In a Feb. 6 research note, CIBC analyst Bryce Adams purported that Largo Resources Ltd.'s (LGO:TSX) record Q4/19 production and 2020 operational guidance portend a positive outlook for the company after its contract with Glencore will expire in May, a near-term catalyst.
"The [Glencore] agreement, coupled with declining commodity prices, has been particularly punitive in 2019 and a significant overhang on the stock," Adams wrote. "In three months' time, this overhang should be removed."
The firm has an Outperformer rating and a CA$2.50 per share price target on Largo Resources. The stock is trading now at around CA$1.105 per share. "We believe current trading levels offer compelling risk to reward," wrote Adams.
As for Q4/19, Largo achieved "strong operational performance," Adams noted. The company produced 3,011 tons of vanadium pentoxide, or V2O5, from its Maracás Menchen operation in Brazil. This was nearly identical to CIBC's projection of 3,108 tons. The company achieved a record with its full-year 2019 V2O5 production, which came in at 10,577 tons, around the midpoint of guidance.
Adams relayed Largo's guidance for full-year 2020, which he described as "solid." It calls for production of 11,750–122,500 tons of V2O5 and sales of 9,500–10,000 tons of V2O5, "with the delta attributable to working capital as it takes sales in-house after the Glencore offtake agreement expires," the analyst explained. Largo projects cash operating costs, excluding royalties, to be US$3.30–3.50 per pound.
Looking even further into the future, CIBC expects Largo will "focus on supply contracts in 2021 that should disconnect from the vanadium spot price due to its high-purity product," Adams indicated. Accordingly, the company already has branded its high-quality product as VPURE and VPURE+.
Adams reported that CIBC revised its model on Largo to reflect a Q4/19 average vanadium price of US$5.25 an ounce, a Q4/19 earnings per share of CA$0.03 (from CA$0.01) and an EBITDA of CA$14.3M (from CA$4.7 million). Also, it accounted for the Q4/19 pricing revisions in Largo's CA$25 million due to Glencore.[NLINSERT]
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Disclosures from CIBC, Largo Resources Ltd., February 6, 2020
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Important Disclosure Footnotes for Largo Resources Ltd. (LGO.TO)
· 2g CIBC World Markets Inc. expects to receive or intends to seek compensation for investment banking services from
these companies in the next 3 months: Largo Resources Ltd.