and thus prices also. Several major new uses promise to make Vanadium more sexy than it has hitherto been and that is why we want to focus at this point upon the small group of up and coming miners in the space.
As the bulk of Vanadium production is concentrated in China, Russia and South Africa, where supply disruptions (particularly energy- & labour-related in South Africa) have occurred (and with rising tensions with Russia and variably tensions with China). One cannot be entirely sanguine about Vanadium’s future accessibility. Those three countries account for around 90% of global supplies. Despite this, the recent British Geological Survey Risk List on Criticality of Supply ranked it a lowly 33 out of 45 metals.
On interesting possibility to speculate upon is a situation where China flips from being a net exporter (and sometime price spoiler) to being a net importer. This scenario could come about due to the Chinese shifting to using a higher percentage of Vanadium in their steel production.
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Speaking of US access to Vanadium the USGS commented, “While domestic resources and secondary recovery are adequate to supply a large portion of domestic needs, a substantial part of U.S. demand is currently met by foreign material”.
The Mine and its Complex
Largo claims the deposit has the highest grade vanadium resource in the world and that is positioned to be the lowest cost producer in the vanadium market. Geologically speaking the entire strike length of the Maracas deposit is rich in vanadium, hosting many deposits of Vanadium-rich titaniferous magnetite mineralization particularly at Gulcari A and other smaller deposits such as Gulcari B, Nova Amparo and Sao Jose.
The NI 43-101 resource estimate outlined in the PEA of March 2013 was:
- Mineral Reserve: 13.1 million tonnes @ 1.34% V2O5 (P&P)
- Mineral Resource: 24.6 million tonnes @ 1.11% V2O5 (M&I)
- 30.4 million tonnes @ 0.83% V2O5 (Inferred)
The project has good access by road from Salvador via 405km of paved secondary road from the main costal highway in Bahia, with a direct project access road about 50 km west of the town of Maracas (population of approximately 25,000).
The Maracas mine employs an open-pit mining process. The process is that ore from the mine will be crushed, milled, and sent through a magnetic separator to create a concentrate. The resulting concentrate is exceptionally high at 3.4% V2O5. This concentrate will then be processed into Vanadium Pentoxide. The company likes to stress that it is utilizing industry proven equipment and processes to produce vanadium – there are no new technologies or processes being utilized at the Maracas plant. This is possibly to deflect comparison with the troubled Windimurra mine of Atlantic Ltd in Western Australia.
Average annual production at Maracas is estimated at 11,400 tonnes of V2O5 equivalent over a lengthy 29 year mine life. The company sustains that there remains good potential for the expansion of resources and production rates at the complex.
In all all the road to production has not been a long one with Largo beginning initial construction activities at the site in June of 2012 and all systems at the project were in the commissioning stage by Q1 of 2014. Progress on the project has been coming thick and fast:
- Kiln commissioning – March 2014
- Deammoniator commissioning – Mar 2014
- AMV precipitation commissioning – Mar 2014
- Leaching commissioning – Feb 2014
- Milling and beneficiation commissioning – Feb 2014
- Approx 20,000 tonne stockpile of crushed ore accumulated – Feb 2014
- Crushing commissioned – Oct 2013
- Electrical power line commissioned – Oct 2013
- Water treatment plant commissioned – Oct 2013
All infrastructure and equipment is in place and commissioning is underway at the project site. As at a week ago construction of the project was 99.8% complete, with only the installation of auxiliary items still underway. First vanadium production is anticipated following the completion of commissioning and warm-up of the kiln.
Largo has contracted a take-or-pay off-take agreement with Glencore for 100% of its vanadium material for six years which will take effect at the commencement of production in 2014.
The first large scale industrial use of vanadium in steels was found in the chassis of the Ford Model T, inspired by French race cars. Vanadium steel allowed for reduced weight while simultaneously increasing tensile strength.
At the moment, Vanadium is used mainly as an alloy in a wide range of specialty steels and titanium alloys to provide greater strength, toughness, and wear-resistance.
New Applications – Worth Mentioning
The current state of the bulk of Vanadium demand is well-known with its strict correlation with steel consumption. New uses are potential X factor for the Vanadium space. While aerospace has been growing organically and increasing its share of the usage of the metal the area with the best potential for a quantum leap is in battery applications.
Chief amongst these is the Vanadium Redox (and redox flow) battery (VRB), which is a type of rechargeable flow battery that employs Vanadium ions in different oxidation states to store chemical potential energy. The present form (with sulfuric acid electrolytes) was patented by the University of New South Wales in Australia in 1986 where scientists carried out the first known successful demonstration and commercial development of the all-vanadium redox flow battery employing vanadium in a solution of sulfuric acid in each half in the 1980s. Although the use of vanadium in batteries had been suggested back in the 1970s by a number of scientists including some at NASA.
There are currently a number of suppliers and developers of these battery systems including Ashlawn Energy in the United States, Renewable Energy Dynamics (RED-T) in Ireland, Cellstrom GmbH in Austria, Cellennium in Thailand, and Prudent Energy in the United States and China. The vanadium redox battery results from over 25 years of research, development, testing and evaluation in Australia, Europe, North America and elsewhere.
The image that follows gives a good idea of one of the more practical applications of such batteries. In this case the solar panels collect energy during the day and store it in the battery for release during the period when the solar panels cannot access sunlight.
A vanadium redox battery consists of an assembly of power cells in which two vanadium-based electrolytes are separated by a proton exchange membrane. The battery exploits the ability of vanadium to exist in solution in four different oxidation states, and uses this property to make a battery that has just one electroactive element instead of two.
