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Largo Resources released its production guidance and outlook for 2015. The company has been producing at its Maracas Menchen mine in Brazil since August, and is aiming to ramp up to nameplate production by the third quarter of this year.
Overall, Largo is targeting average annual production of 17.3 million pounds of vanadium pentoxide for 2015 and an average of 24.3 million pounds for 2016. Nameplate annual production capacity for the mine is 9,364 tonnes.
Furthermore, the company will aim to decrease its operating costs over the next two years. While costs currently average $4.15 per pound of vanadium pentoxide, the company expects its costs to reach $3.21 per pound by December and to stabilize at around $2.60 per pound by the end of 2016.
That’s a key consideration, since, as the company notes, vanadium prices have fallen to five-year lows since hitting roughly $6 per pound a year ago. The company has “adjusted its medium-term planning” in response to the current pricing environment, and is also planning to exclude the sale of iron ore as a by-product from the project due to weak iron ore prices. The base metal will be stockpiled with the potential to be sold at a later date.
Still, in a research note on the news, Joseph Gallucci of Dundee Capital Markets states that the guidance is “disappointing.” Production targets came in lower than expected (Dundee was anticipating 24 million pounds of production for 2015 and 33.4 million pounds for 2016), and operating costs were higher — Dundee had expected costs to average $3.07 per pound for this year.
And although the company is engaging in discussions to restructure its debt, Gallucci is skeptical that the company will be able to meet its imminent short-term liabilities, stating that it is expected to “run out of cash in 2015.”
“We believe the Maracas mine is a viable operation,” he said. “However, the current balance sheet obligations overshadow the profitability of the mine.”
That said, Gallucci does note that if Largo can successfully restructure its immediate liabilities, his firm will “review [its] recommendation and target” for the company. For now, Dundee has downgraded the company from a “buy” to a “hold” rating and lowered its price target from $3 to $1.20.
On the other hand, Matthew Sheppard of Jacob Securities released a much more positive note on Largo’s release, “[applauding] the company’s decision to provide 2015 and 2016 guidance.”
“While the initial ramp-up phase has been more extended than initially conceived, it is encouraging that management have reached the point where it is comfortable providing investors with some insight into its longer-term outlook,” his note states.
Sheppard also came to a different conclusion regarding the weak vanadium price environment. “We believe the projected profitability, even at current vanadium prices, highlights the ability of the Maracas project to operate in an adverse pricing environment,” his note reads.
Finally, the analyst suggests that the market has “priced a precipitous drop in price” into Largo’s stock, and that those who are more confident in a recovery for vanadium prices “should consider Largo a prime investment candidate.”
Certainly, it will be interesting to keep an eye on Largo as activities move forward in Brazil.
Cliff Hale-Sanders of Cormark Securities is also listed as covering Largo. However, Vanadium Investing News was not able to reach him before time of publication.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
