Greg’s Note: Fuel efficiency has become the name of the
game for many industries these days. Especially for companies like
airlines who are watching their profits dwindle as operating costs
soar. So what are they doing? They’re becoming more fuel efficient
with lighter metals that will help save fuel. Chris Mayer has
noticed a recent trend in the use of rare and obscure metals that
are used to improve fuel efficiency. And as we all know, if you
find something rare in great demand, you’ve found yourself a good
investment. Enjoy this one and send any comments to
greg@whiskeyandgunpowder.com.
|
Finding Fuel Efficient Metals |
By Chris Mayer
Gaithersburg, Maryland, U.S.A.
July 15, 2008
Ultra high-strength and super-light steels are the
plastics of the 21st century. There is high demand for these
steels for use in everything from jet engines to rail components.
In turn, there is a big push for the quirky metals so critical in
making them. And in those quirky metals are good opportunities for
investors. One of them is vanadium.
For some industries, such as airlines, finding a
more fuel-efficient way to do business is a matter of survival.
According to a recent Financial Times article, it’s
“triggered a massive jump in the price of obscure and scarce
metals that are used to improve the fuel economy of jet engines.”
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The quest for fuel-efficiency goes beyond just the
airlines, of course. It extends to rail cars and automobiles, to
power plants and high-speed drilling. Vanadium’s primary use: to
strengthen steel. Combine it with titanium and you get the best
strength-to-weight ratio of any engineered material. That makes it
practically irreplaceable in aerospace and other industries.
Companies also use vanadium to produce sulfuric acid, and in
nuclear power plants. Vanadium also promises new advances in
battery technology. Giant vanadium batteries power wind farms and
solar power plants.
In the great infrastructure boom, vanadium takes
its place at the table of other rare and obscure metals that are
growing much more important. The price of vanadium, as with many
of these metals, is way up. For most of last year, vanadium cost
$40 per kilogram. In February, it hit $90 per kilogram. It has
since come back some, but it rallied to over $80 again recently.
The rocketing vanadium price is no mystery. Demand
is strong, while supplies are constrained. A big part of the
supply constraint lies in South Africa. That’s because a massive
electricity shortage is preventing many mines from operating at
full capacity. As the CEO of Windimurra Vanadium, an Australian
mining company, put it: “The market is very sensitive to power
supply issues. Large South African miners are facing up to 15
percent restrictions to their power supply… The supply of vanadium
will remain tight, and that’s factoring in a best scenario for
South African producers, which is no guarantee.” In March,
Xstrata, which produces about 12 percent of the world’s vanadium,
said it would cut its deliveries by 10-15 percent in the second
quarter. And Highveld, the world’s biggest producer of vanadium,
said in February that power outages posed a “considerable threat”
to future output.
The vanadium market also has some interesting quirks. For example,
98 percent of the world’s vanadium comes from only three countries
— China, Russia and South Africa. South Africa, we know, has power
issues. China’s Sichuan province, devastated by earthquake, was
also a rich vanadium producer. Moreover, China is becoming as much
a consumer of vanadium as a producer. So vanadium exports from
China are dropping. Last year, China ended its export credits for
vanadium because it needed the metal more at home. This year,
China went further and put an export tariff in place.
China’s vanadium use per quantity of steel is
still well behind the curve compared with the U.S.’ If China were
to use as much vanadium as U.S. steel producers, the vanadium
market would face a one-third increase in demand. That’s a pretty
nice long-term tail wind for vanadium.
Russia’s Evraz Group is the world’s largest
producer of vanadium, with about 27 percent of supply. I think
it’s safe to say that Russia has been an uneven producer of
certain commodities. And as the Russians like to change the rules
of the game as it suits them, I would not rely too heavily on
Russian supply. And finally, there are no stockpiles of vanadium
or substitutes of equal quality.
So where are the opportunities?
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It’s tough to find a good pure play that is easy
to buy. Most of the producers are in China or South Africa or
Australia. And these producers make lots of other metals. You
wouldn’t buy Xstrata just because you like vanadium. You’d also
have to understand a host of other metals that contribute much
more to Xstrata’s bottom line than vanadium. One interesting
company is Denison Mines. Vanadium could represent up to a third
of Denison Mines’ revenues in 2008. The problem with Denison is
that it is mainly a uranium play. To invest in Denison, you have
to like uranium; you get the vanadium exposure as a bonus. Denison
is probably cheap, although I haven’t looked at it in great
detail.
Some of the best ideas are just in the prospecting
stage or emerging as producers. There are a few in Australia,
including Windimurra Vanadium and Reed Resources. Both have big
vanadium resources and could each eventually represent 6-8 percent
of global production.
One of my favorite vanadium ideas I’m keeping an
eye on is Largo Resources (LGO.V: CDNX). Largo
has the world’s highest-grade vanadium mine, in Brazil. It’s close
to infrastructure and located in a mining-friendly state. The
company should have a completed feasibility study in July.
Production should start in 2010. It’s highly speculative, but
promising.
The company also has a molybdenum and tungsten
project in the Yukon, called Northern Dance. These metals are also
important in infrastructure.
Scarcity is a great thing when you are an
investor. Finding companies that own something scarce — with good
long-term demand behind it — is a winning formula for finding good
ideas.
Regards,
Chris Mayer
P.S.: Finding an interesting and
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