Epstein InvestorIntel CEO Interview: Mark Brennan, Largo Resources
The following Exclusive interview of CEO and President Mark Brennan of Largo Resources was conducted by phone and email on October 8-9.
Please describe Largo Resources to readers less familiar with your story.
Largo Resources (TSXV: LGO) is a growing strategic mineral company with projects in Brazil and Canada. The immediate goal of the Company is to ramp-up production at its Maracás Menchen Mine in Brazil. This globally significant project is already operating at approximately 40% of phase 1 design capacity of 9,600 tonnes of vanadium per year. Our Maracás Menchen mine boasts the highest grade vanadium deposit yet discovered and is expected to be the lowest cost producer in the world. We have a take or pay off-take agreement with commodities giant Glencore for 100% of our production. We believe we are well positioned to become a leading producer of vanadium globally and expect to generate substantial cash flow upon completing phase 1.
Largo put out an important press release on October 7th, can you describe the key takeaways?
Yes. That press release offered an operational update for our Maracás Menchen mine in Bahia State, Brazil. Key takeaways are that we know that we have a fully functioning plant ready to be expanded to maximum design capacity of 9,600 metric tonnes per year. Production rates are stable at about 40% of Phase 1 capacity and we’ve operated as high as roughly 50%. We’ve run several of or our sub-systems at up to 100% of design capacity. We are selling in-spec product right now to Glencore and have received payments. We expect to reach 9,600 annual tonnes by August, 2015. Glencore will take 100% of what we produce take or pay. They pick it up right at the mine gate, eliminating transportation logistics risk.
Your plant is running at 40% of capacity, how are operating costs trending vs. expectations?
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Operating cost per tonne is of course coming down as we ramp up production, we are seeing a steady decline, we believe we will end up very close to the anticipated operating costs at nameplate capacity for Phase 1. We expect to be lowest cost producer in the world. We are the only publically-listed pure-play vanadium company. Russian conglomerate Evraz produces vanadium as does Glencore, but neither are pure-plays.
First revenues have been received, when will Largo become operating cash flow positive?
We believe we will reach operating cash flow positive as soon as December. Cash flow and $33 million of cash on the balance sheet should comfortably fund debt service payments of about $40 million in CY2015. We believe by the 12th month of operation, in August 2015, cash flow from Phase 1 production should be at an annual run-rate of C$60-C$70 million. We hope to reach this target before August. For example, we believe we will be at 80% of design capacity in the first quarter of 2015.
You mentioned in a May, 2014 interview with InvestorIntel that the company could generate $120 million of annual cash flow, is that still the expectation?
Yes. As we progress through Phase 2, completing that Phase in mid-2016, we should be generating run-rate operating cash flow of about $120 million. That assumes a vanadium price of $6/lb and by-product revenues from low grade iron ore at a price of $25/tonne. Importantly, we have two other by-products that we think we can sell to enhance our annual cash flow beyond $120 million.
How does your Brazilian operation rank on a global scale?
As mentioned, we are the only pure-play, listed vanadium company. Our Maracás Menchen mine will be a globally important mine, especially as the vast majority of the world’s current vanadium is mined in China, South Africa and Russia. In fact China is a net importer of about 10,000 tonnes of vanadium per year. We are ramping up a very significant and profitable mine, but our production will not flood the market. We think that there’s ample room to grow the global vanadium market from existing and new users seeking security of supply.
After reaching phase 1 of production, what will phase 2 look like?
Phase 2 contemplates an additional $35mm of cap-ex, but we are now putting in place infrastructure that will serve both Phases, so we think we can come in below that $35mm capex figure. Phase 2, which should be completed in mid-2016, takes us from 9,600 tonnes per year to 14,400 tonnes. That’s from about 7.5% of the growing global market for vanadium to 9.5%. If we come in at or below $35 million in cap-ex for Phase 2, that would represent a payback period of less than 12 months. Beyond 2016, we are looking at the feasibility of constructing Phase 3 and Phase 4 expansions.
Can you please tell us about your off-take agreement with Glencore?
