Vanadium Report Final

INDUSTRY REPORT EQUITY RESEARCH 12 Nov 09

VANADIUM: THE SUPERCHARGER Limited Supply •

• • •

Vanadium is a metal that strengthens and hardens alloys like steel, but that we believe has a bright future in energy storage.

Both lithium ion batteries to be used in the automotive industry and redox batteries to be used in grid-level electricity storage benefit greatly from the use of vanadium, and this use is costeffective.

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

In 2007, only about 59,100 tonnes of contained vanadium was produced globally, with this coming largely from South Africa, China and Russia.

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

Rapidly Rising Demand • •

Ferrovanadium is used to strengthen steel. Both China and Japan are mandating stronger rebar in construction, likely increasing vanadium demand.

We also foresee at least three new demand channels for vanadium in the alternative energy and clean technology arenas.

At least two of these could result in significant vanadium shortages.

Stable Prices are the Catalyst • • •

A major issue in the past has been vanadium price volatility.

Prices have oscillated between levels of $11 per kg. for the metal to as high as $50 per kg.

While there are some opportunities for substitution in steel production, the same is not true for other markets, including our projected new markets.

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

There Just Isn’t Enough • Jon Hykawy, Ph.D., MBA Clean Technologies & Materials 647.426.1656 jhykawy@byroncapitalmarkets.com Arun Thomas, MBA Associate athomas@byroncapitalmarkets.com

Please see back page for disclaimers Please see back page for disclaimers.

Without doubt, vanadium is growing into one of the most important metals about which no one has ever heard. Soon, everyone is likely to become a lot more knowledgeable about vanadium, and investors can benefit by staying ahead of the curve and owning companies that can benefit from rapidly increasing vanadium demand.

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Summary 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 their 2008 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 for years, and will continue to do so.

Vanadium demand is growing because of steel. We will add battery demand, both small and large scale.

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. However, this 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 only follow 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 2

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Vanadium: Vanadium: Supercharging Steel and Energy Vanadium (V) is annually produced at levels of approximately 60,000 tonnes (according to the US Geological Survey’s 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 first roasted 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.

59,100 tonnes of V produced in 2007, 85% of it used to strengthen steels.

Currently, approximately 85% of produced vanadium is used in making steel alloys. By adding small amounts of V, no more than 0.25% by weight to high-carbon steel or less than 5% by weight to steel 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+).

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 3

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Exhibit 1 – Colors of Vanadium Compounds in Solution

Source: Ian Geldard (2008)

Demand will grow due to steel and battery use.

Supply growth without price fluctuations are harder to predict.

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 of companies 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 Sources – ByBy-products and More ByBy-products On a national basis, the production of V is as follows: Exhibit 2 – Production of Contained V by Country (tonnes) Country Australia China Kazakhstan Russia South Africa Japan Total

2003 160 13,200 1,000 5,800 27,172 560 47,900

2004 150 16,000 1000 10,900 23,302 560 51,900

2005 100 17,000 1,000 15,100 22,601 560 56,400

2006 0 17,500 1,000 15,100 23,780 560 57,900

2007 0 19,000 1,000 14,500 24,000 560 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 deposits, especially 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 right 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 4

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Vanadium Pricing – Not 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, or 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 is approximately 60,000 tonnes, which is 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 3 – Historical V Price (per tonne metal, in USD)

V metal has traded between $20 and $85 per kg in just the last two years.

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 Demand – Moving 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 5

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Exhibit 4 – US EndEnd-Use of V (in tonnes) 2006 3,650 n/a 39.5 n/a n/a 335 4,030

Use Steel Cast Iron Superalloy Alloys (excl. above) Chemical Use Miscellaneous Total Reported

2007 4,570 n/a 43.7 n/a n/a 356 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 than metallurgical use.

Current V demand should grow at rates of at least 6% CAGR in the future.

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 Steel Association released figures for steel growth in mid-October 2009, and noted that while steel production fell 8.6% from 2008 to 2009, they are forecasting demand will ramp by 9.2% in 2010, and we believe that Macquarie Bank’s 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 5 below.

Exhibit 5 – Annual Conventional V Demand (tonnes) 2007 59.1

2008 60.8

2009 56.1

2010 60.6

2011 64.0

2012 67.7

2013 71.6

2014 75.7

Source: USGS, Byron Capital Markets

The demand for V from electric cars, due to the use of lithium vanadium phosphate (Li3V2(PO4)3) cathode 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)3 and lithium iron phosphate LiFePO4.

The rationale behind using lithium vanadium phosphate rather than other compounds for lithiumion battery cathodes is that this phosphate produces the highest voltages measured. Li3V2(PO4)3 produces a battery of 4.8 volts, much higher than the 3.7 volts from conventional LiCoO2. Power 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 6

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Exhibit 6 – LithiumLithium-Ion Battery Characteristics with Different Cathodes Cathode LiCoO2 LiMn2O4 LiFePO4 Li2FePO4F Li3V2(PO4)3 LiVPO4F

Voltage (V) 3.7 4.0 3.3 3.6 4.8 4.1

Capacity (mAh/g) 140 100 150 115 130 120

Energy (kWh/kg) 0.518 0.400 0.495 0.414 0.624 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 conventional 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 different cathode 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 isn’t 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 each material.

