Executive Summary / Key Takeaways

• Largo Inc. (TSX:LGO) is strategically transforming from a pure-play vanadium miner into a diversified critical materials and long-duration energy storage provider, leveraging its high-purity vanadium resources and proprietary vanadium redox flow battery (VRFB) technology.
• Recent operational improvements have driven a significant rebound in vanadium production, with Q3 2024 marking the highest quarterly output in seven quarters at 3,072 tonnes, alongside a substantial 31% reduction in operating costs.
• The company's expansion into ilmenite production is rapidly diversifying revenue streams, with Q3 2024 sales up 60% quarter-over-quarter, and a projected 88,000 tonnes of ilmenite production for 2024.
• Largo Clean Energy's VRFB technology, exemplified by the 6 MWh deployment in Spain and a proposed joint venture with Stryten Energy, positions Largo to capitalize on the burgeoning North American long-duration energy storage market.
• Despite persistent vanadium price weakness driven by Chinese oversupply, Largo's focus on cost reduction, high-purity sales, and strategic market positioning in North America aims to restore profitability and deliver value.

A Dual-Asset Strategy for a Critical Materials Future

Largo Inc. is strategically positioning itself at the confluence of critical minerals and the burgeoning clean energy transition. The company's core business revolves around its high-grade Maracás Menchen Mine in Brazil, a world-class asset for vanadium production. However, Largo's vision extends beyond traditional mining, embracing a dual-asset strategy that integrates vanadium production with the development of advanced energy storage solutions and diversified mineral outputs. This approach is designed to enhance resilience against commodity price volatility and unlock new growth avenues in a rapidly evolving global economy.

The company's journey began with its incorporation in 1988, evolving into Largo Inc. in November 2021 to reflect its broader strategic ambitions. A pivotal moment occurred in 2020 with the acquisition of intellectual property for vanadium flow battery technology for approximately $4 million through a non-cash purchase. This move laid the foundation for Largo Clean Energy (LCE), a division dedicated to developing vanadium redox flow batteries (VRFBs). The strategic intent was clear: to vertically integrate its vanadium supply into high-value energy storage applications, thereby creating a captive market for its primary product and capturing additional value across the supply chain.

Largo's competitive standing is shaped by its integrated operations and a strategic focus on high-purity vanadium and innovative energy storage. While larger, diversified miners like Glencore offer vast scale and global reach, Largo differentiates itself through specialized vanadium products and a direct play in the energy storage sector. Compared to other primary vanadium producers such as Bushveld Minerals (BVELF), Largo's emphasis on North American markets and its proprietary VRFB technology provides a distinct edge. The company's exclusive 10-year offtake agreement with Gladieux Metals Recycling, which saw the first delivery of American-made ferrovanadium to a U.S. customer in December 2023, further solidifies its strategic positioning in a market increasingly prioritizing secure, domestic supply chains.

Technological Edge: Vanadium Flow Batteries and High-Purity Products

At the heart of Largo's long-term strategy lies its differentiated technology, particularly in vanadium flow batteries and high-purity vanadium products. Largo Clean Energy (LCE) utilizes patented vanadium flow battery stack technology and electrolyte purification technology. These VRFBs offer tangible benefits over alternative energy storage solutions, particularly for long-duration applications. Specific quantitative performance metrics for LCE's technology were not detailed, but the strategic intent is to provide reliable and sustainable energy storage solutions that enhance grid stability and facilitate the increased adoption of renewable energy sources. The 6-megawatt-hour VRFB deployment at the Son Orlandis plant in Mallorca, Spain, which is the largest VRFB installation in Europe, demonstrates the technology's capability to optimize loading and unloading operations based on renewable production and grid requirements. This project, integrated with a 3.34-megawatt peak photovoltaic plant, showcases the technology's potential for establishing long-term storage solutions and reducing reliance on fossil fuels.

For investors, this technological differentiation translates into a significant competitive moat. The ability to offer a complete solution, from vanadium mining to battery deployment, positions Largo as a unique player in the energy transition. The proposed joint venture with Stryten Energy is a crucial step to commercialize this technology, leveraging Stryten's extensive U.S.-based manufacturing and market reach. This partnership aims to transform the landscape of long-duration energy storage in North America, capitalizing on growing demand for grid-scale solutions and domestic content incentives. This strategic move could lead to higher average selling prices (ASPs) for its vanadium, lower overall costs through vertical integration, and better margins in the energy storage segment.

Beyond VRFBs, Largo's focus on high-purity vanadium products is another key differentiator. The company achieved a record 1,670 tonnes of high-purity V2O5 equivalent in Q4 2023, representing 60% of its quarterly V2O5 output. This focus is critical because high-purity vanadium commands a premium in specialized sectors like aerospace and defense, where demand for reliable and secure sources is rising, particularly in the U.S. market. This allows Largo to capture higher value for its vanadium, especially in a market where ferrovanadium prices are often at a discount to V2O5.

Operational Turnaround and Financial Performance

Largo's recent financial performance reflects a company in the midst of a significant operational turnaround, striving for profitability amidst challenging vanadium market conditions. In Q3 2024, Largo delivered its highest quarterly vanadium production in seven quarters, reaching 3,072 tonnes, a 42% increase from Q3 2023. This operational improvement was coupled with a substantial 31% reduction in operating costs, bringing cash operating costs (excluding royalties) down to $3.12 per pound sold, a 43% reduction from the previous year. These figures underscore the effectiveness of the operational enhancements implemented earlier in the year, which included improving grade control, increasing crushing capacity, and optimizing processing efficiencies.

