Largo 3Q 2022 Earnings: Maintaining Focus on the Structural Growth Ahead
(TSX:LGO) (NASDAQ:LGO) Largo announced earnings today that largely met
expectations and management reiterated they are on track to meet the
lower range of 2022 guidance even with multiple one-time production hurdles
over the last six months.
With a new mining contractor in place and major maintenance completed,
production costs should moderate going forward while production continues to grow, leading to a strong potential step change in profitability.
Inflationary pressures continue to impact Largo, but this is true for most peers across the board and if inflation persists, it has historically been a bullish signal for commodity producers like Largo.
Largo is currently going through one of those plateau periods that in the moment
seems difficult, but in hindsight turns out to be a truly golden opportunity for
investors.
Largo is dealing with weakening demand from the steel industry and moderating
vanadium prices in the short term, but in only 3 quarters the catalysts will be
coming fast and heavy.
- Commissioning of the ilmenite Ti02 plant in Q2 2023 which at full capacity is
estimated to add $30 million or 15% growth to revenue according to the
company’s latest technical report. - Increase in high purity vanadium demand and production, which commands a price premium for Largo’s high quality V2O5 and V2O3 products.
- Commissioning of Largo’s first Vanadium Redox Flow Battery project in Q2
2023. This project with Enel will be critical to proving out the economics and
operational superiority of Largo’s unique battery storage tech.
Structural demand for battery metals, of which Vanadium is one, is growing
exponentially this decade and should lead to higher prices and an entirely new
level of demand for the few high purity vanadium producers like Largo. Coupled
with Largo’s potential as a battery supplier through Largo Clean Energy and Largo
Physical Vanadium (Ticker: VAND) revolutionizing the commercial renting of long-
term battery solutions, Largo is poised to thrive through the rest of this decade,
economic slowdown or not.
Largo is well positioned to execute on all its priorities with $83 million of cash, which
includes the new $20 million debt issued in October against annual investment
spending of $25 million net of cashflow from operations.
The ongoing buyback of shares is also a strong indicator of management’s faith that the true value of Largo shares is higher than where the stock trades today.
The company bought back an estimated 2.3% of the public float in the quarter, spending $5.8 million. 2.8 million shares remain in the buyback, 8% of the public float and are expected to be purchased over the next 7 months.
Ernest Cleave, CFO of Largo Inc. commented on the quarter’s financial results:
“Looking ahead, if we consider a vanadium price of $8 per pound, our sales and
cost guidance, no LPV purchases of vanadium assets, a Brazilian to U.S. dollar
exchange rate that averages approximately 5:1 as well as the latest debt facilities,
we estimate exiting the year with a cash balance of approximately $75 million to
$80 million.”
Q3 2022 Highlights
- Revenues of $54.3 million vs. revenues of $53.9 million in Q3 2021; Revenues per lb sold of $8.80 vs. $9.10 in Q3 2021
- Net loss of $2.6 million vs. net income of $9.2 million in Q3 2021; Basic loss per share of $0.04 in Q3 2022; Inclusive of approximately $3.0 million in non-recurring expenditures such as legal and listing costs for Largo Physical Vanadium Corp. (“LPV”) and an increase in legal provisions
- Net cash provided by operating activities of $10.0 million vs. $15.5 million in Q3 2021
- Operating costs of $45.6 million vs. $32.1 million in Q3 2021 and cash operating costs excluding royalties per pound of V2O5 equivalent sold of $4.86 in Q3 2022 vs. $3.53 in Q3 2021
- Largo exited the quarter with $63 million of cash.
Increased Production of High Purity Material
V2O5 equivalent production from the Maracás Menchen Mine was a total of 2,906 tonnes produced in Q3 2022, down only 11% year over year even with significant refurbishment downtime and the transition to an entirely new mining contractor. Sales increased 4% year over year which continues the company’s positive sales growth momentum from the low point in Q1 2022.
Production in July was impacted by a refractory refurbishment in the kiln and cooler with production in September being largely impacted by a lower amount of mined material due to the transition of mining contractors, which was completed in September.
The move to a new mining contractor was enacted due to underperformance by the last contractor and should lead to stronger output going forward.
In Q3 2022, 351,450 tonnes of ore were mined with a grade of 1.02% of V2O5. The lower ore mined and effective grade during the quarter was due to the mining contractor transition and will rebound. Largo produced 99,513 tonnes of concentrate with a V2O5 grade of 3.26%.
Largo is well positioned to capitalize on increasing demand for high purity vanadium in the aerospace and chemical industries.
