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Interview with Lee Barker, President and CEO of Sparton Resources (TSX.V: SRI): Completed Commissioning of the Zhangbei Project's 8 Megawatt Hour Vanadium Flow Battery

on 7/10/2016
Sparton Resources Inc. (TSX.V: SRI) completed commissioning of the Zhangbei Project's 8 Megawatt Hour Vanadium Flow Battery earlier this year and its client recently received payment of approximately $C3.2 million from the battery's owner, State Grid North China Company. The ongoing maintenance program revenue over the next 3 years will also provide cash flow. These payments will accrue to Sparton’s operating subsidiary company in China. According to Lee Barker, President and CEO of Sparton Resources, the vanadium flow battery is much better than lithium for large scale energy storage: they can go 100,000 cycles of fully charging and discharging, they don't lose charge while being idle, they operate in cold temperatures and warm temperatures, they don't have to be air-conditioned in hot environments, they are not flammable, better for computer systems backup, because the electricity in the vanadium battery can be discharged almost instantaneously, for large-scale storage, these batteries are about 1/3 the cost of a similar sized lithium battery, when you factor in the life of the battery over time; and at the end of their life, they are fully recyclable. There is an incredible market for large energy storage all over the world. Sparton also has access to clean and pure primary vanadium deposits in China that they believe will be developed. They are currently in the process of negotiating with various potential strategic partners to acquire the battery manufacturer and develop these deposits. This way they could potentially build a company with the source for the raw material that can make the vanadium flow batteries, and get a cost benefit from that and make it more competitive in the marketplace.

Dr. Allen Alper: This is Dr. Allen Alper, Editor-in-chief of Metals News interviewing Lee Barker, President and CEO of Sparton Resources. Could you tell us about the vanadium, battery storage, and your program?

Mr. Lee Barker: We've been working on this, Allen, often and continuously more or less for about four or five years now. About this time last year, maybe a little bit earlier in early spring, we got involved with a program to evaluate this battery company in China, which is actually owned by a Cayman Islands company and was originally based in Vancouver, British Columbia, and then in the US. The company operations had shut down for lack of working capital. It became dysfunctional when they changed the management, but it was the pioneering company for building vanadium flow batteries in the entire world. In 1998, the company bought the original patents for these batteries from the University of New South Wales in Australia.

I knew a lot about this company from previous business with them, trying to sell them vanadium from those deposits we were trying to develop in China. I knew the former manager here in Canada, who used to work for me in the 1980s, believe it or not. I followed them for quite a long while. When it became apparent that the company could be perhaps purchased, we began doing a due diligence program. Then while we were doing that, last summer, this company had had a contract with the China state grid north utility -- which is the largest utility in the world, it feeds Beijing and a large part of northern China in the Beijing - Tianjin areas) -- to build this very large flow battery at their renewable energy demonstration site, which is the largest in the world located north of Beijing.

The battery was completed, but the government utility did not ask them to start the battery for well over a year. That was part of the reason why the company became dysfunctional. They lost all the cash flow from the revenue coming from that. We stepped in and said, "Look, if you guys will allow us to get this battery started and put the money up to do it, we'd like to be able to get the revenue that is meant to be paid." They agreed to that. We had a contract with them, so we actually re-hired a number of the key technical staff that had built the battery and set about getting the battery operating. In early February of this year, the battery was successfully tested and accepted by the government utility.

Then the payment became due, if you look through the string of press releases. Basically, the second payment for the battery, which represents 30% of the original contract, came into the account of the client, the battery company, on the 7th of June, which is a couple of days ago. That money first has to be used to pay off the local debts, and then the rest of the money will be turned over to our company in China. I'll try to get some of it back here to pay the bills and things. The ongoing contract to maintain that battery, which is part of the purchase agreement when they built it, goes for 3 years. There's a revenue stream coming from that contract of about 850-900 thousand US dollars a year, to be paid annually on the anniversary of the commissioning. It's a warranty-type thing, for how the battery has to be maintained. We have two full-time staff on the site looking after the battery. We have to make any repairs that are necessary, during that time, to get those payments.

Dr. Allen Alper: That sounds excellent. You did a great job.

Mr. Lee Barker: A lot of people, I'll be honest, didn't have the courage to do this. The company's technology, this battery in particular, and what could be done with this company in the energy storage field, it's not a slam dunk by any means, but all the foundation is there to make this company successful again. We don't need a lot of money to buy it. I won't tell you the price, because we have to get the deal done first, but you'd be buying this company for basically 1/20th of the value that's been put into it, in terms of R&D and development of the technology, sales, and everything. They sold batteries in 12 different countries up until 2014. They really were the pioneers. A lot of other guys are building vanadium batteries now, but these guys were the pioneers and have the most testing work done historically of anybody. They have a lot of new technology in the company that has never even been reported to the market yet, because the company has been basically dysfunctional for about a year and a half.

