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.

A leading vanadium producer

FAR is a vanadium producer – a rare metal that’s a critical component for energy storage devices such as batteries. The company has only been public since 2019 and has continued to trade well below its IPO price of 64p. It was 9.5p a year ago. Even after the most recent surge, the FAR share price is still only trading at 25p. But is that all about to change?

A few days ago, the firm provided an operational update for investors. It announced the successful completion of a second roasting oven within its vanadium plant, boosting its processing capacity by 80 tonnes per month. That’s a 500% increase compared to 2019.

Unfortunately, the business was heavily disrupted by Covid-19. And its processing plant was taken off-line for a cumulative total of five months in 2020. Yet despite these interruptions, overall production for the year grew by 56% to 237 tonnes of vanadium.

The management team hasn’t provided any guidance for full-year revenue. However, looking at the current price of vanadium today (which is around $18,000/tonne), I have estimated it will be somewhere in the region of $4.2m. That’s a 130% increase on 2019’s $1.8m. Furthermore, this revenue figure doesn’t include the additional 400 tonnes that could have been achieved had there not been any interruptions by the pandemic.

Needless to say, 2021 could be an explosive year for the FAR share price.

There are always risks

The vaccine rollout appears to be progressing well in the UK. However, in countries like Kazakhstan, where FAR operates, progress is much slower. The country began distributing vaccines in early February and expects to vaccinate six million people by the end of the year. However, that only represents around 25% of the population. Consequently, I believe the business will continue to suffer from operational disruptions throughout 2021 and potentially even 2022.

Another risk to consider is the fact that the company has no pricing power. It sells vanadium to its customers at a price set by the market. Looking back at historical performance, the company reported a record $4.2m of revenue in 2018. However, in the following year, revenue dropped to $1.84m, taking the FAR share price down with it.

What happened? Production continued as normal, but the price of vanadium collapsed by 75%. And with no other assets in its portfolio, total revenue took a big hit. While vanadium prices might be slowly rising today, they can always drop again in the future if demand falls or the industry becomes over-supplied.

The FAR Share price: time to buy?

The demand for vanadium is currently on the rise as many countries, including the UK, begin to upgrade their energy infrastructure. Part of the government’s Green Industrial Revolution involves installing many energy storage farms that use vanadium-flow batteries.

This presents a fantastic opportunity for FAR and its share price to grow in the future. However, its current market capitalisation of £97m looks like it’s being propped up by significant investor expectations that may not be fulfilled. Therefore I’m not adding the stock to my portfolio today. But I will be keeping a close eye on it.