Reminiscences of a Stockblogger

Feb 19

Gran Colombia’s Debenture Redemption looks favorable

On Thursday Gran Colombia announced the warrant terms of a $152 million USD senior secured note offering. Attached to the notes the company is offering 124 warrants priced at $2.20 per share per $1,000 of note principle.

Dilution amounts to 18.8 million shares. This compares to 72.2 million shares that would have been issued under the existing 2018, 2020 and 2024 debentures if they were fully converted (the table below is from the third quarter MD&A filing).

I think the deal, if it is approved, is pretty positive. Consider:

Under the prior share structure, a $2.50 share price translated into a market capitalization and enterprise value of about $230 million (~92 million x 2.50 = $230 million).

Under the new notes, and considering redemption of all of the existing debentures at par, the share count is roughly 39 million and the market capitalization is $97.5 million (39 million x 2.50). The enterprise value is $202 million (97.5 million + $150 million (x 1.25 CAD/USD exchange) – $45 million (assuming in the money warrant conversion of the 18.8 million warrants) – $9 million).

Debenture Holders can participate

As a debenture holder (I own both the stock and some of the X and V debentures) I’m interested in what my options are with the debentures.

The terms gives existing debenture holders the right to participate in the offering:

Existing holders of the Company’s Outstanding Debentures that are eligible to participate in the Offering may (subject to complying with certain procedures and requirements) be able to do so by directing some or all of the redemption proceeds from their current debentures into Units on a dollar-for-dollar basis.

I’m not entirely sure how to read this. Does it mean that existing debenture holder gets preference to convert their debentures into new notes or is this just on a best efforts basis where an over-subscription to the notes would mean partial allocation?

I’m hopeful that I can direct my debentures into the new notes, but I’m not counting on it.

Its still cheap on Comps

Gran Colombia continues to compare favorably to other gold producers.

One of the quick scans I like to do compares companies on a simple EV/oz produced basis. I’ll do the comparison and then weed out why some companies trade at lower multiples than others. Usually there are good reasons.

At $1,400/produced-oz Gran Colombia trades at one of the lowest multiples of the group. Only the really poor operators that are cash flow negative at current prices (an Orvana Gold for example) are cheaper. Most of the companies I compare to are in the $4,000 – $6,000 per produced-oz range. Even the lower tier companies like Argonaut Gold or the struggling one’s like Klondex trade at over $2,000 per produced-oz.

Its still cheap on Cash flow

Even forgetting that it is a gold stock, Gran Colombia remains reasonably priced as a business.

On the third quarter conference call Gran Colombia reiterated guidance for $16 million USD of free cash flow in 2017. In the fourth quarter they produced 51,700 ounces versus an average of 40,700 ounces per quarter in the first three quarters.

The indication after the strike at Segovia was that new agreements with artisanal miners should lead to more processed ore at the plant. Based on this and progress at the Segovia mine, my expectation is that 2018 free cash guidance will exceed 2017.

I suggested in my original post on Gran Colombia that I thought $20 million USD of free cash flow was not an impossible goal. I still think that’s possible. Assuming the note and debenture deals go through, the market capitalization of the company will be a little under $100 million CAD at current prices. Even though the stock has climbed since my original post, this still means the stock is at less than 4x free cash flow.

Conclusion

Eventually the note offering and debenture redemption should be positive for the stock. But it might take a few months.

What’s tricky is that at $2.40 the stock price is right about where the debentures convert. It isn’t really in anyone’s interest (other than the current debenture holders, though even that is debatable) to see the stock price rise too much above the convert price until the deal is done.

I’ve been adding to Gran Colombia all the way from $1.40 to $2.20. I see no reason to take any off the table yet. The company is doing everything right so far. Hopefully with the new capitalization and simpler structure the market will continue to recognize this.

Feb 13

6 Comments

Radcom’s Growth is Lumpy (and that’s not a bad thing)

I had an interesting comment about Radcom the other day and given today’s release of fourth quarter earnings, it seemed like a good opportunity to expand on my reply.

First let’s talk about the fourth quarter results.