Dr. Allen Alper: You're doing a great job hanging in there and working with this company that was the pioneer in vanadium batteries. Could you explain to our readers and investors why this vanadium battery is a breakthrough, and what about the technology makes it so important?

Mr. Lee Barker: Well, Allen and readers, the vanadium flow battery has many positive characteristics that make it much better than lithium based units, which are the other, competitive batteries in this space, for large scale energy storage. Lithium batteries have a finite life, as everybody knows. Lithium batteries degrade with time, as you know, your battery in your cell phone, computer, and in your Tesla car will have to be replaced every four, five, or six years. In vanadium flow batteries, basically nothing is destroyed the way it is in the chemical reaction that takes place in a lithium energy cell. Flow batteries last at least three times as long. They're warrantied for about twice the life of a lithium battery.

They will do 100,000 cycles under warranty, which they can be charged and discharged fully. A lithium battery cannot. If you discharge a lithium battery below 20% it will destroy the battery, and it cannot be recharged again up to its maximum. Vanadium flow batteries can be discharged and charged 100%. They don't lose their charge when they're sitting idle, which lithium batteries do. If you leave your cell phone, even if it's turned off for a week and you come back, the battery will be partially discharged, because they decay.

These batteries do not overheat. They're not toxic. There's no toxic material in them. The battery is large. They're larger batteries. They won't be used in cell phones or hearing aids, because the energy density is lower than in a lithium battery. There's no competition in that space. Nobody would even try to compete. But for large-scale storage, these batteries are about 1/3 the cost of a similar sized lithium battery, when you factor in the life of the battery over time. The capital cost is about the same, but the batteries last at least three times as long.

These batteries, at the end of their life, are fully recyclable. They're basically a fuel cell which allows electrons to move from the charge side to the discharge side. Tanks of electrolyte, a vanadium sulfate solution, PVC pipe, pumps, a few heat exchangers-- Every component in the steel frames is fully recyclable, including the electrolytes. You don't lose anything. It can be cleaned and reused. There's actually a value to these things at the end of their life of 20 years or so.

On that basis, they have many, many advantages over lithium for larger scale storage. They operate in cold temperatures and warm temperatures. They don't have to be air-conditioned in hot environments. The danger of fire, of course, which is still a danger with lithium, is basically not there. There's nothing in the battery system that actually is flammable, in the sense that it can catch on fire by itself.

Dr. Allen Alper: That sounds great. How is electrical energy generated for these storage batteries?

Mr. Lee Barker: The use for these batteries is multiple. Using them in conjunction with a renewable source of electricity, like wind or solar, is a major application because wind and solar, first of all, don't work when there's no wind and don't work when there's no sunshine. If you can store the electricity produced during the period of time when the wind is blowing and the time when the sun is out into a battery, you can have 24-hour electricity in these systems.

The other main use for these batteries is in something called peak shaving, which is a term for basically buying the electricity and charging the battery at what we call "off-peak rates," at night when consumption is down and the utilities will sell the electricity cheaper, charging the battery with that cheap electricity and then discharging it during the day, when electricity prices are higher. Basically, you save money, and the difference that you save is what they call the "shaved off" portion of the cost. You're saving electricity costs.

The city of New York is using a number of these batteries now for that process. They're also using them as a back-up for their transportation systems, switching computers, because the electricity in the vanadium batter can be discharged almost instantaneously, whereas a lithium battery has to ramp up. A computer can't handle long duration electricity spikes. They'll shut down if there's a long duration spike, but the switching system can almost instantaneously put the electricity from a vanadium battery into the system.

Dr. Allen Alper: That sounds great!

Mr. Lee Barker: Vanadium batteries just aren't getting the media attention that they should get, because lithium batteries are used in the automobile industry with Tesla and other electric vehicles that are being developed. They basically get all the promotion. The lithium business in exploration now is booming. Everybody’s running around looking for lithium properties and making deals and raising money for it. There's lots of lithium in the world, there's no shortage of it that's for sure. The pipeline from lithium in a mining operation to lithium in a battery in fact is a very long one. The value of the lithium in the battery is actually a very small component of the value of the battery. That's just the way the media and everything else climbs on to these bandwagons. I hope that we start to take more notice of the vanadium sector in the near future and recognize that these systems are really, in many ways, much more useful for large-scale energy storage.

There is actually an electric vehicle, a car in Europe, that's been built using a vanadium flow battery. Some buses are being developed in China to use these batteries. There may be in the future, for larger scale vehicles, the possibility of using vanadium flow batteries as well.

