A $10 million private placement that closed on Nov. 1 gives strategic metals junior Largo Resources (LGO-V) the juice it needs to purchase the remaining 10% of the Maracas vanadium project in Brazil that it doesn’t already own.
Construction of the fully licensed project, 813 km northeast of the Brazilian capital of Brasilia and 250 km southwest of Salvador, the capital of Bahia State, started in June and commissioning is targeted for the fourth quarter of next year.
“This will be the highest grading mine within a pure play company,” Jonathan Lee of Byron Capital Markets in New York commented in a research note to clients. “Additionally, with such a high in-situ and concentrate grade (vanadium grade before the energy intensive roasting process), we believe the company will be a low-cost producer of vanadium pentoxide.”
Lee notes that currently investors cannot get pure play exposure to vanadium, as the Chinese companies mine low grade ore to produce titanium, vanadium and iron ore products, while other producers like Evraz Highveld and Xstrata only have vanadium operations that are a part of conglomerates.
Byron Capital Markets, part of a syndicate of agents in Largo’s recent $10 million raise at $0.22 per share, has a target price on the stock of $0.55 per share. It was lowered from a previous target price of $0.60 per share because production at Largo’s tungsten mine in northern Brazil was stopped last week due to a drought.
The drought has affected water supply available at the operation, Lee says, adding that the shutdown will delay expected cash flows into the first quarter of next year. “This equates to approximately $8 million a year in cash flow to be delayed.”
The good news is that in September the company installed and started commissioning a new screening system at the Currais Novos tungsten mine that Lee believes should increase its recovery yields from 11% to 30%, which will generate cash flow “and make the mine a going concern.”
Lee contends that Largo could be a strategic takeout candidate within the next three to five years and points to Talison Lithium (TLH-T) as an example of a pure-play company that was taken out recently at a premium for $724 million in cash.
“While it is a different industry, we can view the companies in similar positions," Lee explains. "First, the companies operate, or will soon operate, one of the highest grade open-pit mines known; 2) there are a limited number of mine operators in the world; 3) positioned to be the lowest cost producers in the industry; and 4) ample resource to expand production if global demand warrants,” Lee outlines.
Largo’s high-grade, low-cost Maracas project will produce an average of 9,200 tonnes of vanadium pentoxide a year during its first five years of operation and the company has already signed an off-take agreement with Glencore International for 100% of its material over the first six years of production.
The deposit contains measured and indicated resources of 24.6 million tonnes grading 1.11% vanadium pentoxide (V205) and an inferred resource of 30.4 million tonnes grading 0.83% V205.
At presstime, Largo Resources was trading at 21.5¢ a share within a 52-week range of 20¢ and 36.5¢ a share. The junior has about 870 million shares, fully diluted.
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