Revenue in the fourth quarter was $10.6 million. They turned a nice profit, about 17c per share. But the big news was announced on the conference call. A new Tier 1 one win:

We are very excited to share that one of these major NFV trials has come to fruition and resulted in RADCOM being selected by a Tier-1 multi-carrier operator. We expect this to result in a formal contract during the first half of 2018 and we’re making preparations for project execution.

Radcom also gave us some guidance for the first quarter and for 2018. They said first quarter revenues will be below the fourth quarter. And they said 2018 revenues will be $43 million to $47 million.

What to make of it?

Let’s go to the comment, which was made by Arf. Arf correctly pointed out that if Radcom grows by 25% in 2019 and 2020, after hitting the midpoint of guidance in 2018 ($45 million), then the upside is not as much as you’d think. He estimated the stock had maybe 70% upside if they got a 20x earnings multiple. This is in 2020 mind you. Given those assumptions, I think that’s probably fair.

So if that’s the upside, why bother with the stock?

My take is this. Because Radcom customers are large Tier 1 service providers, the deals are slow and sporadic but also unusually large compared to the existing revenue base. This combination makes it hard to anticipate the growth rate. Growth is going to be lumpy and its going to depend on the timing of when these deals are signed and when they begin to on-board.

Let’s look at exactly what 25% growth rate is assuming:

So after growth of about $8 million in revenue in 2018, 25% growth adds another $11 million in 2019, and then $14 million in 2020.

That’s a possible outcome, but I don’t think it is an optimistic one. After the announcement today of the third Tier 1 win I would say it’s also less likely.

I’ve been looking at it like this. From the fourth quarter results released today, we know that total revenue for the year was $37.2 million and AT&T accounted for 60% of it. So the deal with AT&T was worth over $22 million in revenue in 2017.

I’ve always assumed that a full win on Tier 1 account should be for at least $15 million. Based on what we are seeing with AT&T, that assumption seems reasonable. It might even be low if Radcom can penetrate these other carriers to the same degree they have with AT&T (ie. sell them on the new visibility product that they will be unveiling at Mobile World Congress in a couple of weeks).

The Verizon foot in the door win was for $5 million. My bet is that eventually Verizon will grow to close the size of AT&T. Let’s say Verizon can be an $18 million win as the deal matures. Other large wins (with say a Telefonica or a Vodafone or a Bell Canada) should at least be $15 million.

With those numbers in mind consider this. A $19 million increase by 2019 ($8 million in 2018 and $11 million in 2019) is really saying that by 2019 Radcom will have successfully integrated Verizon to a similar level as AT&T and not much else. A $14 million increase in 2020 is saying that Radcom finally gets a single third carrier win by that point.

If it’s into 2020 and RDCM only has AT&T, Verizon and one more win, then something has gone horribly wrong with the thesis. Either NFV isn’t getting adopted or a competitor has caught up or something.

What do I want to see?

The difficulty this past year (and what led me to sell out of my position entirely for a couple of months) has been that the lumpiness of the wins has played against Radcom. They had no new wins that contributed to 2017 revenue. They were lucky to have a ramping business from AT&T that allowed for growth in the absence of new deals.

This handicap could become an asset over the next year. Because of the large, lumpy nature of their deals, even if Radcom gets just two wins per year for the next couple of years the company’s growth rate should go up substantially.

If I assume that Verizon is an $18 million deal in 2019, that the just announced Tier 1 is a $15 million deal in 2019 and that two more deals are announced in the next year and a half and begin to contribute meaningful revenue in 2020, I get a very different picture:

These numbers assume that by 2020 Radcom has 5 wins worth of revenue, ie. AT&T, Verizon, the announced win today and two others that will be announced in the next year and a half Its hardly more than one more win a year. In my opinion, this is not wildly optimistic.

So what’s with Guidance?

Any astute bear on Radcom is going to focus on the guidance. At first I was surprised it was as low as it was, given the Verizon win and the newly announced Tier 1. They did $37 million in 2017. The midpoint of guidance is $8 million higher.

But after thinking about it more, it makes some sense. We know the first phase of the Verizon deal is $5 million. We know this new Tier 1 deal is only getting signed in the first half, and even then in all likelihood it will be phased in similarly to the way Verizon was. So $2-3 million in the second half from the new Tier 1 is probably about right.

