Largo Inc. (TSX: LGO) (NASDAQ: LGO) announced second quarter production and sales results that put the supply chain and weather-related issues from the first quarter in the rear-view mirror. Quarterly production of 3,084 tonnes was above 2021, but more importantly it was a 26% improvement over first quarter production.
With management reaffirming full year production guidance of 11,600-12,400 tonnes, they are telling the market that production should meet or exceed Q2’s strong levels for the rest of 2022, a very positive result.
With production returning to normal and expected future catalysts from the Largo Physical Vanadium listing (subject to applicable regulatory approval) and the ramp up of Largo’s vanadium battery technology, there is a lot to like about the Largo story in 2022 and 2023, despite macroeconomic uncertainty.
Vanadium: Key to a Green Future
Capital 10X identified vanadium as a key strategic metal essential to the green revolution. Not only do the inherent properties of vanadium increase the strength and efficiency of industrial metals; vanadium is also essential in the manufacture of vanadium redox flow batteries (VRFBs). We’ve made a report comparing VRFBs to Lithium-ion batteries and their role in the green industrial revolution. Read it here.
Largo is among the largest producers of the metal. The company has a dual pillar strategy as a profitable vanadium producer with an emerging clean energy storage provider.
Picking Up Steam: Strong Q2 Sales & Operational Results
In Q2 Largo produced 3,084 tonnes of V2O5 (Vanadium Pentoxide), a 26% increase above their production in Q1 2022. The company achieved a new monthly V205 production record of 1,168 tonnes (May) in Q1 this year, despite encountering minor availability issues in the April and June months.
Largo experienced a sales catch-up in Q2 with equivalent sales of 3,291 tonnes sold in Q2 2022, a 9% increase over Q2 2021 and 47% above sales in Q1 2022.
Largo is highly leveraged to the vanadium spot price, so a rise per dollar per pound in V205 equals tens of millions of dollars of revenue for the company. In Q2, the average benchmark price per lb of V2O5 in Europe was $11.08, a 35% increase over the average of $8.19 seen in Q2 2021 and 4% higher than last quarter. Vanadium pricing continues to trend above its long-term average price of ~$7.00/lb even in the face of declining commodity prices elsewhere, demonstrating significant demand and not enough supply for the green metal. Price increases coupled with rebounding production bode well for the strength of Largo’s future revenue generation.
The company expects V205 production of 900 – 950 tonnes in July 2022; they maintain their production guidance of 11,600 – 12,400 tonnes this year. The recovery rate also climbed during the quarter to 81.8%, an increase of 6% from Q1.
Paulo Misk, CEO of Largo Inc. commented:
“We are pleased to report the Company achieved a new monthly V2O5 production record of 1,168 tonnes in May. Looking ahead, our team continues its focus on further optimizing operations to achieve consistent plant availability following kiln-related impacts experienced this quarter. In Q2 2022, sales increased 47% from Q1 2022 and the Company expects to benefit from the elevated price environment in Q2 2022. We are confident the Company will achieve its sales and production guidance for the year.”
Scaling Up VRFB Production
In Q4 2021, Largo Clean Energy (LCE) was selected to receive $4.2 million US in funding from the Department of Energy (DOE) to scale up its US-based manufacturing of VRFBs subject to award negotiation. The DOE award negotiation was completed in early July 2022 with the grant of $4.2 million approved. Largo Clean Energy’s total DOE budget is $6 million US. This grant by the DOE is a significant stamp of approval for potential of Largo’s manufacturing ability in the U.S.
The DOE award substantiates VRFBs as a legitimate green technology for long duration energy storage, and an integral part of the US move to shore up its energy security by moving to renewables and more efficient sources of power. LCE expects to complete this project in three years, as they continue electrolyte production and stack manufacturing.
A Significant Buyback Program Has Commenced
The company also announced that it not only is implementing the previously announced buyback program for up to 5% of shares outstanding, but the program is now automated, meaning it will be carried out regardless of earnings blackouts. The buyback program becomes effective as of July 14, 2022. This program could provide a strong bid for the stock over the next 6-12 month with daily purchases potentially equaling up to 25% of daily traded volume in the stock.
Q2 a Return to Form for Largo
With production guidance reaffirmed, pricing holding in and a significant buyback program on the way, there is a lot to like at Largo inc. What we like most about this management team is they aren’t content to let rising commodity prices and a supply shortage do all the work for them. They are continually looking to innovate and create new sources of Vanadium demand to insulate themselves from the typical swings of a commodity focused business. The potential of Largo Physical Vanadium Corp. and the Vanadium Redox Flow Battery technology are significant. We look forward to hearing more about both of these initiatives and quantify the upside to the stock in the coming quarters.
Largo Inc. is a market awareness client of Capital 10X.
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