I originally started following Cornerstone with MicroCap.com subscribers back in February – the following research report (update) was sent June 4th at 80 cents. In the month following, CCC ran to $1.88 but has since corrected so I can now make this report public on our Blog.
Globally, vanadium has been one of the strongest performing commodities for almost two years (yet few even know what it is – or its critical importance). In February 2018 it was trading near a multi-year high of $14 US/lb but this week in both China and Europe we are seeing quotes in the range of $19 US/lb.
My June report below is just as relevant, except now the market cap is $39M CDN and if we were to use $18 US/lb for vanadium, the insitu gross metal value of their Nevada project would be closer to $5.7 Billion CDN versus the $4 Billion I had only a month ago.
June 4, 2018
CORNERSTONE IS A RARELY SEEN MICROCAP “UNICORN”
Cornerstone Metals (CCC: TSXV 80 cents)
Shares Outstanding: 32 Million / Market Cap $26 Million
Deposit’s Estimated Insitu Gross Metal Value > $4 Billion CDN
Our estimated Operating Profit over a Decade: near $2 Billion CDN
Cornerstone (CCC) has the “potential” to become one of the more rewarding investment opportunities I have come across since writing this investment newsletter.
WARNING: Like any resource-based investment, a person is subject to the risks associated with commodity price volatility. No one can control that risk – we can only manage the risk associated with it. Which is why I am closely tracking vanadium fundamentals through www.VanadiumNews.com. However, regardless of my optimism for Cornerstone (CCC.V), do not lose site of commodity price risk. It is as inherent in CCC as it is for any public company dependent upon commodity prices.
Vanadium has done VERY well the past couple years (currently $13.90 after peaking at $15.50 in March). We used $14 USD (18.25 CDN) per pound in our Cornerstone model as the long-term price average, but I will update that monthly as we move forward.
Before I Get into Cornerstone Specifics, Understand Vanadium Supply/Demand Fundamentals
Adding small percentages of Vanadium to steel and aluminum creates ultra-high-strength, super-light and resilient alloys. Only two pounds of vanadium added to one tonne of steel, doubles its strength – 80% of vanadium is used to make ferrovanadium – a steel additive.
The use of vanadium in rebar is critical and for decades China has created substandard rebar that is now resulting in buildings, bridges, and structures with concrete collapsing (or at risk of collapsing) in earthquake regions. In February 2018 the Chinese government mandated (by law) that vanadium content in rebar must almost double beginning November 1, 2018. On the earthquake map below, 94% of China’s 1.38 Billion people live in the right half of the country. Substandard rebar has put hundreds of millions of people at risk in heavily populated earthquake zones (not to mention international rebar exports over decades).
This is going to have a significant impact on the vanadium market. At the same time, Chinese iron ore mines are closing for environmental and economic reasons (these mines are a material source of Chinese vanadium production).
It is estimated that vanadium demand and supply currently intersect near 80,000 tonnes per year. But market research firm Roskill predicts that by 2020 there will be a 45% increase in the demand for vanadium, driven mostly by China.
“Chinese infrastructure investments in the New Silk Road – a $900-billion project set to open up land and maritime routes between China and its western neighbors, namely Central Asia, the Middle East and Europe – is another massive spend on steel that will inevitably require more vanadium than is currently being mined.”
One extremely important story appeared April 9th from Russia, but it was not picked up anywhere else that I could find (which is not surprising, as it originated from an English language Russian construction website).
The ONLY reason I caught it, was because I track the world’s largest wealth managers (in Google News) and Kirill Dmitriev happens to be one of them. He is the CEO of the Russian Direct Investment Fund. A $10 billion sovereign wealth fund.
On April 9th he was quoted as saying that Russia may need to spend up to 30 Trillion Rubles on infrastructure ($625 Billion CDN). If correct, this is very important news for vanadium investors as the amount of rebar and steel required would be enormous over the next five to ten years.
China and Russia are the two largest vanadium exporting countries so their domestic demands alone for steel and rebar, are enough to support high vanadium prices. Over the next five to ten years, China will be building new cities and infrastructure, and constructing the Silk Road. Russia it appears will need to invest heavily in their own failing infrastructure. And Donald Trump wants to invest heavily in American infrastructure. This says nothing about the rest of the world.
