The announcement of President Donald Trump's decision to extend the March 1 deadline for the 10-25% tariff increase on $200 billion of made-in-China products after last week’s trading talks between the two nations should push the price of commodities up.
Thus, investors may want to consider increasing shares of those base metals producers that show strong operations, have a solid balance sheets and nonetheless are still trading cheaply.
The Toronto, Canada-base metals producer Largo Resources Ltd. (OTCPK:LGORF, Financial) matches with the identikit. The company is focused on exploration, development and mining of vanadium. The metal has several uses, but it is mainly employed as a hardening alloy to improve the quality of steel.
The company's operations are so strong that Largo Resources has beaten the average peer by more than 40 percentage points in terms of a higher Ebitda margin, delivering 66% for the past 12 months through the third quarter of 2018. This didn't pass unnoticed by the market, which rewarded shareholders of Largo Resources with a 290% boost in the share price, outperforming the Dow Jones Industrial Average (DJI) by more than 270%.
GuruFocus gave the company a profitability and growth rating of 5 out of 10.
Venadium is produced in flakes and powder at the company’s flagship Maracás Menchen Mine located in Bahia State, Brazil. The mineral property, which is 99.84% owned by Largo Resources, is composed of 18 concessions in an area of 17,690 hectares.
The metal is extracted from an open pit deposit, which has a mine life of nine years and proven and probable reserves totaling 19.01 million tons of mineral grading 1.15%. The mill processes 3,900 tons of ore per day.
For full-year 2019, Largo Resources guided for production of 10,000 to 11,000 tons of vanadium pentoxide.
Besides vanadium, Largo Resources is also exploring mineral properties in search of iron, molybdenum, chromite, tungsten, palladium as well as platinum group metals.
Largo Resources is also the owner of a large undeveloped tungsten-molybdenum deposit in the Yukon region of Canada. It possesses a tailings operation to produce tungsten in Brazil and is the owner of a large iron, titanium and vanadium deposit in Brazil.
Besides cash flow generated from operations, which is influenced by the volatility of the commodity market, Largo Resources can count on a solid balance sheet.
The company has approximately $100 million in cash on hand and securities and even though $127 million in total debts may appear a huge amount compared to the available liquidity, the company is not having any problem paying the interest expense on the outstanding debt. This is indicated by an interest coverage ratio of 6.9. Investors usually consider a threshold of 1.5 for the interest coverage ratio.
GuruFocus assigned a financial strength rating of 7 out of 10.
Wall Street has issued an overweight recommendation rating on Largo Resources, indicating that the stock is foreseen to outperform either the market or the industry. The average target price of $4.53 reflects a 145% increase from the share price of $1.85 at close on Friday.
The share price appears to be cheap. Despite an 85% increase for the 52 weeks through Feb. 22, the stock is still trading below the 200-, 100- and 50-day simple moving average lines. The market capitalization is roughly $956.2 million, the price-book ratio is 4.81 versus an industry median of 1.62 and the EV-Ebitda ratio is 5.02 compared to an industry median of 8.71.
The price at close Friday was 120.2% above the 52-week low of 84 cents and 92.4% below the 52-week high of $3.56.
The 14-day Relative Strength Indicator of 39.91 suggests that the stock is near oversold levels.
Disclosure: I have no positions in any security mentioned.