Dr. Allen Alper: That sounds very good. Tell me, what are your plans going forward?

Mr. Lee Barker: At the moment, we're in the process of dealing with the money that's come in and sorting it out, paying off the debts that the company incurred in China, getting some money back over here and dealing with the maintenance and warranty program. We're also in the process of negotiating with various potential strategic partners, or investors, to acquire this battery manufacturer. We're at advanced stages now, and we're very optimistic in the coming few weeks, we'll be able to have this transaction completed.

Dr. Allen Alper: That sounds very good! Will this company become a subsidiary of Sparton Resources?

Mr. Lee Barker: Right now all the work is being done in the subsidiary company, that's correct. The subsidiary company is just over 90% owned by Sparton. We expect it will remain that way. A subsidiary company's business in this battery field becomes very substantial. There’s always the possibility of an M&A-type transaction to make it completely liquid and not just liquid through Sparton. That will have to be engineered in the future, once we see how the whole situation develops and how the investment group that supports us wants to proceed.

Dr. Allen Alper: That sounds good. What is the name of this subsidiary?

Mr. Lee Barker: VanSpar Mining, Inc. is the company that's been doing all this work. VanSpar Mining is a British Virgin Islands subsidiary of Sparton Resources, 90% owned. Just under 10% owned by private investors that put money into it to support the vanadium initiatives that we've been working on for the last six or seven years.

Dr. Allen Alper: Could you tell me a little bit more about your background and the team?

Mr. Lee Barker: My background is over 50 years in the resource exploration and development business, with a number of employers, both large and small, and also functioning as an independent consultant. Our team consists of a group of individuals who are fully familiar with the technology and the marketing in the energy storage business. We have an American gentleman with extensive experience in the renewable energy and storage fields, we have a couple of business associates in China that were involved locally with the battery manufacturer in the past and its marketing. We have an engineering group that developed all the software and the various intellectual property for that company, which is being maintained. We have our business group here in Canada. We have one director who is also a resource entrepreneur, he's a lawyer in the resource field, and past securities lawyer.

We have a director in England, who is former vice president of Massey Ferguson, a large agricultural implement company, also he was involved with the Canada investment development bank. He was, at one time, president of de Havilland Canada, the airplane manufacturer. He's a mining engineer by profession and has a Harvard MBA. He's very experienced in these sorts of transactions and entrepreneurial business development, which is what he's been doing for the last 30-odd years.

We have a good team, and we have access to a lot of people that have been involved in this field historically, that are willing to come and rejoin us when we get the operation going again.

Dr. Allen Alper: Could you tell me a little bit about your finances and capital structure?

Mr. Lee Barker: The capital structure of the subsidiary is in shares that are owned by either Sparton, through a holding company, or private individuals. Sparton itself is a very old company, actually, since 1985 in its present form, which is over 30 years. Before that, it was a company called Sparton Mining and Development in the 1930s. It's been on the Toronto stock exchange, or the venture exchange, from probably continuously for close to 60, 70 years. We have 111 million shares issued. We have no warrants or options at the moment. They've all expired. We're going to be clearing up a lot of the debts with the money coming in from the battery commissioning business.

The company is trading around 5 cents right now, very liquid company, lots of share trading in the last few days because of this announcement. I think we're still just starting to get some recognition in the marketplace. I think the market was a little bit skeptical about this whole thing in the beginning. We've managed to do exactly what we said we were going to do, and successfully. Now I think there's some recognition starting to come into the market that we're ready to advance ourselves much more significantly than people thought.

Dr. Allen Alper: By the way, if you need funding, I could maybe help you there. I have contacts in New York City also.

Mr. Lee Barker: I'd be very happy to listen. In the energy storage business, for instance, the notice came out this week that California wants bids, California Utility, the state utility, wants bids for 100 megawatts of energy storage by July 15th. That's been ongoing for a year and a half now. There'll be a lot of batteries proposed to the state utility for that. They don't want pumped storage, which means using water in a reservoir. The Ontario government just announced an 8 billion dollar program to support renewable energy and clean technology for energy storage. The government of China this week, announced that they were going to subsidize energy storage systems, and proposals are being accepted from 20 provinces. They want five systems at least in each province.

There's an incredible market for these types of storage units developing now, internationally, all around the world. They're being developed in India, they're being developed in Africa. They're wonderful for solar. Europe has got quite a large number of projects, supplying storage for the wind and their solar installations now in German, Sweden, Denmark, and Holland. There are about five or six serious manufacturers in the world now, and there's lots of room, we believe, for manufacturers to come in and assess this market and actually benefit from it. Energy storage is a huge opportunity now. In the US, if you read the Goldman Sachs report from last October, they show 150 billion dollars’ worth of potential value over the next ten years in energy storage alone, in the United States.

