Largo Inc. (TSX: LGO) (NASDAQ: LGO) reported full year 2021 results; strong revenue and net income growth were driven by favorable vanadium prices.

The setup for full year 2022 is very attractive for investors; an excellent macro backdrop for vanadium, improving operations and a clean energy division with serious upside potential over the long run.

The Market Environment Couldn’t be Any Better for Largo

Largo is currently staring down the barrel of a global commodity shortage coupled with a government driven move to sustainable industrial production.

Rising demand along with the tightest supply conditions management has seen in years is setting Largo up for big growth in revenue and profits.

This supply tightness is reflected in a Vanadium pentoxide prices that rose 57% in the fourth quarter over the prior year and is up a further 40% so far in 2022.

On top of strong pricing, Largo is bouncing back from historic rainfall at its operations in Brazil during the fourth quarter which should see production volumes rebound nicely through the year.

Management is guiding to 20% production growth in 2022.

The Financial Leverage to Strong Vanadium Prices

The earnings conference call really put it in perspective for us how big current vanadium prices could be for the growth and profitability of Largo.

Management is currently expecting EBITDA generation could be as high as approximately $170 million in 2022 if pricing stays at the current level of $12/lb and if its 2022 guidance is achieved.

This would be a huge jump over the prior year and would leave the company with $2.50/share of cash or 20% of the current market cap.

Not to mention leading to earnings of close to $1/sh in 2022 on a $15 stock. Paying 15 times earnings for a company growing 65%+ is a very attractive proposition in the current market.

The year ahead is looking bright, but things could get even better.

Largo has the potential to generate close to $300 million of EBITDA in a few years, simply if prices stay where they are today and if their growth projects are executed on.

For reference Largo generated $400 million of EBITDA in 2018, the last time we saw a supply shortage.

$300 million of EBITDA would see Largo trading for only 3x EBITDA at the current price, a deep discount to most other commodity stocks.

Most importantly when asked about excess cash, management said they would seriously consider using the money to buy back stock, a potential catalyst to close any remaining valuation discount.

A Hedge Fund Legend Enters the Room

Of particular note for investors on the Largo conference call was the participation of legendary hedge fund manager Leon Cooperman; an icon that has beat the S&P 500 by more than 30% over the span of his career.

Cooperman has a history of sniffing out hidden value right when its about to be realized. Largo is a company with a leading market share in an undersupplied commodity that will play a critical role in societies shift to a renewable way of life.

We believe the arrival of deep value investors to the Largo story is a very important indicator of the inherent unrealized upside ahead.

Lots of Ways to Win

It’s clear why Leon Cooperman has Largo Inc. on his radar. A perfect macro backdrop, deep operational expertise and a focus on becoming a key supplier of sustainable batteries and metals.

Largo has multiple ways to win in 2022 and beyond.

The fourth quarter conference call truly laid bare the earnings power of this business. With a well followed investor in the mix, and strong growth on the horizon, we believe Largo’s valuation multiple will move structurally higher from its current deep value zone.

Clean Energy Division Upside Potential

Largo is also diversifying its revenue stream into battery technology, a smart way to tap rapidly growing demand for sustainable energy solutions.

The company has been relatively quiet since the initial announcement in 2021, but today revealed they have been hard at work filling the sales pipeline, with good results.

Though the sales cycle for the company’s VCharge vanadium redox flow batteries can be as long as two years from initial contact to startup, Largo is currently qualifying 11 prospects with a potential order size of over 3,500 MW.

Enough to keep battery production busy for a long time at current capacity of 15MWH, per year.

Growth in the battery business will simply be a bonus on top of the very strong results potential of the legacy mining operations.

Full Year 2021 – Earnings Highlights

• Revenues of $198.3 million, a 65% increase over 2020; Revenues per pound sold of $7.89, a 49% increase over 2020.
• Annual V2O5 production 10,319 tonnes vs. 11,825 tonnes in 2020
• Net income of $22.6 million vs. net income of $6.8 million in 2020; Basic earnings per share of $0.35 vs. $0.12 per share in 2020
• Cash operating costs were $3.37/lb in 2021, compared with $2.56/lb in 2020. The higher costs are related to lower global recoveries, abnormally higher levels of rainfall in Q4 ’21 and increased costs for consumables.

Paulo Misk, President and CEO of Largo, stated:

“The Company generated net income of $22.6 million in 2021 versus $6.8 million last year, aided by a 44% in the average European V2O5 price and a 37% increase ferrovanadium benchmark price. The improvement in vanadium prices allowed Largo to end the year on a positive note despite some operational challenges experienced during the year, particularly in Q4 2021 with abnormally high rainfall at our vanadium production operations in Brazil.”

Largo’s production was down 24% quarter-over-quarter in Q4 2021 due to heavy rainfall at their Maracás operation in Brazil, during the months of November and December. Despite this adversity, Largo exceeded the lower end of guidance with quarterly sales of 2,899 tonnes of V2O5 equivalent in Q4 2021, compared to 3,751 tonnes in Q4 2020.

Largo Inc. is a market awareness client of Capital 10X.