RBC Andrew Wong NewfNewf,
Many thanks,
My Observation:
Andrew Wong: Largo has met a confluence of challenges in 2023, both operationally and through a softening vanadium market. However, we continue to see potential value if the company can execute on operational improvements and successfully ramp-up value-add projects (ilmenite plant in the near-term, LCE longer-term).
I agree. Imho, the following projects / conditions are prerequisite for Largo to embark on the road to recovery in 2024:
Successful cost reduction in a meaningful way (within management control)
Successful delivery of the Ilmenite revenue stream (within management control)
Successful delivery of strategic alternatives for LCE (within management control)
A solid rebound of V prices to US$9.00/lb or higher (outside of management control);
AW: Operational challenges still weighing on results, but improvement could be on the way: Largo is planning to produce ~11Kt of V2O5 in 2024, in line with our expectations and up from our estimate of 9.6Kt in 2023 as operations are set to improve after several unexpected challenges (rain, accident). We are also encouraged by management's plan to focus on cost reduction through capturing operational efficiencies, headcount rationalization, and lower reagent consumption and costs. We forecast $4.52/lb costs for 2024, down from $5.17/lb in 2023.
Delivery is key. In light of the big increase of the mining operating costs from ~80% of revenue in Q1 & Q2 to a record high 97% in Q3-23, Management have failed miserably in their cost reduction promises to date. Will they be able to deliver in 2024?
AW: Ilmenite plant ramping up with top line contribution coming into focus: Largo continues to ramp up operations at the new Ilmenite plant with 700 tonnes produced in September and first commercial shipment by the end of November. Starting in Q2/24, the company expects the plant to be ramped up and producing 8-9kt/month which implies a quarterly run-rate revenue contribution of ~$6M (~10% of revenue) assuming a ~$250/t realized price.
My estimation also comes to ~ US$24M for 2024 based on an assumption of US$300/T. Again delivery is key.
AW: Vanadium market headwinds remain: Vanadium prices have continued to weaken reflecting soft demand in the Chinese and European steel markets. However, Largo continues to see strong demand for high-purity vanadium (aerospace & energy storage end-markets) and plans to further increase the proportion of high-purity production (~38% in Q3), which can help offset the broader market weakness through stronger realized pricing and diversified end-market revenue.
We need a solid rebound of V prices to US$9.00/lb or higher in 2024.
AW: Reiterate Outperform, lower PT to C$8 (from C$9): We reduce 2023E/2024E EBITDA to $7M/$53M, from $20M/$56M and lower our P/NAV multiple on Maracas Menchen to 0.75x, from 1.0x, due to recent operational challenges
The EBITDA for Q1+Q2+Q3-23 are:
Q1-23 actual EBITDA = US$9.00M
Q2-23 actual EBITDA = US$5.00M
Q3-23 actual EBITDA= (US$4.00M)
Total 9-mth = US$10M
Andrew Wong 2023E EBITDA = C$7.00M = US$5.25
thus
Andrew Wong Q4E EBITDA = (US$4.75M)
So Andrew Wong expects Q4-23 to be at least as bad as Q3-23.