TABLE OF CONTENTSNov 26 - Dec 2, 2012 Volume 98 Number 41 - 0 comments

Cashed-up Largo to enlarge stake in Maracas


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By: Trish Saywell

A $10-million private placement that closed on Nov. 1 gives strategic metals junior Largo Resources (LGO-V) the juice it needs to purchase the remaining 10% of the Maracas vanadium project in Brazil that it doesn’t already own.

Construction of the fully licensed project — 813 km northeast of the Brazilian capital of Brasilia and 250 km southwest of Salvador, the capital of Bahia state — started in June, and commissioning is targeted for next year’s fourth quarter.

“This will be the highest-grading mine within a pure-play company,” Jonathan Lee of Byron Capital Markets in New York comments in a research note. “Additionally, with such a high in-situ and concentrate grade [vanadium grade before the energy-intensive roasting process], we believe the company will be a low-cost producer of vanadium pentoxide.”

Lee notes that investors cannot get pure-play exposure to vanadium, as Chinese companies mine low-grade ore to produce titanium, vanadium and iron ore products, while other producers like Evraz Highveld and Xstrata only have vanadium operations that are a part of conglomerates.

Byron Capital Markets, among a syndicate of agents in Largo’s recent $10-million raise at 22¢ per share, has a target price on the stock of 55¢ per share. It was lowered from a previous target price of 60¢ per share because production at Largo’s tungsten mine in northern Brazil stopped last week due to a drought.

The drought has affected water supply available at the operation, Lee says, adding that the shutdown would delay expected cash flows in next year’s first quarter. “This equates to approximately $8 million a year in cash flow to be delayed,” he says.

But in September, the company installed and commissioned a new screening system at the Currais Novos tungsten mine that Lee believes should increase its recovery yields from 11% to 30%, which would generate cash flow “and make the mine a going concern.”

Lee contends that Largo could be a strategic takeout candidate within the next three to five years, and points to Talison Lithium (TLH-T) as an example of a pure-play company that was taken out at a premium for $724 million in cash.

“While it is a different industry, we can view the companies in similar positions,” Lee explains. “The companies operate, or will soon operate, one of the highest-grade open-pit mines known. There are a limited number of mine operators in the world, they are positioned to be the lowest-cost producers in the industry and have ample resources to expand production if global demand warrants,” Lee outlines.

Largo’s high-grade, low-cost Maracas project would produce an average of 9,200 tonnes of vanadium pentoxide (V205) a year during its first five years of operations, and the company has already signed an offtake agreement with Glencore International for 100% of its material over the first six years of production.

The deposit contains measured and indicated resources of 24.6 million tonnes grading 1.11% V205, and an inferred resource of 30.4 million tonnes grading 0.83% V205.

At press time, Largo Resources was trading at 21.5¢ a share within a 52-week range of 20¢ to 36.5¢. The junior has 870 million shares, fully diluted.