Largo Stock: Mine Plan For Maracas Menchen Is A Game-Changer (NASDAQ:LGO)

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Investment thesis

In June, I wrote a bearish article on Largo (NASDAQ: LGO), and then in October, I wrote a neutral one. My main concern in relation to this company has been the relatively short life of mine of the Maracas Menchen vanadium mine, its main asset. Well, Largo recently released a technical report covering an updated life of mine plan for the Campbell Pit deposit and a pre-feasibility study for the Novo Amparo Norte (NYSE:NAN) and Gulcari A Norte (NASDAQ:GAN) deposits and the results look compelling.

The life of mine of Maracas Menchen has been extended by 12 years and the after-tax net present value (NYSE:NPV) of the project stands at $2 billion. Largo has a market valuation of $673.8 million as of the time of writing and I think it looks undervalued. Let’s review.

Overview of the new life of mine plan for Maracas Menchen

Maracas Menchen is located in eastern Brazil and is the highest-grade vanadium mine worldwide. In Q3 2021, Largo mined 366,484 tonnes of ore at an effective grade of 1.10% and produced 113,879 tonnes of concentrate with an average grade of 3.32%. Vanadium production came in at 3,260 tonnes, while sales stood at 2,685 tonnes. It was a good quarter for Largo as the company y booked revenues of $53.9 million and a net income of $9.1 million.

Map of Brazil

Largo

Production at Maracas Menchen comes from the Campbell Pit deposit, which had a proven and probable head grade of 1.15% as of May 2017. The reason for my bearishness on Largo was that reserves were set to run out in 2028 according to the 2017 technical report. Well, in the middle of December 2021 Largo filed an updated technical report which boosted proven and probable reserves by 305% and added titanium dioxide pigment as a by-product. As you can see from the table below, the inclusion of the NAN and GAN deposits into the mine plan is the main reason behind the extension of the life of mine to 2041 despite a planned increase of the nameplate production capacity from the current 13,200 tonnes per annum to 15,900 tonnes per annum in 2032. Mining at the Campbell Pit is now set to end in 2032.

LGO Reserves

Largo

In 2022 and 2023, Largo will invest $25.2 million in a plant with a capacity to produce 150 kt of ilmenite concentrate per year from the Campbell Pit non-magnetic concentrate as well as $96.4 million in a 30 kt of TiO2 pigment plant. Largo expects to put $191.8 million in the latter by 2027 to boost its capacity to 120 kt of pigment production per year. Overall, the total CAPEX for the mine will stand at $590 million.

Largo CAPEX estimates

Largo

Yet the key financial figures look compelling, with Maracas Menchen now expected to generate $4.2 billion in after-tax cash flow over its life of mine. The after-tax NPV at a 7% discount rate stands at $2 billion and if everything goes smoothly, Largo should be generating over $200 million in net income and free cash flow per year by 2028.

Life of mine cash flows

Largo

In my opinion, these profits seem achievable considering the technical report is based on vanadium prices of around $8 per pound for the majority of the life of mine. Metal Bulletin has been reporting vanadium prices since 1997 and the average inflation-adjusted price since then has been $7.87 per pound. However, I’m concerned that Largo is betting on high titanium dioxide pigment prices.

Product sale prices

Largo

Titanium dioxide sale prices

Largo

Looking at the risks for the bull case, I think the major one is low vanadium prices over the next few years. Vanadium prices can be very volatile. For example, they hit a low of $2.25 per pound in 2015 before soaring to $29 per pound only three years later. The reason why I view low vanadium prices as dangerous over the coming years is because this is when Largo needs funds to $590 million of CAPEX at Maracas Menchen. As of September 2021, the company had cash reserves of $87.5 million meaning that a prolonged period of weak prices is likely to result in a delay of the expansion plans or a significant stock dilution to fund them. Vanadium’s fortunes are tied to the construction sector as steel accounts for more than 90% of consumption. China is by far the largest market, which is bad news at the moment considering the local property sector is having a rocky start in 2022. Several local real estate companies have defaulted over the past few months and now the problems are spreading to even once-healthy developers like Shimao.

Investor takeaway

Largo has a strong balance sheet and operates the best vanadium mine in the world. The company recently released a new life of mine plan for Maracas Menchen that adds titanium dioxide pigment as a by-product and envisages the boost of vanadium output to 15,900 tonnes per annum in 2032. The NPV now stands at $2 billion, which is almost three times higher than Largo’s market valuation as of the time of writing.

Overall, I view Largo as a speculative buy considering China’s real estate market has been in turmoil for months now and this could drive down vanadium prices in the near future. This would create significant issues for Largo considering the company plans over $150 million of CAPEX at Maracas Menchen by 2024. Low vanadium prices could result in delays for some projects or in a significant stock dilution if Largo decides to complete them on time.

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