Largo Resources on how to outrun an 800lb gorilla
With the ramp-up of production by Largo Resources (TSXV: LGO) at its Maracas Menchen mine located in Bahia state in Brazil the company, as the most available primary Vanadium mine, looks like the type of tempting morsel that would appeal to a predator, such as Glencore. In this note we shall look at the state of play now the mine is in production and what Glencore might be tempted to do.
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
While others in the Vanadium space have talked about what they would do, Largo Resources crept up on them (and the market) and started production of Vanadium back in early August 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.
In a recent production update the company advised that output was stable between 8-12 tonnes of vanadium pentoxide per day (at approximately 40% of total capacity). However production had at one point achieved 14 tonnes per day (approximately 50% of total capacity).
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The company reported also that several shipments of material have been made and that its first revenues from sales of material had been received.
Production volumes are expected to continue to steadily increase over the coming months with the goal of reaching the Phase 1 nameplate capacity of 9,600 tonnes per annum by or before the twelfth month of operations. The company’s expected production is:
- Year 1 Total: 5,511 Tonnes V2O5
- Year 2 Total: 9,689 Tonnes V2O5
Although total plant is currently stable at 40% of capacity, it is important to note that it has now successfully run many of the subsystems at their full capacity levels to seems pretty well debugged.
Eventual average annual production at Maracas is estimated at 11,400 tonnes of V2O5 equivalent over a lengthy 29 year mine life. The company believes that there is good potential for the expansion of resources and production rates at the complex.
In coming months the focus will be on de-bottlenecking the areas where capacity restraints have been met, and continuing to optimize recoveries and generally improving efficiencies throughout the plant.
Interestingly this final push towards full production is being led by a South African veteran of Xtrata’s operations there. The company appointed Allan Venter to the position of Production Manager. He has in excess of 10 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.
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. Since then, as global steel demand and output recovered, ferrovanadium prices have rebounded to over $30 in 2013, easing back again to around $25 per kg for most of the last year.
Glencore – Count Your Fingers After Shaking Hands
Glencore is the 800-lb gorilla in most rooms it is in and that is no different for the Vanadium space where it is the largest trader of the metal. It has a six-year Take-or-pay agreement for 100% of all material produced at the Maracas mine. This gives much comfort and certainly helps secure the financing to get this show on the road.
But before we go all misty-eyed over the Wizard of Zug the names of two companies come to mind (and we could name more). These are Donner Metals and London Mining. Without digressing too much onto those topics, it suffices to say that they have been lucky to come alive out of the room with the 800 lb gorilla in it.
Glencore, post-Xtrata wants to own mines in the metals it plays in because then it can subliminally focus the minds of competitors/sellers on the potential for it to service its own needs. It has done this most obviously in zinc.. In Vanadium it has this offtake deal with Largo but that only runs for 6 years of the 29 mine life. As we have noted elsewhere it signed a deal for Vanadium offtake from Reed Resources’ Barrambie project and in one of the more startling rumours of recent times was mooted as a buyer of Syrah Resources, the graphite/vanadium play in Australia. This came to naught but made a brief flurry in the stock price. Many (including ourselves) could not understand the interest in graphite, which we have not heard of Glencore being interested in. This makes us suspect that if there was interest it would be in the Vanadium component of what Syrah has at hand.
The mooted price for Syrah was as much as AU$2bn so we are left wondering what Glencore would fool around with Syrah when a story like Largo, that it knows and maybe covets is so much easier to pluck.
Some would argue that Glencore would not want to take out Largo too soon to avoid souring relations. Let’s just say that souring relations is the least of Glencore’s concerns… ever..
Things are so down and out on the TSX these days that a wave of consolidations (which means industry-inspired takeovers elsewhere, but share rollbacks in Canada)
Largo has achieved the near impossible in moving forward to production a project in a specialty metal during a protracted and brutal financing environment. Fortunately its project has come on line at a time when V prices are stable and Western demand for industrial minerals has the best outlook since the slump began in 2008.
The stock rollback gives the horrors to the retail investor crowd in Canada but it is a basic step for the company to “institutionalize” itself, particularly in the US where sub-$2 stocks are treated as pariahs in many circles. Usually these things are done at a point where there is a catalyst and the surge in production (and the onset of real revenues and bottom line) provides such a trigger to mitigate any temporary price erosion of the consolidated price.
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…
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>