Largo Resources starts production at lowest risk vanadium mine in the world
Largo Resources (‘Largo’, TSXV: LGO) Largo Resources completed the first production of vanadium pentoxide at the Maracas Vanadium Project – now renamed ‘The Vanadio de Maracas Menchen Mine’ (Maracas for short) in honor of Kurt Menchen, Largo’s President of Brazilian Operations. Largo said it has tested the product at its laboratory, designed to meet all the specifications required in the off-take agreement signed with Glencore. Largo expects that production volumes will increase progressively over the coming months in order to achieve a nominal capacity of 9,600 tons/month in the first phase of the project (or until the 12th month after the start of operations). Largo’s President and CEO Mark Brennan said that the first production batch at Maracas is the Company’s most important milestone to date, reiterating that Largo has the potential to become world’s vanadium market leader – at least for the short term.
The start of production at Maracas marks a period of substantial growth for the company. It is remarkable, given the current financing climate in the mining sector, which Largo has managed to finance, build and operate successfully a project such as Largo, which certainly explains why the Project was renamed after Kurt Menchen. Largo is now ready to start generating cash flow and establish its position as a leading vanadium producer. In July, Largo reported that the CAPEX for the construction of the Maracas Vanadium mine was USD$ 241 million – just 2.5% higher than first assessed in 2013 (USD$ 235 million) in the PEA; this is no small achievement, considering all the unexpected delays and issues that can arise during the course of a year – and there was in fact a problem with the kiln assembly. As for the financing model that facilitated the completion of the project, Maracas Vanadium used a complex and unusual financing structure for Brazil: pure project finance, such that the Company cannot appeal to shareholders in case of failure or default.
The general essence of project finance is such that debt repayment comes from the project’s future cash flow such as to confine risks within the special purpose company created facilitate operations. Largo used this model, whereas, in Brazilian practice, however, a hybrid model is used whereby shareholders provide bank guarantees to reduce costs. Less than 10% of total project finance operations in Brazil adopt Largo’s model. The advantage is that it does not affect the Company’s credit limit, which reduces risk. Indeed, given that financial institutions have a direct interest in the project’s success, the kind of technical, feasibility and prospects used to persuade lenders over the project have to be as risk free as possible.
Largo has managed to secure various contributions including Brazil’s National Bank for Economic and Social Development (BNDES), Itau BBA, Banco Votorantim and Bradesco BBI. Doubtless, the offtake agreement to sell 100% of production to Glencore Xstrata for six years and the offer of assets – such as machinery, stocks and mining rights – offered to lenders played their part in easing the financing. Moreover, by opting for a pure project finance model, Largo was obligated to address a number of social and environmental requirements, such as efficient energy use, proper disposal of waste from the mining process, and the reforesting of the typical vegetation of the savanna. These factors are commonly described as ‘sustainability’; by taking them on from the start, Largo has further de-risked the Maracas project for investors and shareholders.
This means that not only will the Maracas Vanadium will be the lowest cost and highest vanadium content mine in the world, it may also be the one with the lowest risk. The Maracas deposit is considered to be the best in the world, which gives Largo a strategic advantage among producers worldwide. Largo could soon account for as much as eight percent of the world’s total production of vanadium pentoxide. Largo’s deposit is considered to be the highest grade vanadium deposit in the world because if its low silica content, which makes it easier and cheaper to process.
Vanadium is becoming essential for the production of steel as aircraft and automotive manufacturers address demand for lighter and tougher materials, which contribute to reducing fuel consumption and reduce emissions. Steel companies are now offering high strength low alloy steels which the fastest growing segment of the steel market and vanadium is an essential metal for its production. China is another important driver of vanadium demand because of its use in high strength steel for construction. Demand for such steel in China has been booming because of new anti-earthquake compliance standards. About 90% of vanadium is used for steel making and its use is spreading, particularly in China, India, Brazil and other emerging countries, especially in Africa. Vanadium reinforces steel and it is an important ingredient in modern steel alloys but vanadium output has not increased at the same pace as steel, which suggests there is a potential vanadium shortfall, which Largo is ready to address.