RE:RE:RE:Alexander Jackson RBCHere's what the new guy is saying...
Our view: We are assuming coverage of Largo Inc. with an Outperform rating and $16 price target. We believe Largo provides investors exposure to low-cost vanadium production and strong cash generation to fund growth projects in the near and medium term. In addition to near and medium term growth from its mining business, the company is developing a grid scale battery segment to support the global energy transition via Largo Clean Energy (“LCE”). We expect Largo shares to re-rate higher on strong earnings and FCF growth with EBITDA doubling over the next four years.
Key points: • Low cost producer provides durability through the cycle: Largo’s flagship operation, the Maracas Menchen mine located in Brazil, is among the lowest cost primary vanadium producers globally (per Wood Mackenzie) providing strong leverage to the vanadium market which is poised to benefit from increased demand in steel and from future battery demand and grid level storage solutions. Largo’s position on the cost curve, well below the 90th percentile where we see support for commodities, should drive outsized margins relative to other vanadium producers and miners and help fund the company’s growth projects. •
Near-term growth from pigment projects: We forecast growing earnings and OCF with the start of contribution from the sale of ilmenite concentrate in 2023 and TiO2 later in 2025. In 2021 Largo announced construction of a 150Ktpy ilmenite concentrate plant which we expect to generate an incremental ~U$18M in EBITDA once ramped up (~28% of 2022E EBITDA). Largo has completed technical studies to grow ilmenite and TiO2 production to 425Ktpy and 120Ktpy (from initial production of 150Ktpy and 30Ktpy), which the company can fund internally on our estimates. We could also see Largo look to utilize external financing to accelerate development of these projects and bring forward growth. •
Longer-term growth from battery business: Largo offers investors exposure to an early stage vertically integrated battery producer as the company develops its vanadium redox flow batteries ("VRFB"). LCE is working to develop its battery technology as well as financing solutions for customers to improve the competitiveness of VRFBs and we view this as a longer term opportunity for the company, in a very attractive growth area given the global push for decarbonization and renewable energy solutions. Largo expects to deliver its first battery to a customer early in 2023. We expect meaningful contribution from this business starting in 2029 (~8% of EBITDA growing to ~12%) but are conservative in our estimates given the uncertainty around the economics and scale. • Attractive valuation:
We lowered our target to $16 from $20 as we incorporate an EBITDA multiple to our valuation and use a 50/50 weighting to our sum of the parts NAVPS and 5.0x next year's EBITDA vs. prior valuation based only on NAVPS. Largo shares are currently trading at 0.33x NAVPS and 4.0x 2023E EBITDA, below industrial metals mining peers at 0.72x P/NAV and 4.2x EBITDA on our estimate