Exhibit 7 – Costs of Elements in Cathode Materials ($/kg and $/mol) Element Li Mn Fe PO4 V F Co

Cost ($/kg) 5.00 2.75 0.54 0.10 33.00 9.50 40.00

Cost ($/mole) 34.70 19.83 30.16 9.50 1,681.02 180.50 2,357.20

Source: InfoMine, Reuters, Byron Capital Markets

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 7

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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 8 –Relative Costs of Cathode Compounds, One Mole of Li Compound LiCoO2 LiMn2O4 LiFePO4 Li2FePO4F Li3V2(PO4)3 LiVPO4F

Cost Per Li Mole ($) 2,391.90 74.36 74.36 144.78 1,164.88 1,905.72

Cost Per kWh (relative $) 1.00 0.04 0.03 0.08 0.40 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 amount of 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 9 – Metals Costs for Equivalent Storage Price with Cobalt Other Price for Equivalency ($/kg)

$400.00 $350.00 $300.00 $250.00 $200.00

Equiv Mn

$150.00

Equiv Fe

$100.00

Equiv V

$50.00 $20

40

60

80

Cobalt Price ($/kg) Source: Byron Capital Markets

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 8

100

120

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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 3year 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 at present 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 that 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 of 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 are about 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 10 – Subaru G4e, with Lithium Vanadium Phosphate Cells

Source: Subaru Motors

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 9

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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 nonpolluting 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 gasolinepowered 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 11 11 – Portions of MSDS for Aluminum Laminated LithiumLithium-Ion Battery Battery Material Aluminum Carbon, amorphous powder Copper foil Diethyl carbonate Ethylene carbonate Methyl ethyl carbonate Lithium hexaflurophosphate Graphite powder Lithium manganese oxide Lithium nickel oxide Poly vinylidene fluoride Nickel and inert polymer

% 15 1 10 5 5 5 2 15 28 10 1 3

CAS Number 7429-90-5 7440-44-0 7440-50-8 105-58-8 96-49-1 623-53-0 21324-40-3 7782-42-5 12057-17-9 12031-65-1 24937-79-9 n/a

Source: NEC TOKIN Tochigi

Automotive use of vanadium in batteries could add as much as 26% to current demand by 2014.

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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 10

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Exhibit 12 – Electric Vehicle Adoption and Potential V Demand Vehicle:

2009

2010

2011

2012

2013

2014

Prius-like Volt-like Leaf-like

-

300,000 -

400,000 150,000 200,000

500,000 200,000 350,000

600,000 300,000 500,000

700,000 400,000 700,000

V Required: Prius-like Volt-like Leaf-like Auto Totals

-

236 236

314 1,572 2,751 4,637

393 2,096 4,814 7,303

472 3,144 6,877 10,492

550 4,192 9,628 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 largesized 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 is limited 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 for exactly the desired time, no more than required.

Exhibit 13 – A 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 Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 11

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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 largescale VRBs worldwide. Cellstrom of Austria and Cellenium of Thailand are also working in similar capacities. All have the potential to sell relatively large batteries to utilities and others, with Prudent likely having the commercial lead in this regard.

VRBs can add perhaps as much as 11% to current demand, by 2014.

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. According to 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 of 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 output 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 14 – VRB Demand, Resultant V Demand (tonnes)

Demand for V could rise as much as 61% over 2007 levels, a CAGR of 11% from current demand, by 2014.

MWh Demand V Required

2007 0 0

2008 0 0

2009 0 0

2010 30 303

2012 150 1,515

2013 300 3,030

2014 600 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 12

2011 70 707

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Exhibit 15 – Overall V Demand Potential (tonnes) Demand Conventional Automotive Grid Total

2007 59,100 0 0 59,100

2008 60,784 0 0 60,784

2009 56,063 0 0 56,063

2010 60,590 236 303 61,128

2011 64,046 4,637 707 69,390

2012 67,703 7,303 1,515 76,520

2013 71,571 10,492 3,030 85,093

2014 75,664 14,369 6,060 96,094

Source: 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 global GDP growth.

Vanadium Supply – Keeping 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 investors contemplating 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. Slagbased V production is 56% of the overall market. With this increase we arrive at levels of 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 world’s 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 if the processing plant is also scaled up, but the Company has no publicly-announced plans to do so.

Xstrata’s (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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 13

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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 metal 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 risk attached 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 16 – Potential V Supply Assuming All Projects Reach Market Year Max. Initial Supply (tonnes) Increased Supply, Majors (tonnes) Increased Supply, Juniors (tonnes) Total Potential Supply (tonnes) Total Potential Demand (tonnes)

2010 61,000 3,400 2,800 67,200 61,128

2011 61,000 5,700 17,000 83,700 69,390

2012 61,000 5,700 38,500 105,200 76,520

2013 61,000 5,700 50,500 117,200 85,093

2014 61,000 5,700 50,500 117,200 96,094

Source: Byron Capital Markets

Supply can keep pace with demand, if all junior projects reach market and none are delayed.

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 17 – Potential V Supply, Less One Large Junior Year Max. Initial Supply (tonnes) Increased Supply, Majors (tonnes) Increased Supply, Juniors (tonnes) Total Potential Supply (tonnes) Total Potential Demand (tonnes)

2010 61,000 3,400 0 67,200 61,128

2011 61,000 5,700 5,800 72,500 69,390

2012 61,000 5,700 9,300 76,000 76,520

2013 61,000 5,700 21,300 89,000 85,093

2014 61,000 5,700 21,300 89,000 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.

Conclusion – More 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 14

Equity Research Industry Report The world needs more V, for steel and metals alone.

Batteries of all sizes may add substantially to that demand.

12 November 2009

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 the laptop 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 believe there 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 15

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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 not guaranteed, nor in providing it does Byron Capital Markets (a division of Byron Securities Limited) assume any responsibility or liability. From time to time, Byron Capital Markets and its directors, officers and other employees may maintain positions in the securities that are directly or indirectly involved in this Industry. The contents of this report cannot be reproduced in whole or in part without the expressed permission of Byron Capital 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 report 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.

Jon Hykawy, Ph.D., MBA 647.426.1656 jhykawy@byroncapitalmarkets.com 16

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