The main advantages of the vanadium redox battery are that it can offer almost unlimited capacity simply by using larger and larger storage tanks, it can be left completely discharged for long periods with no ill effects, it can be recharged simply by replacing the electrolyte if no power source is available to charge it, and if the electrolytes are accidentally mixed the battery suffers no permanent damage. The VRB has also been shown to have the least ecological impact of all energy storage technologies.
The main disadvantages with vanadium redox technology are a relatively poor energy-to-volume ratio, and the system complexity in comparison with standard storage batteries.
Sources – Primary and otherwise
The dynamics of the Vanadium supply chain are very interesting. In some ways we might compare the metal’s supply chain to that of Lead, where the chief source is recycling. Much of the current Western supply is sourced primarily from steel scrap, then mining followed by secondary sources (which are also recycling in nature).
Vanadium occurs naturally in about 65 different minerals and in fossil fuel deposits and is the 17th most common element in the earth’s crust. The important thing to note is that, beyond recycling from steel slag) the sources of Vanadium are either mineral deposits or, rather uniquely, as an oil by-product.
Vanadium occurs in deposits of phosphate rock, titaniferous magnetite, and uraniferous sandstone and siltstone, in which it usually constitutes less than 2% of the host rock. Significant amounts are also present in bauxite and carboniferous materials, such as coal, crude oil, oil shale, and tar sands. Amongst the major deposits are the titaniferrous magnetites of China, Russia, South Africa, Western Australia and New Zealand, as well as the oil-related deposits of Venezuela, Alberta (Canada), the Middle East and Queensland (Australia), in addition to ore and clay deposits in the USA.
The table above shows the state of production according to Vanitec, a Vanadium producer/user association. The USGS in its latest survey on the metal said that world resources of vanadium exceed 63 million tons.
Pricing and Trends
Metals sector reflation, supply disruptions and above-trend demand growth pushed ferro-vanadium prices up from an annual average of US$7.73 per kg in 2002 to US$61.94 in 2008. The financial crisis and recession of 2008 and 2009 severely weakened global steel production and demand; in response to this vanadium prices fell to a monthly low of US$18.96 in May 2009. Since then, as global steel demand and output recovered, ferrovanadium prices have rebounded to over $30 in 2013, easing back again to around $25 per kg for most of the last year.
Vanadium demand in the West stands to benefit from the emerging recovery and restocking efforts in the steel sector, however we would not discount a retreat in demand in China as steel consumption there is trending off. In addition to the cyclical economic shifts currently taking place, high-strength, low-weight metallurgical products are increasingly being demanded, as development projects require superior material performance in non-ideal environments. Increased utilization of alloyed steels and titanium alloys will likely have a bullish effect on the vanadium market over the coming decade. In addition, China uses comparatively low amounts of vanadium per tonne of steel produced and will need to dramatically increase its use of vanadium to match the steel quality of regions such as North America and Western Europe.
In a recent report, the metals consultancy, CPM Group, suggested that vanadium producers are likely to be operating at notably higher utilization rates through to 2019 to meet demand. This resulted in a conclusion that “if producer discipline remains intact, however, new projects will be needed to meet demand over the 10-year outlook”.
Largo’s Tungsten Asset
We originally came to know Largo via its Tungsten manifestation rather than its Vanadium activity. However its Tungsten effort, also in Brazil, was only a tailings reprocessing plan (though substantial) with its Currais Novos property having Indicated Resources of 3.46 million tonnes grading 0.12% WO3 and 1.74% F, containing 7.2 million pounds of WO3. Its Inferred Resource has been estimated to be 810,000 tonnes grading 0.093% WO3 and 1.44% F containing 1.3 million pounds of WO3. These tailings were deposited during the processing of ore from the Barra Verde and Boca de Laje tungsten-molybdenum mines. While this was scheduled to start sending out Tungsten from July 2011, this has not as yet been achieved. Largo is targeting production of 2.3 million lbs of WO3 and 675,000 lbs of Mo p.a. when operating at full capacity. The company claims a cash cost of less than $59 per MTU, which is very attractive indeed. It is also estimating cash flow of over $1mn per month from the project. The company managed to get the plant completed in December 2011 but then mothballed it in October 2012 due to a prolonged drought (which has not abated) restricting water available for the reprocessing plant. It remains on care and maintenance till the situation eases.
Largo has achieved the near impossible in moving forward to production a project in a specialty metal during a protracted and brutal financing environment. Fortunately its project is coming on line at a time when V prices are stable and Western demand for industrial minerals has the best outlook since the slump began in 2008.
Vanadium is one of those metals that, up until now, has been dependent upon the fortunes of another (i.e. the steel complex) for its momentum. And that driver has not served it well with most Western economies never being able to regain their momentum post-2008. Steel will eventually recover but China may have gone off the boil then so we find it hard to muster up price scenarios for Vanadium that are substantially higher than where they are currently. The swing factor is the great unknown of usage by new battery applications. This remains such an unknown that to make an investment decision based upon the “might be” of that factor would be daring indeed. We take consolation in the fact that Vanadium’s price has been so stable over the last year giving it a good base to move up from as Western economies’ economic recovery picks up momentum.
Largo’s market cap is currently $290mn with annual average cashflow estimated at $89mn and an OPEX of $2.10 per lb (including iron ore by-product credits). With the average price of V2O5 being over $6 over the last five years, the potential for sizeable margins is fairly obvious. In light of the scant pipeline of new products the potential for new applications demanding more product and even more basic factors like the Chinese adding more vanadium to their steel formulas the prospect for a price crash in V is not very likely. As the pure-play Vanadium production story in the North American markets Largo has carved itself out a fairly unique position.
Christopher Ecclestone is the EU Editor for InvestorIntel and is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten ... <Read more about Christopher Ecclestone>