Largo Reports Q4 and Full Year 2022 Results – A Catalyst Rich 2023 Ahead

Investing is all about the future. By the time financial results arrive in the present, they are already old news. Stock prices, loan rates, mortgages and more all depend on the outlook for the future, not what has already happened.

Luckily for investors in Largo Inc (TSX:LGO) (NASDAQ:LGO), the future is shaping up to be far more exciting than the past. Largo is benefiting from sweeping industry changes as well as operational improvements that could lead to increases in profitability and production over the coming 12 months.

Analyst consensus believes Largo will see a 40% increase in EBITDA in 2023, however we think results could exceed even this strong growth given current vanadium price trends.

In 2021, Largo generated $62 million of EBITDA at a vanadium price of $8.30/lb. In 2023 production is estimated to be up 10% with vanadium prices up around 44% from the lows of 2022.

With vanadium redox flow battery demand expected to account for 10% of global vanadium consumption alone in 2023, Largo is on track to see rising vanadium prices and a big jump in profitability in the coming 12 months.

VRFB Deployments Set to Explode

Since we began following the company we’ve never seen a year full of more catalysts for both a rebound in cashflow and a rerating of the stocks discounted multiple.

Largo is approaching a pivotal moment as it seeks to prove it’s vanadium redox flow batteries are ready for primetime. By this time next year Largo may have opened up an entirely new source of demand, vanadium batteries, that could easily rival steel making as a source of overall vanadium consumption.

Key Catalysts in 2023

• 10% expected production growth in 2023 with no rainfall or mining contractor issues
• Illmenite plant coming on in Q2 2023 which could add up to $30M or 15% of revenue at full capacity, based on company’s technical report.
• China is building 2GW of vanadium redox flow batteries over the next 12 months, enough to absorb 10% of global vanadium supply. It also plans to install ~20GWh of vanadium battery manufacturing capacity over the coming years, which would increase global vanadium consumption by 100% once fully utilized.
• CAPEX down $14M or 21% in 2022. CAPEX could be down another 35% in 2024 with the Ilmenite plant up and running.
• Installation of VRFB for Enel Green Power Espana contract in Q1 and full commissioning in Q2. Will prove out the viability of VRFB batteries for large scale storage applications.
• Expecting cash costs to decline 2%-6% in 2023 ($4.85-$5.25) from the $5.15/lb experienced in 4Q22 due to flooding and mining contractor replacement.

Operational Highlights

The fourth quarter was marred by record rainfall and efficiency losses as Largo switched mining contractors.

Management said the rainfall led to 16 days of downtime between late December and early January or almost 10% of operational days in Q4 and Q1 combined. Positively, management expects a significant production improvement in the coming year which tells us they are confident the new mining contractor will get the job done.

Production totalled 2,004 tonnes in the 4th quarter, flat compared to the 4th quarter of 2021. Sales of 2,772 tonnes declined 4% compared to the same quarter last year.

Revenue of $47.5 million declined 6% over Q421 driven by a 1.4% decline in revenue per pound and a 4% decline in pounds sold.

For the full year, revenue per pound was $9.38/lb, a 19% increase over 2021.

Management is guiding that production and sales will be impacted in Q1 by the end of year rains, but will bounce back strongly and we believe production could end the year 50% higher than where it was in 4Q 2022.

Cash costs of $5.15/lb increased 6% QoQ and 40% YoY primarily driven by widespread COVID-19 driven material and labor inflation. Management is confident costs have now peaked and is guiding for cash costs to be down as much as 6% in 2023.

4th Quarter Operational Summary

CAPEX Declining While Cashflow is on the Rise

Largo released 2023 capital spending guidance in January and expects spending to be down 20% as the ilmenite plant finishes construction in Q2. With ilmenite CAPEX making up more than a third of spending, CAPEX could fall another 20%+ in 2024.

At the same time capital spending is falling, vanadium prices are rising. Vanadium has been averaging around $10.50/lb through early March which is an increase of 50% over the same period of 2021 and a 25% increase over the fourth quarter of 2022.

Largo will likely see a big positive swing in free cashflow in 2023, giving management flexibility with its capital allocation strategy.

With a strong balance sheet, we believe Largo is well positioned to weather any economic storm while it continues to drive new sources of vanadium demand.

Big Improvements Coming in 2023

Largo provided production and cost guidance in late January that painted the picture of significant improvement in both production and costs as the year progresses.

Outside of the mine, investors will get the proof of concept for Largo’s vanadium redox flow battery (VRFB). VRFB’s are emerging as a global contender to be THE battery for large scale renewable energy storage.

Regardless of what happens with new technologies, Largo’s traditional mining operations are set for a dramatic improvement with declining costs coinciding with ramping volumes and rising prices.

2022 was a difficult year for the company given inflation pressures, record rainfall and problems with mining.. With all three issues in the rearview mirror and both vanadium demand and prices strengthening significantly in just the last six months, 2023 is shaping up to be one filled with investment catalysts.

Production and Sales History with 2023 Guidance

Largo continues to trade at a significant discount to peers in both battery metal mining and battery storage solutions. We like Largo stock here simply because the company will see a significant operational turnaround in 2023, however the company also offers investors a heavily discounted way to invest in the electrification of transportation and energy generation, the two defining trends of this decade.

Largo Cashflow Multiple vs Peers

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