The Energy Report

Source: Streetwise Reports   11/21/2017

With the price of vanadium on the rise, one pure-play producer is reaping the benefits.

Vanadium, a metal that maintains a low profile, has been on a tear recently. The metal is used to harden steel: a mere two pounds of vanadium added to one ton of steel doubles its strength. The price of vanadium has surged since the summer, led by the expectation of China increasing the required amount of vanadium in steel used for construction, according to Bloomberg. China is the largest supplier of vanadium, responsible for over 50% of the world’s annual production.

Although over 90% of vanadium is used in steel, rechargeable vanadium redox flow batteries are gaining in popularity for large-scale energy storage, and with them the demand for vanadium grows.

Bloomberg reported that while the price of vanadium is soaring, “there’s currently no easy way to invest directly in vanadium. The metal isn’t traded on any exchanges and for a company like Glencore Plc, which describes itself as one of the largest producers of primary vanadium, the metal represents a small percentage of the group’s total production.”

Largo Resources Ltd. (LGO:TSX) offers a pure play on vanadium. The company hosts the Maracás Menchen Mine in Brazil, which, according to the company, boasts the world’s highest-grade vanadium deposit with a P&P reserve grade of 1.17% vanadium pentoxide (V2O5), with low costs of production.

The company released its Q3 earnings on Nov. 6, reporting revenue growth of 153% year over year, and reporting quarterly net income for the first time since the Maracás Menchen Mine began commercial production. “Net income for Q3 2017 of $13.5 million compares to a loss of $24.7 million for Q3 2016. . .Revenues increased to $53.5 million in Q3 2017 from $35.8 million in Q2 2017 and from $20.8 million in Q3 2016, mainly driven by higher V2O5 prices and increased production,” the company reported.

Mark Smith, Largo’s president and CEO, stated: “Our Q3 2017 financial performance is our best to date and the first time Largo has achieved net income and earnings per share. This represents a significant improvement over previous quarters and was driven by excellent operating performance, especially due to our improvements in overall recovery levels and robust vanadium prices. We anticipate continuing to deliver strong financial performance as the vanadium market continues to tighten and place upward pressure on vanadium pricing levels.”

At the end of October, Largo released an independent technical report on the project, which included a life of mine plan for the Maracás Menchen mine, a feasibility study for the Campbell Pit of the mine, and a preliminary economic assessment for a number of satellite deposits.

The technical report included the following highlights:

• NPV8 (net present value at an 8% discount) post-tax is $542 million (U.S.) for the reserves at the Campbell pit, representing an increase of approximately 195% over the NPV reported for reserves in Largo’s updated mine plan and mineral reserve report filed on July 8, 2016.
• NPV8 post-tax is $140-million (U.S.) for the mineral resources in the Satellite deposits.
• Life of operation for the reserves in the Campbell pit is 11 years.
• An additional mine life of 12 years was estimated, if the inferred resources in the Satellite deposits come to be converted to mineral reserves.
• The technical report is a vanadium-only study. No value was given for any byproducts at this time, including iron, ilmenite (TiO2) and platinum group metals.
• The technical report used a long-term vanadium pentoxide (V2O5) price of $6.34 (U.S.)/pound for the life of mine except for the years 2018 and 2019, where vanadium pentoxide price of $9.00 (U.S.)/pound was used.
• The LOMP results indicate an operating life of the Maracás Menchen mine, including the Satellite deposits, to be of 23 years.
• The technical report contemplates two expansions to increase production at Campbell pit as follows: in 2019: 960 tonnes/month (11,520 tonnes per annum) and in 2020: 1,100 tonnes/month (13,200 tonnes per annum).

Largo CEO Mark Smith noted, “Both the increase in the net present value of our operations and the greatly increased mine life that could be achieved as a result of the Satellite Deposits speak to what I view as a very bright future for Largo. This Technical Report further reinforces that Largo has a world class vanadium operation.”

In early October, Largo announced that it achieved a new quarterly production record at the mine in Q3/17, producing 2,513 tonnes of V2O5, 4.7% over the plant’s nameplate capacity.

Largo has a 100% 6-year take-or-pay off-take agreement for Maracás with Glencore that began in 2014. It also has entered into a non-binding agreement with Vionx Energy Corp., which produces vanadium redox flow batteries for utility grid applications.

In addition to the Maracás Menchen Mine, Largo’s portfolio also includes a 100% interest in the Currais Novos Tungsten Tailings Project in Brazil, a 100% interest in the Campo Alegre de Lourdes Iron-Vanadium Project in Brazil, and a 100% interest in the Northern Dancer Tungsten-Molybdenum Property in the Yukon Territory, Canada.

Largo has 473 million shares outstanding, with 80% in the hands of management and institutions. Its market cap is approximately CA$463 million.

Arias Resource Capital, an investment firm that manages funds, holds a large equity stake in the company. J. Alberto Arias, the firm’s founder, who also serves as a Largo board member, told Streetwise Reports that the vanadium market is currently in supply deficit, which he expects to continue to reduce inventories and strengthen prices for another year or two. “Recently, a lot of attention has focused on vanadium redox flow batteries, which have the potential to be a significant source of new vanadium demand. Largo is very well positioned to benefit from the stronger outlook for vanadium prices,” he said.

Arias Resource Capital has been involved with Largo since before construction began on the Maracás Menchen Mine. “Largo, in our view, has three very attractive key features,” Arias stated. “The first is the quality of the team; they are doing an excellent job delivering great operating results and planning for an even better future. Second, Largo’s high-grade vanadium near-surface ore deposit is considered among the highest quality in the world; that high quality gives Largo a competitive edge for further growth with very attractive returns on capital employed, in our view. Third is the vanadium industry fundamentals. Vanadium is a critical element that is starting to get more recognition and I believe we are still at an early stage for the equity market to recognize full credit for it.”

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