Largo Reports Stabilizing Costs, Rebounding Production in Q2 2023

Largo’s financial results in Q2 were largely in-line with production numbers released two weeks ago. Production rebounded throughout the quarter and was largely back to normalized levels as of June with management still expecting to hit guidance numbers for the year.

However even with positive production and sales momentum, the stock sold off largely due to negative macroeconomic commentary around steel demand in China and Europe.

We recommend investors sharpen their pencils as the company now trades at its lowest multiple of sales ever, right at the beginning of a return to normal production levels and the most bullish fundamental demand change vanadium has potentially ever seen.

At nameplate capacity around 3,000 tonnes per quarter we estimate Largo can produce over $80 million of EBITDA and this excludes any growth in the battery business or contribution from the Ilmenite plant. At the current enterprise value Largo is trading for only 3.0x EBITDA, compared to an all-time low of 3x, a peer median of 6x, Largo’s own historical median of 12x and as high as 36x during the last vanadium bull.

Largo Multiple at an All-Time Low

Source: Bloomberg, Largo, Capital10x Estimates

 

Looking through the current construction weakness there are strong demand growth trends
happening in the other parts of Largo’s business. Aerospace demand is growing and will remain structurally higher than it has in the past as manufacturers continue to optimize for weight to hit fuel efficiency goals. Aerospace sector vanadium sales can generate higher margins than the legacy steel/rebar sectors business as well.

Demand for vanadium from the battery sector is up 141% from Q1 2022 to Q1 2023 and is forecast to accelerate even further over the next 5 years.

Analysts are expecting a 4x increase in EBITDA next year from current levels which means Largo is trading at only 2.3x EBITDA or a 40% EBITDA yield, yet another all-time low for this company.

A Focus on Costs = Margin Expansion

An important transition is taking place at Largo and that is on the cost side of operations. Largo has battled with COVID driven cost inflation the past two years, but we are finally starting to see a moderation in cost inflation.

Management has now made cost containment a main focus and expects to see results starting as soon as next quarter. As an example, Largo is guiding to a 50% decline in costs from the Largo Clean Energy Division going forward.

Cash costs were essentially flat over last quarter and have now been flat for over 9 months, after what was two straight years of COVID-19 driven cost inflation prior. Management even commented in the press release that they are starting to see cash cost reductions in the third quarter.

Source: Largo
The Company is beginning to see a reduction in key consumable costs at its mine site and has implemented a cost reduction plan at LCE.Daniel Tellechea, Interim CEO & Director

Largo is seeing a trifecta of positive trends: costs, volumes and demand. The only remaining piece that needs to fall into place is pricing and Capital10x expects that will happen eventually.

Upcoming Catalysts to Watch

With operations on the mend and costs beginning to come down, the focus now shifts to two important catalysts on the horizon in 2023.

Largo announced that it had completed construction of its Ilmenite plant and will have the
facility fully commissioned by the end of Q3 with a full year of sales in 2024.

The ilmenite plant is expected to add an additional source of revenue for the company which we will be able to quantify once financials from a quarter of operations are released.

The second catalyst to look forward to is completed hot commissioning and customer acceptance of Largo’s very first vanadium battery installation. On the call management said the battery is currently charging and discharging while hooked up to the local grid.

Commercial operation of Largo’s first vanadium battery will prove the battery chemistries advantages to potential customers and should mark the beginning of a fast growing new source of revenue for the company.

Completion of the battery installation is a critical milestone for the company due to the massive demand potential VRFBs (Vanadium Redox Flow Batteries) hold for the vanadium market.

Demand for VRFBs is taking off in China and elsewhere and Largo is one of the best positioned companies to supply that demand as the owner of the largest and one of the highest grade primary vanadium mines in the world.

Source: Largo Investor Deck

Financial Review

Revenue of $53 million was down from Q2 of last year due to largely to lower vanadium prices and V2O5 sales. Realizations per pound of $9.42 were down 20% year over year while V2O5 sales were also down 22%.

A decline in Chinese steel usage in construction, a major source of demand, is weighing on vanadium prices.

Q2 Financial Summary

Source: Largo

Costs

Cash costs excluding royalties were $5.18/lb of V2O5 sold in Q2, essentially flat over the past nine months.

Taking into account the current cost cutting measures and a return to nameplate production and sales we are expecting cash costs to trend lower over the next 12 months.

Source: Largo

Production

Largo reported strong production growth in the second quarter as operations recovered from maintenance and flooding in the prior six months.

Production grew 25% quarter over quarter and exceeded even the high end of its guidance production guidance by 10%.

More importantly, production exited the quarter in-line with some of the best quarters Largo has ever had and management said they expect to return to nameplate capacity as soon as a critical replacement part is received from Germany.

Monthly Vanadium Production (Tonnes)

Source: Largo

Ilmenite Plant On Track for First Sales Early Next Year

Largo announced the completion of construction this quarter on the value added ilmenite plant. Ilmenite is used extensively in industrial and consumer products and is expected to serve as a margin enhancer for Largo’s overall production.

The plant is now ready for commissioning in Q3, production ramp up in Q4 and the company is expecting a full year of sales in 2024.

VRFB Battery Commissioning Close to Complete

A very exciting catalyst for Largo is the current hot commissioning of the company’s first commercial vanadium battery. As of August, the company was actively charging and discharging VRFB batteries hooked into the Grid in Spain for Enel Green Power Spain. The company expects commissioning to be completed by the end of the third quarter.

Successful real world operations of Largo’s battery system will likely help prove to potential clients the efficacy of the system, driving more future installations.

Global demand for VRFB technology is rapidly tightening the supply and demand balance for Vanadium with forecasts calling for 10% of all vanadium supply to go into batteries in 2023.

Recent Vanadium Battery Announcements in China

Source: Largo Physical Vanadium

For long term VRFB installation forecasts to be realized, all vanadium would need to be redirected to this use by the end of the decade. Vanadium batteries are truly revolutionizing the vanadium supply chain.

Global VRFB Deployment Potential for Vanadium Demand

Source: Largo Physical Vanadium

As one of the largest pure-play producers of vanadium in the world, Largo is well positioned to become a key supplier of grid level battery storage globally.

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

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