One month after commercial production started at its high-grade Maracas vanadium mine in Brazil, Largo Resources (TSXV: LGO; US-OTC: LGORF) has turned over the first vanadium pentoxide (V2O5) to its off-take partner, Glencore (LSE: GLEN).
Mark Brennan, the company’s CEO, says production is stabilizing at between 8 and 12 tonnes of material per day — or 40% of nameplate capacity (9,600 tonnes per year in the first phase) — and confirms the mine can reach that target in less than a year.
“I think it’s realistic,” he says of the one-year target, “and I hope we can beat that.”
The second phase entails producing 14,600 tonnes per year starting in 2016, and Brennan estimates it will take six months to get to that run rate.
Once in full production, Brennan says Maracas will be the cheapest producer of V2O5 in the world, grabbing the championship belt from Glencore’s Rhovan mine in South Africa. Brennan forecasts Maracas will produce V2O5 for US$2.50 per lb., including sustaining capex and general and administrative expenses.
Part of the reason why Largo can do that, he explains, is because the vanadium at Maracas has much higher grades of and iron than any other vanadium mine in the world, and has low levels of contaminants such as silica.
The reserve at Maracas is 1.34%, or 1.35% V2O5 in the ground, while the industry average runs at less than 0.5%, Brennan says. The average concentrate grade at Maracas is 3.4%, which is far above the 2% average of other primary producers, he says.
“This is a very, very unique project, and nothing has been seen like this in the world,” he says. “I’m not a geologist, but my geologists tell me that the best way to describe it is that there were two events: the first was the geological event that brought the deposit into being, and the second was mother nature cooking the deposit in a way that it essentially beneficiated it through nature.”
The vanadium is contained within a massive, titaniferous magnetite that has much higher grades in both V2O5 and iron content than any other vanadium project in the world. Along with the low level of contaminants, that makes extracting and processing the vanadium much easier.
“We have the best breed of any other project and we’re in a market that is growing by at least 5% or 6% a year, so you’ve got a robust commodity and we will start generating substantial cash flow going forward,” Brennan adds.
Vanadium is used as an alloy to strengthen steel and reduce its weight, and with trends in the steel industry, demand is growing for stronger and lighter products for advanced applications, he says.
Largo has signed a six-year off-take agreement with Glencore, which picks up the V2O5 directly from the Maracas mine gate. “We don’t have to deal with market logistics or travel costs, so it works well,” he says. “They’ve been very good partners, and we continue to have a good relationship.”
The six-year off-take coincides with the six-year debt repayment, he explains. “Glencore, I’m sure, would have loved to have life-of-mine, but that wasn’t something the company was prepared to look at.”
He adds that “it’s an evergreen contract, so the intention is that both sides will come back to the table. But that is something we have to evaluate as we get into years four, five and six.”
The company applied for its first permits in 2010, and initial construction of the open-pit mine began in June 2012. Despite a five-month delay in the shipment of critical rollers from China, initial production was just three months behind schedule, with capex coming in at US$242 million — up slightly from the US$235-million forecast.
“We were pretty happy with that,” Brennan says.
At the end of June, Largo held $18 million in cash and $200 million of debt on its books.
Joseph Gallucci and Sean Bracken of Dundee Capital Markets estimate that Largo will have a free-cash flow yield of 18.3% during the first decade of production and 11.3% over the mine’s life, “making Largo potentially one of the highest cash-flow yield stocks in our coverage universe.”
The analysts have a 50¢-per-share target price.
Over the last year the stock has traded within a window of 18.5¢ to 36¢. At press time it traded at 29¢.
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