Some thoughts on impact of off-take... Hi all,
Thanks to Frank for posting the details of the terms of Largo’s Maracas Vanadium off-take agreement with Glencore – I do seem to remember having heard something somewhere previously about the fixed 8% discount to spot off-take price, but couldn’t find the information anywhere.
I would like to draw attention to an interesting, and perhaps somewhat counter-intuitive effect that this discounted off-take price has on the sensitivity of Maracas operating margins (and project NPV) to changes in the price of FeV.
Assuming a fixed production cost of $13/kg Fev, and taking as a starting point the recent FeV spot price low of $23/kg:-
- ‘Gross’ operating margin (i.e. assuming no off-take discount) would be $10/kg ($23/kg - $13/kg)
- ‘Net’ operating margin (assuming 8% off-take discount) would be $8.16/kg ($21.16/kg - $13/kg)
If FeV spot price increases $1 to $24:-
- ‘Gross’ operating margin increases from $10/kg to $11/kg (10% increase)
- ‘Net’ operating margin increases from $8.16/kg to $9.08/kg (11.27% increase)
Basically for every $1 increase in price of FeV, net operating margin increases
.92 – this relationship is fixed, but the percentage change in ‘net’ operating margin will always be higher than the percentage change in ‘gross’ operating margin, and the lower the price of FeV, the more pronounced the delta differential is.
This means that LGO is MORE geared to a change in the price of FeV (especially at these price levels) than it would be without the off-take agreement with Glencore.
I am (of course!) not trying to argue that it is better to receive an 8% lower realised price on our product – this results in lower profitability for LGO at all FeV price levels, however I am conscious that a small increase in FeV price can have a very large (and amplified due to off-take) impact on Maracas project projected profitability and NPV.
To take my previous example of (an expected) 40% increase in the price of FeV to $32/kg from the recent oversold lows of $23/kg. The increase in Maracas’ NPV when I was assuming no off-take discount to realised price was 190% (from roughly $250m to $725m), but once I factored in the 8% lower realised off-take price, this increase to NPV became 290% (from roughly $150m to $590m).
Again – I’m not arguing that a $590m NPV is better than a $725m NPV, but assuming that the market is correctly valuing LGO now, I’d certainly rather see an increase of 290% from current valuation levels than one of 190%!!
I bought a few more at
.295 yesterday.
Good luck to all,
E17