Largo Inc. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to Largo's Third Quarter 2024 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Alex Guthrie, Director of Investor Relations. Please go ahead.

Thank you, operator, and thanks to everyone who has joined us for Largo's Third Quarter Financial Results Conference Call. Our Q3 2024 financial statements, related MD&A, and most recent AIF are available on our website at largoinc.com, as well as on SEDAR+ and EDGAR. Before we proceed, please note that some information discussed today will include forward-looking statements and non-IFRS measures. Please refer to the cautionary notes and non-GAAP section of the company's latest MD&A, financial statements, and AIF, which are all available online. Additionally, all figures mentioned are in US dollars unless otherwise stated. Today's speakers include Daniel Tellechea, Interim CEO and Director; Celio Pereira, CEO of Largo Brazil; David Harris, CFO; and Francesco D'Alessio, CEO and President of Largo Clean Energy. Following the prepared remarks, we will open the call to questions. Please limit your questions to two and requeue if you have further inquiries to allow everyone a chance to participate. I will now turn the call over to Daniel.

Thank you, Alex, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. In Q3, Largo continued to make positive strides on several fronts, and I am pleased to highlight a few areas where we are seeing real progress. First, we delivered our highest quarterly vanadium production in seven quarters, producing 3,072 tonnes, up 42% from Q3 last year. Additionally, we saw another strong quarter in ramping up our ilmenite production, contributing to our efforts in diversifying revenues at Largo. Largo's cost improvements have been equally important during the quarter. We reduced our operating costs by 31%, allowing us to maintain a competitive position within the vanadium sector. And as announced, our vanadium supply agreement, which unlocks approximately $23.5 million of additional liquidity from our vanadium inventories upon delivery, now enables us to strategically manage our inventory while still meeting our ongoing and future sales commitments. In terms of our commercial strategy, we’ve taken decisive steps to realign our sales approach to better navigate a challenging market environment. In September, Francesco D'Alessio was promoted to Chief Commercial Officer, bringing a wealth of industry experience and strategic vision to our sales leadership. With Francesco's expertise, we’re implementing a refreshed sales strategy aimed at optimizing inventory and strengthening customer relationships, positioning Largo as a trusted and reliable supplier in both the vanadium and ilmenite markets. Looking forward, our recently announced technical report highlights that Largo's long-term potential with a 67% increase in mineral reserves and a 64% increase in mineral resources expands our mine life to 2054. This strengthened resource base, paired with our production and cost initiatives, sets the stage for future value creation going forward. With that, I’ll hand it over to Celio to discuss our operational progress in more detail.

Thank you, Daniel, and good morning, everyone. This quarter, our team's hard work paid off as we reached a significant production milestone. In Q3, we produced 3,072 tonnes of V2O5 equivalent, a testament to the effectiveness of the operational enhancements we put in place earlier this year. Our global V2O5 recovery rate also improved to 81.1%, up from 76.9% last year. On the mining side, we achieved a 34% increase in total ore mined compared to Q3 2023, reaching 600,000 tonnes. Those improvements highlight the changes we've made to enhance processing efficiencies and address variability in magnetic and V2O5 ore grades. Our operations are as efficient as possible while maintaining high safety and environmental standards. Ilmenite production also saw strong gains, reaching 16,383 tonnes in Q3, an increase of 90% over the previous quarter. Finally, to maintain optimal operational continuity, we've moved our annual kiln maintenance to Q4 to coincide with the upcoming rainy season, minimizing the impact of any weather-related disruptions. Consequently, Q4 production is expected to be impacted by the maintenance period, resulting in lower production levels and higher operating costs for the quarter. However, we remain confident in our ability to meet our full-year 2024 guidance for production, costs, and sales. Before concluding, I'd like to highlight that our third quarter results reflect substantial progress in production and cost management; however, we remain focused on further optimizing our vanadium and ilmenite operations. Largo is still in the process of a broader turnaround initiative aimed at driving consistent improvements across the mine. This includes enhancing operational efficiency, advancing silica control measures, and continuing recovery optimizations in our ilmenite plant. While we have made meaningful strides, we remain committed to further progress as we work towards fully realizing our operational goals and fostering a culture of continuous improvement across our team. With that, I will now pass it over to David Harris for the financial results.