By 2025 it is also estimated that 85% (currently 45%) of all American vehicles will include vanadium alloy to reduce their weight and thereby increase their fuel efficiency to conform to strict new fuel economy standards set by the US EPA. Vanadium’s corrosion-resistant properties have many applications and vanadium-titanium alloys have the best strength-to-weight ratio of any engineered material on earth.
But its latest application in vanadium redox flow batteries for grid energy storage, offers the most significant “new” growth opportunities.
As renewable energy continues to replace fossil fuels, we could see material growth for vanadium-based batteries over the next two decades.
Cornerstone Metals (CCC: TSXV 80 cents)
Shares Outstanding: 32 Million / Market Cap $26 Million
Deposit’s Estimated Insitu Gross Metal Value > $4 Billion CDN
Our estimated Operating Profit over the First Decade of Production: near $2 Billion CDN
The broader market has yet to recognize the future value of Cornerstone’s Vanadium project in Nevada. But after the release of Tuesday’s metallurgy results, this is no longer an “exploration” story – it is a development story.
We know the Vanadium is there, we now know it can be recovered (the economics of which will be modelled this year through more testing and flow-sheets), and we have personally modelled what this mine plan should / could look like.
If we are correct in that modelling, and if the price of Vanadium continues to do well (which we believe it will), I feel this company should be at a minimum, worth $3 per share, and more realistically once a mine is financed and operational, $5 to $10 per share – theoretically, this could even be a fair takeover price before a mine is even built.
I have the model to justify that claim and I will release it by September (after we visit the site in August to further de-risk our modelling). I am taking my friend Kelsey along who is an economic geologist and mine planner – and who developed our original mine plan and valuation model.
My main concern is that a large mining company or private equity group steps in over this next year to try and take them over, and if that happened below $5 per share, we (as shareholders) would be short-changed. I personally want to see the existing management group move this project through to production. They have the expertise as mine builders, and we would then realize full (fair) value from our investment.
Before I get into the importance of this past Tuesday’s Cornerstone metallurgy news, there were developments last week in the world of Vanadium that need to be addressed as they are VERY important to CCC and my coverage of this company.
1) Ninety percent of global Vanadium production is consumed in the steel and titanium industry. A large percentage of the remaining ten percent is being used in vanadium redox-flow batteries for grid-scale energy storage (primarily wind and solar farms).
Last week there was a low-key announcement out of Spain that is VERY important to this industry (from a demand perspective). Siemens Gamesa announced they are trialing a new redox flow battery at their test site in Spain.
Elon Musk and Tesla (who employ 37,000 people) kickstarted, and continue to fuel, the rally in battery metals like Lithium, Nickel, and Cobalt. If Siemens Gamesa invests heavily in their new vanadium battery technology, this could be our Telsa moment. It won’t have the same celebrity high profile, but it is a huge endorsement from one of the world’s largest players in wind generation.
On the solar side, large Chinese companies are investing in vanadium storage – but Siemens Gamesa will also have a vanadium storage solution for solar.
2) Vanadium (Again) Deemed a Critical Metal to the U.S.
May 18th The United States Department of the Interior Released their 2018 List of 35 Minerals Deemed Critical to U.S. National Security and the Economy. Vanadium remains on this list and it is important to note that the U.S. Imports 100% of their Vanadium. In particular, they are VERY dependent upon China (who Trump keeps pi$$ing off). Russia is the next big supplier, but that country is already buried in economic sanctions.
In 2017, China was the number 1 Vanadium producer with 43,000 tonnes, Russia number 2 with 16,000 tonnes, South Africa with 13,000 tonnes, and Brazil (Largo Resources) number 4 with 8,400 tonnes – 73% of the world’s Vanadium production originates from the two countries that pose the greatest threat to the economy and national security of the United States.
This quote was from a leading member of congress last week: “The United States cannot afford to be dependent on adversaries like China and Russia for critical minerals at any time.”
“The Department of the Interior today published a list of 35 mineral commodities considered critical to the economic and national security of the United States. This list will be the initial focus of a multi-agency strategy due in August this year to implement President Donald J. Trump’s Executive Order to break America’s dependence on foreign minerals.”
3) America Lawmakers are Working on a Bill to Accelerate Critical Mineral Mine Approvals
NDAA – National Defense Authorization Act
Wednesday May 23rd, Vice-Chairman for Policy and Appropriations, Congressman Mark Amodei, received support (229-183 – http://clerk.house.gov/evs/2018/roll223.xml) for an amendment to the 2019 NDAA that would accelerate the approval and development of any mineral / metal projects in the United States that have been deemed Critical by the USGS – this includes Vanadium.
