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  • 8/6/2019 Byron Capital Vanadium Report Final Via VanadiumSite.com

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    Please see back page for disclaimers.

    EQUITY RESEARCH

    Please see back page for disclaimers

    NDUSTRY REPORT

    12121212 NovNovNovNov 09090909

    VANADIUM:THE SUPERCHARGERLimited SupplyLimited SupplyLimited SupplyLimited Supply

    Vanadium is a metal that strengthens and hardens alloys liksteel, but that we believe has a bright future in energy storageBoth lithium ion batteries to be used in the automotive industrand redox batteries to be used in grid-level electricity storagbenefit greatly from the use of vanadium, and this use is costeffective.

    Vanadium is produced in limited quantity as a by-product of otheprocesses.

    In 2007, only about 59,100 tonnes of contained vanadium waproduced globally, with this coming largely from South AfricaChina and Russia.

    There is a threat that Chinese supply may be declared strategiand export curtailed, further constraining global supply.

    Rapidly Rising DemandRapidly Rising DemandRapidly Rising DemandRapidly Rising Demand

    Ferrovanadium is used to strengthen steel. Both China and Japaare mandating stronger rebar in construction, likely increasinvanadium demand.

    We also foresee at least three new demand channels fovanadium in the alternative energy and clean technology arenasAt least two of these could result in significant vanadiumshortages.

    Stable Prices are the CatalystStable Prices are the CatalystStable Prices are the CatalystStable Prices are the Catalyst

    A major issue in the past has been vanadium price volatilityPrices have oscillated between levels of $11 per kg. for the metato as high as $50 per kg.

    While there are some opportunities for substitution in steeproduction, the same is not true for other markets, including ouprojected new markets.

    In order to make end prices of products predictable, the price ovanadium must stabilize. This provides pull for new producers ovanadium to enter the market.

    There Just Isnt EnoughThere Just Isnt EnoughThere Just Isnt EnoughThere Just Isnt Enough

    Without doubt, vanadium is growing into one of the mosimportant metals about which no one has ever heard. Sooneveryone is likely to become a lot more knowledgeable abouvanadium, and investors can benefit by staying ahead of thcurve and owning companies that can benefit from rapidlincreasing vanadium demand.

    Jon Hykawy, Ph.D., MBAJon Hykawy, Ph.D., MBAJon Hykawy, Ph.D., MBAJon Hykawy, Ph.D., MBA

    Clean Technologies & MaterialsClean Technologies & MaterialsClean Technologies & MaterialsClean Technologies & Materials

    647.426.1656647.426.1656647.426.1656647.426.1656

    [email protected]@[email protected]@byroncapitalmarkets.com

    Arun Thomas, MBAArun Thomas, MBAArun Thomas, MBAArun Thomas, MBA

    AssociateAssociateAssociateAssociate

    [email protected]@[email protected]@byroncapitalmarkets.com

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    Equity Research Industry Report 12 November 200

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    SummarySummarySummarySummary

    Vanadium (chemical symbol V) is a relatively rare metal that has one predominant use - a

    strengthening additive in steel and some forms of iron. According to the US Geological Survey

    (USGS) (2007), of the approximate 59,100 tonnes of vanadium produced in 2007, about 85% of this

    metal is used as a steel additive (Moskalyk and Alfantazi, Minerals Engineering, v16, 2003). In thei2008 update, the USGS notes that 93% of US consumption of V is metallurgical, including steel, iron

    and titanium alloys.

    Of the balance of material, the remainder is largely used in catalysts (in the form of vanadium

    pentoxide, V2O5, in the manufacture of sulfuric acid, or as an oxidizer in the manufacture of maleic

    anhydride), and ceramics (V2O5 is a widely used material in ceramic production). There are also a

    horde of minor uses, as one would typically find for any metal.

    Both China and Japan have upgraded their requirements for building materials, including the

    strength of rebar. In China, the requirement was phased-in commencing 2007, and in Japan various

    enhancements to the requirements for building materials has been adding to vanadium demand fo

    years, and will continue to do so.

    It is worth noting that for many different types of steels, ferroniobium can be substituted for

    ferrovanadium. However, the substitution is only economic at very high vanadium prices. It should

    also be noted that the amount of V used in steels is small, therefore the price of V must increase

    substantially to allow for substitution. For example, typical high-carbon steel containing vanadium

    as a hardener would have no more than 0.25% V content by weight, while ultra-hard tool steels like

    those used in high-speed machining would contain no more than 5% V by weight, and typically much

    less (down to perhaps 1%).

    Vanadium is used in other alloys, as well, including the aerospace industry, where there are no other

    metallic substitutes. For example, a common titanium alloy in use in aerospace is Ti 6Al 4V

    denoting titanium alloyed with 6% pure aluminum and 4% pure V. V has a peculiar ability to allow

    titanium to perform better and at higher temperatures, with no other options available. Howeverthis use is, again, not a high volume driver of V demand.

    We do believe there are several drivers that could have a significant impact on V demand in coming

    years. One is the use of lithium vanadium phosphate or fluorophosphate cathodes and lithium

    vanadium oxide anodes in rechargeable lithium batteries. These batteries exhibit much improved

    safety compared to the more generic lithium cobalt oxide-type cathodes seen in cellular telephone

    or laptop batteries, which have higher operating voltages and higher rates of energy storage

    Another is the use of vanadium in large-scale rechargeable batteries, called vanadium redox cells

    The last is the use of vanadium as an anti-corrosion agent in some rare-earth magnets, enabling use

    of a new set of materials for use in strong magnets.