In Q3 2024, Largo reported revenues of $29.9 million, including $27.2 million from vanadium sales and $2.7 million from ilmenite sales. Revenue was impacted by lower vanadium prices and reduced sales volumes, with the average benchmark price per pound of V2O5 in Europe down to $5.71 compared to $8.03 in Q3 2023. Operating costs decreased from $44 million in Q3 2023 to $29.5 million this quarter, a 31% reduction from Q3 2023. Cash operating costs, excluding royalties, were $3.12 per pound sold, a 43% reduction from last year. As Celio highlighted just now, these results underscore our continued focus on cost management, and I'd like to recognize the hard work from our teams who played a crucial role in realizing these savings. The net loss for Q3 was $10.1 million, including non-recurring items of $3.3 million, which is an improvement over the net loss of $11.9 million in Q3 2023. Adjusted EBITDA for our mining operations was $2.4 million in Q3 2024 compared to $2.7 million in Q3 2023, reflecting the impact of the vanadium market conditions, but also highlighting ongoing cost management efforts. At the close of the quarter, we had a cash balance of $30.4 million and a net working capital surplus of $46.7 million. While the recently announced vanadium supply agreement is expected to contribute approximately $23.5 million upon delivery of material between Q4 this year and Q1 next year, we continue to focus on managing liquidity carefully to support Largo's financial flexibility. In addition, we are working closely with a group of banks to explore restructuring options for our existing loan facilities. These discussions are aimed at optimizing our capital structure to ensure that we're well prepared to navigate current market conditions with a continued focus on managing liquidity. Before I hand it over to Francesco, I'll reiterate that we remain committed to achieving sustained cost improvements at the Maracas Menchen Mine. We are closely monitoring all operational expenses as part of our broader strategy to optimize performance and enhance profitability, and we look forward to updating you on our continued progress in the quarters to come. With that, I'll turn it over to Francesco for an update on our sales and commercial activities.

Thank you, David, and welcome everyone to the call. It's a privilege to join today as Largo's Chief Commercial Officer and provide an update on our commercial activities for Q3 2024, along with a brief update on Largo Clean Energy. In Q3 '24, we recorded V2O5 equivalent sales of 1,961 tonnes, which includes 124 tonnes of purchased material. This represents an 18% decrease from Q3 2023, driven primarily by softer spot demand in key markets, particularly Asia and Europe, where we continue to face significant headwinds affecting vanadium demand, especially within the steel sector. Low prices and an oversupply in the Chinese market have contributed to a more challenging supply-demand balance, pressuring prices across regions. The average benchmark price per pound of V2O5 in Europe was $5.71 in Q3, down from $8.03 in the same period last year, reflecting these ongoing market challenges. In response to these conditions, we are refining our sales approach to strengthen direct sales to end users and expand our reach, particularly in North America. With the recent appointment of Randy Doyle, an industry leader with deep vanadium experience, we are enhancing our sales efforts and building closer customer relationships, solidifying Largo's position as a trusted supplier of vanadium and ilmenite products. Our recent contract campaign for both high purity and ferrovanadium products has been successful, reinforcing our strategy to grow market share and secure stable long-term partnerships. Additionally, given current geopolitical factors, our increased presence in North America further positions Largo as a key supplier to this market, which is becoming increasingly crucial amidst shifting global dynamics. While we continue to see softness in demand in Europe and expect this to extend into 2025, we are encouraged by early signs of recovery in the US market, which has been less affected by low-priced vanadium supply from China. This trend is reflected in the growing interest from US-based end users, particularly in sectors such as aerospace and defense, where demand is rising for reliable and secure sources of vanadium supply. These factors, along with the narrowing production supply gap globally, position Largo favorably in the current environment. On the ilmenite front, we achieved a strong performance in Q3 with sales totaling 19,572 tonnes, a 60% increase over Q2 2024. Demand for ilmenite continues to grow, and we remain optimistic that this trend will support revenue growth as we build a stable diversified revenue stream alongside our vanadium business. Turning to Largo Clean Energy, we are advancing discussions with Stryten Energy towards a potential joint venture. This partnership will leverage Largo's expertise in vanadium flow battery technology alongside Stryten's manufacturing and market reach, positioning us strongly within the energy storage sector, particularly in North America where demand for grid-scale solutions is expanding. We remain focused on maximizing LCE's role in Largo's overall growth strategy, ensuring that our technology aligns with the rising demand for reliable and sustainable energy storage solutions. While we recognize the challenges in the vanadium market, we're optimistic about future demand prospects, bolstered by recent regulatory developments, a recovering US market, and increasing demand from key sectors. Our team's strategic focus on efficient production and sales management keeps us well-positioned to meet these emerging opportunities. With that, I'll turn it back to Daniel for closing remarks.

