The Ferro Alloy Resources (LSE:FAR) share price exploded this week. The mining stock saw a 150% surge in value following the latest company announcement. So what happened? And should I be adding the business to my portfolio?
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.