Good question. Our off-take agreement with Glencore was executed in May, 2008. Glencore has supported this project for a long time. The take or pay off-take for 100% of our vanadium production greatly de-risks the company. As mentioned, Glencore picks up our concentrate at the mine gate. Over the past several years, Glencore has made key introductions with investors, helped attract bank funding and helped us with our technical systems, among other things. Glencore gave our project status in the eyes of the Brazilian agencies we worked with. We sell our vanadium to Glencore at what I would call a modest discount to the LME price. Given that’s our mine gate realized price, we are very happy with this arrangement.
Where is the Vanadium price currently and how does it compare to the past 5 years? Do you have a view looking forward?
The average price over say the past 4 years through 6/30/14 has been approximately $6.30/lb. Recently, like many commodities, the price has declined to around $5.25/lb. We are seeing some weakness due to lack of demand. 50% of global demand comes from China, they produce about 40% domestically, they important 10%, Importantly, China and India are moving up the steel quality scale. Currently they only use about 0.03% vanadium in their steel. That figure should double within a few years. China alone could be consuming 70% more vanadium than they are today. China is earthquake prone, they simply have to improve the strength of their steel and they have stated that they are doing so.
The company’s corporate presentation mentions a 6.5% CAGR for Vanadium over the past several years? What do you envision going forward?
Yes, according to a 2013 Roskill report the CAGR has been 6.5%, I think 5% growth going forward is a reasonable estimate. To be clear, 5% would still be very good for us. On one hand, growth in use of vanadium in markets such as vehicles, aviation & aerospace, bridges, tunnels and buildings and for national defense is rising robustly. On the other hand, we could be in a global slowdown for the next couple years. The IMF just lowered global growth estimates, China is slowing and the European Union could fall into recession.
Approximately 90%-95% of vanadium is used in the steel market. What about other uses that might be growing faster than the steel market?
Certainly the use of vanadium in new end uses is growing as vanadium has the highest strength to weight ratio of any alloy. Until recently I was skeptical about vanadium redox batteries for large-scale energy storage. But we’ve been asked about that, and clearly both wind and solar energy around the world is growing robustly, albeit from a small installed base. Aircraft usage presently accounts for approximately 7% of the vanadium market and is growing rapidly, demand is projected to double by 2016. Still, I think that China’s and India’s doubling of vanadium consumption in coming years will continue to mean that 90%+ of vanadium will be used in the steel industry for the foreseeable future.
Does Largo have any non-core assets that it could monetize?
We have other projects, including: a 100% interest in the Currais Novos Tungsten Tailings Project in Brazil; a 100% interest in the Campo Alegre de Lourdes Iron-Vanadium Project in Brazil; and a 100% interest in the Northern Dancer Tungsten-Molybdenum property in the Yukon Territory, Canada. We are not a seller of any of these other assets in a distressed market. Our Northern Dancer tungsten & molybdenum project in the Yukon has a PEA completed. It’s a terrific asset, but will require a lot of upfront capital. High cap-ex projects are currently out of favor. When tungsten prices turn, we think we will have opportunities to develop, partner with or sell these assets in a much better environment.
Pro forma for your recent capital raise, can you give readers a snapshot of Largo’s capital structure?
Sure. After our recent C$30 million raise, we have about 1.1 billion shares outstanding, C$33 million of cash. Fully-diluted shares is approximately 1.45 billion. Our warrants and options are struck at an average price near C$0.35/share, so the exercise of those would generate proceeds of C$122 million. We have C$185 million of debt, but the repayment schedule is not onerous. Starting in May of next year we begin paying back $155 million of the debt in 63 monthly installments. Therefore, on a fully-diluted basis our Enterprise Value is about C$ 380 million.
Are there any misconceptions about Largo Resources that you would like to address?
No. I would just highlight that we are largely de-risked at 40% of capacity and growing. Glencore is taking our in-spec product and paying us. We expect to be operating cash flow positive as soon as December, 2014. We expect to be will at 80% of design capacity by end of 1st qtr 2015. We will be the lowest cost producer in the world, up to 20% lower than the next lowest cost producer. We don’t expect to have to come back to the equity markets for capital again. Our main vanadium project is highly significant and largely de-risked. Therefore, we think our valuation is compelling.
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