Operational Highlights
Largo had operating costs of $45.6 million Q3 2022 (Q3 2021 – $32.1 million), which
include direct mine and production costs of $24.7 million (Q3 2021 – $18.6t million).
Production costs were impacted by the kiln refurbishment and contractor transition
but will likely moderate in coming quarters with these one off items behind the
company.
The increase in direct mine and productions costs can is primarily due to cost increases in critical consumables, including heavy fuel oil and ammonium sulfate.
There was also increased consumption of these critical consumables and sodium carbonate.
Higher production costs were also driven by shutdowns for the refractory refurbishment in the kiln and cooler, repairs to the cooler support bearing, maintenance of the cooler and power substation. Operating costs continue to be impacted by reduced de-ammoniator and kiln availability and the time between production and sales.
The company also recognized an inventory write-down for its purchased products this quarter, which was mainly due to the decrease in average benchmark prices.
Cash operating costs excluding royalties were $4.86 per lb sold in Q3 2022, compared with $3.53 for Q3 2021.
The increase seen in Q3 2022 compared with Q3 2021 is largely due to the reasons noted above for operating costs and remains in line with prior 2022 guidance. Further, produced V2O5 equivalent sold decreased as compared with Q3 2021.
The Company recorded a net loss of $2.6 million in Q3 2022, compared with a net income of $9.1 million in Q3 2021. This movement was primarily due to lower sales and an increase in operating costs, professional, consulting and management fees and other general and administrative expenses.
Production
V2O5 equivalent production was a total of 2,906 tonnes produced in Q3 2022. Production in July was impacted by the refractory refurbishment in the kiln and cooler, with September impacted by lower quantities of ore mined as the Largo moved to a new mining contractor.
August’s production rate hit 1,140 tons meaning the company could easily hit production of 3,400 tons for the quarter if no operational one-off issues get in the way.
The global recovery achieved in Q3 2022 was 80.7%, a 3.6% decrease from the 83.7% achieved in Q3 2021. The global recovery in July 2022 was 80.1%, with 81.3% achieved in August and 80.8% achieved in September.
Sales
In Q3 2022, Largo sold 2,796 tonnes of V2O5 equivalent (Q3 2021 – 2,685 tonnes) up 4% over the same time last year, including 351 tonnes of purchased products (Q3 2021 – 135 tonnes).
Produced V2O5 equivalent sold decreased, with 5.4 million lbs sold in Q3 2022, as compared with 5.6 million lbs sold in Q3 2021.
Lower Q3 2022 sales are attributable to weaker spot demand during the period as well as ongoing shipment delays.
Largo Clean Energy (LCE)
During Q3 2022, LCE made good progress on the Enel Green Power España (“EGPE”) contract, which remains a key focus. All high-power battery stacks have been manufactured and the company is working on factory acceptance testing. The required battery stack containers are fully assembled, and final validation and factory acceptance testing remains ongoing.
Additionally, electrolyte storage containers are progressing through the final painting, lining and integration process. Most of the required alternating current (“AC”) components have been manufactured and factory-accepted, and shipment to the deployment site has begun. The battery deployment site is under construction and LCE expects to begin equipment installation in November 2022.
LCE continues to experience shipping and logistical delays related to certain components for its EGPE VRFB deployment, but still expects commissioning to begin next year.
Management is monitoring the situation closely and now expects the completion of the commissioning of the EGPE VRFB to begin in Q2 2023.
As their clean energy division grows, Largo has been actively exploring opportunities to benefit from the recently passed inflation Reduction Act in the U.S. which includes approximately $60 billion of clean energy manufacturing tax credits and $30 billion of tax credits for state and electric utilities to adopt clean energy and clean energy storage.
Largo believes that their U.S.-based clean energy business should qualify for some of the credits, and will provide updates on their efforts in this direction.
Largo Physical Vanadium
In Q3 2022, Largo’s industry first public vanadium vehicle began trading on the TSX exchange under the ticker VAND. Largo initially contributed 200 tonnes of V2O5 equivalent and $20.0 million of the $30.2 million that LPV raised in a financing that closed in April 2022. Largo physical vanadium currently holds 523 tonnes and has a net asset value of $34 million.
LPV was created to acquire and store vanadium units in commercial forms as well as in electrolyte solutions for VRFB applications. LPV ensures adequate supplies of Vanadium for battery customers while also dampening price volatility of vanadium in the market.
Largo Inc. is a market awareness client of Capital 10X.
