Largo Inc (TSX: LGO) is a natural resource development and exploration company having operation of mining and exploration properties located in Brazil and Canada. The company primarily explores for vanadium, iron, tungsten, molybdenum, chromite, palladium, and platinum group metals.

Key highlights

• Achieved Sales guidance for Vanadium Oxide (V 2 O 5): For FY 2021 total V 2 O 5 equivalent sales stood at 11,393 tonnes, 11% higher than total sales in FY 2020 and above the lower end of the Company's 2021 annual sales target (11,200 – 11,800 tonnes). However, V 2 O 5 equivalent sales declined by 23% to 2,899 tonnes in Q4 2021, compared to Q4 2020, as it faced issues from worldwide logistical delays, which impacted all aspects of the Company's supply chain.

• Proven track record as a vanadium producer: The company has a long and successful history as a producer of vanadium mineral, which is evolving as a critical energy transition input factor for renewable energy transition. New use-cases for vanadium are also being developed, which could serve as a source of rising demand, implying greater future pricing. Furthermore, beginning in 2033, the company's vanadium production is predicted to increase by 20%, and the mine life has been extended to 20 years.

• Robust financial numbers: Steel and chemical industries have seen strong demand of the company’s product, and the aerospace industry is slowly resuming, which is an encouraging sign for the company. In the reporting quarter, the organization sold 2,685 tonnes of V 2 O 5, up 15.7% from Q3 2020, and earned USD 53.9 million in revenue, up 96% from Q3 2020. The similar positive trend was seen in net income.

Source: Company Presentation

• Increase in cash provided by operating activities: In the reported period of Q3 2021, the company clocked higher cash from operations at USD 15.5 million compared to USD 0.3 million in the previous corresponding period, which got benefitted from higher revenue and higher price of V 2 O 5.
  

• Vertically integrating into electrical energy storage systems: The company is transitioning to produce vanadium-based electrical energy storage devices, which is a strategic move. The management believes that vertical integration of superior vanadium redox flow battery (VRFB) technology with existing vanadium operations will enhance the company’s market opportunity in vanadium products. Additionally, it would provide the competitive advantage to the company in the energy storage market. The management believes that vertical integration of superior vanadium redox flow battery (VRFB) technology with existing vanadium operations will enhance the company’s market opportunity in vanadium products.

• Improving operational efficiency: The Company maintained its pace and witnessed spirited performance across its gross margin, EBITDA margin, operating margin and net margin. We believe the momentum to continue in the foreseeable future, as the Company has big plans to support future growth. Higher average realized prices of the commodities also played a crucial role in achieving healthy revenues and margin.

Source: REFINITIV, Analysis by Kalkine Group

• Adding Capacity: The Company recently stated that the development of a new ilmenite concentration plant had been approved by its Board of Directors. The new plant, which will have a capacity of roughly 150,000 tonnes of ilmenite concentrate per year, is projected to be ready for use in early 2023. The ilmenite concentration plant's sophisticated engineering and construction is estimated to cost around USD 25.2 million, with the majority of the costs expended in 2022.

• Healthy guidance for FY 2022: The Company has provided solid production, sales and cost guidance for 2022 and management expects to maintain its global competitive position in the vanadium sector.  The Company remains confident that its nascent but growing sales and trading division will add significant long-term value to the Company. It expects V 2 O 5 Equivalent Production and Sales in arrange of 12,000 – 12,750 (tonnes) with a Cash Operating Cost of USD 3.20 – 3.40/lb sold.

Source: Company Filing 

Risks associated with investment 

Despite improved production results and steady vanadium demand in all regions, the Company experienced logistical challenges which resulted in lower sales for the quarter, compared to the previous sequential quarter. Any continuation on this challenge can bring fatal results. 

Financial overview of Q3 2021 (Expressed in 000’s of U.S. dollars)

Source: Company Fillings

• Robust growth in revenue: In Q3 2021, the Company sold 2,685 tonnes of V2O5 equivalent and clocked a revenue of USD 53.8 million, increased 96% compared to USD 27.5 million in the previous corresponding period. The revenue increased mainly due to higher demand in all of the Company’s key markets in Q3 2021.
• Elevated operating expenses: The company’s total operating expenditures increased to USD 40.4 million against USD 24.1 million in pcp, primarily due to higher operating cost and elevated professional, consulting and management fees.
• Higher net income before tax: The company’s net income before tax stood at USD 13.5 million compared to a loss of USD 3.3 million in pcp.
• Multifold jump in net income: The company’s net profit zoomed to USD 9.2 million compared to USD 2.5 million in pcp.
  

Top-10 Shareholders 

The top 10 shareholders have been highlighted in the table, which forms around 63.29% of the total shareholding. Arias Resource Capital Management LP and West Investment Holdings LLC hold the company's maximum interests at 43.32% and 8.61%, respectively. The company's institutional ownership stood at 59.08%, and ownership of the strategic entities stood at 52.25%. A higher institutional holding boost confidence in the retail investors.

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

Stock recommendation

The Company's sales and revenues per pound sold increased 96% and 69%, respectively, in the third quarter compared to the same quarter in 2020, thanks to strong vanadium prices. It also managed to improve its operating results in Q3 2021, primarily owing to greater recoveries and throughput, which also helped the group to post healthy cash from operations at USD 15.3 million. Moreover, despite encountering global logistical delays throughout the year and heavy rains in Brazil in Q4 2021, the Company adapted to the challenges presented and managed to exceed the lower range of its vanadium sales guidance in 2021.

Furthermore, the group shared healthy production and sales guidance for FY 2022, which is a significant plus. The company is also transitioning itself to produce vanadium-based electrical energy storage devices, which is a strategic move. We believe this would provide a unique competitive advantage in the rapidly growing long duration energy storage market.

Hence, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the current market price of CAD 10.29 at 10.17 A.M Toronto time on January 28, 2022.

One-Year Technical Price Chart (as on January 28, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Disclaimer

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