    Due to relatively low levels of annual production, we believe that the vanadium market can onlyfollow two possible paths. One is the boom-to-bust price gyrations of the past, assuming new

    suppliers do not enter the market, and the other is a much more stable pricing curve assuming new

    suppliers do enter the market, helping to stabilize the spread between supply and demand.

    Vanadium demand

    is growing because

    of steel. We will

    add battery

    demand, both

    small and large

    scale.

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    VanadVanadVanadVanadium: Supercharging Steel and Energyium: Supercharging Steel and Energyium: Supercharging Steel and Energyium: Supercharging Steel and Energy

    Vanadium (V) is annually produced at levels of approximately 60,000 tonnes (according to the US

    Geological Surveys 2007 survey). Production is primarily a by-product of the iron and steel industry

    Iron ores containing amounts of V on the order of 1.0%-1.5% are processed in a furnace, creating

    slags that may contain as much as 25% (the rough amount of V in South African slag) vanadium

    pentoxide. These slags are then treated using a roasting/leaching process, with the slags firstroasted in combination with sodium compounds to make water-soluble sodium vanadates. The

    sodium vanadate is washed out using water, and the sodium compounds are then converted to

    ammonium vanadate through the addition of acid and ammonia. The ammonium vanadates are

    then carefully roasted to produce the desired vanadium oxides.

    Currently, approximately 85% of produced vanadium is used in making steel alloys. By adding smal

    amounts of V, no more than 0.25% by weight to high-carbon steel or less than 5% by weight to stee

    intended for use in high-speed tools, the hardness and strength of the steel is significantly

    enhanced. While there is a substitute available for the ferrovanadium (FeV, an alloy of iron and

    vanadium that is priced by vanadium content) usually used, in the form of ferroniobium (FeNb), the

    substitution of niobium is uneconomic until V prices reach high levels, and the use of FeNb is not as

    effective as the use of FeV.

    Certain V is also used in speciality alloys, especially alloys of titanium, utilized in the aerospace

    industry. However, the bulk of the remaining 15% of V produced annually that is not used in steel is

    used in catalysts for the production of sulphuric acid or maleic anhydride.

    While growth in the use of V as a catalyst is linked to GDP growth, growth in the use of V as a

    hardening/strengthening agent is expected to accelerate beyond GDP growth as governments such

    as Japan and China mandate the use of stronger construction materials, including rebar.

    We believe that there are two large-scale demands for V that will arise in the next few years, putting

    additional strain on demand and potential strain on pricing. They are to allow V to be used in the

    compound making up the cathodes of lithium-ion rechargeable batteries, and in the form of

    vanadium pentoxide (V2O5) to be used as the energy storage medium in battery known as a

    vanadium redox flow battery. Finally, V also acts to increase the effectiveness of rare-earth

    magnets, including making the magnets much more resistant to corrosion across a broader range of

    temperature and humidity. We will make projections regarding V demand for each one of these

    new applications.

    The use of V in electrical energy storage, particularly in the redox battery, is driven by V having four

    oxidation states: V2+, V3+, V4+ and V5+. The ability to take on a variety of oxidation states leads to one

    of the most striking properties of vanadium compounds, the wide range of bright colours the

    compounds can assume (lilac, green, blue, and yellow as oxidation state moves from 2+ to 5+).

    59,100 tonnes of V

    produced in 2007,

    85% of it used to

    strengthen steels.

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    Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Colors of Vanadium Compounds in SolutionColors of Vanadium Compounds in SolutionColors of Vanadium Compounds in SolutionColors of Vanadium Compounds in Solution

    Source: Ian Geldard (2008)

    While we firmly believe that V demand will significantly increase over the coming years, we are less

    able to confidently predict that supply can maintain pace. There are an increasing number ocompanies exploring projects that could supply a substantial amount of V in years to come, but

    many of these projects are at early stages of development and some are located in politically

    troublesome parts of the world. We believe that supply will increase, given time, but we cannot rule

    out significant price movements during this period.

    Vanadium SourcesVanadium SourcesVanadium SourcesVanadium Sources ByByByBy----products and More Byproducts and More Byproducts and More Byproducts and More By----productsproductsproductsproducts

    On a national basis, the production of V is as follows:

    Exhibit 2Exhibit 2Exhibit 2Exhibit 2 Production of Contained V by Country (tonnes)Production of Contained V by Country (tonnes)Production of Contained V by Country (tonnes)Production of Contained V by Country (tonnes)Country 2003 2004 2005 2006 2007

    Australia 160 150 100 0 0

    China 13,200 16,000 17,000 17,500 19,000

    Kazakhstan 1,000 1000 1,000 1,000 1,000

    Russia 5,800 10,900 15,100 15,100 14,500

    South Africa 27,172 23,302 22,601 23,780 24,000

    Japan 560 560 560 560 560

    Total 47,900 51,900 56,400 57,900 59,100

    Source: US Geological Survey, 2007 Minerals Yearbook

    Vanadium is present in over 65 different minerals, but as with many uncommon metals its

    production is less a matter of discovery and much more a matter of finding them in economically

    viable concentrations. Vanadium is also a common contaminant in some fossil fuel depositsespecially oil shales, but rarely anything approaching a useful concentration.

    The vast majority of V comes from processing of iron ores or uranium. Magnetite ores of the righ

    type can contain a high percentage of V in their slag. Similarly, there are ores containing uranium

    such as carnotite (K2(UO2)2(VO4)2 3H2O) that provide V, post the removal of the primary target of

    mining. V is largely produced as a by-product, and at best, a co-product of other metal production.

