Largo (TSX:LGO, NASDAQ:LGO) reported Q1 2023 financial results. Due to a delay with their infill drilling campaign, Largo has lowered its 2023 production and sales guidance and increased the upper end of its cash cost guidance; however there are key catalysts ahead this year – the completion of the ilmenite concentration plant and the installation of their 6.1 megawatt-hour vanadium battery in Spain.
We view the lowered sales and production guidance as a transitory headwind that won’t impact the company for the entire year as they are expected to complete the infill drilling campaign in Q2 2023. The future outlook, which is what ultimately drives stock prices is unchanged and remains more favorable than for any other commodity in our view.
Largo currently trades at 2.7x next year’s consensus EBITDA, 70% cheaper than early 2021 and in-line with the 2019 multiple when vanadium batteries were merely at the prototype stage.
We believe investors that take a long-term view are presented with a very attractive risk/reward proposition; multi-year potential upside from the growing global mismatch between vanadium supply and demand, the ramp up of the ilmenite plant, the launch of the first vanadium battery and a dramatic improvement in both production and sales through the rest of the year.
Enterprise Value to Estimated 2024 EBITDA
The Vanadium Battery Sales are at an Inflection Point
It is our view that the supply of vanadium is currently inadequate to meet future 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 unique business model is expected to give the company a leg up on most other vanadium battery providers.
VRFB’s Could Consume 10%-100% of Vanadium Supply in Only a Few Years
The Rest of 2023 Will See Dramatic 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 its guidance range and handily beat expectations on vanadium sales volumes.
With today’s market selloff we think the market is clearly ignoring the operational improvements the company will see from here on out.
Important operational turnarounds we noticed in the quarter:
- Largo mined 13% more ore year over year and 5% more than the prior quarter showing operations are already rebounding from record rainfall and contractor issues in 2022.
- High purity production sold into higher margin markets like aerospace were 49% of total production in the quarter. Higher margin products made up 70% of revenue in the quarter vs 52% last year and will contribute to better margins in the future, especially as production rebounds.
1Q23 Revenue by Product Type
Production volumes were 13% below last year but are expected to increase as they progress through the year, ending up 40% by 4Q on a year over year basis if they produce within guidance.
Remaining Production and Sales Forecast for 2023 (Midpoint)
Recovery rates also saw a big improvement, rising to 83% from 77.5% a year ago and 75% just last quarter.
Vanadium Demand is Strong
Largo ended up selling more vanadium than guided further complemented by a return of demand from the aerospace industry, where Largo’s high purity vanadium is in high demand.
Largo is expected to sell 30-40% of its mined vanadium to the Aerospace industry in 2023 as a higher margin, higher purity product. Regardless of the strong growth forecast from battery deployments, Largo should capitalize on premiums associated with high purity vanadium sales.
Vanadium Supply and Demand Metrics
VRFB Battery Installation in Spain Nears Completion
Largo provided an operational update on the company’s first vanadium battery deployment in the 1st quarter financial release.
To recap, Largo is installing its first VRFB with Enel in Spain, with 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.
Largo also revealed that improvement to the Massachusetts stack manufacturing facility is complete and the company will have ramped up to battery capacity of 12.5 megawatts per year by the fourth quarter with plans to ultimately expand to 100 megawatts per year by 2025.
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 gradually producing ilmenite concentrate in early Q3 2023.
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.
Largo Inc. is a market awareness client of Capital 10X.
