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

• Change in legal name: Recently, on November 8, 2021, the Company changed its legal name from Largo Resources Ltd. to Largo Inc.

• 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, 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.
  

• 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 Company believes that vertically integrating its financially strong vanadium operations with its superior vanadium redox flow battery ("VRFB") technology will provide a higher value market opportunity for the Company's vanadium products in the future, as well as it would provide a unique competitive advantage in the rapidly growing long duration energy storage market.

• 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.

• Revised guidance for FY 2021: The Company has committed a significant proportion of its monthly production in 2021 to sales of its VPURE+TM and VPURETM products, as well as FeV produced from VPURETM. The Company remains confident that its nascent but growing sales and trading division will add significant long-term value to the Company. The Company has revised its 2021 production and sales guidance, with the revised guidance presented below.

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

• Growing 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.
• Rising Operating Expenses: The company’s total operating expenditures increased to USD 40.4 million against USD 24.1 million in pcp.
• Increased Net Income before Tax: Net income before tax stood at USD 13.5 million compared to a loss of USD 3.3 million in pcp.
• Net Profit: 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 54.92% of the total shareholding. Arias Resource Capital Management LP and Grantham Mayo Van Otterloo & Co LLC hold the company's maximum interests at 43.32% and 5.31%, respectively. The company's institutional ownership stood at 59.21%, and ownership of the strategic entities stood at 43.65%. A higher institutional holding boost confidence in the retail investors.

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

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks. 

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. Despite worldwide logistical delays, the company managed to improve its sales and 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. 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.

LGO 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. Furthermore, the group revised its production guidance, which is a significant plus. Hence, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 12.17 on December 23, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Technical Price Chart (as on December 23, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

 

*Recommendation is valid on December 24, 2021, price as well.

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