Earnings Call Transcript - LGO Q3 2023

Alex Guthrie, Senior Manager of External Relations

Good morning, everyone. Thank you for attending Largo's Third Quarter Financial Results Conference Call. Largo's Q3 financial statements, related MD&A and most recent AF can be accessed on our website at largoinc.com as well as on SEDAR and EDGAR. Before continuing the call, I would like to remind you that some of the information you will hear during today's discussion will consist of forward-looking statements, including, without limitation, those regarding future business outlook. On the call today is Daniel Tellechea, Largo's Interim Chief Executive Officer and Director; Ernest Cleave, Largo's Chief Financial Officer; Paul Vollant, Largo's Chief Commercial Officer; and Francesco D’Alessio, the President of Largo Clean Energy. Following delivery of the prepared remarks, we'll open the call for questions. So with that, let me turn the call over to Daniel.

Daniel Tellechea, Interim CEO

Thank you, Alex, and good day to those joining us for our quarterly update call. I want to begin by acknowledging that Q3 was another challenging quarter for Largo. We faced some unforeseen costs that impacted our operations, and I would like to provide you with an update on these events and how we are moving forward. For Q3, V2O5 equivalent production was 2,163 tonnes, which is a decrease from the 2,639 tonnes produced in Q2 2023, and the 2,906 tonnes produced in Q3 2022. For the 9 months ended September 30, 2023, V2O5 production was 6,913 tonnes versus 8,432 tonnes for the same period in 2022. In July, we were deeply affected by a traffic accident at our chemical plant which resulted in a capacity bottleneck in the evaporator section. These unfortunate incidents forced us to lower vanadium production furnaces in July and August. I want to express our gratitude to our dedicated team for their rapid response and the safe commissioning of the evaporator circuit in early September which is now operating as intended. In addition to the accident, we experienced technical delays in the commissioning of our new crushing plant, which was designed to offset the impact of lower ore grades. While this delay impacted vanadium production in Q3, our operating team is working hard to resolve those issues. I would like to emphasize that our mining operations are, in fact, proceeding as planned, with mine material being 46% higher in Q3 as compared with the same period of last year. A major prevailing issue was a large amount of ore that remained in stockpile following failures in engineering and design in the crusher and magnetic separator stages. Consequently, in response to the aforementioned challenges we have undertaken a change in leadership at our Maracás facility. We want to assure you that a comprehensive plan is in place to address the challenges discussed today. Our focus remains on improving our processes to ensure that they might or can be processed going forward. As a sign of improvement, the crushing plant produced more than 1,000 tonnes of contained V2O5 in October despite further improvements scheduled for November and December. We are also optimizing additional operational efficiencies at Largo to enhance our performance in the future. This includes the increase of high-purity vanadium production, which now represents approximately 44% of all production in the first 9 months of 2023 versus 27% in the same period of last year. And during the month of October, it represented 72% of total production. We are also restructuring maintenance processes at the mine and ramping up production to diversify our product and revenue mix going forward. Significant strides have been made in reducing costs, with notable reductions in key consumable costs such as sodium carbonate, as well as additional headcount reductions. As we continue to realize the benefits of our optimization efforts, we should expect to see additional cost benefits in future quarters. These initiatives are crucial to mitigate the impact of decreasing vanadium prices. Before I hand the call over to Ernest, I will note that we have made substantial investments over the past year. These include increased waste rock, pre-stripping, and infill drilling to optimize future production. The commissioning of the ilmenite plant, the construction of a new magnetic separation crushing plant, and progress with the delivery of our first vanadium battery to NL, our European energy storage customer. We're also investing ongoing efforts at Maracás with the goal of increasing measured and indicated resources. In the first 9 months of 2023, we have completed approximately 19,000 meters of diamond drilling at our Campo de Alegre Lourdes targets in Maracás. We plan to provide an update on this program soon. Again, as we see this investment as critical to ensure the sustainability of our operations in a lower value price environment. In summary, we recognize the challenges we face in Q3 and the importance of the investments we have made. We remain committed to optimizing our operations, reducing costs, and achieving our targets. We believe these actions put us on the path to stabilize operations and cost of production in a safe environment, and we appreciate your continued support as we navigate through these challenges. With that, I will now turn the call over to Ernest to provide an overview of our financial performance for Q3.

