RE:RBCHeres the main part of the report painful to post on this site.
Our view: We continue to see significant potential value in Largo if the company can execute on operational improvements and successfully rampup long-term value-add projects (pigments, LCE). Additionally, while we see continued near-term challenges to vanadium prices, we expect long-term prices to recover as macro conditions improve.
Key points:
Vanadium prices subdued until macro improves, but high-purity a positive: Vanadium prices remained under pressure through early-2024, primarily due to a challenging macro environment and weak steel-related demand. European V2O5 prices at ~$5.50/lb in Q1/24 are down from ~$8/lb average through 2023, and we expect prices to remain in the $5.50-6/lb range through 2024. We have lowered our long-term V2O5 price assumption to $8/lb, from $9.50/lb, which is more in-line with the historical average and taking into account tempered views on the impact from vanadium redox flow battery adoption. However, Largo indicated that high-purity vanadium demand remains strong from the aerospace sector and the company has made an effort to producer more high-purity product. In Q4/23, high-purity products accounted for ~60% of production, and have average ~1Kt per quarter since mid-2022, up significantly from <0.5Kt prior. We have raised our forecasted percentage of sales to high-purity to 40%, from 25%, which is positive to Largo's overall average realized price.
Operations set to stabilize in 2024: We see 2024 as a transitional year for operations as the company works through recent challenges (rain, accident, ore grades) and focuses on returning production to nameplate. We lower our production forecast to 9.6Kt V2O5 production in 2024 (from 11Kt previously), about in-line with 2023 levels at 9.7Kt and compared to guidance at 9-11Kt, with improvements weighted to H2/24 due to earlyyear maintenance and turnarounds. Largo also continues to ramp the new ilmenite plant and we forecast 2024 production at 78Kt with first commercial sales in Q1/24.
Potential Stryten/Largo Clean Energy (LCE) partnership could help unlock value: Largo is working to finalize a proposed JV with Stryten Energy to form a business leveraging Largo's vanadium redox flow battery technology and Stryten's industrial manufacturing expertise. We think the JV could help LCE to eventually realize the potential upside from the vast energy storage opportunity in North America, although we lower our valuation ascribed to LCE to account for the 50/50 JV partnership.
Reiterate Outperform, lower PT to $5 (from $8): We reduce 2024E/2025E EBITDA to -$2M/$47M, from $53M/$95M and lower our NAVPS estimate to $14.53 from $19.90. We base our PT on 3x 2025E EBITDA (vs. 5x previously) and a blended NAV (0.75x for Maracas Menchen, 0.5x for Pigments and LCE segments) representing a discount to industrial metals peers. Our PT suggests solid upside potential supporting our Outperform rating.