The Ferro-Alloy Resources (LSE:FAR) share price continues to surge. Over the last seven days, it has increased by more than 35%. And in the previous 12 months, the stock price shot up by nearly 350%. What’s causing this explosive growth? And should I be investing in this company?
The surging Ferro-Alloy (FAR) share price
I’ve previously explored Ferro-Alloy’s business. But as a quick reminder, the company is a vanadium producer. This rare metal is a critical ingredient for renewable energy technology – specifically high-capacity batteries. As the world accelerates its transition towards carbon-neutrality, demand for and the price of vanadium have been on the rise.
The initial surge of the FAR share price earlier in March came after the management team announced the completion of a second roasting oven in its vanadium processing plant. This upgrade allowed production capacity at the facility to increase by 500%. And since vanadium prices are on the rise, this is some exciting progress for shareholders. But as far as I can tell, the growth seen over the past week is mainly attributable to its Balasausqandiq project.
Balasausqandiq is a large black-shale deposit that contains an abundance of vanadium as well as other precious metals, including uranium and molybdenum. Mining has yet to begin. But Ferro-Alloy recently made a few encouraging announcements surrounding its progress.
Firstly, the company successfully completed the construction of a new power grid. This new infrastructure will supply electricity to the extraction site and should be far more reliable than the original power sources, as well as cutting utility costs in half. Meanwhile, Vision Blue Resources completed its initial investments in the project, flooding the balance sheet with an additional $1.5m of cash. What’s more, Ferro-Alloy is expanding the scope of its feasibility study. While this does mean the investigation won’t be completed until 2022, the potential yield for the site is expected to go up faster than initially projected.
Needless to say, this is very positive news for a young resources business. So, I’m not surprised to see the FAR share price take off.
The risks that lie ahead
The progress made by Ferro-Alloy continues to impress me. But there are still some significant risks to be aware of. First and foremost, its revenue stream is entirely susceptible to fluctuating commodity prices. For now, the value of vanadium is going up due to increased demand and restricted supply. But as other companies ramp up production to take advantage of higher prices, the market may become saturated, leading to a rapid decline. In fact, this is precisely what happened in 2019. The collapse of vanadium prices resulted in Ferro-Alloy’s 2019 gross income being less than half the $4.22m of 2018, dropping to $1.84m a year later.
Furthermore, the rapidly rising FAR share price has pushed the business’s market capitalisation beyond £130m, despite revenue for the first six months of 2020 coming in at only $1.13m. That’s quite a lofty valuation. And indicates the stock price is being significantly inflated by shareholder expectations. If Ferro-Alloy fails to deliver, then its stock could plummet just as quickly as it went up.
Overall, this business sounds and looks incredibly promising to me. However, the valuation carries far too much risk for my portfolio. Therefore, it’s staying on my watch list for now.