    Demand will

    grow due to steel

    and battery use.

    Supply growth

    without price

    fluctuations are

    harder to predict.

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    Vanadium PricingVanadium PricingVanadium PricingVanadium Pricing Not Necessarily an AfterthoughtNot Necessarily an AfterthoughtNot Necessarily an AfterthoughtNot Necessarily an Afterthought

    We should note that V is not necessarily a by-product when considering the revenue it can drive

    This is due to highly unstable V pricing, resulting from a relatively small supply and quickly changing

    demand. Note that pricing of V can be expressed in the form of price of V2O5, the price of FeV, o

    the price of the contained metal itself. We will attempt to be as explicit as possible regarding the

    form of pricing we are using, and note that while global production of contained V metal isapproximately 60,000 tonnes, whichis the equivalent of 214,200 tonnes of V2O5, or 61,000 tonnes

    of FeV containing 80% V.

    Historical pricing of V has been compiled by a number of sources, including the US Geological Survey

    .

    Exhibit 3Exhibit 3Exhibit 3Exhibit 3 Historical V Price (per tonne metal, in USD)Historical V Price (per tonne metal, in USD)Historical V Price (per tonne metal, in USD)Historical V Price (per tonne metal, in USD)

    Source: InfoMine.com

    With prices of the metal spanning a range of $19,000 to $85,000 per tonne over periods as short as

    two years, there is an obvious need to stabilize prices, so that both users of V as well as their

    customers can set prices and cost expectations accordingly.

    Vanadium DemandVanadium DemandVanadium DemandVanadium Demand Moving Up and to the RightMoving Up and to the RightMoving Up and to the RightMoving Up and to the Right

    There is little doubt that V demand will increase with time; the real question is by how much. The

    US Geological Survey has provided a snapshot of V end-use for 2007, its latest such analysis

    However, their report excludes its use in various segments, allowing companies to keep sensitive

    information confidential.

    V metal has

    traded between$20 and $85 per

    kg in just the last

    two years.

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    Exhibit 4Exhibit 4Exhibit 4Exhibit 4 US EndUS EndUS EndUS End----Use of V (in tonnes)Use of V (in tonnes)Use of V (in tonnes)Use of V (in tonnes)Use 2006 2007

    Steel 3,650 4,570

    Cast Iron n/a n/a

    Superalloy 39.5 43.7

    Alloys (excl. above) n/a n/aChemical Use n/a n/a

    Miscellaneous 335 356

    Total Reported 4,030 4,970

    Source: US Geological Survey Minerals Yearbook (2008)

    The 2009 USGS Mineral Commodity Summary for V states that approximately 92% of V in the US

    was used in metallurgical processes. This implies that of total global consumption, assuming the

    rest of the world uses its V much as the US does, 92% will be growing above global GDP.

    Chemical use of V, including use as catalysts for the production of sulphuric acid and maleic

    anhydride, should grow at roughly GDP levels, as we assume the balance of conventional V use

    would. Thus, the remaining 8% of current global V demand will grow at a slightly slower rate thanmetallurgical use.

    Based on recent releases by the World Bank, among others, and as per our industry report on

    lithium (4-Sep-09), we scale demand for non-metallurgical V based on GDP growth of 2% in 2010

    and 4% thereafter. Our level for metallurgical use of V is, however, much higher. The World Stee

    Association released figures for steel growth in mid-October 2009, and noted that while stee

    production fell 8.6% from 2008 to 2009, they are forecasting demand will ramp by 9.2% in 2010, and

    we believe that Macquarie Banks prediction of at least 6% per year thereafter likely still holds. This

    is consistent with predictions for V demand from groups such as Precious Metals Australia, for

    example. It is also consistent with growth rates in V demand in the recent past.

    Using this rate of expansion, we can see that basic V demand scales to 2014 as shown in Exhibit 5below.

    Exhibit 5Exhibit 5Exhibit 5Exhibit 5 Annual Conventional V Demand (tonnes)Annual Conventional V Demand (tonnes)Annual Conventional V Demand (tonnes)Annual Conventional V Demand (tonnes)2007 2008 2009 2010 2011 2012 2013 2014

    59.1 60.8 56.1 60.6 64.0 67.7 71.6 75.7

    Source: USGS, Byron Capital Markets

    The demand for V from electric cars, due to the use of lithium vanadium phosphate (Li3V2(PO4)3cathode material in place of the conventional LiCoO2 used in cellular telephone or laptop computer

    batteries, is an open question. At least two companies, BYD in China and Valence in the US, are

    researching and/or constructing batteries based on either Li3V2(PO4)3 or a combination of Li3V2(PO4)

    and lithium iron phosphate LiFePO4.

    The rationale behind using lithium vanadium phosphate rather than other compounds for lithium

    ion battery cathodes is that this phosphate produces the highest voltages measured. Li3V2(PO4)3produces a battery of 4.8 volts, much higher than the 3.7 volts from conventional LiCoO2. Powe

    scales as the square of voltage, so, in theory at least, batteries made with lithium vanadium

    phosphate should be more powerful. In addition, work by a number of researchers has indicated

    that batteries made with Li3V2(PO4)3 should also be capable of storing the most energy of any

    lithium-ion rechargeable cell.

    Current V

    demand should

    grow at rates of

    at least 6%

    CAGR in the

    future.

