VCHARGE± - Leading and vertically integrated VRFB systems to meet the world’s fast-growing energy storage needs. (CNW Group/Largo Resources Ltd.)Largo Resources (Largo Resources Stock Quote, Chart, News, Analysts, Financials TSX:LGO) has had an amazing run over the past 12 months but there should be more upside to come, according to RBC Capital Markets analyst Andrew D. Wong, who recently raised his target price on the company. Wong said Largo’s new clean energy business shows promise and adds value to the company. Largo Resources, a mining and exploration company, launched its Largo Clean Energy (LCE) initiative in December 2020 where the company aims to be a player in the large battery and electricity storage business. Largo is one of a small handful of companies globally to focus on mining vanadium, a metal commonly used in energy storage but one that has the unique property of allowing an energy storage system to last forever without degradation, as its rechargeable electrolyte never wears out. Largo hosted its Battery Day in early June to tout what it calls its sizeable growth opportunity in long-duration batteries, with president and CEO Paulo Misk calling Largo’s LCE business model “truly disruptive” to the long-duration battery sector. “Through our unique vertical vanadium integration, Largo has a powerful opportunity to provide potential customers with a competitive and commercial solution to the growing need for long-duration energy storage with its vanadium redox flow battery system,” Misk said in a June 9 press release. Largo’s share price has been up and down in recent years, mainly due to volatility in the price of vanadium, but the stock really started to pick up the pace since this past November, going from C$9 per share to as high as C$22 by early May. LGO has pulled back a bit in the weeks since, but Wong sees a boost in share price coming from Largo’s new battery segment. “We believe that Largo's transition to a vertically integrated VRFB business creates significant additional value over and above the traditional mining business. We think the new Largo Clean Energy business should attract a higher valuation if executed properly,” Wong wrote in a June 29 report to clients. “However, we recognize that much of this value creation will be over the long term, and near term cash flows may be impacted as Largo invests in the new business and builds up a portfolio of vanadium leases,” Wong said. Wong has a base case where LCE adds 46 per cent to Largo’s value, above and beyond its traditional mining business. “We also see a potential vanadium price reaction as Largo shifts from market sales to LCE as Largo currently accounts for about seven per cent of global production. We think any meaningful shift towards batteries and away from the traditional vanadium markets could tighten the vanadium market and support higher prices. We assume vanadium prices could be $3-5/lb higher in 2025-2028 as vanadium coming off the market into LCE peaks, before returning to our long-term price at $8/lb,” Wong wrote. With the added capex as Largo develops its LCE business, Wong has estimated the company to be EBITDA and free cash flow break-even in the early 2030s, with both of these then accelerating past the traditional mining model as LCE gets up and running. Wong said signing battery contracts over the next few years will be key to charting the company’s growth prospects from here on out, while he added that Largo’s recent board appointment of Ian Robertson, former CEO of Algonquin Power, should help Largo push forward its LCE strategy. “In our view, it will take time for Largo to realize the additional value from Largo Clean Energy and the transition will require patience. The company needs to build up a significant portfolio of vanadium leases in order to generate higher cash flows. Meanwhile, the transition from traditional market sales to vanadium leases will likely impact near and mid-term EBITDA and cash flows, as upfront revenue is lower and additional capital expenditures are required,” Wong said. Over the nearer term, Wong is calling for Largo to generate 2021 and 2022 revenue of $216 million and $230 million, respectively, and 2021 and 2022 EBITDA of $94 million and $108 million, respectively. (All figures in US dollars except where noted otherwise.) With the update, Wong has maintained his “Outperform” rating for LGO and increased his target price from C$20.00 to C$25.00, which at the time of publication represented a projected 12-month return of 27 per cent. His “Upside Scenario” has a target of C$31.00 and a projected return of 58 per cent. “In our base case scenario for Largo Clean Energy, we are assuming that battery sales gradually ramp up to steady state sales of 1,400MWh per year beginning in 2027. To achieve this sales target and to accommodate ongoing vanadium sales into the high-purity market, we assume Largo expands production capacity by 25 per cent to 15.7kt/yr (16.5kt nameplate capacity) at a cost of ~$100 million,” Wong wrote. “In our upside case, we assume demand for VRFBs from the base case is higher than expected and Largo ramps up to steady state battery sales of 1,730MWh in 2025, with all vanadium production from the expansion going to battery sales,” he said.