Largo is no longer a cash machine When the share prices were in the C$20 range, I thought that there was a possibility that we could end 2021 around C$30 and that the momentum would continue into 2022. I could not be more wrong.
Commercial independence was supposed to give Largo the long awaited opportunity to make the highest profit margins by realizing the full potential of its top quality high purity V products.
Regarding commercial independence Mark Smith said: “We are producing some, if not, the highest purity V2O5 in the world and what is really special about that is that there is a high purity market out there . So when I put things together, low unit costs and not any extra money to produce high purity material but able to sell it at a premium I’m starting to hear shareholder value. The shareholders will absolutely see the benefits when you compare the one customer, one offtake to what this company deserves because of its high purity and the reputation for high purity that we have been able to obtain ....”
Sadly MS is no longer with Largo and the value of the company has continued to decrease during the transformative period due to the incompetence of the current rookie management team. Since commercial independence have the sales of high purity products been so embarrassing for management to stay silent on any sales data relevant to high purity premium? Why was there nothing on the sales of V2O3 in Q1-22?
| Glencore Offtake | Commercial Independence |
| Glencore had the obligation to buy all V production | Sales depend on the performance of the sales team |
| V Products: Standard V2O5 | V Products: VPure (standard), VPURE + (High Purity); FeV |
| Sold at a discount to the standard Euro V2O5 spot price | Sold at a discount to the standard EV2O5 spot price |
| No sales / marketing costs | Must maintain a global sales team and marketing costs |
Is Largo still a cash machine?
As a cash machine, Largo was a great company for me to invest in by riding the V cycle and buying low (when the V cycle is down) and selling high (when the V cycle is up). There was no risk that a cash machine could ever go under.
Imho, Largo is no longer a cash machine. In Q1-22, the company booked a Net Loss of ~US$2M while the revenue per pound of sold was US$8.67. In the world of volatility where V prices always follow an up / down cycle, the thought of a sales price below US$5/lb sends shivers down my spine.
If Paul Vollant continued to dump our top quality products at a discount to the standard V2O5 spot prices instead of focusing on getting HP premium then the following Roskill forecasts would be very worrisome.
Remember the fanfare about the Dec 2021 Technical Report which indicated “$2.8 Billion Pre-Tax / $2.0 Billion After-Tax NPV7% and $5.8 Billion Pre-Tax / $4.2 Billion After-Tax Life of Mine Cash Flow”?
The following were some key assumptions of that report:
The majority of Revenue would come from the sales of V products
Average long term V2O5 sale price = US$8.53/lb
Gross Profit Margin = 47.1% to 61.7% of Total Revenue (with 2022 = 60.8% and 2023 = 59%)
Net Profit Margin = 27.9% to 45.3% of Total Revenue (with 2022 = 45.3% and 2023 = 43.9%)
Note:
Gross Profit Margin “is the proportion of money left over from revenues after accounting for the cost of goods sold (COGS)”.
Net Profit Margin “illustrates how much of each dollar in revenue collected by a company translates into profit”
Let’s compare the data above with Q1-22’s:
Revenue per pound sold = US$8.67/lb
Gross Profit Margin = 42.6% of Revenue as compared to the 60.8% estimated for full year 2022 in the Technical Report
Net Profit Margin = Net Loss of US$2M as Total Costs exceeded Total Revenue
Conclusion:
As the company is no longer a cash machine LGO is not a safe bet anymore. The current management can not be trusted in creating shareholder value. Actually their poor performance is destroying the value of the company. The sp are unable to dig their way out of the bargain basement. They have missed the analyst earnings consensus for 5 consecutive Qs. While V prices remain strong since the last 6 months, we had a Net Loss Before Tax of US$0.3M out of a total Q revenue of US$50.3M in Q4-21 and a Net Loss After Tax of US$2M out of a total Q revenue of US$42.7M. The risk of Largo becoming debt-laden again is real.
How about the VRFB pillar? It is supposed to be a sensible bet for Largo. About a year ago we announced our first sales of “6.1 MWh VCHARGE± system” to EGPE with expected commissioning in Q4 2022. This is really a tiny system.
Stephen Prince - Q4-21 CC: “So Largo Clean Energy has been focused on delivering the Enel contract and you made reference to that. And that's occupied a significant amount of time for the team, and they continue to progress in that regard and that contract will be commissioned at the end of this year”.
Stephen Prince - Q1-22 CC: “Right now, we're ramping the electrolyte production around the delivery of the Enel project”
If the tiny 6.1 megawatt-hours project took up all of our focus / effort for more than a year, how realistic would that be for us to meet the company’s objective of 1,400 megawatt-hours by 2025? Another “over promise and under deliver” in the making?
My 2 cts
DYODD