Thank you, Francesco. As we head into Q4, Largo remains committed to improving operational efficiency, reducing costs, and diversifying our revenue streams. Despite the current headwinds in vanadium prices, our recent technical report update and strategic agreements position us well to deliver value in the quarters ahead. Thank you to our entire team for their efforts and our shareholders for their support. We look forward to sharing our continued progress in the future. With that, we will now open the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Heiko Ihle at H.C. Wainwright. Please go ahead.

Hi, good morning, everybody. You state that recent data indicated that the oversupply gap is gradually narrowing and that there is some early indications of maybe a touch more favorable market dynamics. Where exactly is this demand coming from? I mean, earlier on this call, you mentioned the Americas, if I heard you correctly. And we are now halfway through Q4. Is this impact going to be showing up in the Q4 results? Or is this something that's maybe more of a 2025 thing?

Francesco, can you provide more details?

Yes, it will primarily be evident in next year's contracts. We are currently in the contract season and are witnessing strong demand, particularly from the aerospace sector. As you may know, the US market has certain restrictions; there are anti-dumping measures on Chinese and South African ferrovanadium and high duties on Korean ferrovanadium. This situation places Largo's ferrovanadium in a favorable position for freight contracts within the US steel sector. Moreover, we are seeing significantly higher demand based on forecasts from our aerospace customers, which will be reflected in the contracts for 2025.

Got it. And just to clarify on the vanadium supply agreement signed a couple of weeks ago, can you explain your experience with these agreements? How do the prices compare to spot pricing? Do these agreements generally trade at a premium like in the uranium market, where firms seek to secure supply? Or are they more aligned with market rates? This can be general and not necessarily about the specific agreement.

You mean the agreement we signed recently for $23.5 million?

Yes. I mean, that's obviously one agreement, but there are presumably more of those coming.

At this time, this is the only agreement we have planned for something like this. It will complement our shipments for Q4, where we intend to deliver a significant portion of the 2,100 tonnes in this agreement during the fourth quarter. This will enhance our sales and shipments for that period. Currently, this is the only agreement we have in place. The remaining agreements for 2025 will be standard sales to the steel, defense, and aerospace industries. Those will be typical agreements. Does that answer your question?

Yes. No, that's pretty good. And with that, I think I will get back in queue.

Thank you. The next question comes from Andrew Wong at RBC Capital Markets. Please go ahead.

Hi, good morning. Can you just provide maybe a bit of an outlook on where you think prices could land in 2025, given some of the improvements that you've worked on?

Francesco, can you take that question?

Yes, I can take that, Daniel. It's a challenging question to discuss pricing forecasts. If we had a crystal ball, it would be easier, but you will definitely see a two-tiered market. There will be higher prices in the US for reasons I've mentioned earlier, primarily due to the limited origins that can enter the US market. This is already being reflected in the current CRU index compared to the Metal Bulletin index, showing a disparity between the two markets. Additionally, most of the aerospace volume is priced at a premium to the industry. Therefore, we anticipate a quicker recovery in prices in the US compared to Europe or the rest of the world.

And a little bit on costs for 2025, given some of the operational efficiencies and improvements that you've worked on?

Celio, can you take that question?

Yes, for sure. We keep moving our turnaround and increasing our efficiencies at the mine. We are now having a very strong look at logistics and good supply. So we expect that the average cost of 2025 should be trending lower compared to this year.

Andrew, on the cost side, we will continue with this trend of finalizing the analysis of each of the contracts, concentrating on logistics. So there is still a way to go in this turnaround process that we started months ago. We expect that the cost of production will continue to benefit from those adjustments and analyses for next year.

Okay. And just looking out a little bit here, when we look at the mine plan and the resources and what the deposits look like longer-term, the grades come down, and the Campbell Pit is a lot higher grade. So the best material, I think, that you have in your resource inventory. Does it still make sense to be depleting your best resource at relatively minimal profitability and prices today?

Can you take that question, Celio?

Yes, thank you, Daniel. We have added two new pits to our reserve base that we didn't have before. Campbell is our current pit that we mine. We've experienced weaker prices this past year, but our mining plan for Campbell is in place until 2031 or 2032. It is a world-class asset with very high grades for V2O5. We believe it's strategic to continue mining Campbell for now and in the coming years until we are ready to shift to the lower-grade assets and reserve pits we have in Maracas.

Okay, thank you.

Thank you. The next question comes from Gordon Lawson at Paradigm Capital. Please go ahead.

