Largo Inc (LGO)

[Slashnuts]

Largo to Capitalize as Vanadium Supplies Slim

Vanadium demand is expected to remain largely unchanged this year, although global supply constraints should support higher prices, according to Largo Resources Ltd, which is hoping to capitalize on any shortfall after a difficult 2015. "Demand isn't really seeing much up or down. What's going to drive the vanadium market is the supply side. With supply going down as it is, I think we're about to see some exciting things in this market," Largo president and ceo Mark A Smith told Metal Bulletin sister title AMM in a recent interview. Smith pointed to two factors affecting supply: bankruptcies among some of the more prolific South African producers, and reduced steel output coupled with higher imports of iron ore into China. South African company Evraz Highveld Steel & Vanadium Ltd, which entered business rescue proceedings last April, saw that plan collapse recently and is now expected to be wound down.

In China, the world's biggest steel producer, steel output dropped 2.3% in 2015 compared with the previous year, while iron ore imports rose 5% year on year in January, according to Metal Bulletin. Industry sources suggested that South African producers contribute 10% to 12% of the world's vanadium supply and China about 55%. As China imports more iron ore, Smith said, its output of vanadium could fall by about 25%. Vanadium is often a derivative of the steelmaking process. It is refined from the slag produced by smelting vanadium-rich iron ore, which is found in abundance in China and South Africa. Since the iron ore imported by China doesn't contain vanadium, supply in that nation will naturally decrease, Smith noted. Ferro-vanadium prices dropped sharply in 2015, with spot prices in North America plummeting 53% between January and December, from an average of $12 to $13.20 per lb to $5.82 to $6.02 per lb, the lowest level since December 2003, according to AMM's price archives.

"Even though [Evraz Highveld] wasn't producing, they had a lot of material in inventory to [take to the market]. The buy side of the market got the idea that there was a surplus. But guess what? That's gone. That material isn't available anymore," Smith said, adding that the supply constraints are going to become even more prevalent now that the Chinese New Year is over and China's mills are getting back to work. Metal Bulletin's latest assessment of vanadium pentoxide is $3.10 per lb, up from $2.375 in December 2015, its lowest point ever. Ferro-vanadium, into which most vanadium pentoxide is converted, has also started to rebound significantly. It climbed to $6.85 to $7.25 per lb in AMM's latest assessment from last month's lows of $5.60 to $5.70 per lb. As major players fall back and the market starts to respond to supply cutbacks, Toronto-based Largo plans to capitalise with its Maracs Menchen Mine in Brazil. "These are two good incentives for us to produce at top nameplate capacity (9,600 tpy), because we think the prices will be impacted almost immediately. That's what we saw in January," Smith said.

The company's production costs in December were $3.30 per lb for vanadium pentoxide, he said. Chinese producers, which traditionally have the lowest cost, were churning out material at a cost of $3.50 per lb. Once the Maracs Menchen Mine hits nameplate capacity, he expects production costs to be $3 per lb. "At our production cost, on an operating basis we are getting quite close to breaking even now and will be positive when the price goes up even more," he said. Largo also has a "take or pay" contract with Baar, Switzerland-based Glencore Plc, so it is assured of a guaranteed buyer. "Once the material leaves our gates at the mine, its marketing is 100% Glencore's responsibility. [Can we] do better on [our] own? Maybe, but at the same time it sure is nice to know all we have to do is produce V205 and it's Glencore's problem after that," Smith said.

Smith is optimistic about Largo's prospects, even though the company has had some setbacks, including the need to refinance loan and equity agreements as the price of vanadium pentoxide dropped to record lows last year. He himself owns more than 3 million shares in the company and provided a $1-million bridge loan in January for ongoing working capital requirements. The loan was primarily "to keep [the company's raw material suppliers] at a certain level of happiness so we wouldn't have any problems" accessing feedstock while the company hammered out its refinancing agreements, he said. "If I didn't believe in the company, I wouldn't take a risk like that. The market read it [as] a desperate move because the company was desperately in need of cash. I viewed it more as my absolute confidence in this compan's success," Smith said.

The Brazilian government is also rooting for the success of the company, he said, which is one of the reasons banks continue to discuss financing. The Brazilian Development Bank is one of the company's creditors. "We've gained for all practical purposes two years of runway where we will have no interest or physical payments on any of our debt, and that really relieves the tension in terms of this cash flow generation issue with the low prices," he said. While Smith was proud of the company's performance over the past year, he could not give specifics about total production just yet, estimating the figure to be at or around nameplate capacity. He did, however, acknowledge that in November and December, the Maracs Menchen facility had to be shut down for technical upgrades, and that an uncharacteristically wet January further hampered production. "We're back up and running now, so we're hoping February is better," he said.

http://www.amm.com/Article/3531325/Largo-to-capitalize-as-Vanadium-supplies-slim.html

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