Largo set to end Glencore vanadium deal

Largo Resources Ltd.  [LGO-TSX; LGORF-OTCQX] said it has formally given notice to Glencore International AG of its intention not to renew an offtake agreement dated May 14, 2008. The offtake agreement is scheduled to expire on April 30, 2020.

The announcement, which came after the close of trading on August 20, 2019, sparked heavy trading in Largo shares. On Wednesday, the shares eased 2.13% or $0.03 to $1.38 on volume of 6.24 million. They are currently trading in a 52-week range of $1.40 and $4.65.

News that Largo has served notice to Glencore comes after the company recently reported a net loss of $20.5 million or $0.04 a share in the second quarter of 2019. That compared to a year ago profit of $90.7 million or 17 cents.

Largo is focused on the production of vanadium flake, high purity vanadium flake, and high purity vanadium powder at the Maracas Menchen Mine in Bahia State, Brazil.

The company attributed the loss in the second quarter to a decrease in revenues and an increase in operating and financing costs.

Largo has said that under the terms of the company’s off-take agreement, vanadium prices were 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.

Following the $46.3 million reduction in revenues as a result of the re-measurement of trade receivables/payables under the Glencore contract, the company reported revenue of $29.5 million in the second quarter of 2019, compared to revenue of $103.3 million in the second quarter of 2018.

Vanadium is a ductile and malleable transition metal. It is widely used as an alloy to strengthen steel and titanium.

In 2017 and 2018, vanadium prices were driven higher by a change in steel reinforcement standards in China, which is drove up demand for vanadium.

The average price of vanadium pentoxide (V₂O₅) was approximately US$18.30 a pound in 2018, up from the 2017 average of US$6.52. However, prices have since tumbled from US$24.53 in the fourth quarter of 2018.

The company said revenues per pound sold in the second quarter was US$4.02 compared to US$14.62 in the year ago period. Largo is the world’s only pure-play vanadium producer and is currently the world’s lowest cost producer.

The company reported 2,515 tonnes (5.5 million pounds) of V₂O₅ production in the second quarter, an increase of 20% over the first quarter of 2019, and a 2% increase over the second quarter of 2018.

Cash operating costs, excluding royalties, came in at US$3.30 a pound in the second quarter.

“Our current off-take agreement was instrumental in securing the initial financing for the construction of the Maracas Menchen Mine and allowed the company to focus solely on producing among the highest quality vanadium in the world,” said Largo CEO Mark Smith.

“With the appointment of Paul Vollant, Director of Sales and Trading, the company will  continue developing its internal sales and trading business to further enhance Largo’s presence as the leading supplier for premium applications,” Smith said.