Sorry, I was on mute. So the beat on cash cost this quarter was pretty significant and really stands out. What should we expect for – you have already talked about what to expect in terms of beating this year, but how much should we add to cost for the ilmenite production on a per pound basis?

Celio, can you take that question?

Yes. If we consider that ilmenite is a new revenue stream that we are still in the ramp-up phase and optimizing recoveries and production, I believe when we reach our full capacity at ilmenite and optimize all of these processes, I think we will be talking about seeing $0.30 to $0.50 range in terms of vanadium production costs.

That seems quite reasonable. In this regard, the $22 million investment to double ilmenite production appears to be a low barrier. What factors influenced the decision to approve this in relation to securing customers and expected return on investment?

Celio, can you take that question? And most of this is in the technical reporting. So we can get the information from that.

Yes. Sorry, I didn't understand the investment side of the question. Can you please repeat?

Well, it seems rather inexpensive to double the production. So I'm just wondering if this is an issue of lining up customers for the product or whether there is more to it beyond a simple ROI?

Yes, the strategy to double the production is linked with the vanadium side as well because the ilmenite is produced from our non-magnetic tailings from our current milling that produces the vanadium concentrate. So the strategy is linked with a 20% actually, it's 33% expansion in our current kiln happening first. And then we will, of course, have an upgrade in the milling and crushing together with this kiln expansion. After that, we will have more material to process and do the full expansion of the ilmenite. So that's more because of the vanadium strategy; we also link this ilmenite strategy ramp-up and expansion in the future.

So the grades of the hits beyond the Campbell Pit are clearly playing a much bigger role than just aligning the customers as I mentioned.

Yes, correct.

Thank you. Our next question comes from Gary Bryck at Northern Insights Asset Management. Please go ahead.

Good morning. Could you tell me how much debt on the balance sheet is attributable to the Majorca storage facility? Could you discuss how it's working and whether you're generating any revenue from it? And could you compare that vanadium technology to other battery technologies that you may be competing with? And I have one other question, which I've asked for the last 5 years. Could you discuss the elasticity of demand for vanadium?

Can you take that one, Francesco?

Yes. So elasticity for demand for vanadium, are you referring to a specific industry? Or what would you like me to elaborate on?

Well, if you understand elasticity, maybe you could explain how prices would change if you, for example, reduced your production of vanadium.

Well, most of the vanadium market pricing is obviously driven by the two largest producing countries, right, which are Russia and China. You can understand, obviously, the current geopolitical situation has affected one of those origins, and the current softness of the market in China has caused the price to drop this year. The exports from China have drastically increased. So if you look at the supply/demand dynamics that are drastically affected by the exported units from the Chinese market. But our strategic positioning within the US market is why we've diversified our strategy in going after a region that is not subject to those effects of the Chinese units.

Maybe we can take this question offline. I don't think you understand it. Could you discuss how much debt is on your balance sheet attributable to the Majorca storage facility? Could you discuss how it's functioning? Could you discuss whether you're generating any revenue from it, whether you're generating any potential sales of new storage facilities? And could you discuss your vanadium storage technology compared to other storage technologies?

Yes. I will address the first part of the question.

I'll take the second one.

Yes. Just to clarify on the debt, there is no debt on the balance sheet related to the battery storage facility in Majorca. That project has been entirely self-funded. Therefore, there is no debt associated with it. In terms of the project.

Didn't you borrow $95 million to buy the technology in the first place?

No, that's not correct.

What is correct?

The IP that we have that was acquired, that was acquired for approximately just over $4 million in 2020, and that was sort of a share in noncash purchase that was done at the time. Any other one has just been funding the LCE activities as a whole. In terms of the delivery of the project, I mean, as you'll note in our MD&A, the final tests and the commissioning activities have not been completed. So the project has not been delivered, and as such, we have not recognized revenue from delivery of that project as of this time. But perhaps, Francesco, you can just comment a bit more in terms of the status of the ramp-up and commissioning of the P&L projects.

Sure. So we replaced the inverter and the transformer. So those activities have been completed, and we're now undergoing the final factory acceptance testing for the final commissioning of the battery system. So we're in the final stages of overall commissioning of the system.

Okay. Thank you. I'm sorry, I thought you had this facility running two years ago. So it's a good update for me. Thanks.

Thank you. There are no further questions. I will turn the call back over to Alex Guthrie for closing comments.

Thank you, operator. This concludes our Q&A session of the quarterly call. Thank you, everyone, and have a great day. Bye now.

Ladies and gentlemen, this concludes the conference for today. We thank you for participating, and we ask that you please disconnect your lines.