Buy Element No. 23

Eric Fry By Eric Fry
Macro Strategist

Commodities

The electric vehicle is not the only transformational technology that’s bursting onto the scene. Energy storage is too. This story is just as big and just as ripe with investment potential.

A few months ago, for example, Saudi Arabia announced plans to build the biggest-ever solar project, with 200 gigawatts (GW) of generating capacity.

“The project would dwarf the total solar panels that the entire photovoltaic industry supplied worldwide last year,” Bloomberg reported.

The most interesting aspect of this story is not the titanic scale of the proposed solar installation, but rather a feature that will accompany it: the biggest utility-scale battery ever made. In other words, the project would not only produce solar power, but also store it for later use.

The growth potential here is off the charts.

Bloomberg New Energy Finance predicts the global energy storage market will “double six times” by 2030 – from a starting point of less than 5 gigawatt-hours to 305 gigawatt-hours. An estimated $103 billion will be invested in energy storage over that time period.

Parabolic growth trajectories of this scale are rare. To boost energy storage from where it is today to 305 GW by 2030 would require an annualized growth rate of 40% – or roughly 10 times the growth rate of nominal global GDP. That’s big.

So what’s the best way to play this megatrend?

The jury is still out, but I’ll render a partial verdict anyway: vanadium – named for Vanadis, the Norse goddess of beauty, love and fertility.

This element – No. 23 on the Periodic Table – is key to an innovative battery that is fast becoming the preferred technology for utility-scale energy storage.

Currently, the dominant form of energy storage is lithium-ion technology, but vanadium-redox flow batteries possess some valuable advantages.

They last longer and can be charged and discharged repeatedly, without any significant drop in performance. They are also easy to recycle and good for projects where space isn’t an issue.

A handful of vanadium-flow installations are already operating around the world. But China is in the process of deploying this technology in a big way. It is constructing an 800 megawatt-hour (MWh) vanadium-flow battery that will be the largest chemical-flow battery in the world.

According to Bushveld Energy, every 1,000 MWh of vanadium-flow energy storage requires 5,500 tons of vanadium. That means China’s new battery will require about 4,400 metric tons of vanadium – equal to roughly 5% of the annual worldwide production.

So even without demand from power utilities, the vanadium market is fairly strong.

The element is produced as a byproduct of steel smelter slag. It is also mined, but very few vanadium mines are operating worldwide.

“Vanadium is primarily used as an alloy to strengthen steel and reduce its weight,” a producer of the metal explains. “Vanadium enhanced steels are used in a vast and growing range of products… With a compound annual growth rate of over 6% for the past several years, vanadium is a bourgeoning commodity with concentrated supply… As trends in the steel industry now demand increasingly stronger and lighter products for advanced applications, the use of vanadium is expected to continue this growth over the medium and long term.”

But vanadium’s primary investment appeal derives from its use in energy storage. This new source of demand could drive the price much higher.

The steel market currently consumes about 91% of the vanadium supply, leaving only 9% for all other applications. But remember, China’s new vanadium battery will require a quantity of metal equal to 5% of the global supply.

So it isn’t hard to imagine that additional demand from the energy storage sector could push the vanadium price significantly higher…

To play the investment potential of this metal, I advised the subscribers of my trading service, Fry’s Pinnacle Portfolio, to buy Largo Resources (OTC: LGORF) four months ago. Not only was the fundamental rationale for buying Largo very attractive, but the stock’s strong value and momentum readings were signaling the start of a new uptrend.

So far, so good. The stock is up 50% since my recommendation.

But this stock has a lot more room to run… and legendary hedge fund manager Leon Cooperman agrees. When he appeared on CNBC this week, he sang Largo’s praises.

Largo is the only publicly traded pure play on vanadium production. The Toronto-based company focuses on the production of vanadium flake and vanadium powder from its Maracás Menchen Mine located in Bahia State, Brazil. The mine has been operating since 2014.

A few key details about this mine:

  • It is the only operating vanadium mine in the Americas.
  • It holds the highest-grade vanadium deposit yet discovered.
  • It is one of the lowest-cost producers of the element in the world.
  • It has an offtake agreement in place to sell all of its production to Glencore PLC (OTC: GLCNF).

After enduring a few challenging years, the company is now thriving. Revenues and earnings are rising, and debt levels are falling. And now, thanks to a sharply rising vanadium price, the company is well-positioned to produce spectacular earnings growth.

If the vanadium price holds around the current price of $18 a pound, or moves higher, Largo’s earnings could soar. The company is forecasting vanadium production this year of 8,950 to 9,950 metric tons, produced at an estimated annual average cash operating cost per pound of $4.15.

Scrawling these estimates on the back of an envelope – and assuming an $18 vanadium price for the year – Largo could generate more than $250 million of gross earnings (EBITDA, or earnings before interest, taxes, depreciation and amortization).

At that level of profitability, Largo stock is selling for less thanfour times EBITDA! That’s about one-third the valuation of the S&P 500 Index.

So that’s very cheap. Of course, that level of profitability would rely on vanadium remaining at or above its current price.

I like the odds… especially since 100% of its production is promised to Glencore.

The vanadium story is just getting underway… and it could be a very long and profitable one.

Good investing,

Eric