Largo Hitting the Vanadium High Notes
The ramp-up of production by Largo Resources (TSXV: LGO) at its Maracas Menchen mine located in Bahia state in Brazil is back on pace after the distractions of financing/debt-restructuring issues, and a leadership change, in the first half of this year. Hitting new records in recent weeks is comforting for those investors who have persevered with the story.
Beyond the performance aspects, Maracas, as the most available primary Vanadium mine, looks like the type of tempting morsel that would appeal to a predator, such as Glencore. While Glencore will probably not move until forced to (an alternative bidder appearing) when it does the move will be worth it as Maracas is rather a unique asset and key to Glencore’s strong position in the Vanadium space.
Largo claims the Maracas deposit has the highest-grade vanadium resource in the world and that is positioned to be the lowest cost producer in the vanadium market. Geologically speaking the entire strike length of the Maracas deposit is rich in vanadium, hosting many deposits of Vanadium-rich titaniferous magnetite mineralization particularly at Gulcari A and other smaller deposits such as Gulcari B, Nova Amparo and Sao Jose. The property totals 28,587 hectares and is located roughly 250 km southwest of Salvador (capital of Bahia) and 813 km northeast of Brasilia (capital of Brazil).
Ramping to New Heights
Largo Resources started production of Vanadium back in early August 2014 at the Maracas mine. The company is employing an open-pit mining process with ore from the mine being crushed, milled, and sent through a magnetic separator to create a concentrate. The resulting concentrate is exceptionally high at 3.4% V2O5. This concentrate is then processed into Vanadium Pentoxide.
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In this week’s production update the company advised that it produced at or above 24 tonnes (around 94% of design capacity) of vanadium pentoxide, for a total of 4 days, and over 20 tonnes (at or above 80%) for a total of 10 days during July.
On one exceptional day Largo achieved a new production record of 26 tonnes in a single day, which represents approximately 100% of the plant’s design capacity. The chart (from May) shows the company’s projections of capacity utilization rates for the first 12 months of production. The blue line (if continued) would show a steep upturn of late now that the 100% production rate has been hit.
In not mistaken the goal was to reach the Phase 1 nameplate capacity of 9,600 tonnes per annum by or before the twelfth month of operations. Therefore to hit 100% in July implies that the company is one month ahead of the target.
Eventual average annual production at Maracas is estimated at 11,400 tonnes of V2O5 equivalent over a lengthy 29-year mine life. We would not expect nameplate production increases while Vanadium prices remain so torpid with the focus instead being on reducing cash costs. The company believes that there is good potential for the expansion of resources and production rates at the complex.
Largo’s final push towards full production has been led by Allan Venter, a South African veteran of Xtrata’s operations there. He holds the title at Largo of Production Manager. He has more than ten year’s senior management experience in the production of vanadium pentoxide and Ferrovanadium. His experience was gained in Xtrata’s Vantech operation and at the Evraz Vametco plant in South Africa.
In an interchange we had with Mark Smith the CEO, he commented “This is an extremely exciting moment for the Maracas Mine as it demonstrates the plants ability to produce at its design capacity over a single day. The next step is to begin stringing more and more of days like these together. As we also mentioned, we have produced at or above 80% capacity for 10 days already this month. We still have work to do before we start achieving full capacity days consistently, but this is a great start, and certainly indicates to me that we are getting there.”
Pricing and Trends
Pricing seems to be holding pretty stable, which frankly is good considering the woes of the iron ore sector and the jitters in the steel arena in recent months.
Metals sector reflation, supply disruptions and above-trend demand growth pushed ferro-vanadium prices up from an annual average of US$7.73 per kg in 2002 to US$61.94 in 2008. The financial crisis and recession of 2008 and 2009 severely weakened global steel production and demand; in response to this vanadium prices fell to a monthly low of US$18.96 in May 2009. After that point, as global steel demand and output recovered, ferrovanadium prices rebounded to over $30 in 2013, easing back again to around $25 per kg for most of the last year and almost touching $20 this year.
It’s important to remember that much of Largo’s opex is Brazilian Real denominated. The hard part is that the mine was built in the golden days when the Brazilian miracle was in full swing and the Real strong which resulted in the cost overruns with the construction. However, in compensation for this the opex has been getting a hefty tailwind from the ever-diminishing Real over the last two years. The chart below shows how helpful this has been for Largo in restraining costs and remaining competitive while Vanadium has been wallowing.
With the financing done and production hitting new highs (and targets) the only part of the puzzle stubbornly refusing to comply is the Vanadium price. That is the one thing outside the company’s control. This piece will probably not fall into place until there is a more concerted recovery in global steel volumes, most particularly in China.
Nevertheless Largo has achieved the near impossible in moving forward to production a project in a specialty metal during a protracted and brutal financing environment. Except for a couple of names in the Tungsten space (Almonty and Wolf Minerals) and one in the Lithium space (Orocobre with its Olaroz project), it’s hard to think of major specialty metals projects that have got across the line in recent years.
It’s worth repeating the point we noted last year that as productions and revenues ramp up, the goal will now be to bulk up market cap to hopefully outrun predators or at least make them pay dearly for the pleasure. Some moves that might help this process might be a mainstream US-listing and/or a Brazilian listing.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>