Numbers just keep climbing for vanadium producer…
The numbers just keep climbing for vanadium producer Largo Resources Ltd. (TSX: LGO | OTCQB: LGORF) (“Largo”). As if an exploding vanadium market gracing the company with soaring prices over the last couple of years wasn’t enough, a recent study has the potential to significantly expand the Maracas Menchen mine in Brazil, Largo’s flagship resource. The project has been in production since 2014, and in my opinion, is one of the greatest feats of junior mining timing in recent history.
The main pit and several new satellite pits were investigated to reveal any potential to expand mineral reserves. The resulting NI 43-101 compliant technical report outlined an after-tax net present value (NPV), using an 8% discount rate, of $542-million for the reserves at the Campbell pit, representing an increase of about 195% over the NPV reported for reserves in Largo’s updated mine plan and mineral reserve report filed on July 8, 2016. In addition to practically doubling the NPV of the main pit, the after-tax NPV for the mineral resources in the satellite deposits came to an additional $140-million.
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Should the company be successful to convert the inferred resources found at the satellite deposits to the mineral reserves classification, it could mean a further 12 years of production at the operation. Largo already had a fairly healthy 29-year mine-life stamped on Maracas, and so a dozen more years would be a substantive change to future cash flow. Already, the company has made a habit of beating production records, regularly exceeding nameplate throughput and output as well as overall product quality (100% of which goes to Glencore).
Last month, the company reported that Maracás Menchen had produced 2,513 tonnes of vanadium pentoxide (V2O5) in the third quarter ended 30 September; 202 tonnes more than the previous record set in the second quarter of 2016, and 4.7% above the plant’s nameplate capacity. The company’s record output has married nicely with a 249% jump in V2O5 prices, which averaged $8.74/lb over the period, compared to an average price of $3.51/lb during the same period of 2016. Recent V2O5 prices have touched the $11/lb level, as a Chinese crackdown on illegal miners and increasing environmental enforcement drive prices yet higher.
The report issued on October 26th assumed a long-term V2O5 price of $6.34/lb for the life of mine, except for the years 2018 and 2019, where the V2O5 price of $9/lb was used to better represent the current state of the market. According to the majority of sources, China will continue to create positive pressure for mineral prices into the near future as it continues to close mining operations in favour of cleaner air. Additionally, vanadium is fetching a higher price domestically in the eastern manufacturing nation, and so barely any product is departing the shores for elsewhere, leaving non-Chinese vanadium producers in an enviable position.
For me, Largo has been a great portfolio choice for quite some time, and the recent developments in both the market and at home only strengthen the argument and widen the buy window. I see no real reason why these additional reserves shouldn’t get the seal of approval, and so until then, Largo’s stock can be considered undervalued. Whether it be lightening alloys or powering batteries, vanadium has a bright future indeed, and Largo are in it for the long haul.