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Friday, 10 May 2013
Largo Resources has potential to become “leading supplier” of vanadium, says analyst
Largo Resources (CVE:LGO) has garnered some impressive feedback from analysts this week, with some saying the company has the potential to become a leading supplier of vanadium in the stable jurisdiction of Brazil.
After a recent site visit to the company’s Maracás project in Brazil, Euro Pacific Canada’s Luisa Moreno issued a research note on Largo, confident in the fact that the Canadian natural resources developer’s flagship property is slated to enter commercial production in 2014.
The project, which is fully funded and progressing on budget, is targeting annual average production of 11,400 tonnes of vanadium pentoxide (V2O5) equivalent over a 29-year mine life. Starting in year three, the plant will convert a portion of the vanadium pentoxide produced to ferrovanadium to generate two products, with an average of 3,830 tonnes of ferrovanadium.
Largo has already inked a six-year off-take agreement with international commodities trader Glencore International for 100 per cent of its output, and the Euro Pacific analyst sees the company as continuing to expand resources, and possibly production, depending on the condition of markets.
Moreno, after the site visit, learned that the project has already received around 40 per cent of the equipment required for commissioning and more than 90 per cent of the total capex has been committed, with construction progressing on schedule. Commissioning is expected to start in the fourth quarter as planned, with first sales next year and full production in 2016.
“The high-grade Maracás deposit has a mineralization that favours a relatively simple and economic process that could make Largo a low-cost producer of vanadium. The company’s project economics are robust. Production will start to ramp up beginning in 2014 and the project is expected to generate significant cash flow at current V2O5 prices, which are expected to increase over the intermediate term due to growing demand and unstable supply,” said Moreno in the research note.
Indeed, the vanadium price assumptions used in Largo’s economic analysis were US$6.37 per pound of V2O5 and US$12.70 per pound of ferrovanadium (FeV), but according to Moreno’s research, industry reports forecast an increase in vanadium demand in 2013 and 2014, with demand expected to marginally exceed supply, and V2O5 prices forecast to reach US$11.00 per pound by 2017.
Though Largo was not rated by Moreno, she concludes that like the Brazilian company CBMM (Companhia Brasileira de Mineracao and Metalurgia), the world’s largest producer of niobium – also an important steel alloy like vanadium – Largo has the potential to become a “large supplier and low-cost producer” of vanadium.
She says the project has one of the highest grades of vanadium in the world, and the Rio Jacaré intrusion on which the property sits has not yet been fully explored, indicating potential upside to expand resources. “If Largo is able to discover additional high-grade vanadium deposits on its claims, it could strengthen its position as a major future supplier of vanadium and vanadium products, for many years,” she writes.
Likewise, London-based VSA Capital’s Jessica Pendal is bullish on Largo Resources, and issued a note on Thursday that boosted the company’s price target to 65 Canadian cents from 57 cents previously, on the impact of decreasing the discount on Maracás from 20 per cent to 10 per cent, “as we are now around six months from commissioning”.
Pendal, who also removed Largo’s Currais Novos project from the sum-of-the-parts on account of the company suspending operations at the tungsten site due to a severe drought, reiterated her buy recommendation on the to-be vanadium producer.
Largo’s economic report for Maracás, released in March of this year, was based on a 1.4 million tonne per year processing plant capacity, yielding an estimated net asset value of US$554 million at an 8 per cent discount rate, and an IRR of 26.3 per cent.
In the first year of production, total revenue and EBITDA are pegged at $87 million and $31 million, respectively, with Euro Pacific estimating an average EBITDA per year of $108.4 million for the life of the project. Operating costs are expected at around US$3.10 per pound.