Ernest Cleave, CFO

Thank you, Daniel, and thank you to those that could join us on the call today. Taking a closer look at the financial performance for Q3 2023, it's clear that we faced significant headwinds during the quarter. I'll now provide a summary of our financials for Q3. Revenues for the quarter totaled $44 million, a decline from the $54.3 million recorded in Q3 2022. This decline can be attributed to two primary factors: lower vanadium prices and reduced vanadium sales volumes. This also translated to revenues per pound sold of $8.34 compared to $8.80 in the same period last year. On the cost side, we recognized operating costs of $42.5 million in Q3 2023, which is a reduction from the $45.6 million incurred in Q2 2022. The decrease in operating costs is primarily a result of the lower overall sales volumes in the quarter. This includes a reduction in the sale of purchased products and lower royalties due to lower sales. As Daniel pointed out, we are actively focusing on reducing costs across the organization. At our mine site, this includes a reduction in our fixed cost structure through various initiatives including contract renegotiations and optimizing key operational areas. This also involves a further examination of our mining operations, maintenance procedures, equipment rentals, and consumables. As noted earlier, we are committed to enhancing efficiency across the board. In terms of cash flow, we reported cash used before working capital items of $4.4 million in 2023 and this compares to cash provided before working capital items of $4.3 million in the same period of 2022. As of the end of Q3 2023, our cash balance stands at $39.5 million, with a net working capital surplus of $91 million and a debt of $65 million. To close out, while we did face a challenging quarter, our team is actively working on strategies to adapt to these market conditions, optimize our cost structure, and enhance our financial resilience. We remain focused on our long-term goals and are diligently looking to navigate through the challenges discussed on the call today. I'll now turn it over to Paul for his update.

Paul Vollant, CCO

Thanks, Ernest, and thanks, everyone, for joining the call. The Third Quarter continued to be difficult for vanadium prices with the overall market facing headwinds, especially from the steel industries in China and Europe. Prices have further decreased over the past months and the short-term outlook seems challenging. The average benchmark price per pound of V2O5 in Europe was $8.03 in Q3 2023, a 2.5% decrease from the average of $8.23 in Q3 2022 and was $6.65 at the publication last Friday. On a positive note, we continue to see strong growth from the aerospace and energy storage sectors, further highlighting the importance of our ability to adapt to new market demands and produce high-quality vanadium products. In the past quarter, we sold 2,385 tonnes of V2O5 equivalent, which is a decrease from the 2,796 tonnes sold in Q3 2022, but we remain in line with our annual guidance. As Daniel mentioned, we're excited to have signed our first sales contract for ilmenite. Subject to any operational delays, we should record the sale at the shipment date from Brazil by the end of November, which is our original estimate of Q1 2024. We have developed a strong sales pipeline and are confident in our ability to place these units either all or internationally as production ramps up. This new income stream is of utmost importance to diversify our revenues and increase the profitability of our main assets. Thank you for your time, and I'll stop there and turn it over to Francesco.