In other words, it looks to me like Radcom is guiding to known revenue only. They aren’t assuming anything incremental from AT&T. They are assuming no further expansion from Verizon this year. And they are assuming a slow ramp of the new Tier 1 in the second half.

I think they are setting themselves up for raises later in the year.

But I might be wrong. The other possibility is that guidance reflects an expected slow ramp of the NFV business for Verizon and other Tier 1. Given how slow it’s been for deals to materialize, this wouldn’t be that surprising.

It doesn’t matter (in my opinion)

Nevertheless, I don’t think it matters if this is a slow ramp or if it’s sandbagging. The only thing that matters here is whether I am wrong about these deals ramping to $15 million or more on an annual basis.

In fact with this latest Tier 1 win, deal size is the last leg for bears to stand on. They need to focus on the $5 million Verizon deal, assume that the deal won’t grow much more, and extrapolate that size to the other service provider trials.

Indeed if I am wrong and Verizon maxes out at $6 million or $8 million or this other Tier 1 maxes out at $5 million, then Radcom is going to struggle. But if these are $15 million plus deals, and because there is every indication that there will be more to come, then it’s just a matter of waiting until it plays out.

I just don’t buy the former scenario. It doesn’t make sense to me. These are large service providers. They are in the ballpark of AT&T and so the size of the deals should be in that ballpark when they are rolled out across the network.

What’s more, the revenue is recurring. A recent article in Light Reading clarified this for me. In particular:

Essentially, Radcom’s customers pay a constant, recurring and regular fee to use the vendor’s software, no matter how many instances they deploy and how many customers they are supporting with the software. So whether an operator is deploying Radcom’s probes in one market or ten, and supporting 50,000 customers or 5 million, the fee remains the same — the cost to the operator does not scale as it uses the software more. The traditional model of linking technology payments to boxes or instances or customer metrics doesn’t apply with Radcom.

I know I’ve been talking the Radcom story forever and I’ve been both very right and very wrong about it at various times. But unless someone can tell me why Verizon or Telefonica or Bell or any other Tier 1 wouldn’t have a deal size roughly comparable to AT&T, then I am going to say that right now things look as strong as I’ve seen them.

Therefore I am pretty excited about where Radcom is going. It’s my largest position right now. It’ll probably continue to be painfully slow, but the end goal seems clearer than ever.

Feb 9

89 Comments

Precision Therapeutics – Buying into the Sales Ramp

Precision Therapeutics (AIPT) is roughly a $12 million dollar market cap company. They have 11 million shares outstanding and no debt. After a January share and warrant capital raise (which I am including in my share count) they should have about $4 million of cash on hand. They also have a $1 million note receivable from joint venture partner Cytobioscience.

The recent share and warrant raise diluted shareholders significantly. The placement was for 2.9 million units, consisting of shares at $0.95 and 0.3 warrants prices at $1 per share. This was a $1.50 stock as recently as November.

Precision raised the cash because they are burning cash. I estimate cash burn per quarter is about $1 million per quarter. This will probably continue.

Those are the facts, most of them not pretty. So why did I take a position?

The STREAMWAY System

Precision markets a medical fluid waste disposal system called the Streamway System. The system is a wall mounted device located in the operating room. During procedures surgical waste fluid is continuously removed via suction, passed through proprietary filters, measured and recorded, and then passed directly into the building’s sanitary sewer.

This is very different than traditional waste handling during procedures. Competitive solutions use mobile carts and disposable cannisters that have to be replaced, often multiple times during the procedure, and in many cases treated with gels to minimize the chance of contamination. Even so, accidents occur and they are expensive. Hospitals spend $4,500 on average for a mishap.

