- New PEA Shows Significantly Better Economics: Largo Resources Ltd. (Largo) released a PEA for its Maracas Vanadium Project located in Brazil that is currently in construction for Q4/13 production and has a take-or-pay off-take agreement with Glencore International for all of its material produced for the first six years. The PEA shows good economics with an after tax NPV of US$554 million and an IRR of 26.3%. With a market capitalization of $169 million and an enterprise value of $335 million (assuming the full draw down of the Brazilian Development Bank-backed debt). On that basis, Largo is trading at a P/NAV of 0.31x and EV/NAV of 0.60x, much less than other minor metal mining companies that are fully financed and in construction/ commissioning. On that basis, we believe there is upside potential for Largo relative to the market and on an intrinsic basis. We maintain our STRONG BUY rating and $0.55 target price based on a 1.0x NAV and an 8% discount rate.
- Vanadium Prices Rising: Since December, vanadium prices have rebounded off of historic lows in 2012, up 20%. This may have been one of the reasons there was downward pressure on Largo in 2012. Vanadium prices have returned to those assumed in this PEA and back to historical norms. With approximately 30% of supply produced in South Africa, we see this as an opportunity for Largo, as it enters the market this year, especially if there are further disruptions in South Africa. We believe that tighter supply might be due to the four-week strike at Evraz's South African operation in Q3/12, as well as higher demand for vanadium pentoxide from the aviation industry.
- Larger Mine Life and Increased Production Possible by Incorporating Resources: In Largo's previous DFS released in September 2012, the mine life was limited because it included reserves but not resources. However, in this PEA, resources were included to increase mine life to 29 years from 15 years. Additionally, the previous DFS assumed production at 9,200 tonnes vanadium pentoxide (5,100 tonnes vanadium contained) while the new expanded production is expected to average production of 6,367 tonnes vanadium pentoxide and 4,899 tonnes vanadium contained in ferrovanadium (8,460 vanadium contained). This represents the ability to increase production by 65% while doubling the mine life. We believe these are the main drivers to the increase in NPV from the September 2012 DFS. Operating costs, assumed sale prices and capital costs have all remained fairly constant.
Jonathan Lee, MBA
Battery Materials and Technologies Analyst
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