Largo Resources Ltd. (OTCQX: LGORF) is a Toronto-based strategic mineral company focused on the production of vanadium flake, high purity vanadium flake and high purity vanadium powder at the Maracás Menchen Mine located in Bahia State, Brazil. The Company’s common shares are principally listed on the Toronto Stock Exchange under the symbol “LGO.”
The fundamental situation for vanadium is rapidly improving, and the Maracás Menchen Mine demonstrated another strong operational quarter in Q3 with record production of 2,563 tonnes of V2O5, while also achieving the highest monthly average overall V2O5 recovery rate in the Company’s history. With 7,235 tonnes of V2O5 produced so far, this year, the Company is well positioned to achieve the upper end of its increased and revised 2018 guidance range of 9,150 to 10,150 tonnes of V2O5 produced for the full year.
From a financial performance standpoint, the company continues to produce robust operational and financial results. For Q-2, 2018, LGORF, reported a record revenue of $103.3 million, compared to $35.8 million in Q-2, 2017 and $91.1 million in Q-1, 2018. Cash before non-cash working capital items was $77.7 million compared to $66.7 million during the previous year. Largo’ operations team continues to focus on implementing improvements in maintenance and production practices. The Company’s consistent low cash costs combined with the continued strengthening of V2O5 prices make it one of the most profitable vanadium producers in the world.
9M-2018 production result:
Vanadium prices continue to surpass decade high averages with the latest European Metal Bulletin price range for V2O5 posted during the week of October 5, 2018, being US$22.25-$23.00/lb. As announced in February (see press release dated February 12, 2018), the enforcement of China’s new rebar standard and the central government’s special action to cut down “substandard steels” comes into effect next month which, in the Company’s view, should add further pressure to the vanadium market.
Key and unique differentiating factor of Largos and Vanadium:
With V2O5 prices continued to edge higher, which puts the company in a very strong position for the fourth quarter and 2019. Management continues to remain very optimistic for the year ahead as the Company begins the construction phase of the Maracás Menchen Mine expansion plan which will see capacity increase at the mine from a total of 800 tonnes produced per month of V2O5 to 1,000.
Analysts tracking the stock believes that Largo has up-and-coming prospects, as it is the only pure-play producer of the Vanadium globally and value investors should consider exposure in this company/sector, as the fundamentals remain exceptionally favorable.
About the Industry:
Other recent announcements/highlights:
- Renewal of the operating license: In accordance with standard practice, INEMA published the confirmation of the renewal of the operating license for the Maracas Menchen Mine on October 5, 2018. The renewed L.O. is valid for a period of 2 years and may then be further extended within six months of the L.O.’s new expiry date for an additional 2-5 years period.
- Repayment of All Existing Long-term Brazilian Debt: On 27, 2018, the company announces that its operating subsidiary Vanádio de Maracás S.A. has repaid in full to Banco Pine S.A. its outstanding debt (the “BP Debt”) of R$70,981,564.30 (being approximately CDN$22.9 million). The BP Debt was the only long-term debt that remained outstanding in Brazil following repayment of the Company’s facilities in August 2018 (see press release dated August 2, 2018). This is will lead to further improvement in the capital structure and overall financial flexibility of the company.
- Early Redemption Right to Repay US$15 million of its 9.25% Senior Secured Notes Due 2021 – On Sep. 19, 2018, the company announced redemption of US$15 million in aggregate principal amount, representing 10% of the US$150 million aggregate principal amount currently outstanding, of its 9.25% Senior Secured Notes due 2021. From and after the Redemption Date, the redeemed Notes will no longer be outstanding, and interest will cease to accrue on such redeemed Notes. This early redemption of the Notes demonstrates the Company’s prioritization of debt repayment and is another step-in furtherance of the company’ goal to improve its capital structure and reduce its interest costs.
- Closure of secondary Offering: On July 24th, the company announced the closing of the secondary offering of 60,000,000 common shares and an additional 9,000,000 common shares (offering price of $1.40 per share) representing the exercise in full of the over-allotment option which was exercised on closing by the underwriters.
Latest Quarter Financial position:
- Net income of $90.7 million and earnings per share of $0.17 after a deferred income tax recovery of $45.6 million
- Revenues of $103.3 million in Q2 2018, a 189% increase over Q2 2017 and a 13% increase over Q1 2018
- Cash provided before non-cash working capital items of $77.7 million in Q2 2018, an increase of $66.7 million over Q2 2017
- Total production of 2,458 tons of V2O5 in Q2 2018, a 13% increase over Q2 2017 and an 11% increase over Q1 2018
- Average Vanadium Pentoxide (V2O5) price of ~US$15.44/lb. V2O5 in Q2 2018
- Cash balance at June 30, 2018, of $84.2 million (excluding restricted cash of $201.2 million)
2018 Guidance: The management believes that Elevated commodity prices and consistent production rates to drive exceptional operational and financial performance in 2018.
Key risk factors and potential stock drivers:
- The company’ business and operational risk profile are susceptible to fluctuations in metal prices and the end-user industry, and exposure to the risk of product concentration.
- The Company’ Revenue and profitability have strong linkages to the overall economic growth and demand in the end user industry. Fluctuations in Vanadium prices and the downturn in the end-user industry would continue to impinge growth.
- On Wednesday, October 17th, 2018, LGORF was at $2.83 on volume of 252K shares exchanging hands. Market capitalization is $1.408 billion. The current RSI is 58.46
- At $2.83, shares of LGORF are trading above its 50-day moving average (MA) at $2.27 and above its 200-day moving average (MA) at $1.49
- The present support and resistance levels for the stock are at $2.5463 & $2.9205 respectively.