“This amendment will allow the United States to more efficiently develop our nation’s strategic and critical minerals, including rare earth elements, by centralizing permitting review projects under a lead agency, streamlining permitting time-frames for critical and strategic minerals and preserving necessary environmental protections.”
“In agreement with Executive Order 13806, a healthy manufacturing and defense industrial base and resilient supply chains are essential to the economic strength and national security of the United States.”
4) May 31st Trump Slaps the EU, Canada and Mexico with Big Tariffs on Steel (25%) and Aluminum (10%)
Donald Trump continues to offend foreign countries and build a protectionist wall around the United States. He wants to manufacture steel in America and associated components for automotive, defense, etc. That is all fine, but how do you accomplish that when you are 100% dependent upon importing rare earth metals AND vanadium?
Aside from the importance of vanadium to their automotive and defense industry, it is estimated that almost 80,000 bridges need repair or replaced in the United States. It is no wonder he wants to employ his own people in the steel industry.
The United States is incredibly dependent upon China for their vanadium. South Africa has supply, but power and water are major issues at South African mines. Brazil has supply from Largo Resources, but they cannot guarantee the United States exclusive supply as their production is far too small.
If Trump wants protectionism, he needs a “home grown” supply chain – which is why Congress is supporting the bill discussed above to accelerate approvals for any mining companies (within the United States) that want to mine commodities on the Critical Minerals List – and Vanadium is high on that list.
From the U.S. Critical Minerals List and USGS estimates, these are the top minerals / metals that the United States is 100% Dependent Upon Importing. Aside from the dollar value (the number shown below is their annual imports), the primary concern for the United States is that they have NO supply of vanadium within their own borders.
This is a notable National Security threat – that I give the Trump administration credit for recognizing. They cannot get Vanadium from Russia, and if China ever decided to block the export of vanadium to the United States (the two countries accounting for 73% of global supply), or placed huge tariffs on it, the implications to the American economy would be dramatic.
Not to mention, the impact on fighter jets, tanks, armored personnel carriers, ships, missiles, etc. – basically, the American Defense Industry.
An American based vanadium project is not just important to investors, it should be of National Security Interest (which also leads me to believe Cornerstone would have many opportunities to finance mine development – in the interests of National Security).
I am sure these leading American defense contractors would be more than happy to see a reliable vanadium supply on American soil. And these firms will have their own network of investment bankers that may even help finance such a project: Lockheed Martin / Boeing / Raytheon / General Dynamics / Northrop Grumman / United Technologies / L-3 / BAE Systems.
THE IMPORTANCE OF “PURE” VANADIUM PROJECTS
In some countries, vanadium is sourced from recycling programs, but for the most part, Vanadium is found within magnetite iron ore deposits, and is usually mined as a by-product and not as a primary mineral. Vanadium can also be tied to titanium, which must be separated out as an impurity during processing. The higher the titanium content in the ore, the harder it is to remove the vanadium.
In China, a LOT of their vanadium production is associated with iron ore mining. But many of their mines are being closed for environmental reasons, and others are closing because of economics. Their iron ore is low grade and cannot compete with high grade iron ore from Australia (and many of those iron ore mines in Australia do not have vanadium associated with them – or it is too low grade to economically process).
Investors need to be wary of public companies that are trying to capitalize on this new interest in Vanadium. If they are not PURE vanadium projects like Cornerstone (where the Vanadium is contained within shale), then they are dependent upon putting an Iron Ore or Titanium project into production.
And that is going to be VERY challenging because those commodity prices are not high enough to justify the enormous capital costs associated with building a mine and a processing plant. A LOT of rock needs to be moved from pit to plant so operating costs are high. These are some of the operational challenges that companies in China are facing – so trying to finance NEW mines that are not PURE vanadium plays, will be a major challenge.
Public companies and paid newsletters are pitching vanadium stocks with an emphasis on tonnage. Tonnage is far less important that low operating cost, low capex, ease of mining, processing (metallurgy), and location. It doesn’t matter if you report a Billion tonnes of vanadium if the capital costs to put that mine into production are too high – or if the mining and processing costs are high.