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    Exhibit 6Exhibit 6Exhibit 6Exhibit 6 LithiumLithiumLithiumLithium----Ion Battery Characteristics with Different CathodesIon Battery Characteristics with Different CathodesIon Battery Characteristics with Different CathodesIon Battery Characteristics with Different CathodesCathode Voltage (V) Capacity (mAh/g) Energy (kWh/kg)

    LiCoO2 3.7 140 0.518

    LiMn2O4 4.0 100 0.400

    LiFePO4 3.3 150 0.495

    Li2FePO4F 3.6 115 0.414Li3V2(PO4)3 4.8 130 0.624

    LiVPO4F 4.1 120 0.492

    Source: Byron Capital Markets, Hsing (MIT B.Sc. Thesis), Barker et al., Zhu et al.

    The vanadium phosphate cathode material can support 20% more energy storage than conventiona

    cobalt oxide, but as much as 26% more than iron phosphate and 56% more than manganese oxide.

    However, in order to be useful, the cost of the battery cannot be higher, on some scale, than the

    cost of alternatives.

    We believe that the correct criterion is for the cost of the battery to be calculated on the basis of

    kWh of stored energy. For most practical applications, the battery has a maximum size defined by

    the device it is powering. If more kWh of stored energy can be included in a battery of differentcathode chemistry, at a cost per kWh of no more than the alternatives, then the designer has the

    option of either reducing the size/weight and cost of their cell or taking advantage of the added

    energy and reduction in size compared to the alternate chemistry.

    The basic rule with cathode materials is that, all other things being about equal, we need to include

    the same number of lithium atoms in the cathode, no matter the materials used. What varies are

    the other materials in the compound. We can scale the costs using bulk costs for each of the

    materials involved, and assume purification and processing carries similar costs, across the board

    Note that there isnt any cost for oxygen; we believe oxidation is essentially free.

    Our estimated costs for the materials are below. Note that we show conventional cost per kg of

    each material, but also the cost per mole, and the cost per a standard number of atoms of eachmaterial.

    Exhibit 7Exhibit 7Exhibit 7Exhibit 7 Costs of ElementsCosts of ElementsCosts of ElementsCosts of Elements in Cathode Materials ($/kg and $/mol)in Cathode Materials ($/kg and $/mol)in Cathode Materials ($/kg and $/mol)in Cathode Materials ($/kg and $/mol)Element Cost ($/kg) Cost ($/mole)

    Li 5.00 34.70

    Mn 2.75 19.83

    Fe 0.54 30.16

    PO4 0.10 9.50

    V 33.00 1,681.02

    F 9.50 180.50

    Co 40.00 2,357.20

    Source: InfoMine, Reuters, Byron Capital Markets

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    If we then calculate the cost of each of the various compounds to be used, arriving at a standard

    number of lithium ions (one mole of lithium ions in the final compound), we find:

    Exhibit 8Exhibit 8Exhibit 8Exhibit 8 Relative Costs of Cathode Compounds, One Mole of LiRelative Costs of Cathode Compounds, One Mole of LiRelative Costs of Cathode Compounds, One Mole of LiRelative Costs of Cathode Compounds, One Mole of LiCompound Cost Per Li Mole ($) Cost Per kWh (relative $)

    LiCoO2 2,391.90 1.00LiMn2O4 74.36 0.04

    LiFePO4 74.36 0.03

    Li2FePO4F 144.78 0.08

    Li3V2(PO4)3 1,164.88 0.40

    LiVPO4F 1,905.72 0.84

    Source: Byron Capital Markets

    These costs should not be considered final, by any means. Given that we have not included

    processing costs, etc., the results are, at best, relative and directional. Yet, the above does provide a

    compelling argument as to why certain companies are doing what they do. For example, we know

    that A123 (AONE:NASDAQ) is developing and marketing lithium iron phosphate batteries. Clearly

    batteries made with the LiFePO4 cathode are the least expensive cells that can be made, per amountof stored energy or per cell. However, these cells cannot store the same amount of energy as can

    be stored by a given weight of battery containing Li3V2(PO4)3 cathode, and at the end of the day, the

    battery using Li3V2(PO4)3 stores a given amount of energy for less money than any cathode materials

    except LiFePO4 and LiMn2O4, yet can store far more energy in a given package size/weight.

    What is truly important are the crossover points on the economics of each material. Again, we

    make no representation that we have covered off all costs, but we can at least directionally present

    the level at which prices for each of Co, Mn, Fe and V would need to be, to become the most

    economic battery on an energy storage basis.

    Exhibit 9Exhibit 9Exhibit 9Exhibit 9 Metals Costs for Equivalent Storage Price with CobaltMetals Costs for Equivalent Storage Price with CobaltMetals Costs for Equivalent Storage Price with CobaltMetals Costs for Equivalent Storage Price with Cobalt

    Source: Byron Capital Markets

    $-

    $50.00

    $100.00

    $150.00

    $200.00

    $250.00

    $300.00

    $350.00

    $400.00

    20 40 60 80 100 120

    OtherPriceforEquivalency($/kg)

    Cobalt Price ($/kg)

    Equiv Mn

    Equiv Fe

    Equiv V

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    Exhibit 9 above shows the levels for Mn, Fe and V prices in order for LiMn2O4, LiFePO4 and

    Li3V2(PO4)3 batteries to have equivalent costs for energy storage. We have graphed the range of 3

    year pricing for Co, from $30/kg up to $120/kg. What we find is that LiFePO4 batteries remain less

    expensive regardless of what Co price does; Fe prices must rise to at least $30/kg to cause concern

    which simply cannot happen. In the last three years, Mn has traded between $1.40 and $4.75

    according to InfoMine, but Mn needs to rise to over $94 to make it uneconomical compared to Co

    Vanadium has traded between $20/kg and $85/kg, and is economical across most of this range atpresent Co pricing levels (V price would need to be above $84/kg for its batteries to become

    uncompetitive with Co at current prices, for example).

