Editor’s Note: Today, we
have a special profit-seeking article by our special situations guru
Chris Mayer. Just as he did with molybdenum, he just found another way
to invest in much-needed rare metals. Enjoy…
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The Other Metal That You Never Heard Of |
By Chris Mayer
July 21, 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.”
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.
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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.
Sincerely,
Chris Mayer
P.S.: These rare metal
plays are nothing new to my Mayer’s Special Situations
readers. In fact, they are sitting on the best molybdenum play in the
investment world right now. Shares are still cheap for this company,
but they won’t stay that way forever. I urge you to check out this
report on our other hot topic, Blue Gold. Do that now and
sign up, before The Street figures it out…