Here is a look at Streamway (Skyline is the former name of Precision) and its competition:

The Streamway system has a number of advantages over incumbent waste disposal options:

Price: Cost of the unit is similar to slightly less than competition (Stryker system plus docking station costs $34,000 though I suspect they have been discounting to try to squeeze Streamway), but the disposable cost is 1/2 to 1/8 of the cost of replacing cannisters
Safety: no chance to spill fluid or to have an accidental catheter removal during a cannister change
Labour: cannisters have to be changed during a procedure anywhere between 2-10 times. This is entirely eliminated with Streamway
Accuracy: can more accurately estimate volume extraction than the manual estimation using cannisters
Ease of use: removal of clumsy cannisters, latching, and replaces with simple instrument panel with instructions
Time: Procedures do not have to be stopped to replace cannisters which can result into 20-50% faster surgery

The primary negative with Streamway is installation. It has to be hooked up to the sewage line and therefore the operating room needs to be shut down and the wall cut open to complete the install. This has been a sticking point, particularly as hospitals are not unhappy with the mobile carts they’ve been using. Precision has taken to emphasizing the improved safety of using Streamway.

The cost advantage of Streamway is significant. This is from the last 10-K:

A study by the Lewin Group, prepared for the Health Industry Group Purchasing Association in April 2007, reports that infectious fluid waste accounts for more than 75% of U.S. hospitals biohazard disposal costs. The study also includes findings from a bulletin published by the University of Minnesota’s Technical Assistance Program. “A vacuum system that uses reusable canisters or empties directly into the sanitary sewer can help a facility cut its infectious waste volume, and save money on labor, disposal and canister purchase costs.” The Minnesota’s Technical Assistance Program bulletin also estimated that, in a typical hospital, “. . . $75,000 would be saved annually in suction canister purchase, management and disposal cost if a canister-free vacuum system was installed.”

A second study, by the Tucson Medical Center, found similarly significant savings. They estimated they would save $22,000 per year in a single operating room. Bottle costs for the mobile unit they had installed previously were $107 per procedure. The Streamway disposable cost brings that down to $24 per procedure.

In general, the $24 price tag is a favorable disposable expense compared to the costs of replacing cannisters, waste disposal, gel costs and labor for the competing Stryker and Zimmer systems. Those systems need to have cannisters replace anywhere between 2-10 times depending on the procedure. The material and waste disposal costs can be between $25 – $100 (or more) and on top of that there are labor costs and the time cost of having to pause the procedure to empty the cannister. You add to that the risk of a contamination event (which is going to be a $4,500 hit) and its easy to see how Streamway saves money.

Struggling Sales

So you can make the argument that Streamway is a superior system. Nevertheless the company has had a horrible time ramping sales. On the third quarter conference call the CEO Carl Schwartz, came clean about what had been happening:

When I took over as CEO in 2016 like many of you I thought the Streamway System was a slam dunk…Nothing could have been further from the truth. We had two very entrenched competitors, Stryker and Zimmer, who have their units at most hospital facilities in the country. In addition they were able to bundle their units in with other operating equipment, offering substantial discounts. Furthermore, it became increasingly evident that many institutional hospital customers would not allow us to connect to the hospital sewer system because they did not want us to open the operating room wall. Given these challenges and the fact that their unit and ours effectively removed fluids, what was our competitive advantage? After several months of effort we discovered that our most competitive advantage was our ability to avoid the spread of infection in the hospital by eliminating any contact between the infectious materials and the patients and staff and we have been hammering that home where ever we present the Streamway system and in newspaper articles all over the country. As you know it has been a slow going but we are making substantial progress.

In addition to pressure from the competition in the United States, the company has been slow getting regulatory approval in non-US districts. Up until this year their sales staff and list of distributors was sparse. It was a situation where you had a solid, superior product, but it was competing against well-funded incumbents, and marketing and sales dollars were not enough to mount an offensive.

In fact it seems like management had begun to give up themselves. There was a failed merger with Cytobioscience in the summer. There was a subsequent joint venture with Helomics and a proposed one with Cytobioscience. Indeed even the strategy for 2018 includes the following statement:

To expand Skyline’s business to take advantage of emerging areas of the dynamic healthcare market. To this end, management is implementing a Merger & Acquisition strategy focused on finding and acquiring high-growth companies that have established operations and the ability to drive both revenue and capital appreciation for the Company, or entering into strategic relationships with these companies.