    This tells us that lithium vanadium phosphate batteries are likely to prove better (higher voltage and

    higher energy) and cheaper than lithium cobalt oxide batteries in the future. It also reveals tha

    lithium vanadium phosphate cannot compete with lithium iron phosphate on cost, but by storing as

    much as 26% more energy for the same battery weight, they can likely be sold on a performance

    basis. Do not forget that our cost above is pure raw materials cost, and adding purification o

    materials and processing, which should be close to fixed regardless of cathode compounds, allows

    raw material discrepancy to diminish.

    Note that there are strong indications that lithium vanadium phosphate batteries are making, or areabout to make, significant inroads into the automotive battery market. BYD Company Ltd

    (1211:SEHK) of Shenzhen, China is now in the process of constructing a plant in the vanadium

    producing region of China, with the intention of producing lithium ferrous vanadium phosphate

    batteries (a combination of vanadium and iron phosphates) to the automotive market as quickly as

    possible. Their publicly stated rationale for producing anything other than lithium vanadium

    phosphate is the variability of vanadium cost.

    Subaru has unveiled a prototype of its G4e electric car, powered by lithium vanadium phosphate

    batteries. The talking point for this concept car is the range provided by a relatively small vanadium

    phosphate battery pack, roughly 200 km and double what their earlier R1e concept car could

    achieve. The G4e has been the best argument for the use of lithium vanadium phosphate batteries,

    to date.

    Exhibit 10Exhibit 10Exhibit 10Exhibit 10 Subaru G4e, with Lithium Vanadium Phosphate CellsSubaru G4e, with Lithium Vanadium Phosphate CellsSubaru G4e, with Lithium Vanadium Phosphate CellsSubaru G4e, with Lithium Vanadium Phosphate Cells

    Source: Subaru Motors

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    Thus, there is a significant market for lithium vanadium phosphate batteries building in the near- to

    medium-term. We have already made predictions on electric vehicle adoption in our recent lithium

    industry report. While there is a wide disparity between other predictions on vehicle adoption, we

    would suggest that adoption may proceed more quickly than most expect; the combination of the

    novelty of fully electric/primarily electric vehicles combined with the cachet of driving a non-

    polluting automobile is likely to work well when offsetting any perceived price differential between

    what a buyer gets for their hard-earned dollar when buying an electric vehicle versus a gasoline-powered car.

    Nissan has published the most extensive information available for any next-generation electric

    vehicle, to date. The Leaf is powered by a 24 kWh lithium-ion battery pack using lithium manganese

    oxide as the cathode material. The battery pack uses 192 cylindrical cells, manufactured by a joint

    venture between NEC and Nissan. NEC has been quoted as saying that the battery pack in the Leaf

    will use roughly 4 kg of lithium metal equivalent, or about 21 kg of lithium carbonate equivalent.

    NEC has also produced material safety data sheets for its new batteries that outline lithium use.

    These batteries use 37% lithium compounds by weight, including lithium hexaflurophosphate in the

    electrolyte along with lithium manganese oxide and lithium nickel oxide in the electrodes.

    Exhibit 1Exhibit 1Exhibit 1Exhibit 11111 Portions of MSDS for Aluminum Laminated LithiumPortions of MSDS for Aluminum Laminated LithiumPortions of MSDS for Aluminum Laminated LithiumPortions of MSDS for Aluminum Laminated Lithium----Ion BaIon BaIon BaIon Batterytterytteryttery

    Material % CAS Number

    Aluminum 15 7429-90-5

    Carbon, amorphous powder 1 7440-44-0

    Copper foil 10 7440-50-8

    Diethyl carbonate 5 105-58-8

    Ethylene carbonate 5 96-49-1

    Methyl ethyl carbonate 5 623-53-0

    Lithium hexaflurophosphate 2 21324-40-3

    Graphite powder 15 7782-42-5

    Lithium manganese oxide 28 12057-17-9

    Lithium nickel oxide 10 12031-65-1

    Poly vinylidene fluoride 1 24937-79-9

    Nickel and inert polymer 3 n/a

    Source: NEC TOKIN Tochigi

    On the basis of the figures in the MSDS, we can ascertain that the proportion of lithium, by number

    of atoms, used in the cathode, is 95%. The usage rate of lithium carbonate equivalent has been

    shown to be higher than what we had previously assumed in our lithium industry report, roughly

    600 grams per kWh. The usage rate now stands at 880 grams per kWh of battery storage.

    Automotive use

    of vanadium in

    batteries could

    add as much as

    26% to current

    demand by

    2014.

