In the world of vanadium mining and exploration, costs are key to the potential success of the business. Higher than average costs can scuttle a vanadium producer before they even get off the ground, while lower than average costs can lead to a massive competitive advantage and high profitability. This is not always easy to accomplish however, with vanadium often found in iron ore, an intense and somewhat expensive processing procedure is needed in order to separate it. Any company that can avoid this situation has a significant competitive advantage of most of their peers. Rocky Mountain Resources (TSX-V:RKY) is one such company.
Unlike many of their peers, the vanadium at Rocky Mountain’s Gibellini property is not found in iron ore, it is found in a sedimentary shale deposit, already at surface. The rock is extremely fractured already, heavily oxidized and broken up, and will require only sulphuric acid heap leaching in order to process it – a much cheaper process than that required to extract vanadium from iron ore. In addition, the project has a very low strip ratio – 0.2:1– and as such, comparatively little of the resource will be waste. Even now the company are in the middle of evaluating if they will be able to remove crushing entirely from the process, which if it does turn out to be the case, would likely reduce both capital and operational costs even further.
For those unfamiliar with this metal, vanadium is a soft, silvery-grey mineral that can be produced as a by-product of steel smelter slag, or mined in two different types of deposit: disseminated in carbon rich deposits and shales, as is the case with Gibellini, or magnetite (iron oxide) alongside titanium.
Historically, around 85% of vanadium production is used as an alloy to harden steel, 7-8% is used to make specialty alloys, such as those used in jet engines, and around 7% has been used in industrial sulphuric acid production. However, a new and exciting use has been found for the mineral, which although is currently small compared with the other uses, will no doubt have an impact on the demand and supply curve for vanadium going forward, with a lot of near-term demand already coming through to the market. This is the use in vanadium redox batteries (VRB); flow batteries that are designed to store large amounts of energy, able to be charged and discharged an unlimited number of times without capacity drop-off. Naturally these have a wide variety of uses in high energy and uninterruptable power supply, and demand is set to increase as the global economy continues to push forward. Couple this with the growing demand for steel seen in China and India, who have been moving to generally produce higher quality steel and so require even more vanadium, forecasts for vanadium suggest prices will continue to increase into the longer-term.
The Gibellini property covers 3,400 acres of Eureka County, Nevada, about 44 kilometers (km) south of the town of Eureka. The deposit occurs within a fault wedge of organic-rich siliceous mudstone, which forms a northwest trending ridge. The top 30 – 45 meters (m) of the deposit is oxidized to various degrees, showing high vanadium grades. Below this level, there is a transition zone which comprises of both oxidized and unoxidized material, which has an even high vanadium grade. Below here, there is an unoxidized zone, which holds the lowest vanadium grades within the deposit. A NI 43-101 compliant resource estimate for the deposit, showed the three zone contain an Indicated 18 million tonnes of resource, averaging a grade of 0.3% vanadium pentoxide, or some 122 million pounds. The report also showed a total Inferred resource of 2.8 million tonnes grading an average of 0.28% vanadium pentoxide, or around 16 million pounds.
The economics of the project also show similarly strong numbers. A scoping study conducted in 2008 showed that with an annual tonnage of 3 million tonnes, and using heap leach processing, the mine could produce 14 million pounds of vanadium pentoxide per annum. With a capital cost of US$94 million, and a 5.7 year mine life, operating costs could be expected to be US$2.97/lb, with a very healthy internal rate of return (IRR) of 40%. A net present value (NPV) in the region of US$100 million, leaves a lot of room for the company’s US$10 – 12 million market cap to see a lot of growth over the next few years. Rocky Mountain have now engaged AMEC to produce a bankable feasibility study (BFS) to build upon this scoping study, with the potential for even better numbers when it does come through.
This politically stable backdrop and the low operational costs that allow profitable production given most price fluctuations, the project has a far lower risk profile than many similar companies. To give you some example of this robustness to price movements, the current price of vanadium pentoxide, the type produced at Gibellini, is in the region of US$7 per pound (/lb). Almost all forecasts suggest the price will remain at that level and higher for the foreseeable future.
The expected operational costs for Rocky Mountain’s project are US$3/lb, effectively meaning production is profitable at all prices above there. This allows a lot of leeway to withstand any volatile or unexpected price action in the vanadium market, and similarly places the company in a strong position to take advantage of any upswings. If the company are able to removing crushing from their processing procedure, these costs are expected to fall even further. Likewise, the expected capital cost, which currently stands in the region of US$90 million, will also fall by an estimated US$5 million. These capital costs are so low in fact, that the company have stated the project will be going ahead “regardless of any market hiccoughs”, and in doing so they expect its value to increase several fold over the coming years.
To this end, Rocky Mountain are currently going ‘full throttle’ at Gibellini, advancing the project across all fronts. All pre-production and BFS programs, such as environmental permitting, infrastructural requirements and geotechnical studies, are currently underway. In this, Gibellini is a relatively advanced stage project, expected to go into production in approximately 2 years time.
With US$4 million in cash and no debt, the company have more than enough money to see them through to the delivery of the BFS, which is set to come through in the second quarter of next year. The company are currently in the process of engaging banks regarding private finance, and steel producers and metals traders regarding off-take agreements, and having seen an “extremely positive initial reaction”. With this, Rocky Mountain are confident they can strike agreements with a number of top-tier institutions, hoping to have banks lined up by the end of the year, and off-take agreements in place by the first quarter of 2011.
That said, the company are not resting on their laurels. Just this week they announced the acquisition of the Del Rio Property, a new vanadium project located 13km south of the Gibellini, where they discovered the extensive, vanadium-bearing shale and now hold a 100% interest. The vanadium bearing shale exposed at surface on the property is mineralized over 550m of strike and 360m of width, with channel sampling results similar to, and in some cases better than, those from the oxidized zone at Gibellini.
Rocky Mountain has a simple, low cost operation, in one of the most stable mining regions in the world. The nature of their deposit allows them to operate at very low costs, and all studies to date show very good numbers when it comes to the economics. The risk profile is low, and Gibellini will be brought into production regardless of any ‘hiccoughs’ in the broader market along the way. The outlook for vanadium itself is good, and Rocky Mountain are in a prime position to take advantage of it. With all these factors in their favor, one can’t help but see the potential value growth there is to be had.