Largo Reports Q1 Production Beat and Imminent Vanadium Battery Deployment

2023 looks increasingly like THE key transition year for Largo (TSX:LGO).

For the last two years the company has been executing on ambitious plans to become not only one of the largest global producers of vanadium but also a major player in the rapidly growing battery storage industry.

With the news that Largo’s inaugural Vanadium Redox Flow Battery (VRFB) system installation is almost complete, by this time next year, Largo will have proved out its battery technology allowing it to begin ramping up sales to utility customers and harvesting an entirely new source of revenue growth.

The supply of vanadium is currently inadequate to meet demand needs from the battery industry based on forecasts of VRFB installations. Because of this, buyers need to be reassured that they can source vanadium to truly scale their storage needs over time.

Largo’s vertical integration will give the company a leg up on most other vanadium battery providers. Only Largo can provide the surety and flexibility of supply buyers need to feel comfortable making millions of dollars in VRFB battery commitments.

With China’s rapid rollout of batteries contributing proof of concept to the world, Largo is on the precipice of completely remaking the business model in less than 12 months.

VRFB’s Could Consume 10%-100% of Vanadium Supply

2023 Will be a Year of Operational Improvements

Largo has been warning for months that the first quarter would see lower production than the first half of 2022 due to record flooding and a mining contractor switch.

However even with these transitory challenges, the company was still able to produce close to the top of the guidance range and handily beat expectations on vanadium sales volumes.

Largo is guiding to more than 10% production growth over the rest of 2023 which could serve as a catalyst for the stock price along with rising vanadium prices.

Production and Sales Forecast for 2023

Source: Largo Mgmt Guidance

Sales volumes of 2,849 tonnes exceeded the year ago quarter by 28% even including an increase in third-party purchased vanadium.

Production is running at a quarterly rate of 2,742 pounds as of March indicating we will be seeing a 30% or more improvement in production next quarter if current rates are sustained.  

Recovery rates also saw a big improvement, rising to 83% from 77.5% a year ago and 75% just last quarter.

Source: Largo

Largo had this to say about the quarter:

As expected, effects from heavy rains and reduced high-grade massive ore availability impacted production in Q1 2023 and the Company has been diligently working to rebuild the necessary stockpiles to maintain steady-state operations going forward. Despite these challenges, I am pleased to report that we are tracking in line with our 2023 production and sales guidance as of Q1 2023.” He continued: “We expect to reach a number of significant milestones in 2023, including the successful delivery of the Company’s first VRFB system in Spain, the inauguration of its ilmenite concentration plant as well as finalizing negotiations with Ansaldo, which remain ongoing. As the vanadium sector continues to exhibit steady demand, our focus remains on delivering these milestones over the course of the year in an effort to maximize shareholder value.-Interim Ceo Daniel Tellechea

Vanadium Demand is Strong

Largo ended up selling more vanadium than it expected in the quarter due to a ramp up on orders from the aerospace industry, where Largo’s high purity vanadium is in high demand.

Largo is selling 40% of its mined vanadium to the Aerospace industry as a higher margin, higher purity product. Regardless of the strong growth forecast from battery deployments, Largo will see rising margins as high purity vanadium makes up a greater share of overall sales.

Vanadium Supply and Demand Metrics

Source: Wood Mackenzie, Vanitec, CRU, CISRI, Bloomberg, World Bank

VRFB Battery Installation in Spain Nears Completion

Largo provided an operational update on the company’s first vanadium battery deployment in the 1st quarter production release.

To recap, Largo is working with Enel to test its battery technology in Spain. The first battery will have a capacity of 6.1mwh. All required hardware for the installation was delivered and LCE’s field service team completed a significant portion of the system installation, including the alternating current power systems, chiller system, LCE’s power containers and electrolyte storage containers.

The Company expects hot commissioning of the VRFB system to be completed in June 2023 with final approval from Enel coming in Q3 2023.

Additional Revenue Growth From Ilmenite Plant Coming Soon

Following the anticipated completion of construction and commissioning of its ilmenite concentration plant in Q2 2023, the Company expects to begin producing ilmenite concentrate in early Q3 2023.

Management has said previously they will be releasing revenue and profitability guidance related to the Ilmenite plant soon after commissioning is complete and production commences. 

The Company expects a gradual ramp up of ilmenite production in Q3 2023 with the expectation of building sufficient stockpiles of produced material for sale in early 2024.

The Company continues to explore alternative debt financing or strategic association options with regard to developing its titanium dioxide (“TiO2“) pigment plant.

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