Largo faces vanadium price impact

Largo Resources Ltd.  [LTO-TSX; LGORF-OTCQX] said results for the first quarter of 2019 will be significantly impacted by the decline in the price of vanadium pentoxide [V₂O₅] since the start of this year. The company said results will also be affected by the measurement of trade receivables under an off-take agreement with Glencore Ag, a Swiss metals trading giant.

Under the terms of the company’s off-take agreement, vanadium prices are provisionally set at the time revenue is being recognized, based on market V₂O₅ prices. Revenue, and a trade receivable, is recognized at the time of shipment.

On Tuesday Largo shares jumped 14.19% or 22 cents to $1.77 on volume of 3.2 million. The shares are trading in a range of $1.44 and $4.65.

Vanadium is a ductile and malleable transition metal that is widely used to strengthen steel and titanium.  More than 85% of the world’s vanadium is used in steel manufacturing applications.  About half of that amount is used to produce steel reinforcement bars (rebar).

In the last two years, prices have been driven higher by a change in steel reinforcement standards in China, which is driving up demand for vanadium.

The average price of V₂O₅ (vanadium oxide) was approximately US$18.30 a pound in 2018, up from the 2017 average of US$6.52. However, prices have since slipped to around US$16.28 in January 2019 from US$24.53 in the fourth quarter of 2018.

Largo is the world’s only pure-play vanadium producer and is currently the world’s lowest cost producer. The company is focused on the production of vanadium flake, high purity vanadium flake, and high purity vanadium powder at the Maracas Menchen Mine in in Bahia State, Brazil.

In the first quarter of 2019, the Maracas Menchen Mine produced 2,099 tonnes of vanadium pentoxide, a decrease of 5% in comparison to the equivalent quarter in 2018.

Production of 816 tonnes in January and 735 tonnes in February were both impacted by maintenance in the fusion section of the plant and unanticipated power outages, which most occurred in February, the company said.

Production in March of 548 tonnes of V₂O₅ was, as anticipated, significantly impacted by the scheduled kiln refractory replacement, which resulted in 11 days of production down-time.

A complete replacement of the kiln refractory occurs every two years as a result of the high temperatures that are utilized in the kiln. However, the kiln refractory replacement has been completed, the company said.

Largo CEO Mark Smith recently said the company is looking at ways to return capital to its shareholders in the form of share buybacks and or dividends. He said the excess cash and cash flows may also be used to fund a further expansion of its Maracas Menchen Mine, potentially making Largo the world’s second largest producer of vanadium, with annual output of up to 25,000 tonnes.