Tuesday, January 26, 2016

Vanadium Vagaries

Last week the chief executive officer of Largo Resources Ltd., Mark Smith, made the rounds among investors in New York City to spread the word on the developing opportunities in the vanadium market.  Largo expects to benefit from a change in circumstances in China, which has been the undisputed largest producer of vanadium on the planet.

Image result for vanadium imageVanadium is a hard, silvery metal that is mostly used in strengthening steel.  Adjusting the mix to just one-tenth percent vanadium can double the tensile strength of steel.  China’s steel production has been significant source of demand for that country’s vanadium production, some of which was as a by-product of iron ore smelting.  Rebar for concrete reinforcement is a frequent end-use. 

However, when China producers figured out a new process to produce rebar without vanadium, demand shriveled for even domestic vanadium.  Some China vanadium producers shuttered their doors.  Unfortunately, China exports of the new rebar have been turned away by the European Union.  China is also instituting new rebar standards to elevate rebar quality for domestic use.  Smith and his colleagues at Largo Resources are confident it is only a matter of time before China rebar producers will be coming back to the market for vanadium.  What they will find is fewer producers and a shortage of available vanadium supplies. 

Even if the steel products market does not seem promising in the face of weak economic growth, vanadium has other uses.  There are numerous other alloys made with vanadium such as a titanium-aluminum-vanadium mix used in jet engines.  Vanadium foil is used for metal cladding and superconducting magnets achieve exceptional performance with vanadium-gallium tape. Vanadium has been characterized as the ‘electric metal’ because of its utility in energy storage and green technology.

What is more interesting than the long list of clever uses for vanadium is the very short but compelling list of off-take agreements Largo Resources has in place for its vanadium production.  The Swiss commodity trading company, Glencorp Plc, has agreed to purchase all of Largo’s production.  Glencorp claims half of the world copper market and trades sizable portions of most other metals as well as grains, oil and gas.  It is ranked in the top twenty of Fortune’s Global 500 companies and is the world’s third-largest family business.  It would be difficult to find a more credit worthy customer. 

With a reliable and eager customer in Glencorp, Largo has invested heavily in developing its mining operations.  Largo’s top asset is the Maracas project in southern Brazil, producing vanadium oxide at grades more than twice the industry average.  The open pit mine has 24.5 million tons of measured and indicated reserves, of which 13.1 million are proven.  Largo claims to be the lowest-cost producer in the world with cost per pound coming in just under and average $4.50 per pound in 2015.  By the end of the year, Largo operators had squeezed cost down to $3.60 per pound.  Average product at Maracas mine in 2015 was 6,500 tons or 17.3 million pounds. 

Against the backdrop of this demand-supply imbalance and low-cost production achievements, Smith was also pitching the merits of the company’s stock, which trades on the Toronto Venture Exchange under the symbol LGO.  There are quotations on the Over-the-Counter Market for non-reporting stocks under the symbol LGORF.  Largo Resources has a heavy debt load and recently renegotiated terms with its largest lenders in Brazil.  One stipulation of the debt restructure arrangement is an increase in equity. This has Largo management on the road, charming shareholders and new investors in an attempt to raise CDN$39 million in new equity capital.

Largo’s stock is trading at an interesting price of ‘two bits.’  The stock has lost value right along with the price of vanadium, which recently slipped below the historic floor of $5.00.  Of course, the prospect of a new, dilutive share issuance at the current low price is also a factor in current trading sentiment.  Smith makes a compelling argument that the stock is oversold and has reinforced his message with his own money.   Earlier this month Smith made a $1 million bridge loan to Largo Resources for working capital and has pledged to convert the loan at the time of the financial closings.  If Smith is prepared to underwrite the vagaries of vanadium with his own money it might be worthwhile for other investors as well.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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