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    Exhibit 12Exhibit 12Exhibit 12Exhibit 12 Electric Vehicle Adoption and Potential V DemandElectric Vehicle Adoption and Potential V DemandElectric Vehicle Adoption and Potential V DemandElectric Vehicle Adoption and Potential V DemandVehicle: 2009 2010 2011 2012 2013 2014

    Prius-like - 300,000 400,000 500,000 600,000 700,000

    Volt-like - - 150,000 200,000 300,000 400,000

    Leaf-like - - 200,000 350,000 500,000 700,000

    V Required:

    Prius-like - 236 314 393 472 550

    Volt-like - - 1,572 2,096 3,144 4,192

    Leaf-like - - 2,751 4,814 6,877 9,628

    Auto Totals - 236 4,637 7,303 10,492 14,369

    Source: Byron Capital Markets

    Finally, we have one other potential large-scale use of V metal - the grid-level storage allowed by

    vanadium reduction-oxidation batteries, usually referred to by the acronym VRB. A VRB is a large-

    sized battery, with the ability to have its output power and its energy storage levels scaled

    independently; if one builds a battery out of fixed cells, such as lead-acid car batteries, then one islimited to adding them in discrete chunks, and adding additional storage still requires one to pay the

    premium for additional power. A VRB can be designed to produce exactly the desired power fo

    exactly the desired time, no more than required.

    Exhibit 13Exhibit 13Exhibit 13Exhibit 13 A Representative VRBA Representative VRBA Representative VRBA Representative VRB

    Source: Dept. of Chemistry, Washington University in St. Louis

    Although many discuss the ability of VRBs, or other large-scale storage systems, to allow greater

    levels of penetration of alternative energy, such as wind or solar, we believe the true use of VRBs by

    utilities may be far more pedestrian. This use would be the augmentation of the existing grid, to put

    off major capital expenditures. For example, one of the first uses of a VRB in North America was to

    augment a local substation that was being strained by faster-than-anticipated community

    development. Essentially, a remote community had grown faster than the utility serving it had

    expected; the utility was left with the choice of spending millions of dollars to upgrade the

    substation and pull additional feeder cables, to meet an electricity supply shortfall that lasted hours

    each day, or add a VRB for less money and put off the upgrade for years. Given that in North

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    America, utility rates are generally set by pricing boards their costs of capital are such that putting

    off such capital expenditures results in a very high IRR for the utility.

    We believe there is significant latent demand for such a product. As an aside, while we were

    covering a company working on grid-scale storage, we were receiving phone calls from major North

    American utilities interested in learning more about the product from an unbiased source. This is

    the first and only time such a thing has happened in our experience.

    There are several companies working on grid-level storage using VRBs. Prudent Energy of Beijing

    China purchased the assets of VRB Power of Vancouver, and is working to develop and sell large-

    scale VRBs worldwide. Cellstrom of Austria and Cellenium of Thailand are also working in simila

    capacities. All have the potential to sell relatively large batteries to utilities and others, with Pruden

    likely having the commercial lead in this regard.

    All VRBs aim to put V ions into solution, as it is the ability of the V ion to assume any one of four

    oxidation states that allows the battery to store energy. The V can come in the form of any one of a

    number of compounds, including vanadium sulphate or vanadium pentoxide, all dissolved in

    relatively dilute sulphuric acid. Our past work with VRB Power allowed us to carry out some basic

    calculations regarding V requirements. For a VRB, storage was 20 Wh/liter of electrolyte. Accordingto the inventors of the technology at the University of New South Wales, the concentration of the

    electrolyte is 2M V2(SO4)3 in 2.5M H2SO4 (lots of vanadium sulphate that was electrolytically

    dissolved in a sulphuric acid solution).

    For every MWh of energy storage required, 50,000 liters of electrolyte are needed. That 50,000

    liters holds 100,000 mol of V2(SO4)3. 100,000 mol of V2(SO4)3 has a mass of just slightly over 39

    tonnes. Of that 39 tonnes of mass, 26.1% of it is V, or 10.1 tonnes. Thus, at present prices of about

    $33/kg of V metal, this is worth approximately $335,000. A price of $335,000/MWh of electricity

    storage, for the raw materials required, is not at all excessive. One also needs to add in the cost o

    the reaction cells that actually allow the ion exchange to drive electric current, and the amount is

    not inconsequential, but the cost of the final battery, in many circumstances, is manageable.

    However, what should be noted is that VRBs are generally built to provide outputs of MW power for

    many hours. A 3-4 MW VRB, good for eight hours, would be of a size that could provide outpu

    levelling for a wind farm, for example. This is at least 24 MWh of storage, requiring 242 tonnes of V

    metal. On an annual production level of less than 60,000 tonnes, a few such batteries can begin to

    make an appreciable contribution to demand.

    For purposes of projecting V demand, we make the following predictions as to VRB demand in

    Exhibit 14.

    Exhibit 14Exhibit 14Exhibit 14Exhibit 14 VRB Demand, Resultant V Demand (tonnes)VRB Demand, Resultant V Demand (tonnes)VRB Demand, Resultant V Demand (tonnes)VRB Demand, Resultant V Demand (tonnes)2007 2008 2009 2010 2011 2012 2013 2014

    MWh Demand 0 0 0 30 70 150 300 600

    V Required 0 0 0 303 707 1,515 3,030 6,060

    Source: Byron Capital Markets

    If we add these three areas, conventional, battery and grid-storage demands, the need for V

    appears to have the potential to be more than robust.

    VRBs can add

    perhaps as

    much as 11% to

    current demand,

    by 2014.

    Demand for V

    could rise as

    much as 61%

    over 2007 levels,

    a CAGR of 11%

    from current

    demand, by

    2014.