Even if management was just being strategic with its new diversification approach, investors were frustrated. Listening to conference calls in 2017 is a painful exercise. Lots of frustrated investors, many of them long time investors, having been expecting a steep sales ramp, saw unit sales trickle in a 1 or 2 a quarter and the share price lag.

With cash levels dwindling, management had to raise capital with the dilutive raise I mentioned previously. That, along with the failed Cytobioscience merger, was likely the last straw for many investors.

As a consequence, the share price hasn’t done well. The one year chart illustrates the disappointment:

Things are turning

I’ve had Precision Therapeutics on my watchlist for the last 6 months. I can’t remember why I added it, I’m pretty sure it was mentioned by someone on twitter though I don’t remember who. When I looked at it a number of months ago I thought they had an interesting product but there was no indication that they were gaining any sales traction. So I passed.

However that appears to be changing. In early January the company announced that they had sold 5 Streamway systems in the fourth quarter. They sold another 6 systems in January alone. I wish I had been paying a bit closer attention to the company when this news release came out, as I would have probably started buying it back then.

I did pay attention to the second news release that came out last week. Precision projected 100 systems sold in 2018 from the United States alone. I caught the stock soon after it jumped on the news.

Precision sold 10 systems in 2017. This includes at least 1 system sold in Canada. So the projection for 2018 is for at least 10x 2017 sales.

While up until now sales have drifted aimlessly, the company has been doing a lot of work behind the scenes that has set themselves up for this type of increase. They have:

Hired 4 regional sales managers and a VP sales in early 2017. Up until the end of 2017 they had a single regional sales manager and no VP Sales.
Signed a contract with Vizient, which is a healthcare improvement company with a $100 billion in purchasing volume, in the summer
Partnered with Intalere, a health care supply chain manager
Signed a 3 year agreement with Alliant Health, a Service-Disabled Veteran-Owned Small Business that sells medical device products to the federal government, to sell STREAMWAY to into Federal Hospitals

And while early sales have been sporadic, they do mark first steps toward greater penetration, opening up the opportunity for more significant deployment once the systems benefits are experienced. Take for example, the two units sold in the third quarter. Both sales were to single operating rooms across much larger hospital networks, in one case a 6 facility network and in the other a 11 facility network. On the third quarter call Schwartz said they were in discussions to standardize waste management across each network.

Foreshadowing the increase in sales, Precision did 92 demos in the first three quarters and equaled that amount in the fourth quarter alone. They did 145 quotes in the first 3 quarters, and more than 75 in the fourth quarter.

International sales have been even slower to come then domestic, but in the last 6 months Precision has made some strides there as well. In June they got the CE mark for the system, which allows them to start selling the devices into Europe. Later in the year they partnered with Device Technologies, which will be selling Streamway in Australia, New Zealand, Fiji and the Pacific Islands (they seemed quite excited about the Australia opportunity on their third quarter conference call). They added a distributor in Canada as well as have been selling systems directly. They added another distributor selling into Switzerland in November and opened a European office a few days ago. Its worth pointing out that the 100 unit sales projection is not including any sales outside of North America.

One time and Recurring Revenue

Streamway systems retail for about $24,000 per unit. 100 units should equate to around $2.4 million in revenue.

That will be a big uptick from 2017 revenue. The company has been printing quarterly sales in the $100,000-$150,000 range for the last few years, so the 5 Streamway units sold in the fourth quarter and the 6 and January should provide a nice revenue ramp.

However maybe the more important consideration is that as more Streamways are installed into operating rooms, recurring revenue will scale as well.

Precision generates recurring revenue from the sales of disposable filters and cleaning fluid. According to the 10-K, the filter and fluid retail for $24. The company recommends changing the filter and cleaning the unit (with the fluid) after every procedure.

I think hospitals are doing this more like every 2-3 days. Nevertheless, Precision has been generating about $100,000 of revenue per quarter from the sales of the disposables. Given that there is about 100 units currently in operation, it works out to $1,000 of revenue /unit/quarter. While the company doesn’t provide margins from disposables, its pretty easy to estimate them. In the second quarter no Streamway units were sold, and the company generated $106,000 at 80% gross margins.

