2023-11-27 23:43:46 ET
Summary
- The company booked an $11.9 million net loss for Q3 2023 due to technical issues at Maracas Menchen as well as weak vanadium prices.
- Largo kept its 2023 guidance unchanged, which means that production and unit costs should improve in Q4.
- Yet, I think that vanadium prices are likely to continue to be depressed for months to come due to weak steel production in China.
- While Largo is trading at a fraction of the $2 billion NPV of Maracas Menchen, this could be a bad time to open a position.
Introduction
I’ve been following Brazil-focused vanadium major Largo (LGO) (LGO:CA) closely, and I’ve written a total of 8 articles about the company on SA to date. The latest of them was in August when I said that unit cash costs could improve in Q3 2023 and that vanadium prices seemed to be stabilizing.
On November 8, Largo released its Q3 2023 financials , and I think they were underwhelming. Cash operating costs continued to increase due to falling grades, while vanadium prices were soft due to weak demand in China and Europe. As a result, Largo’s revenues went down by 18.9% year-on-year in Q3, while the net loss quadrupled to $11.9 million. In my view, the prospects for the next few quarters don’t look promising, and I’m cutting my rating on the stock to neutral. Let’s review.
Overview of the Q3 2023 results
In case you aren't unfamiliar with Largo or my earlier coverage, here's a short description of the business. About two-thirds of global vanadium supply comes from Chinese steel mills where it’s produced as a co-product of the steelmaking processes, and Largo is the largest vanadium miner in the world at the moment through its Maracas Menchen open pit mine in east Brazil. The latter accounts for about 7% of total vanadium supply, with an output of 10,436 tonnes in 2022. It’s a high-grade project which allows Largo to offer several high-purity products that fetch a premium, including vanadium pentoxide flakes, vanadium pentoxide powder, and vanadium trioxide powder.
Largo recently completed the construction of a 150,000-tonne ilmenite concentration plant at Maracas Menchen and the facility is currently ramping up production, with output in Q3 2023 at 1,050 tonnes (see page 1 here ). The commissioning and ramp up is expected to be completed in Q4 2023 and this facility forms part of an ambitious project that includes the construction of a 30,000 tpa titanium dioxide pigment chemical processing plant. According to an updated life of mine plan for Maracas Menchen from 2021, investments in the ilmenite concentration plant and titanium dioxide pigment chemical processing plant are expected to be $233.1 million between 2024 and 2027.
Besides Maracas Menchen, Largo owns 65.7% of physical vanadium investment company Largo Physical Vanadium Corp. ( VAND:CA ) ( OTCPK:VANAF ) which has a market value of C$14.5 million ($10.6 million) as of the time of writing. It also has a vanadium redox flow battery (VRFB) solutions arm called Largo Clean Energy. However, the latter seems to be struggling as its net loss for Q3 2023 came in at $4.6 million (see page 6 here )
Turning our attention to Largo’s consolidated financial results for the quarter, I think they were weak as vanadium prices continued sliding while cash operating costs continued to rise. Revenues per pound sold were $8.34 compared to $8.80 a year earlier as the market is being pressured by weak demand from the steel industry in China and Europe. Cash operating costs, in turn, were negatively affected by a drop in the ore grade mined as well as operational challenges. In July and August, production was low due to the chemical plant operating at limited capacity following an accident in the evaporation section. In September, the availability of the crushing circuit was low (see page 8 here ).
Largo
Largo
Looking at the income statement, revenues slumped by 18.9% to $44 million, while the net loss soared to $11.9 million. In addition, I find it concerning that the operating cash flow has entered negative territory and that finance costs are rising rapidly and are now over $3 million per quarter. The main reason behind the growing finance costs is a rising debt load as net debt soared to $25.4 million in September compared to a net cash position of $22.4 million in December (see page 1 here ).
Looking at what to expect for the future, Largo kept its 2023 guidance unchanged, which suggests that production and cash costs per pound will improve in Q4. However, I think that vanadium prices are likely to continue to be depressed for months to come due to weak steel production in China.
Largo
According to data from the World Steel Association , crude steel production in China fell by 1.8% in October to 79.1 Mt. With the country’s real estate market in significant turmoil, it seems likely that steel output won't return to growth anytime soon. As the steel industry accounts for some 90% of global vanadium demand, rising demand from other markets such as VRFB is unlikely to help reverse the trend.
On a positive note, Largo has initiated a review of strategic alternatives for Largo Clean Energy (see page 10 here ) and I’m optimistic that this could result in a JV or cost-cutting measures in the near future. The latter accounts for a significant share of Largo’s losses, as its net loss came in at $16.5 million for the first nine months of 2023 (see page 6 here ).
Overall, I think that Q3 2023 was challenging for Largo due to technical issues and low vanadium prices and that the outlook for Q4 looks dim. On top of that, debt is rising ahead of major capital expenses over the coming years. While I continue to think that the company is undervalued as the after-tax net present value ((NPV)) of Maracas Menchen was some $2 billion according to the 2021 life of mine plan, this seems like a bad time to open a position.
Investor takeaway
In my view, this was another challenging quarter for Largo due to headwinds from operational issues at Maracas Menchen as well as weak vanadium prices. The company is valued at a small fraction of the NPV of Maracas Menchen, but I think this is unlikely to change over the coming few months as vanadium prices remain under pressure. That being said, cost savings or a partial sale of Largo Clean Energy could improve the financial performance of Largo significantly.
For further details see:
Largo: Poor Q3 Results Due To Operational Issues And Low Vanadium Prices (Rating Downgrade)