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    Exhibit 15Exhibit 15Exhibit 15Exhibit 15 Overall V DemandOverall V DemandOverall V DemandOverall V Demand Potential (tonnes)Potential (tonnes)Potential (tonnes)Potential (tonnes)Demand 2007 2008 2009 2010 2011 2012 2013 2014

    Conventional 59,100 60,784 56,063 60,590 64,046 67,703 71,571 75,664

    Automotive 0 0 0 236 4,637 7,303 10,492 14,369

    Grid 0 0 0 303 707 1,515 3,030 6,060

    Total 59,100 60,784 56,063 61,128 69,390 76,520 85,093 96,094Source: USGS, Byron Capital Markets

    While we are unwilling, without the assurance of new producers entering the market and allowing

    prices to stabilize, to definitively predict that V demand can scale this way, the potential is there. It

    is possible to see a possible 61% increase in demand over that reported by the USGS for 2007 by

    2014, a CAGR of 11.4% compared to 2009 demand levels and well above any estimates for globa

    GDP growth.

    Vanadium SupplyVanadium SupplyVanadium SupplyVanadium Supply Keeping Pace with GDP, Just Not with Growth PotentialKeeping Pace with GDP, Just Not with Growth PotentialKeeping Pace with GDP, Just Not with Growth PotentialKeeping Pace with GDP, Just Not with Growth Potential

    We have little desire to produce a report on the vanadium industry on par with that from a company

    such as CPM Group. However, we recognize that one of the critical questions for investorscontemplating buying junior vanadium companies is whether there is room for other players in the

    space.

    The historical high in demand for V likely came in 2008, with production estimates from mining and

    slag processing of 60,000 tonnes from the USGS. Add to this an amount of V from reprocessing of

    catalysts, and one comes to roughly the level we have determined for 2008. Demand likely dropped

    with steel production in 2009, but it appears ready to rebound. Clearly, the industry can support

    our projections for demand through to at least 2011 on the basis of historical production rates.

    Beyond this level, we believe it will be difficult for slag-based producers to expand their output

    much past 10% additional output, due to production constraints and supply of raw materials. Slag

    based V production is 56% of the overall market. With this increase we arrive at levels o

    approximately 64,400 tonnes of metal, however, that does not cover off even 2011 levels of

    demand.

    Evraz Group (EVR:LSE) of Russia maintain that they supply approximately 34% of the worlds V

    Between operations in the US, South Africa, Russia, the Czech Republic and Switzerland, the

    Company produces and markets 26,700 tonnes of V metal equivalent per year, approximately 50%

    of current demand. At present, Evraz has no publicly stated plans to increase capacity.

    The second-largest world producer of V today is Panzhihua New Steel and Vanadium (000629:SZSE)

    a subsidiary of state-owned Panzhihua Iron and Steel Group, or Pangang, of Panzhihua, China, in the

    Sichuan province. However, while the Company produces perhaps 9,000 tonnes per year, it does so

    solely as a by-product from steel operations. V output can scale with increased steel production i

    the processing plant is also scaled up, but the Company has no publicly-announced plans to do so.

    Xstratas (XTA:LSE) Rhovan operation in South Africa is currently producing roughly 10,000 tonnes of

    V2O5 per annum, along with 6,000 tonnes of ferrovanadium. In 2004/2005 Xstrata decided to ramp

    production at Rhovan, and plans to increase production by an additional 4,100 tonnes per year of

    V2O5, or the equivalent of about 2,300 tonnes of V metal, less than 4% of current annual production

    This expansion is not yet complete, but is still slated to be complete in 2011, helping to offset what

    could become a shortfall in supply.

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    Vantech Vanadium Products (private) purchased some of the assets of Highveld Steel and

    Vanadium, including the Highveld Vanchem plant. This plant was producing at what amounts to

    capacity for the project, roughly 8,000 tonnes per year of V2O5, or 4,500 tonnes per year of meta

    equivalent. We have found no stated plans to increase production.

    There are a large number of junior vanadium projects scattered around the world, belonging to both

    private and public firms. These juniors have various levels of managerial, financial and political riskattached to them. However, we will assume that the projections made by the various companies

    can be met, that production can commence at the levels and at the times specified by these firms.

    We would assume such projections are optimistic, but we will include them as demonstrated in

    Exhibit 16.

    Exhibit 16Exhibit 16Exhibit 16Exhibit 16 Potential V Supply Assuming All Projects Reach MarketPotential V Supply Assuming All Projects Reach MarketPotential V Supply Assuming All Projects Reach MarketPotential V Supply Assuming All Projects Reach MarketYear 2010 2011 2012 2013 2014

    Max. Initial Supply (tonnes) 61,000 61,000 61,000 61,000 61,000

    Increased Supply, Majors (tonnes) 3,400 5,700 5,700 5,700 5,700

    Increased Supply, Juniors (tonnes) 2,800 17,000 38,500 50,500 50,500

    Total Potential Supply (tonnes) 67,200 83,700 105,200 117,200 117,200

    Total Potential Demand (tonnes) 61,128 69,390 76,520 85,093 96,094

    Source: Byron Capital Markets

    The above assumes every one of the projects we have enumerated comes to market in a timely

    fashion, having convinced investors that each project is economically viable in order to become fully

    funded. Obviously, this is not likely to occur. We have selected one large prospective project by

    one junior and dropped it out of our supply projections, but delays and production issues at the

    majors could serve the same purpose. The supply picture becomes:

    Exhibit 17Exhibit 17Exhibit 17Exhibit 17 Potential V Supply, Less One Large JuniorPotential V Supply, Less One Large JuniorPotential V Supply, Less One Large JuniorPotential V Supply, Less One Large JuniorYear 2010 2011 2012 2013 2014Max. Initial Supply (tonnes) 61,000 61,000 61,000 61,000 61,000

    Increased Supply, Majors (tonnes) 3,400 5,700 5,700 5,700 5,700

    Increased Supply, Juniors (tonnes) 0 5,800 9,300 21,300 21,300

    Total Potential Supply (tonnes) 67,200 72,500 76,000 89,000 89,000

    Total Potential Demand (tonnes) 61,128 69,390 76,520 85,093 96,094

    Source: Byron Capital Markets

    Minus one larger project, the V supply and demand picture is very tight. If other projects are

    delayed or disrupted, or steel demand ramps faster than we have anticipated, it is entirely possible

    for the supply/demand picture to fall completely out of sync.