It looks like the average operating room performs 2-3 surgeries per day. If hospitals actually used the disposables after every surgery, I estimate revenue would be more like $4,300 to $6,500 per quarter per unit sold, or over 4-6x what I estimate it is now. That’s a lot of reason to promote proper usage.

Even at the current disposable usage rate, 100 extra units means $400,000 more high margin recurring revenue annually. Add that to existing consumable revenue, and add on the $2.4 million from unit sales, and I get annual revenue of about $3.2 million for 2018.

CRO Joint Ventures

Probably because Streamway sales have been slow, management has looked to alternative lines of business to boost interest in the stock. The initiatives kicked off in the summer with an announced merger with Cytobioscience, a contract research organization (CRO) that specializes in testing the cardiac safety of drug compounds. The merger was subsequently postponed in favor of a joint venture in November, and at the same time a second joint venture was announced with Helomics, another CRO company.

As it stands now, Precision has a 25% ownership stake in Helomics and a $1 million loan to Cytobioscience. The joint venture with Cytobioscience was supposed to close by year end but I haven’t seen anything to that effect. Listening to the last conference, it seems like even the merger with Cytobioscience may take place once audits and accounting work are completed (it was suggested that the merger didn’t transpire because of auditing required on Cytobioscience before it could be merged with a public company). On the other hand this article, which I can’t read in its entirety, says that Cytobioscience walked away from the merger, so who really knows.

I don’t know what to make of these two joint ventures and the move into CRO. It seems like the CRO business is growing. Whether these companies are at the forefront is anyone’s guess. Cytobioscience said on the second quarter call that they expected $700,000 of revenue a month by the first quarter of 2018. Helomics, which specializes in customizing cancer treatment based on finding patterns with their patient database, is in a growing field.

I’m also not entirely sure why these companies want to merge with Precision. The Streamway doesn’t really have a strong connection to the CRO businesses that they operate from what I can tell. Precision does have net operating losses of $11 million that could be utilized against future profits. So maybe that’s it?

Just last week the Economist dedicated an article (and a cover) to the emerging field of using data to provide better diagnosis and treatment. The article talks about using AI to better customize treatment to patients. That is essentially what Precision will be trying to do in their partnership with Helomics.

Summary

Cash on hand should be enough to get Precision through 2018, and maybe further depending on how these sales develop and how much they end up spending on partnerships. If I ignore cash, the price to sales (P/S) multiple that the company trades at is 3.5x. Including cash its more like 2.5x.

Given the growth (10x the revenue in 2017), the margins (gross margins of 80%), and momentum in engagements across the United States and internationally, this doesn’t seem out of line to me.

The stock is hated by investors because it has disappointed for so long. There is a long list of bashers I’ve seen on twitter and a few on SeekingAlpha. None of these bashers have brought up a point that has concerned me though. They are mostly just rehashing past price declines.

I think the stock moves higher. At the very least it should get back to its November levels, which were above $1.50. If there is evidence that the strengthening of sales of Streamway is sustainable over multiple years though, that should just be the beginning. The recurring nature of the disposable sales adds a lot of value as more systems are installed. Finally, if the Cytobioscience merger becomes a “go” again, that would be another catalyst to the stock.

So you have a beaten down stock, pretty clear indications of sales momentum, and the outside chance that something bigger is announced. All around it seems like a decent bet.

Note: I have been told there is a SeekingAlpha article by Jonathon Verenger on Precision that is quite good. I haven’t read it yet because I wanted to write up my own ideas first without influence.

Jan 30

17 Comments

Vanadium battery demand and ways to invest in its potential

In past portfolio updates I briefly mentioned my position in Largo Resources and how I have a positive outlook on the vanadium market. I wanted to expand on those thoughts in this post.

Vanadium Supply and Demand

The Vanadium market has been in deficit for over five years. I don’t think that is going to change this year and in fact there are factors that could exacerbate the deficit in 2018.

Vanadium deficits have been precipitated by low prices which have led to mine closures and a lack of new mine development. The low prices were a consequence of cheaper “slag” production in China. A significant portion of vanadium supply comes via a by-product of producing steel (called slag) from some types of iron ore.