Despite these operational achievements, revenue in Q3 2024 was $29.9 million, impacted by lower vanadium prices and reduced sales volumes. The average benchmark price for V2O5 in Europe fell to $5.71 per pound, down from $8.03 in Q3 2023. This market weakness, driven by softer spot demand in Asia and Europe and an oversupply from China, led to an 18% decrease in V2O5 equivalent sales from Q3 2023. The net loss for Q3 2024 was $10.1 million, an improvement over the $11.9 million loss in Q3 2023. Adjusted EBITDA for mining operations in Q3 2024 was $2.4 million, reflecting the impact of market conditions but also highlighting ongoing cost management.

The company's financial health has been under pressure, with full-year 2023 revenues decreasing by 13% to $198.7 million, primarily due to a 31% year-over-year reduction in European vanadium prices. The net loss for full-year 2023 was $32.4 million. However, the adjusted EBITDA for Q4 2023 saw a 138% increase to $1.4 million, signaling the initial positive impact of cost-saving initiatives.

Largo's diversification into ilmenite production is gaining momentum. In Q3 2024, ilmenite production reached 16,383 tonnes, a 90% increase over Q2 2024, contributing $2.7 million to revenues. Sales volumes for ilmenite totaled 19,572 tonnes, a 60% increase over Q2 2024. This new revenue stream, derived from non-magnetic tailings, is expected to contribute significantly to overall profitability, with management anticipating ilmenite production to eventually reduce vanadium production costs by $0.30 to $0.50 per pound.

Outlook, Guidance, and Strategic Initiatives

Largo's forward-looking strategy is firmly rooted in achieving sustained cost improvements, optimizing production, and diversifying revenue streams. The company remains confident in meeting its full-year 2024 guidance for production, costs, and sales, despite anticipating lower production and higher costs in Q4 2024 due to planned annual kiln maintenance. Management projects an average cash operating cost (excluding royalties) in the range of $4.50 to $5.50 per pound for the second half of 2024, with an ambitious target of achieving costs below $4 per pound in 2025. This reduction is expected from ongoing operational efficiencies, including a targeted BRL40 million reduction in operating expenditures and BRL12 million in capital expenditures for the remainder of 2024.

For 2024, Largo plans to produce approximately 11,000 tonnes of V2O5, maintaining an average of 900-950 tonnes per month, and aims to build 3.6 million tonnes of V2O5 in stockpiles to enhance future operational flexibility. Ilmenite production is projected to ramp up significantly, from 300-500 tonnes per month in Q1 2024 to 8,000-9,000 tonnes per month starting April 2024, following the full commissioning of the plant. The company's recently updated technical report highlights a 67% increase in mineral reserves and a 64% increase in mineral resources, extending the Maracás Menchen Mine life to 2054, providing a robust long-term production base.

Largo's commercial strategy is adapting to a two-tiered vanadium market. While softness in European demand is expected to persist into 2025, the U.S. market shows early signs of recovery, driven by demand from aerospace and defense sectors. Anti-dumping duties on Chinese and South African ferrovanadium, coupled with high duties on Korean ferrovanadium, position Largo's products advantageously in the U.S. This is expected to be reflected in 2025 contracts, with a faster recovery in U.S. prices compared to Europe. The recently announced vanadium supply agreement, expected to unlock approximately $23.5 million in additional liquidity between Q4 2024 and Q1 2025, further strengthens the company's financial flexibility. Largo is also actively exploring restructuring options for its existing loan facilities to optimize its capital structure.

Risks and Competitive Dynamics

Despite the strategic advancements, Largo faces several pertinent risks. The primary challenge remains the volatility of vanadium prices, heavily influenced by supply/demand dynamics from major producers like China and Russia. An oversupply from China has contributed to depressed prices, impacting Largo's revenue and profitability. The company's reliance on its Maracás Menchen Mine in Brazil also exposes it to operational risks, as evidenced by the Q3 2023 accident and technical delays that impacted production. Furthermore, the presence of pegmatite in the ore body and the mining of lower-grade disseminated ore continue to affect vanadium grades, necessitating ongoing investments in crushing and separation technologies to maintain concentrate quality.

In the competitive landscape, Largo's strategic positioning in the U.S. market, bolstered by its high-purity products and the Gladieux offtake agreement, helps mitigate some of the competitive pressures from lower-cost Chinese supply. However, the broader vanadium market remains competitive, with larger, diversified players like Glencore (GLNCY) benefiting from economies of scale and extensive global networks. In the energy storage sector, while VRFBs offer distinct advantages for long-duration applications, they compete with more established lithium-ion technologies and emerging alternatives like hydrogen fuel cells. The success of Largo Clean Energy's joint venture with Stryten Energy will be crucial in establishing a significant foothold in this rapidly evolving market.

Conclusion

Largo Inc. is executing a compelling strategic transformation, evolving from a traditional vanadium miner to a diversified critical materials and clean energy solutions provider. The company's core investment thesis hinges on its ability to leverage its high-grade vanadium resources, drive operational efficiencies, and capitalize on the burgeoning long-duration energy storage market through its proprietary VRFB technology. Recent operational improvements, including record vanadium production and significant cost reductions, demonstrate management's commitment to restoring profitability despite a challenging vanadium price environment.

The strategic expansion into ilmenite production and the promising trajectory of Largo Clean Energy, particularly with the proposed Stryten Energy joint venture, are critical pillars for future growth and revenue diversification. While the company faces ongoing risks from vanadium price volatility and operational complexities, its focused strategy on high-purity products, North American market penetration, and technological differentiation positions it for a potential resurgence. Investors should closely monitor Largo's continued progress in cost reduction, the successful commercialization of its VRFB technology, and the sustained ramp-up of ilmenite production as key indicators of its long-term value creation.