Dr. Allen Alper: Now what differentiates your company and your subsidiary from others?

Mr. Lee Barker: We're the only ones doing it, to start with. The only other listed company that is in the vanadium flow battery manufacturing business is a small company on AIM called redT Energy. None of the other companies are actually listed. There are lots of lithium companies that are listed, but there's a very small handful of vanadium flow battery manufacturers that are actually public companies. That's the difference right there.

Dr. Allen Alper: Very good! Could you give the primary reasons why our high-net-worth readers /investors should invest in your company?

Mr. Lee Barker: It's hard to give investment advice, but we're basically almost in a seed capital situation right now, with the stock trading at 5 cents, a market cap on the company of around 6 million dollars, and the acquisition, if we completed this business, will have a book value of well over 20 million. A portion of that will accrue to us, of course. In terms of the investment appetite for this type of situation now, I think as the media starts to recognize the usefulness and the competitive nature of vanadium flow batteries for large scale storage, in comparison to lithium, I think there will be a much wider interest level from all levels of investment, not just individual readers but probably institutions and things like that. We're looking at this as almost an entry-level situation, in a mature technology, but one that hasn't been fully recognized by the media or the investment community.

Last year around the world, there were about 150 million dollars invested by venture capital firms and groups in (vanadium) flow battery technology. This particular company we're trying to access had over 75 million invested in it over time. The dilution of that 150 million amongst maybe six or eight companies puts this company, with already 75 having gone through it and a large amount of intellectual property, basically very advanced in terms of its ability to deliver products.

Dr. Allen Alper: That sounds very good. Is there anything else, Lee, that you would like to add?

Mr. Lee Barker: The vanadium market itself, as a commodity, Allen, has been quite subdued recently because of the reduced steel output around the world. The steel industry has been very soft for the last four or five years. Iron ore prices have gone, as you would well know, from over $100/ton down to under $40 at times. Vanadium's major use was as the most common alloy metal for strengthening steel. The price of vanadium has gone down to around $4/lb from $7-$8, historically. There are vanadium deposits in the world not related to iron ore. Most of the vanadium deposits in the world that are being promoted and discussed are basically iron ore deposits that must have the vanadium and titanium removed, to make a clean iron ore. The ratios of those metals are too high to actually use them for making steel.

We do still have access to a number of very clean and pure primary vanadium deposits in China that we believe will be developed. They're actually the ideal source for the vanadium products, to make these batteries, because they contain far less contaminant, they're higher grade, and they're far cheaper to produce and extract the vanadium from. We're optimistic that in the future, we can end up with some type of vertically integrated organization that has the source for the raw material and can make the products to use it effectively, and get a cost benefit from that and make it more competitive in the marketplace.

Dr. Allen Alper: That sounds good. Very good. Could you tell me what experts are saying about the vanadium market going out in the future?

Mr. Lee Barker: I think the vanadium market in the larger scale, in the bigger picture, will expand as the steel industry starts to recover, but the supplies of vanadium around the world have dropped a little bit, because one of the major vanadium producers in South Africa went bankrupt. Evraz sold its vanadium division to a company called Bushveld Minerals. It is a magnetite deposit, again a bi-product type situation. A very large producer in Australia, called Atlantic, also has some problems and apparently is under administration, so it may be producing large amounts in the future. These people are producing what we call standard grade vanadium pentoxide, 97- 98%. The chemical grade vanadium, which would be produced from these deposits which we have access to in China, is 99.5% plus. It sells for nearly twice the price of the cheaper standard grade. You're looking at basically a value of vanadium of minimum of 2 and as much as 3 or more times the price of copper. If you have a 1% high purity vanadium deposit, that's equivalent to having a 2-3% copper deposit. Well, there aren't very many of those kinds of copper deposits around.

Look at the economics, the market for the chemical grade material is growing as the battery business grows. Vanadium is also used, and many people don't know this, as a catalyst to manufacture sulfuric acid from power plant stack gases and smelter gases, things like that. Sulfuric acid is the most highly consumed industrial chemical in the world. You can judge a country's industrial economy health by the amount of sulfuric acid produced and consumed in that country. As the economics of the world start to recover back to levels of five or six years ago, over time, then the consumption of sulfuric acid is going to go up, and that's going to mean they're going to need more vanadium for catalysts. We think the vanadium market will stabilize and start to grow as the use for these things recovers as well.

Dr. Allen Alper: Well, that sounds great!

http://www.spartonres.ca/

81A Front Street East, Suite 216
Toronto, Ontario, M5E 1Z7
Telephone/Fax: 647-344-7734

E-mail: info@spartonres.ca



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