Glencore Supplier to Be Lowest Cost Vanadium Maker, CEO Says

Jul 30, 2014 5:09 pm ET

(Updates with closing share price in last paragraph.)

July 30 (Bloomberg) -- Largo Resources Ltd. expects to produce vanadium in Brazil for less than half the market price to become the lowest cost producer of the steel strengthener.

Largo, which has a deal to sell all its vanadium to Glencore Plc for six years, forecasts operating costs at its high-grade Maracas project in Brazil of $2.50 a pound compared with a market price of about $5.75, Chief Executive Officer Mark Brennan said in an interview yesterday. That would mean a gross margin of 57 percent and a markup of 130 percent.

Global demand for the additive used in construction and rechargeable batteries probably will grow 6 percent a year as steelmakers focus on supplying lighter, more resistant alloys, he said. The average gross margin of 15 peers tracked by Bloomberg over the past 12 months is 25 percent while the group’s average operating margin is 8.2 percent.

“We have a much higher quality material and as a consequence, we will be the lowest cost producer of vanadium,” Brennan said by telephone from Toronto, where the company is based. “This is an exceptional project.”

As it ramps up the $242 million project in northeastern Bahia state, Largo is seeking to mirror the growth of Cia. Brasileira de Metalurgia & Mineracao, another Brazilian steel strengthener producer.

CBMM, controlled by the billionaire Moreira Salles family, dominates the supply of niobium, used in steel from oil pipelines to jet engines, after starting operations in 1961.

‘Mini-CBMM’

“We will hope one day to be a mini-CBMM,” Brennan said. “As opposed to CBMM’s 80 percent of the market, we will be somewhere close to 30 to 40 percent.”

Output at Maracas will start “imminently,” is expected to reach 2,500 metric tons this year and approach its 9,600-ton annual capacity next year, the CEO said. It probably will generate about $80 million cash in a first phase, he said. In a second stage, output will increase 50 percent to 14,400 tons.

“Glencore would take it up at the mine gate, so we will not need to worry about transport or logistics,” Brennan said. “They have always called vanadium the metal of the future and I think that’s now starting to be evident.”

Largo shares are up 64 percent this year in Toronto compared with an average peer group gain of 23 percent. The stock jumped 6.2 percent today, boosting the company’s market value to C$340 million ($311 million).