This decade’s most important theme in the eyes of commodity investors is the rise of electric vehicles and renewable energy.
These two revolutions in how we move and generate power are forecast to drive acute supply shortage across multiple commodities such as copper, nickel, lithium, silver and cobalt.
Though we believe shortages will create opportunities in the most well known electric metals, the real money will be made by those who identify the lesser known materials facing the same shortages.
One of those materials is vanadium.
Vanadium Demand is Being Flipped on Its Head
Vanadium, more than any other metal, stands to have its supply chain completely remade by the growth of renewable energy.
Historically vanadium has been used as an important strengthener of steel and a catalyst for various industrial processes. More than 90% of vanadium produced goes into the construction sector currently, with only 1% going to battery storage.
Uses for Vanadium
But this is about to change.
Vanadium Market Overview
The growing need for industrial scale energy storage solutions and the rising popularity of the vanadium redox flow battery (VRFB) are set to drive explosive demand growth for vanadium through this decade.
Looking at the current and forecast supply and demand for vanadium will put the opportunity from vanadium batteries in perspective.
The world currently consumers 130,000 tons of vanadium pentoxide. Demand is expected to grow to 180,000 tons over the next 8 years, 4% annual growth and drive a growing supply deficit expected to reach 14% of demand by 2030.
But even this positive demand outlook fails to account for potential demand from the battery industry, which is the real game changer.
China, the leader in the buildout of VRFBs is aggressively ramping up battery deployments. The largest flow battery in the world, with a capacity of 400MWh was installed in China near the end of 2022 by Dalian Rongke Power and another 500MWh project is currently under construction by VRB energy in China’s Hubei Province. Dalian Rongke also plans to double their battery’s current capacity over the next 5 years to more than 800MWhs.
If China constructs even half of its planned vanadium storage projects over the next seven years, China would move from the largest exporter of vanadium in the world to a net importer. Upheavals like this rarely happen in commodity markets which is why we’ve taken notice.
Global Vanadium Battery Deployment Forecast
Historically, even a small shortage of vanadium leads to extreme moves in prices. In 2018 and 2019, stricter rebar standards in China led to demand exceeding supply by only 10%, yet the price of vanadium went up almost 6 times, hovering near $30/lb.
Vanadium battery demand is set to push the vanadium market into a more severe deficit than what we experienced in 2018 within only a few years, telling us that higher vanadium prices are a must to incentivize supply to meet demand later this decade.
The Three Ways to Invest in Vanadium
With the demand outlook for Vanadium stronger than ever, the key piece of the puzzle is how can an investor take advantage of potentially much higher vanadium prices.
Below we’ve listed the three most liquid ways to benefit from an increase in vanadium demand and prices.
Largo (Ticker: LGO) Largest Pure Play Vanadium Miner and VRFB Battery Supplier
Largo (TSX:LGO NASD:LGO) is the largest primary vanadium producer globally and one of only two publicly traded pure play vanadium miners. Largo produces around 10,000 tons of vanadium pentoxide a year, 8% of total global supply, out of its Maracas Menchen mine in Brazil.
Largo’s recent production was impacted by historic flooding in the fourth quarter, but production is forecast to be up 40% year over year by 4Q 2023 and will continue to grow strongly thereafter.
Largo is also diversifying into vanadium by-products to drive additional cashflow. The company’s ilmenite concentration plant is scheduled to start operating in Q3 of this year and we estimate it could help Largo increase EBITDA by 30% at full operating capacity.
Most importantly, Largo is in the final stages of installing its first 6.1MWh VRFB battery in Spail for Enel. Successful testing of this battery will set the stage for Largo to become one of the few major vanadium battery suppliers outside of China.
Largo owns a battery manufacturing facility in Wilmington Massachusetts with the capacity to produce 12.5MW per year and will be scaling the facility to 100MW by 2025.
Remember that every 1,000MWh of battery demand eats up Largo’s entire vanadium production in a year.
Bushveld Minerals (Ticker: BMN) Second Largest Pure Play Vanadium Miner
Bushveld (LME:BMN) is the second largest primary vanadium miner in the world with two of four operation vanadium processing facilities. Bushveld is operates out of South Africa through two subsidiaries, Bushveld vanadium and Bushveld Energy.
Bushveld Vanadium owns the vanadium mines and processing facilities. Bushveld energy operates a mini solar grid, a vanadium battery electrolyte manufacturing facility and an indirect ownership in a vanadium battery supplier.
Bushveld Asset Map
The company is guiding to 15% production growth in 2023 and has longer term plans to reach 5,000 metric tons of production a year, from 3,842 metric tons in 2022.
Bushveld’s VRFB battery unit is taking a different competitive strategy to Largo, choosing to build their own VRFB energy utility, and supply the vanadium electrolyte that goes in the batteries instead of offering off the shelf vanadium battery systems and installations.
Bushveld is currently in the middle of restructuring a large loan coming due which has led to worries about dilution, but once the market gets clarity on how the loan maturity will be handled, the company is set up well operationally to benefit from strong vanadium demand growth.
Both Largo & Bushveld are trading at a significant valuation discount to traditional battery manufacturers and battery metal mining peers.
Largo Physical Vanadium (Ticker: VAND): Owning the Physical
For investors who prefer to keep things simple and gain exposure to only the price of vanadium itself, the Largo Physical Vanadium (TSXV:VAND) trust is a solid option.
The trust simply takes money from investors and buys and stores physical vanadium pentoxide(V2O5), the raw material used in vanadium batteries and combined with steel to make stronger and lighter building materials.
But theres a twist.
LPV also lends out its vanadium for use in vanadium redox flow batteries and earns a small fee for doing so. This unique model potentially offsets the typical holding costs of a physical commodity fund while also decreasing the upfront capital cost of buying and installing a VRFB for customers, driving more VRFB adoption, an ingenious strategy.
LPV also looks attractive due to the fact it is currently trading for a discount to the value of the vanadium it holds. The market price of the fund is 5% below the net asset value of vanadium on the books.
In rising markets NAV discount often turn to premiums and vice versa, making this potentially an atractive time to gain exposure to physical vanadium.
Largo Physical Vanadium Discount to Net Asset Value
But What About the Looming Risks of a Recession?
We’re not even sure the uncertain global growth outlook can hurt the medium term upside for vanadium. The market is just that tight.
There is a unique natural supply balancing mechanism embedded in the vanadium market due to the fact that a majority of supply comes as a by-product, not the main output of the steel making process in China.
When economic growth and construction activity are weak, falling production of and demand for steel automatically take vanadium supply out of the market, balancing supply and demand.
When you couple falling supply from the steel industry with rising demand from the battery industry, we think even a global recession won’t make much of a dent in the almost inevitable rise in vanadium prices.
Market beating returns come from finding opportunities the crowd has not and among commodities, vanadium stands out.
While research reports and newspaper articles keep rehashing the looming supply deficits in copper, lithium and cobalt, those are all well known.
Conversely, historic vanadium supply shortages are looming, yet barely a drop of ink has been spilled covering it on Wall Street or the mainstream financial media.
We strongly believe investors who look through the radio silence and stay focused on this once in a quarter-century vanadium industry reshuffling will be well rewarded.
Largo Inc. is a market awareness client of Capital 10X.
In Australia TMT is the one to break out.
At EPA approvals stage – and has enough ‘in the ground’ to produce 6% of the worlds Vanadium requirements.
Incredibly under-priced at 26c.