Francesco D’Alessio, President of Largo Clean Energy

Thanks, Paul. I'll focus my time on a few key updates we made at our Clean Energy business during the Third Quarter and some made subsequent to the quarter end. First and foremost, we're pleased to announce that our 6-megawatt hour Canadian flow battery deployment for new Green Power Spain was validated to upgrade as conditions according to EGP in October. This is a fairly significant milestone achieved both for Largo and LCE as it showcases the adoption and use case of our technology and the clean energy storage solutions that LCE offers to the market. While this deployment faced delays, it demonstrates our team's ability to successfully implement a grid-scale battery that we believe is expected to provide an important catalyst for our strategic evaluation process for LCE. To that point, our ongoing strategic review to unlock and maximize the value of Largo Clean Energy continues to gain momentum. We are pleased to report that our efforts have attracted interest from various parties, reflecting the potential of our technology holds within the industry. As mentioned by Daniel, LCE is not immune to the need for cost-cutting measures at the organization. As part of these measures, we've instituted a reduction in headcount in LCE, and we'll continue to explore additional efforts to reduce costs at this subsidiary going forward. We acknowledge that a substantial investment has been made in LCE and we remain confident that our strategic review process will optimize the value proposition of LCE and allow us to actively participate in the clean energy transition, with vanadium playing a pivotal role as a critical material. And with that, I'll close by saying that we look forward to updating you on our progress in the coming quarters, and thank you for your continued support. I'll now hand it over to the operator for our question-and-answer session.

Operator, Operator

The first question comes from Andrew Wong at RBC.

Andrew Wong, Analyst

Thanks for having me on. Just sorry if this might have been already answered, I came on a little bit late. Could you just talk about some of your early expectations for 2024 in terms of production and cost? It sounds like some of these improvements might start picking up steam into next year and start contributing? And how does that look like versus what we saw this year?

Daniel Tellechea, Interim CEO

I can take that call, Ernest. For 2024, we are expecting as we already have the infill drilling, so I can give you the final mining information. We are planning to produce around 1.5 million tonnes of material mined from the mine every month in order to continue stripping the mine and create additional flexibility in future operations. We are planning to produce around 11,000 tonnes of V2O5. That's about an average between 900 and 950 tonnes per month, and we're planning to create around 3.6 million tonnes of V2O5 in stockpiles in order to prevent issues with future production. So that's how we look into 2024 production at the mine. In terms of cost, I still don't have the final information because we are currently working on our forecast for 2024. So I will skip for the time being that particular information.

Andrew Wong, Analyst

Okay. That's understandable. It's great to see the ilmenite plant ramping up here. Can you talk about what sort of financial contribution we might be expecting as we go into next year, what do prices look like or the night today and how are prices that you expect to realize relative to the market?

Daniel Tellechea, Interim CEO

Paul, can you take on the prices, and I will take at the end, the volumes that they were expecting?

Paul Vollant, CCO

Sure. Hi Andrew, ilmenite prices today are between $250 to $350, and that price really depends on the quality. Without targeted quality, we believe we'll end up around the middle of that range. But that will take a bit of time for us to qualify with the relevant customers and also to achieve the desired quality. So we will see an increase in prices as we improve our production quality.

Daniel Tellechea, Interim CEO

Now in terms of volumes, as we are moving forward with the commissioning of the plant, between the First Quarter of next year, we're planning to produce around an average of 300 to 500 tonnes per month. Starting April of next year, we expect that the plant will be completely transitioned on its commissioning timeline, and we should be producing between 8,000 to 9,000 tonnes per month.

Operator, Operator

The next question comes from Steve Silver from Argus Research.

Steven Silver, Analyst

From the prepared remarks, it sounds like the company is now planning for lower vanadium price environments to continue over the near term, than maybe you might have previously envisioned. I guess I'm just asking broadly, whether it's surprising that vanadium prices are being as tied to China steel demand without finding support at some level from this pent-up demand for Clean Energy and battery applications?

Daniel Tellechea, Interim CEO

Can you give us the price environment, Paul?

Paul Vollant, CCO

Yes, sure. Well, obviously, forecasting prices is always very difficult, right? But I want to say that at this point of time, we think prices are under pressure. As mentioned before, it's mainly due to low performance in the Chinese and European steel industries. But you're right, I mean, the brighter picture is with high purity demand in both the aerospace industries and also the battery sector. We've seen a number of very big announcements in the sector in the past few quarters. So we're also hoping that this demand will help to balance the supply-demand in the more longer term, we look historically, we are in a very low price environment today, right? So there's a good chance that we see a rebound at some point. It's just very hard to predict when that will happen.