In Nevada, there is a company called Prophecy Developments (PCY:TSX). Like Cornerstone, they are a PURE vanadium project, but it is very low grade. A week ago, they released their preliminary economic assessment (PEA) on that project. It showed surprisingly strong economics and a high rate of return. IRR of 51%, NPV of $338 Million at a 7% discount rate, a 13-year mine life, and a 0.26% V2O5 mineable grade.
We are quite shocked at their numbers given that low grade. In our Cornerstone model, this Prophecy grade of 0.26% V2O5 is LOWER than the cut-off of the historic vanadium resource in our Cornerstone model. If Prophecy’s economics are that good with their low grade, image the potential economics of the Cornerstone deposit!!!
At the end of the day, PURE vanadium projects are very hard to find – and near impossible within the United States. Cornerstone has a shallow, high grade vanadium core that our modelling shows can be VERY profitable.
I am not even looking at other vanadium companies unless they are a PURE vanadium project – in particular, the vanadium is hosted in shales, is high grade, shallow, near infrastructure, and in a safe (pro-mining) region. Cornerstone is the ONLY project I have found that meets ALL of these criteria.
THE IMPORTANCE OF CORNERSTONE’S METALLURGY RESULTS (MAY 29th)
Metallurgy at any mine is “critical” – no matter what the commodity. You must be able to extract the metal / mineral from the rock, soil or shale – and do it economically. Otherwise it doesn’t matter how much of the commodity you say you have, it always boils down to economics.
The giant Molycorp rare earth mine (near the California / Nevada border) was living proof of this. The mine started production in 1952 but in later years struggled with the economics of lower grade ore – it just became more and more expensive to extract the rare earth metals from the rock.
By the time they filed for bankruptcy in 2015, they owed $1.7 Billion. It was purchased by its largest creditor Oaktree Capital and was reorganized under the umbrella of a Chinese company (a huge mistake). Now (which is hard to imagine) they find it more economic to ship material to China and process the rare earths from there.
Cornerstone’s vanadium claims cover 1,140 acres near Carlin, Nevada. Union Carbide in the 1960’s drilled 127 holes to prove up a sizable high-grade vanadium deposit. But then Cornerstone followed up with their own drilling this winter (and more this summer).
The metallurgy (getting the vanadium from the shale) has been a BIG unknown variable in this entire speculation. Union Carbide had some results, but it required the application of modern technology. If the metallurgy couldn’t be proven, it would make the entire project “questionable”. That concern was blown out of the water last Tuesday when Cornerstone reported their “initial” metallurgy test results – recoveries of 80% to 83%.
This took less than two months and was not only four months sooner than we expected, but well above our target (we were “hoping” they would achieve 70% recovery). This was a clear demonstration of the skill level of this management and advisory group.
As I have previously referenced, Cornerstone is not run by promoters looking to capitalize on vanadium. This company is run by hardened mine builders and trouble-shooters, geologists, and a metallurgy “rocket-scientist”. They all bring a specialized skill set to the table. Just two examples:
1) Bill Matheson has almost 40 years of industry experience and is currently helping to build a gold mine in the jungle of Ecuador for Lundin Mining (he helps oversee 1,400 employees). The expertise required for this is world class.
2) Dr. Rad Vukcevic from the EU has a PhD in Metallurgy and taught for more than 20 years as Associate Professor in Metallurgy at RMIT, Melbourne and Witwatersrand University in Johannesburg. He was a Professor of Metallurgy at University of Western Australia and published several books on metallurgy. He holds several industrial patents for mining-related technologies. He also spent years travelling around the world optimizing and trouble-shooting world class processing plants (Alcoa for example).
Cornerstone management (including Dr. Vukcevic) works closely with Sherritt Technologies in Northern Alberta. This is a state of the art metals research and testing facility. Nearly every week they hold conference calls to develop and optimize the metallurgy on their Carlin Vanadium project.
The metallurgy results reported last Tuesday were the result of this group combining their areas of expertise. They hit it out of the park on their first attempts. Now over the next several months they will continue to do more testing and optimization.
The goal is to develop a flow sheet that costs out the most opportunistic method for extracting the vanadium from the shale. When the smoke settles, the final recovery will likely be between 75% and 85%. For example, they may be able to get higher recoveries, but that also needs to be weighed against both operating and capital costs. This process can typically take three to six months, but when it is done, I am confident (given the skill set of this group), that we will have the best numbers possible.
In our original mine plan and valuation model (that was build over a period of weeks by my economic geologist friend Kelsey), we estimated 70% for our metallurgy results (recovery). When we updated that to 80% based on Tuesday’s news, it resulted in an additional $630 million of potential operating profit in the first decade of operation. This shows the critical importance of metallurgy.
