The Last “Cheap” Battery Metal
The Last “Cheap” Battery Metal is About to Go Ballistic
Prior to 2010, lithium was an after thought in the commodities world.
It was a gray metal produced as a byproduct from potash fertilizer mining. Back then, its largest use was in grease, ceramics, and aluminum metal.
Little did we know that lithium prices were about to take a wild ride.
That chart is deceptive because of its scale. Every increment on the vertical axis is $10,000. In 2010, the price of lithium averaged less than $4,000 per metric ton in 2010. By 2016, it was over $20,000 per metric ton. That’s an incredible 400% increase, but it was just the beginning.
In 2017, the demand for lithium from electric vehicles was only 15%. That was enough to drive the price higher. After that, demand tripled. The price peaked over $37,000 per metric ton. From 2010 to its peak, the lithium price rose over 800%.
The impact on lithium producers was…pronounced.
Fertilizer giant Sociedad de Quimica y Minera (NYSE: SQM), was a ten bagger from mid-2015 to its peak in 2022.
As you know, we believe the lithium market has flaws. Lithium is abundant. At $5,000 per ton, it wasn’t worth the effort to produce. But at $40,000 per ton, it spawned an entire new industry.
This month, we’re going to look at a metal that is far less abundant.
Like lithium it has humble origins. It’s a byproduct used mostly in steel making.
However, China has developed a battery based on this metal that is perfect for grid scale batteries.
These are the “holy grail” in the electric grid right now. In simple terms, they can store energy when it’s cheap and demand is low. Then they can return the power to the grid when demand is high, and prices are rising.
Grid scale batteries are the key to smoothing out supply and demand. They dramatically improve the economics of solar and wind. They can limit brown outs and even mitigate disasters. That’s why this technology is so important…and will be in huge demand.
Today, this metal is cheap. Prices just fell 30% on slow steel demand. BUT China is rolling out these new batteries across the country. And soon demand for this metal will be felt in the supply.
That’s when this new battery metal will have its lithium moment.
The great news is that the SQM of this new metal is insanely cheap thanks to the recent price decline. We can buy the next huge bull market in battery metals today at a discount to its price last year!
Before we get to the investment, lets look at this new battery metal and why it will be in so much demand soon.
VRFBs – The Solution to Grid Scale Batteries?
Grid scale batteries need to be huge. They need to store hundreds of megawatt-hours of energy at a time. That’s enough to power thousands of homes for many hours.
Today, lithium batteries are the most used in this role. But they have some serious flaws:
- Fire danger – lithium batteries are prone to overheating and causing fires. At grid-scale this is a serious problem.
- Low energy density – lithium is light, which makes it the best fit for EVs. But it has relatively low energy density. That limits their ability to store a lot of energy in a given space.
- Limited duration – lithium batteries are best used for short-term storage.
- Degradation – lithium batteries have a limited number of charge/discharge cycles before they begin to decline. We see that in the battery life of a typical cell phone.
- Cost – lithium batteries are expensive for grid-scale storage.
The need for this technology is huge. And lithium clearly isn’t the long-term solution.
In 2023, the global grid-scale battery market was $1.05 billion. Forecasts for growth range from 26% compound annual growth to 32% compound annual growth through 2031.
The winner in the grid scale battery war appears to be “flow batteries”. These batteries use chemical reactions in fluids to convert between chemical and electrical energy. While too heavy for vehicle applications, they make up for that in lower cost, high energy density, and long lives.
A typical flow battery can last between 10,000 and 20,000 cycles without requiring rest. A lithium battery can go about 3,000 cycles.
That’s why these batteries are so valuable for grid-scale applications.
Vanadium redox flow batteries (VRFB) appear to be a favorite in China today. And that mystery metal was discussed earlier is vanadium. This simple metal goes mostly (85%) to steel making. It’s also used in some alloys and as catalysts. But in the future, VRFBs will dominate the demand for the metal.
If that sounds familiar, it should. This is the same path that lithium took. The difference is that the vanadium price got beaten down over the past two years:
That looks like an opportunity, thanks to the emergence of VRFB technology.
Analysts at Wood Mackenzie published this outlook for VRFB demand:
This looming demand should inject life back into the vanadium market. Particularly because these batteries moved from conceptual to actual. China has some huge VRFB systems under construction.
- Dalian: 100 Megawatts (MW)/400 Megawatt Hour (MWh) system expandable to 200MW/800 MWh
- Hubei: 100 MW/500 MWh system
China is expected to reach an annual VRFB deployment of 14.5 GWh by 2031. That dwarfs the rest of the world. However, other countries are following quickly. Japan’s Sumitomo Electric installed a 15 MW/60 MWh system in Hokkaido in 2019. And the UK has a 2 MW/5 MWh system. Australia and Canada are also leaders in the VRFB space.
The outlook for vanadium is excellent. The supply of vanadium is low. That means any extra demand will push prices higher. And we are sitting at the bottom in demand right now. All eyes remain on China for guidance on vanadium prices. But as we sit at the low end of things right now, most scenarios take the vanadium price higher from here.
This looks a lot like the early days of lithium and EVs.
That’s why we want to take a position today in the SQM of vanadium.
Largo Inc. (Nasdaq: LGO) is the SQM of Vanadium
Largo Inc. is a $119 million Canadian vanadium producer and product manufacturer. Largo is one of the lowest cost vanadium producers in the world. Its Maracas Menchen mine in Brazil has one of the highest-grade vanadium resources in the world.
It can produce vanadium between $4.50 – $5.50 per pound (before royalties). And it can produce up to 11,000 metric tons per year.
The company has two divisions: vanadium sales and VRFB sales. It makes batteries and components at its Wilmington, Massachusetts facility. The company can manufacture 12.5 MW per year. It plans to expand that to 100 MW per year by the end of 2025.
The problem is that the company isn’t making money at the current low vanadium price:
In 2023, the vanadium price began the year at $9.44 per pound and declined to $6.53 per pound. The average price for 2023 was $8.33 per pound versus $9.52 per pound in 2022. That was the high point for vanadium prices recently. In 2021, the average price was $8.24 per pound.
As you can see, that decline in price hammered Largo’s financials. And as the vanadium price fell and Largo’s earnings sagged, its share price collapsed:
We see that as an opportunity. Under $2 per share is literally the “blood in the streets” price for Largo. It’s currently trading at just $1.87 per share.
The downside risk here is that China’s economy doesn’t recover, steel demand remains flat, and demand for VRFBs doesn’t materialize as quickly as forecast. That would keep a lid on vanadium prices and send Largo shares lower. However, we see that as a distant risk.
Largo does have some debt, but it has cash as well. Its current market cap is about 60% of its sales. In March 2023, the company traded for 1.5 times sales. That’s more than double its current price. And we believe Largo can get back there, with a little help from the vanadium price.
Action to Take: Buy Largo Inc. (Nasdaq: LGO) up to $2.00 per share and use a 30% trailing stop on the position. That means, if we buy shares for $2.00 each and they fall below $1.40 each, we will sell.
We sincerely believe that vanadium has the potential for a huge bull market.
Unlike lithium, it’s difficult to find and produce more vanadium in a hurry. And if VRFB technology lives up to its promise, the demand for vanadium could skyrocket.
One analyst report projected that the vanadium demand from batteries could consume all the current vanadium produced by 2030.
That’s the kind of setup that drove up the prices of lithium, cobalt, copper, etc. And that’s why we dubbed vanadium the last cheap battery metal.
We don’t think this will continue past this year, so it’s time to jump on the Largo train.
For the Good,
The Mangrove Investor Team