Stars to realign for Largo in Brazil

Largo Resources (TSXV: LGO; US-OTC: LGORF) is keeping its 2015 guidance at the Maracas Menchen vanadium mine in Bahia, Brazil, despite the slower-than-expected ramp up. 

Maracas, which produced its first vanadium pentoxide (V₂O₅) flake last August, has had hiccups in reaching its first-phase nameplate capacity of 9,600 tonnes V₂O₅ per year, or 26.4 tonnes per day, by October.

“The primary issue the facility has been struggling with is mechanical conveyance issues — just trying to get the material from one part of the process to the other,” CEO Mark Smith says. He joined Largo in April and also serves as executive chairman of NioCorp Developments (TSX: NB; US-OTC: NIOBF). He was also the CEO of Molycorp until 2013. 

“Some of those pieces of equipment weren’t made with the right materials of construction, or they were not built robust enough,” Smith says of Maracas’ plant, “and so it was a constant maintenance problem.” 

To fix that, Largo is rebuilding several of those conveyance systems. They are set to arrive on-site from July through November. This should help increase production at the Maracas mine, starting in mid-July or early August, Smith says. 

However, the executive says Maracas will not finish the ramp-up in September as guided. “It may be a couple of months later than that because one of the primary pieces of equipment that we have been struggling with is the pan conveyor … and the new one isn’t scheduled to arrive until November,” Smith explains, we will have that installed immediately. And I anticipate that in December we should be hitting full nameplate capacity.” He adds the plant should be “very close to 90%” of capacity before the pan conveyor arrives. 

In May, Maracas hit a record monthly production rate of 487 tonnes, or 23 tonnes per day, representing 87% of the plant’s design capacity. (Largo is selling all of its vanadium to Glencore International AG under a six-year off-take agreement.)

Despite the slight setback at the plant, Largo is sticking with its annual 2015 and 2016 guidance. It forecasts 2015 production of 7,850 tonnes (17.3 million lb.) V₂O₅ at cash operating costs of US$3.78 per lb. Costs are set to drop to US$3.21 per lb. V₂O₅ before 2016. 

The miner anticipates costs will sink next year, as Maracas undergoes a planned expansion to bolster V₂O₅ output to 11,000 tonnes (24.3 million lb.) annually, with estimated year-end 2016 costs of US$2.60 per lb. 

When that happens, Smith claims the Maracas mine will become the world’s lowest-cost vanadium producer, due to its ore grades. The reserve at Maracas contains 13.1 million tonnes of 1.3% V₂O₅, compared with the industry average grade of 0.5%. 

But before Largo can take the lowest-cost producer title it needs to reach its first-phase production target. To give it a solid financial footing to achieve that goal, Largo recently stretched out its debt repayments and raised US$75.2 million in equity. 

Largo faced a cash crunch earlier this year due to several factors, including the slowed ramp-up at Maracas, the drop in vanadium prices in the first half of 2015, and the company’s looming debt payments. “The best way to say it is that the stars were not aligned,” Smith says, noting those “issues are behind us now.” 

In mid-June, the Brazilian Development Bank (BNDES) and a consortium of commercial banks agreed to extend Largo’s construction debt and export credit loans for the Maracas mine. The agreement defers Largo’s repayments on the R$461.2 million (US$147 million) BNDES loan by two years and extends the maturity date by three years for the U.S. dollar component, or 67% of the facility. The banks also pushed out amortization for the export credit loans by a year, and the maturity date by two years.

The debt restructuring followed a US$75.2-million private placement in May, and a $12-million convertible bridge loan with Arias Resource Capital in March. (Arias is Largo’s largest shareholder at 46.3%.)

Largo is “pretty excited” about the equity raise and the debt-restructuring agreement, Smith says, explaining it showed that the market had confidence in the Maracas project and the miner’s capabilities. “So the morale is much improved in the company.” 

Vanadium prices have also improved. After hitting a low of US$3.37 per lb. in May, the specialty metal used mainly as an alloy to strengthen steel is now trading in the US$4.30 to US$4.50 per lb. range, Smith notes. The earlier price drop came after Chinese vanadium producers put their extra V₂O₅ production on the market following the slump in Chinese steel production. 

“The general feeling is that a lot of that is through the system now, and so we are now back into a relatively stable price and demand situation. And prices have recovered probably over $1 per lb. already.”  

In a June corporate presentation, Largo reported that total global V₂O₅ equivalent supply is 127,000 tonnes, while total demand is 136,000 tonnes and growing. China provides 70% of the world’s supply, followed by South Africa and Russia. 

Chinese producers extract vanadium as a co-product from iron ore mines and are the lowest-cost V₂O₅ producers, with unit prices of US$3.50 per lb. However, Smith reckons Chinese producers could shut down many of their iron ore mines, as those mines suffer from low ore grades and high production costs of US$125 per tonne iron ore. That is more than double the current iron ore price of US$55 per tonne.  

“When that iron ore production shuts down — remember China produces only 10–12% of the world’s iron ore supply, but 70% of the world’s vanadium supply — I think we’re going to be in for some interesting times in the vanadium market, if this iron ore issue plays out in the market,” Smith says. 

He envisions that scenario occurring later this year, adding that “if things continue to go well and the market turns around, I think you are going to see Largo as a significant contributor in the vanadium market. That is really where we want to be.”