Steven Silver, Analyst

That's helpful. And one last one, if I can. You mentioned the downturn in consumable costs beginning in the most recent quarter. Just trying to get a sense as to whether there are any other input metrics that you're looking at besides certain carbonate that you're watching that could kind of get in the way of a more sustained consumable cost decline moving forward?

Daniel Tellechea, Interim CEO

Yes, there are another two that we are watching very closely. One is sulfuric acid that has been even between 2022 and 2023. That is an important one. And the other is the cost of the reagents that we are using to recover the ilmenite. So those are the ones that we have been noticing that have been coming down from our original projections in that particular case. But in the case of the plant, silica is the enemy in the recovery of the vanadium. That is the most important one that we are following. Just to give you an idea on sodium carbonate, in 2023 compared to our original budget, we have around BRL 10 million of savings compared to the real price we are getting and around 4.4 million compared to 2022. So sodium carbonate, which is the main one, has been softening incredibly in our favor. As I said, forecasting is almost even in our cost structure.

Operator, Operator

The next question comes from Mike Heim from Noble Capital Markets.

Michael Heim, Analyst

You've taken several steps to improve the grade issues. My question is, how quickly should we expect to see grade improvement?

Daniel Tellechea, Interim CEO

Well, grades will continue more or less at this level during the last quarter and a little bit higher for 2024. Just to give you an idea of the elements considered in the grades, the magnetics that we have been mining in 2023 is around 19% magnetics. We are expecting according to our infill drilling that will increase to 22% in 2024. Now what Largo has been doing in order to offset the effect of the lower magnetics in the last quarter of '23 and '24 is the main reason why we invested in the new drive mark, which means that all the disseminated ore that we have been mining will continue mining is being concentrated in the drive back in order to keep the same rate that we need for feeding the concentrates into the kiln. So that is more or less the way we are looking into the future grades and the guide for this last quarter.

Michael Heim, Analyst

And then for my second question, in terms of the cost reduction you've done, including reducing the number of contractors at the mines. Do you feel comfortable that you have adequate resources to make the projections you just gave for 2024? And if numbers were to grow in years beyond 2024, would you need to reverse some of these cost reductions?

Daniel Tellechea, Interim CEO

If we're discussing the mine, I believe that with the contractor change last July and August, along with our recent negotiations, we will continue to mine approximately 1.5 million tonnes per month. This is already established, with the necessary equipment and workforce from the contractor secured. We managed to obtain a discount on a per ton basis, which is in effect. Therefore, I do not anticipate any significant issues regarding the mine's performance in the last quarter or moving forward. Regarding the plant, the challenges you’ll see in the last quarter, and by January next year, primarily involve increasing the plant's capacity with minimal investment. We plan to arrange the two mills to operate in parallel rather than sequentially, which should be completed by the end of January to enhance concentrate production for the kiln. This will only entail a small capital expenditure for that specific project. Additionally, we are focused on boosting our capacity in the high-grade and high-purity market, which is vital given the current market dynamics where V2O5 is converted to ferrovanadium at a discount. Selling more into the high-purity market at a premium is beneficial. Consequently, we will enhance our investment and capacity in the V2O3 plant and in powder V2O5 to improve our sales mix for those products. Those are the key aspects we are considering. Even with the current headcount from the contractor side, I don't foresee any major negative impacts from the reductions since we are returning to the headcount we had a couple of years ago before the construction of the ilmenite plant and crushing system. As those projects near completion, reverting to our previous headcount seems reasonable.

Operator, Operator

We have no further questions. I will turn the call back over to Alex Guthrie for closing remarks.

Alex Guthrie, Senior Manager of External Relations

Thank you, operator, and thanks, everyone, for joining the call today. This concludes the Q&A session and the quarterly investor conference call. Have a great day.

Operator, Operator

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