Largo Resources (CVE:LGO) is on path to becoming the lowest cost producer of vanadium in the world from a primary source, according to CEO Mark Brennan, with the company's Maracás project in Brazil on pace for commissioning in the fourth quarter.
"The all-in operating costs of $2.10 per pound of vanadium pentoxide equivalent are very low even compared to secondary sources of the material," the chief says in a recent interview with Proactive Investors.
"Look at vanadium pentoxide. The floor is at 4 or 5 dollars, below which you see production shut down. Even at the worst possible case for vanadium, we still make a lot of money."
Analysts agree. After a recent site visit to the company’s Maracás project, 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 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."
The project, which is scheduled to eventually produce two vanadium products and an iron ore by-product, is projected to generate significant cash flow at current vanadium pentoxide (V2O5) prices - which are expected to increase over the intermediate term due to growing demand and unstable supply, added the analyst.
Indeed, the vanadium price assumptions used in Largo’s economic analysis from earlier this year 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.
Largo’s economic report for Maracás, from March of this year, was based on a 1.4 million tonne per year processing plant capacity, yielding an estimated after-tax net asset value of US$554 million at an 8 per cent discount rate, and an after-tax IRR of 26.3 per cent.
All-in operating costs are expected at US$2.10 per pound of vanadium pentoxide equivalent, which includes a credit for the iron ore by-product, a natural effluent of the process, in addition to the two vanadium products of V2O5 and FeV. Capex is seen costing roughly $236 million, with about $200 million spent thus far.
Largo has already inked a six-year off-take agreement with international commodities trader Glencore International for 100 per cent of the project's output of the important steel alloy.
"The agreement will see Glencore pick up the material at the mine gates, meaning there are no transportation costs involved," says Brennan.
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 vanadium products, with an average of 3,830 tonnes of ferrovanadium, which is used in the production of steel.
In the first six months of production, the company expects to operate at 50 per cent capacity, and by the end of 2014, it is aiming to produce at 100 per cent capacity. After reaching a projected 14,000 tonnes of vanadium pentoxide in another 12 months, the company says it will look to further ramp up output.
The project has already received around 40 per cent of the equipment required for commissioning, with civil engineering well on its way to being completed and electrical-mechanical erection ramping up.
Production from the mine is expected to work out to around 7 per cent of world output of 75,000 tonnes a year, says Largo's chief, who doesn't expect to raise any equity capital, with a total cash position of some $40 million.
"We have debt facilities outstanding that we are drawing down on right now, and we may look at drawing down pre-payment facilities that we have with Glencore," the CEO explains.
Brennan is confident in the project, assuring that it is "the best deposit of its kind". "We have a low cost producer coming into the market, and no matter what happens with vanadium, it will be up and going."
Despite a second tungsten project in Brazil - where operations were suspended recently on account of the "worst drought the region has seen for 80 years" - the chief executive is firm on the fact that the real value in the company is the Maracás project, which has 13.1 million tonnes of proven and probable reserves at a grade of 1.34% vanadium pentoxide.
"We have the highest grade, highest quality and lowest cost vanadium deposit in the world that can also be expanded very dramatically. It is a fantastic ore body."
Maracás sits on Brazil’s Rio Jacaré intrusion, which 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,” analyst Moreno concluded in her research note on the company.
The deposit also contains platinum group metals minerals, which were not attributed any economic value in Largo’s March 2013 report, but Largo will likely conduct additional testwork for possible recovery of these minerals to add future value.
The company, which is listed on the junior venture exchange in Toronto, is trading at around 19 cents, with a market cap of $165 million and just over 870 million shares outstanding.
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