    ConclusionConclusionConclusionConclusion More Potential ShortagesMore Potential ShortagesMore Potential ShortagesMore Potential Shortages

    We have no precise idea how quickly electric cars will ramp in terms of consumer demand, and the

    adoption rate of lithium vanadium phosphate batteries into the market is an admittedly open

    question. Similarly, we admit to having little ability to predict the future in terms of the adoption

    rate for large-scale vanadium redox batteries. Even something as relatively simple as a prediction

    for V use in steel making in the future is dubious. One should take the above figures with respect to

    potential supply and potential demand of V with a very large grain of salt.

    Supply can keep

    pace with

    demand, if all

    junior projects

    reach market

    and none are

    delayed.

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    However, we are certain of the following. Lithium-ion batteries containing lithium vanadium

    phosphate cathodes are the rechargeable lithium-ion batteries with the greatest ability to store

    electricity. Ultimately, these cells should prove to be of lower cost than the conventional lithium

    cobalt oxide cathode-equipped cells, commonly used in cell phones and laptops. Certainly, the

    automotive market should gravitate not to the cheapest rechargeable battery available (otherwise

    why not use nickel metal hydride throughout) but to the battery with the highest energy content in

    the given space, giving the car the ability to travel as far as possible. We have not included thelaptop battery market in our projections, but this is an area where operating time per charge is

    valued highly as well, therefore should be a ready market for lithium vanadium phosphate.

    There is really only one competitive technology for grid-level electricity storage, as far as we are

    concerned, and that is vanadium redox batteries. The VRB may not find much use as a backup

    system for the individual home, but there is no shortage of use at the substation level.

    Finally, barring catastrophic price increases in V, we also know that the use of V as a

    hardening/strengthening agent in steel will dramatically increase over the next few years. Demand

    from China and developing nations will see to that, alone.

    Overall, we know that the need for stronger and more steel is driving V demand up. We believethere may be significant V demand building from areas such as lithium-ion battery use and redox

    battery deployment. All in all, this is more than enough reason for investors to look at investments

    involving another uncommon metal, vanadium.

    The world needs

    more V, for steel

    and metals alone.

    Batteries of all

    sizes may add

    substantially to

    that demand.

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    Disclosures

    Information contained in this Industry report has been drawn from sources believed to be reliable but its accuracy or completeness is n

    guaranteed, nor in providing it does Byron Capital Markets (a division of Byron Securities Limited) assume any responsibility or liability. From time

    time, Byron Capital Markets and its directors, officers and other employees may maintain positions in the securities that are directly or indirec

    involved in this Industry. The contents of this report cannot be reproduced in whole or in part without the expressed permission of Byron Capi

    Markets. This information is intended for use by accredited investors only, and is not intended for use by any U.S. investor.

    Byron Capital Markets Policies and Procedures Regarding the Dissemination of Research

    General policy is to make available a research report to its clients for an exclusive period of up to 30 days. Following that period, the research repo

    will appear on the Byron Capital Markets website at www.byroncapitalmarkets.com.

    Analyst Certification

    I, Jon Hykawy, certify the views expressed in this report were formed by my review of relevant company data and industry investigation, and

    accurately reflect my opinion about the investment merits of the securities mentioned in the report. I also certify that my compensation is not

    related to specific recommendations or views expressed in this report.

    Byron Capital Markets publishes research and investment recommendations for the use of its clients. Information regarding our categories of

    recommendations, quarterly summaries of the percentage of our recommendations that fall into each category and our policies regarding the

    release of our research reports is available at www.byroncapitalmarkets.com, or may be requested by contacting the analyst.

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    Byron Capital Markets Contacts

    Department Desk Email

    Executive

    Campbell Becher 647-426-1657 [email protected]

    Research

    Jon Hykawy, Ph.D., Clean Technologies & Materials Analyst 647-426-1656 [email protected]

    Guy Gordon, Oil & energy Analyst 647-426-1672 [email protected]

    Drew Clark, Mining Analyst 647-426-1673 [email protected]

    Arun Thomas,Associate 647-426-1674 [email protected]

    Sales and Trading

    Main Trading Line 647-426-1670

    Cyrus Osena, Head Institutional Sales 647-426-1675 [email protected]

    David Kemp, Head Institutional Trading 647-426-1666 [email protected]

    Tom Chudnovsky, Institutional Sales 647-426-1665 [email protected]

    Kariv Oretsky, Institutional Sales 647-426-1658 [email protected]

    Nick Stajduhar, Institutional Sales 647-426-1664 [email protected]

    Jonathan Samahin, Institutional Trading 647-426-1670 [email protected]

    Nick Perkell, Institutional Trading 647-426-1671 [email protected]

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    Corporate Finance

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    Operations

    Derrick Chiu (Syndication) 647-426-1662 [email protected]