Andrew Wong...May 12th reportOps need to get back on track to unlock value
Our view: We continue to see value in Largo's various businesses — toptier vanadium asset that has performed well in the past; developing battery business that can meet growing demand for energy storage; and value-add pigments by-products. The company also has a solid financial position to work through the current transition. We think management is taking the right steps, but execution will be key to unlocking value.
Key points:
Mining operations need to get back on track, may take some time: Largo's Maracas Menchen vanadium mining operations had been considered a strength for the company through 2020 with gradually rising production and relatively low production costs resulting in strong cash flows. These cash flows were an important source of funds for Largo's longer-term ambitions to grow the Clean Energy and Pigments business. However, various operational challenges starting in 2021 have persisted and may take until early-2024 to fully resolve.
The latest challenge with excess rainfall late-2022 leading to lower production in 2023 was disappointing as operations looked set to improve with a solid Q1 performance. Management expects potential resolution by H2/2023, but the issue could impact early-2024 production. Meanwhile, Largo will also be focused on reducing costs, specifically targeting reagents that have risen in cost substantially (i.e., sodium carbon costs increased >200%) and improving processes to reduce downtime. Largo has previously proven Maracas Menchen can be run well and management is focused on the right steps to restore operations back to normal, but execution will be key. We have lowered 2023 and 2024 V2O5 production to 10.2Kt and 11.0Kt, from 11.5Kt and 12.0Kt, and increased 2023 and 2024 costs to $5.20/lb and $4.35/lb, from $5.08/lb and $4.04/lb.
LCE and pigments continue to progress: Encouragingly, Largo's other initiatives have progressed. LCE (Largo Clean Energy) is set to complete its first battery installation in Spain by Q3/23 and the business' Massachusetts manufacturing is set to ramp through to 2025. LCE discussions with Ansaldo Green Tech have progressed to final agreement negotiations, which could unlock a key partner to deploying batteries in the EMEA region. The ilmenite concentration plant is expected to complete construction in Q2/23 and fully ramp up by late-2023/early-2024.
Financial position remains solid to work through transition: Largo continues to maintain a strong financial position with essentially zero net debt while generating moderate operational cash flow that can mostly cover spending needs — we forecast operational cash flow of $40M and $66M in 2023 and 2024, compared to capex spending at $64M and $35M.
Reiterate Outperform, lower PT to $8: We lower our 2023E and 2024E EBITDA to $37M and $77M, from $49M and $93M