Metallurgy will also have a BIG impact on capital costs. Paul Cowley (CEO of Cornerstone) believes they can develop a method for processing that will lower operating and capital costs (by industry standards). This is an area they will be focusing on through the rest of 2018.
In our own model, we factored in capital and processing costs that are quite high – to error on the side of caution. If they can keep the plant / processing costs low, the economics will be that much more attractive.
This summer they will do more drilling and will continue to test their metallurgy methods across the known deposit. This is done with the intent of de-risking the project ahead of financing efforts (likely in 2019).
What is so exciting about Cornerstone, is that they have moved through the typical junior mining phases at lightening speed – because; (1) there was so much data from Union Carbide in the 1960’s (2) their confirmation drilling went so well this winter, and (3) their metallurgy work has gone equally well, very early.
As a result of this, they have not experienced the typical “froth” and blind speculation associated with junior exploration companies, just stable healthy growth.
In spite of the healthy growth, the market cap (valuation) is still incredibly low in relation to what they are truly sitting on. It is a VERY exceptional situation – which is why I refer to them as a rare unicorn in the microcap world. I cannot remember seeing this before, simply because the economics are so big, but the valuation is so dramatically below that future value.
The historical drilling and now the metallurgy success, has dramatically de-risked this project. Environmental work and permitting takes time (into 2019), but as I discussed above, it appears they will have the United States government working on their behalf to accelerate the mine approval process.
Cornerstone Corporate Presentation:
ADDITIONAL NOTES: JULY 17, 2018
VANADIUM INDUSTRY DEVELOPMENTS
1) Largo, the publicly traded vanadium producer in Brazil, issued a production update last week. In it, they stated the following: “V2O5 prices continued to edge higher, with the latest European metal bulletin price range posted during the week of July 6 being $18.50 (U.S.) to $19.00 (U.S.) per pound.
These are VERY big numbers. For the Cornerstone project an $18 vanadium price equates to an insitu metal value of $5.7 Billion ! This is from their higher grade core of our 10 year mine model and ignores the outer perimeter. We are using $14.75 but it shows the huge value of this deposit when Cornerstone even at a $1 has a $35 million market cap.
As a minimum this stock should be worth $3 right now.
2) Trump’s trade war continues to risk major upheaval in the United States technology sector (and their economy in general) as they are incredibly dependent upon China for rare-earths and strategic metals / minerals like Vanadium. So far Trump things he can bully China into submission but history has proven different and China is not only unlikely to back down – and in fact, would be smart to retaliate by restricting the export of strategic metals.
2) Russian scientists recently published an article in The Journal of Applied Energy that showed they have developed a mathematical model of the electrochemical cell of the vanadium flow battery. This is very important to the world of grid-scale energy storage.
Vanadium flow batteries are the leading solution for large scale energy storage but there are still some cost challenges for widespread global adoption. The research done by the Russians may lead to significant technological advancements – and higher vanadium demand.
4) FerroAlloyNet hosts a big Vanadium conference in China mid September. I noticed this week on the home page of their registration, they bring up serious issues facing the industry within China – which is very relevant to use because China and Russia account for 70% of world production. This definitely works to our advantage if China continues to face production challenges. Excerpts below:
“In the first half of 2018, the vanadium market fluctuated again. By the end of June, the unit price will go up to a higher level, and the price may continue to be high. But at present, under the effect of national environmental protection policy, the production of vanadium extraction from stone coal in domestic is difficult, the output of ammonium vanadate and vanadium pentoxide decreased obviously. The vanadium extraction from steel slag is facing severe resource challenges. This series of problems still make the vanadium market unstable.
With the “environmental protection – supply and demand – steel – efficiency production capacity – source” and other problems, how will the enterprises solve the above problems in the second half of 2018? What are the challenges that enterprises will face? Can resource problems be effectively solved and what opportunities will the follow-up market bring? What impact will the rebar new standards to be implemented in November bring to the market?”
Cornerstone’s metallurgy work has been making dramatic progress and June 20th they reported that vanadium extraction levels in the lab (Sherritt Technologies) had achieved 95%. This was an extremely important development that is not reflected in my report from June 4th but adds tremendous value to Cornerstone’s potential recoverable metal.
Danny Deadlock / MicroCap.com
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