Largo Intends to Initiate a Big Stock Buyback, Reports Strong Pricing in Q1 2022 Results

Largo (TSX:LGO NASDAQ:LGO) delivered first a quarter earnings report filled with promise. Though the company is working through COVID induced supply chain bottlenecks like the rest of the mining industry, the underlying drivers of the Vanadium business have never been stronger.

Vanadium prices have remained resilient, with the average benchmark price per pound in Europe up 31% year-to-date in 2022. An ongoing structural shortage of vanadium and growing demand from aerospace, chemical and energy markets should provide strong support to pricing over the coming decade.

The most important takeaway from this quarter’s results for us is how confident management is in the future of the company. A decision to commence a buyback for a peer leading 10% of shares outstanding is not made lightly. For management to believe they can generate enough free cashflow to satisfy the buyback means they expect very strong profitability in the years ahead.

Largo is a trailblazing company in the vanadium space and is not content to harvest profits from an undersupplied market. They are intent on building new sources of demand so the success of the Vanadium business is not solely based on the price of the raw commodity.

Largo provides investors with exposure to a commodity with potential the best supple and demand outlook in the industry with the added benefit of two unique expansion opportunities, that if successful will pay off in a big way.

The Big Takeaways

On the volume front, the company had to contend with unanticipated weather events and preventative maintenance in Q1, but so far in April, sales volumes are running at 3,734 tonnes for the quarter, a strong rebound from the 2,232 tonnes sold in Q1. Management is confident the production ramp can continue based on updated guidance calling for quarterly sales of 3,089 tonnes for the rest of the year on average.

Turning to Largo’s growth opportunities outside of core production, the quarter saw two important milestones. Largo completed the previously announced private placement for Largo Physical Vanadium Corp (LPV) which means the company has the capital needed to start trading as a public entity and to begin buying physical vanadium. Investors can think of LPV as a structure very similar to the Sprott Physical Uranium Trust, a listed public company that will purchase and hold vanadium to provide investors exposure to the physical commodity.

Largo clean energy (LCE), a future producer of innovative battery storage solutions, hired a CEO in the quarter and began prospective customer visits in May. The beginning of the sales process is a very important milestone and will be key to building demand for the company’s unique battery technology.

Q1 2022 Operational Highlights

  • Revenue of $42.7 million (+7% y/y) and Revenues per pound sold of $8.67 (+34% y/y)
  • V2O5 production 2,442 tonnes vs. 1,986 tonnes in Q1 2021 (+23% y/y)
  • The average benchmark price per pound of V2O5 in Europe was $10.72 in Q1 2022 vs. $8.30 in Q1 2021 (+29%)
  • Total V2O5 equivalent sales of 2,232 tonnes vs. 2,783 tonnes in Q1 2021
  • Cash operating costs per pound (ex. royalties) of V2O5 equivalent sold was $3.97 vs. $2.87 in Q1 2021
  • Net loss of $2.0 million vs. net income of $4.1 million in Q1 2021

Largo commenced the construction of its ilmenite concentration plant in April as a part of its previously announced Ti02 pigment project; the Ti02 content is expected to be sourced from the vanadium ore created at the company’s operations.

The configuration of the Largo Clean Energy vanadium redox flow battery (VFRB) product development and stack manufacturing center in Massachusetts is expected to be completed by May 2022; they’ve begun producing stacks and purifying electrolytes at the facility.

Stephen Prince was appointed president of LCE in January 2022, the company has initiated a strategic review of costing and pricing practices of LCE’s VCHARGE and VCHARGE+ product offerings over the coming months.

Updated 2022 Guidance

Largo continues to monitor and has taken preventative measure at its mine sites and corporate offices to mitigate threats from the COVID-19 pandemic. Although there are logistical challenges (i.e., delays and higher costs), the company’s production and shipments from Maracás have not had significant downturns.

The company anticipates a catch-up in H2 2022 sales following an expected improvement of supply chain constraints. We’re already seeing a rebound in the sales channel; in April 2022 were 1,246 tonnes of V205 equivalent – which represents over half of the sales in Q1 2022.

The company issued updated 2022 full year guidance, Vanadium production is expected to be between 11,600 and 12,400 tonnes, at the midpoint a growth of 16% year-on-year; while vanadium sales are anticipated to between 11,000 and 12,000 – with the midpoint in-line with 2021.

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



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