Description

Largo Physical Vanadium (LPV) VAND:CA

If you are familiar with Sprott Uranium Trust, this set up will feel very familiar.

Largo Physical Vanadium (LPV) is a holding company founded by Largo Resources (LGO) and Sprott Inc (SII) that purchases and holds Vanadium. At inception (Sept ’22), Largo contributed about $30 million worth of Vanadium (at current prices) and Sprott has committed to marketing the vehicle.  The trust previously traded at a pretty wide discount to NAV for its entire lifespan. Recently, however, the discount to NAV has been closing and it now trades right near NAV (see below). This is in part due to a recent uplisting on the OTCQX and the company's appearances at various industry conferences.

For those of you familiar with Sprott Uranium Trust (SPUT), you know that once these entities trade above NAV then the Sprott marketing machine can be turned on.

As a refresher, here is how (SPUT) worked:

1)SPUT trades above NAV 2)It issues more units and uses that cash to buy more Uranium. 3)The increased buying causes the price of Uranium to go up. 4) Investor interest in the space goes up. 5) SPUT issues more units and buys more Uranium….and on and on....

It appears that Sprott and Largo are using the same exact playbook that was used for SPUT and taking it to a much smaller and less liquid market, Vanadium.

Vanadium

Vanadium is a rare element that is primarily used for two things. The first is as a steel additive and the second is as the main component of Vanadium Redox Flow Batteries (VFRB). Overall, Vanadium is a $3.5bln market with 90% of that being used for steel. Like most commodities, the marginal price has historically been driven by Chinese demand (China accounts for more than half of global Vanadium consumption).

Here is a summary of the recent price action from LPV’s excellent primer  

November 2018 saw the implementation of new construction standards in China mandating the use of higher-quality rebar. Large scale consumer restocking in preparation for these regulatory changes created a very tight market, and prices increased accordingly. After reaching record highs, prices fell back in 2019. Demand that year was lower than expected as the new regulations in China were inconsistently enforced, steel mills released inventories, and substitution of ferrovanadium for ferroniobium helped to soften vanadium demand. Prices reached a floor by the early stages of COVID-19 but saw upward movement when China emerged early from global lockdowns and went on to post record steel production in 2020. In 2021, prices crept upwards as the post-pandemic recovery saw demand pick up in the ROW and, in March 2022, they shot up on the news that Russia had invaded Ukraine. However, over the rest of 2022 prices retreated as was the case with many commodities, as supply-risk concerns over the war were replaced with demand- side concerns over the health of the global, and particularly Chinese, economy.

Largo is the worlds largest producer of Vanadium and its P&L and stock price are dependent on the spot price of Vanadium. Largo developed Vanadium Redox Flow Batteries as a means to decouple from Chinese steel demand, but uptake on these batteries has been slow even though the technology seems to work well (more below).

Vanadium Redox Flow Batteries (VRFB)

Vanadium Redox Flow Batteries (VRFB) are large batteries used for electricity storage and are usually attached to power plants or electrical grids. Uptake of these batteries has been slow although there have been some sizeable projects in China and Australia in recent months. See below for the growth in VFRB, but note that it still remains a small percentage of overall Vanadium consumption.

The main issue impacting VRFB uptake has been the high cost, and in particular the volatility around that price. Utilities, in general, do not like budgeting for a major capex like large scale batteries only to have the price double on them in just a few months. Historically, potential customers have moved on to other technologies with more stable pricing.

Now you might think that a Sprott induced short squeeze is not the best way to go about creating more stable pricing if your goal is to grow demand for VFRBs. However, what is fascinating about VFRB batteries and the LPV set-up, is that the Vanadium in VFRB batteries doesn’t degrade. This means that the Vanadium can be collected and re-used once the battery is no longer viable. It also means that the Vanadium in the batteries can be rented rather than sold. This business model dramatically reduces the cost and volatility of VFRB pricing which should drive demand for the batteries.

So to recap: Largo is the worlds largest producer of Vanadium and as of now, their pricing and ultimately their stock price is driven by Chinese demand for steel. After some boom years, that is not going so well and the future doesn’t look so good either. Largo is hoping batteries can drive Vanadium demand, but nobody wants them because they cost too much and the pricing is too volatile. The solution that Largo came up to solve these problems is actually incredibly elegant.

Largo created Largo Physical Vanadium Trust (LPV) and partnered with Sprott to market it. This alone will create a new demand channel for Vanadium which should drive prices higher (see circular SPUT process) but it also creates and entity that can rent out Vanadium for batteries. LPV will buy Vanadium from Largo and then will rent it back Largo to place in their batteries. Largo can then sell the batteries at much lower and much more stable pricing. Largo believes this could dramatically increase VFRB sales. All the while, the Vanadium price should keep rising due to all this new demand, bringing the NAV of LPV up along with it.

LPV hasn’t turned on the rental model yet so it is unclear if this will lead to the trust having a yield or if Sprott’s fees will just be offset by rental income. Either way, it is a unique and interesting wrinkle that could cause this to continue to trade above NAV.

In summary, this is all just starting. The opportunity is to buy LPV before Sprott turns on their marketing machine and ride the Vanadium price increase wave that is going to come from LPV’s circular buying (SPUT) and from the increase in demand for VFRB batteries. What is particularly interesting in Vanadium, unlike Uranium, is that there isn’t a ready supply of inventory in Vanadium. Therefore, an increase in demand reverberates much faster and stronger on pricing than it does in the Uranium market.  If this works, which I think it will, LPV should be a multi-bagger.

Catalyst

Buy LPV before Sprott turns on their marketing machine, issuing more units, and driving the Vanadium price up (aka SPUT squeeze)

Growing demand for VFRBs from rental model