As China steel production has boomed, slag production has increased. This resulting supply has pushed expensive mine supply out of the market. As well integrated steel production operations outside of China, which also produce vanadium, have shutdown, like Evraz Highveld in South Africa, which closed in 2015:

The consequence is that inventories have been falling for some time. Recently, this has been exacerbated as long-time stagnant vanadium demand has started to increase.

The traditional usage of vanadium is as an additive to steel that improves its strength. Demand as a steel strengthener has remained fairly flat (though that may change this year as I will discuss). But a new source of demand has emerged – vanadium redox flow batteries.

Vanadium redox flow batteries

I started looking at vanadium back in September when I began looking into ways of playing the electric vehicle (EV) revolution. Vanadium is not directly related to EVs. Vanadium redox flow batteries are not a realistic alternative for vehicles. They are, however, an excellent way to store electrical energy at a large scale. So they are complimentary to the story.

A few months ago I read an excellent book called The Grid. One of its main points is that our grid is about to undergo a massive shift due to renewable generation. But there is a major problem with renewable generation: it is not aligned with consumption patterns. An energy storage solution is necessary.

Because vanadium redox batteries are well-suited for large energy storage applications, they are well suited to helping solve the storage problem.

But vanadium redox flow batteries do use a lot of vanadium. A few numbers will go a long way to illustrating the opportunity:

First consider that the vanadium market is small; its only about 80,000tpy.

From this article, it takes 15 tonnes of vanadium to build 1.6MWh of vanadium redox flow battery capacity. What this is saying is that if these batteries are implemented at scale, they are going to require A LOT of vanadium.

China is building a 800MWh vanadium redox battery project in Dalian. This project alone will use 7,500 tonnes of Vanadium. That in itself would give a big boost to global demand.

If Vanadium redox flow batteries catch on in scale, demand for vanadium is going to increase substantially.

Other factors weighing on supply and demand

In addition to battery demand, other positive developments are occurring. China is curbing the import of many of the sources of iron ore that produce vanadium as a by-product as part of their efforts to lower pollution. Producing vanadium from slag is dirty, particularly when its from low quality slag. So China is banning the import of such material.

I talked about China’s anti-pollution initiatives in my post about rare earth elements. Much of the same dynamic that I described for neodymium applies to Vanadium. There has been specific actions in the vanadium market that will squeeze supply further, as the Metal Bulletin reported:

a scrap import ban by Chinese authorities at the end of the year will cut approximately 4,500-5,500 tonnes

At the same time, a second move by China will increase demand. As another Metals Bulletin article describes, changes to China’s rebar standards could cause “vanadium consumption to surge 30%”.

These two quotes, which I took from Prophecy Development Corps recent presentation, summarize the current situation.

Largo Resources and Prophecy Development Corp

My preferred way of playing vanadium is Largo Resources. I also have a smaller position in Prophecy Development Corp. I prefer Largo because they are more liquid and they are currently producing. In fact I believe that Largo is the only public producing vanadium company on the market. They own one of the few primary vanadium mines still producing after the Chinese slag onslaught.

Largo isn’t perfect. They have a habit of issuing shares at a cheap price (like this recent 80c placement back in November). There has been insider selling. They are a single mine operator, so they have the risk of a bad quarter if the mine has a hiccup. And they aren’t particularly cheap based on historic vanadium prices.

Of course the bet here is that history is not a good guide for the future.

I estimate that at current levels Largo is trading at about 7x EBITDA based on the third quarter realized vanadium price of $8.75/lb. As slide 6 of the Prophecy Development Corp presentation I linked to above references, current vanadium prices are $12.80/lb. As is the nature of mining operations, apart from taxes, all price increases in the commodity fall directly to the bottom line. I estimate that Largo trades at a little less than 4x EBITDA at current vanadium prices.

Of course, at some point price increases destroy demand. If this was purely a steel story, like previous prices spikes have been, I would be cautious. But given the emergence of vanadium redox flow batteries and the significant demand they could represent if adopted at even a modest scale, I remain optimistic that prices can hold these levels and maybe even go higher. I don’t think that Largo (and Prophecy) are reflecting this yet.