By Peter Kennedy
Largo Resources Ltd. [LGO-TSX; LGORF-OTCQX] shares rallied Wednesday March 27 after the company said record production at its Brazilian vanadium mine enabled it to generate a profit of $316 million or 61 cents a share in 2018.
Largo CEO Mark Smith said the company is now 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 in Bahia State, potentially making Largo the world’s second largest producer of vanadium, with annual output of up to 25,000 tonnes.
Largo shares advanced on the news, rising 6.9% or 15 cents to $2.33 on active volume of 2.9 million. The 52-week range is $1.24 and $4.65.
Largo is the world’s only pure-play vanadium producer and is currently the world’s lowest cost producer, Smith said recently. The company is focused on the production of vanadium flake, high purity vanadium flake, and high purity vanadium powder at the Maracas Menchen Mine.
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 Chain, 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.
Vanadium’s importance to the energy sector is also growing rapidly with more than 10% of vanadium production used in energy storage where its substantial cost and performance benefits make it an alternative choice to lithium ion in several areas.
With roughly 350 employees on the payroll (as well as 350 on contract), the Maracas Menchen Mine produced a record 9,830 tonnes of vanadium pentoxide in 2018, exceeding the company’s midpoint guidance of 9,650 tonnes by 2%. That marks a 6% increase in production compared to 2017.
Largo recently guided investors to anticipate production of 10,000-11,000 tonnes this year at an average cash cost of US$3.45 to US$3.65 a pound.
However, the company has said it plans to expand the capacity by 25%, taking its production levels to about 12,500 tonnes per year. The expansion project aims to achieve a monthly production rate of 1,000 tonnes of V2O5 and is progressing as planned with a target completion date for construction of the second quarter of this year. The company said it expects the ramp-up to be completed during the third quarter of 2019. It expects to reach the increased nameplate production rate of 1,000 tonnes of V2O5 per month from the beginning of the fourth quarter of 2019 and onwards.
Smith said the company hopes to achieve the production increase at a cost of about US$15 million, and may decide to proceed with a further expansion to 25,000 tonnes.
“We entered 2019 in a very solid financial position with a cash balance of $206.2 million and the company currently has US$29.1 million of outstanding debt with plans to eliminate this remaining debt balance in early June 2019,” said Smith. “We are hitting on all cylinders when it comes to production,” he said.
Meanwhile, the company said its 25,000-metre exploration program planned for 2019 is progressing, with an update expected to be announced in the second half of 2019. Back in December 2018, the company said it had significantly extended vanadium mineralization at the Nov Amparo Norte deposit (NAN) by 130% to 1.84 km of strike length.
In January 2019, the company launched this year’s drilling program with four drill rigs. The aim is to follow up on recent drilling results at NAN. So far, the company said it has completed an additional 47 diamond drill holes (5,400 metres) of drilling, primarily focused on increasing the confidence in the resource category of the deposit.
Drilling has also begun on the Nova Amparo target. The aim is to increase the size and confidence level of the current inferred resource.
NAN lies approximately 6.5 km north of Largo’s current mining operation at the Campbell Pit. The Novo Amparo deposit is located 2.8 km south of and along strike from NAN.
Including NAN, the company said it has identified and drilled seven vanadium-rich magnetite zones in the Jacare Sill north of the Campbell pit. The satellite deposits will see the majority of exploration work in 2019, the company said.