Largo Inc. (TSE:LGO) (NASDAQ:LGO) reported an improvement in both production and sales results for the second quarter highlighted by a net income increase of $18.0 million, which represents a 113% growth year over year. increase from the comparative quarter in the previous year.

Production increased a strong 26% over the Q1 2022, while sales volumes were up even more, increasing almost 50%. The improvement in production and sales in Q2 2022 was due to improved operational stability at the Company’s vanadium plant as well as the re-establishment of inventories after the abnormally elevated levels of rainfall experienced in Q4 2021. As a result of strong vanadium prices during the quarter, overall revenue doubled quarter over quarter and was up 56% over the same quarter in 2021.

Encouragingly Largo continues to set new milestones with its strategy to advance the commercial rollout of its VCHARGE Vanadium Redox Flow Battery (VRFB) technology. After the quarter, the company announced they have signed a non-binding MOU with Ansaldo Green Tech for the manufacturing and commercial deployment of VRFBs throughout Europe, The Middle East and Africa power generation markets.

Further complimenting this strategy includes the award in funding by the Department of Energy to Largo Clean Energy of US$4.2 million. The funding is to develop and demonstrate efficient manufacturing processes, scalable to the high production volumes needed to meet the projected demand for VRFBs. This tells us the government likes the technology enough to make sure it can be produced at scale.

Largo expects to complete the DOE project in three years.

To learn more about the advantages of VRFBs over traditional lithium-ion batteries please read this in-depth article the 10X team put together in July.

Management Focused on Cost Control 

Largo is also showing discipline on the cost side of the business as well, shuffling around the timing of CAPEX payments to conserve as much cash as possible and increase operational flexibility. Largo lowered capital spending guidance for the rest of the year significantly for both the Ilmenite concentration plant and the Titanium Dioxide (TiO2) processing plant.

The ilmenite project is still on schedule with the capex change simply due to new timing on payments. The TiO2 project is still on track from a construction standpoint, but a delay in acquiring the land pushed out the CAPEX schedule a bit. Given that supply chains remain a challenge globally, the new timeline for the TiO2 plant could end up saving money in the long run.

Judging by the NY Fed’s Global Supply Chain Index, supply chains could be back to normal in another 4-6 months.

A Review of the Quarter

Largo generated close to record production in the second quarter hitting a production level of 3,084 tonnes of V2O5.

Largo has full leverage to the spot price of vanadium, which was demonstrated by their solid performance this quarter.  The company significantly increased revenues to $84.8 million from sales of 3,291 tonnes of V205; compared to 3,019 tonnes from the same period last year.

Largo has a 2-pillar business strategy – one consisting of a top-tier vanadium supplier, and two as an emerging clean energy business deploying Vanadium Redox Flow Batteries (VRFBs), for grid-level energy storage use.  Demand in these key markets have remained strong, reflected in the robust vanadium price this quarter.

The average benchmark price per lb. of V2O in Europe was $11.08 in Q2 2022, an increase of 35% from the average of $8.19 seen in Q2 2021.  Vanadium prices have decreased since the period, coinciding with a slowdown in consumption of the green metal in the steel sector.  Demand in the steel making process is the largest source of demand for vanadium, but Largo is working to diversify its industry weighting over time.

On the earnings call, management shared that they’re experiencing a significant increase in demand from the aerospace chemicals and energy sectors.  Although these smaller sectors provide lower volumes, they require high purity products which sell for a premium price – Largo is uniquely positioned to be the supplier of choice for these markets.

Q1 2022 demand from the aerospace industry is more than 30% above Q1 2021.  V2O3 is demand is closely linked with high purity markets, so adding it to the Largo portfolio drives volumes, which drive premium margins.  As one of the only approved producers for the aerospace industry, Largo has a big opportunity to diversify while also increasing revenue and margins in the coming quarters.

So, despite a slowdown in the steel sector, the overall supply/demand dynamic provides strong support for a healthy vanadium market over the next decade.

The Company also revised V2O5 equivalent production guidance to 11,000 – 12,000 tonnes from 11,600 – 12,400 tonnes. Cash operating cost excluding royalties’ guidance increased to $4.10 – 4.50 per lb. sold from $3.90 – 4.30.  Largo has made considerations for the price increase of consumables and has factored this into their operating costs into the next quarter.  Based on this conservative cost guidance, production costs will likely peak next quarter.

Largo has also amended its ilmenite concentration plant CAPEX guidance – which was lowered to $19 – 21 million from $29 – $30 million.  This reflects a change in expected payment timing.

The CAPEX guidance for their TiO2 processing plant was also postponed, considering delays in license permits associated with the projects’ land acquisition.  Titanium dioxide (“TiO2”) processing plant capital expenditures guidance lower to $2.0 – 3.0 million from $9.0 – 10.0 million.  The company expects the TiO2 project to be delayed until the first half of 2025.

On the conference call Largo said they are managing cashflow tightly and if all their assumptions play out they don’t expect cash on the balance sheet to decrease materially over the remaining six months of the year. Management is also well aware of the need for a cash buffer during uncertain markets and are prepared to slow the buyback should vanadium pricing weaker significantly.

In the third quarter Largo has already purchased 805,000 shares, or 1.2% of total shares outstanding for $5.5 million.

We are very encouraged to see a management team readily willing to return excess cash to shareholders during good times, while still preserving liquidity in times of uncertainty. This tells us management appreciates the needs of shareholders while also managing the business conservatively for the long term.

Onward and Upward

Overall Largo remains one of the most exciting companies playing in green alloy and renewable energy sectors today. Largo produces a product with some of the strongest C02 emission reduction properties within steel as an alloy on the market and is truly thinking outside the box to push the adoption of vanadium-based technologies forward.

With a strong cash position, consistent share buybacks and expected cashflow generation based on future growth projects, Largo is well positioned to become a key holding for any fund or investor focused on a low carbon future.

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