Largo Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 9, 2023

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Largo's Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to your speaker today, Alex Guthrie, Senior Manager of External Relations, please go ahead.

Speaker 1

Good morning, everyone. Thank you for attending Largo's 3rd quarter financial results conference call. Largo's Q3 financial statements, related MD and A and most recent AI can be accessed on our website at largoinc.com as well as on CR Plus 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 Danielle Talatia, Largo's Interim Chief Executive Officer and Director Ernest Cleave, Largo's Chief Financial Officer Paul Volant, Largo's Chief Commercial Officer I'm Francesco D'Alessio, the President of Largo Clean Energy.

Speaker 1

Following delivery of the prepared remarks, we'll open the call for questions. We ask that participants restrict their questions to and then re queue if there are additional questions to allow others the opportunity to participate. So with that, let me turn the call over to Daniel.

Speaker 2

Thank you. 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 obstacles 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, D205 equivalent production Was 2,163 tons, which is a decrease from the 2,639 tons Produced in Q2 2023 and the 2,906 tons Produced in Q3, 2022.

Speaker 2

For the 9 months ended September 30, 2023, V2O5 production was 6,913 tons versus 8,000 432 tons for the same period in 2022. In July, we were deeply saddened By a traffic tragic accident at our chemical plant, which resulted in a capacity bottleneck In the evaporator section, this unfortunate incident led to lower vanadium production 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 is In addition to the accident, we experienced technical delays in the commissioning Of our new crushing plant, it 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 problem we encountered was the large amount of ore that remained Stockpile following failure in engineering and design in the crusher and magnetic separator stages.

Speaker 2

Consequently, in response to the aforementioned challenges, we have undertaken a change in leadership At our Maracas facility, we want to assure you that a comprehensive plan is in place to address The challenges discussed today, our focus remain on improving our processes to ensure that the mine ore can be Processes going forward. As a sign of improvement, the crushing plant produced more than 1,000 tons of contain P2O5 in October despite further improvement scheduled for November December. We are also optimizing additional operational efficiencies at Largo This includes the increase of high purity vanadium production, Which now represents approximately 44% of total production in the 1st 9 months of 2023 Versus 27% in the same period of last year and during the month of October Represented 72% of total production. We are also restructuring maintenance process at the mine And ramping up production to diversify our product and revenue mix going forward. Significant strides are being made in reducing costs with notable reduction in key consumable costs Such as sodium carbonate as well as additional and headcount reductions.

Speaker 2

As we continue to realize the benefit of our Optimization offer, we should expect to see additional cost benefits in future quarters. These initiatives are crucial to mitigate the impact of decreasing Panalion prices. Before I hand the call over to Ernest, I will note that we have made substantial investments Over the past year, this include increased waste rock, pre stripping and infill drilling to future production, the commissioning of an ilmenite plant, the construction of a new magnetic Separation crushing plan progressed with the delivery of our first vanadium battery to Enel, Our European Energy storage customer were also invested in Ongoing at Maracas with the goal of increasing Measure and indicator resources. In the 1st 9 months of 2023, we have completed approximately 19,000 meters of diamond deal rolls at our Campo de Alegre Lourdes and Maracas targets. We plan to provide an update on this program soon.

Speaker 2

Again, as we see this investment as Critical to ensure the sustainability of our operations in a lower vanadium price environment. In summary, we recognize the challenges we face in Q3 and the importance of the investment we have made. We remain committed to optimizing our operations, reducing costs and achieving our targets. We believe this action put us on the path to stabilize operation 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.

Speaker 3

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 $44,000,000 a decline from the $54,300,000 recorded in Q3 2022. This decline can be attributed to 2 primary factors, low vanadium prices and reduced vanadium sales volumes.

Speaker 3

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 $42,500,000 in Q3 2023, Which is a reduction from the $45,600,000 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.

Speaker 3

At our mine site, this includes a reduction in our fixed cost structure through various initiatives, including contract renegotiations and optimizing This also involves a further examination of our mining operations, maintenance procedures, equipment rental 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 $4,400,000 in Q3 2023, And this compares to cash provided before working capital items of $4,300,000 in the same period of 2022. As of the end of Q3 2023, our cash balance stands at $39,500,000 with a net working capital surplus of 91,000,000 And a debt of $65,000,000 To close out, while we did face a challenging quarter, our team is actively working on We remain focused on our long term goals and are working diligently to navigate through the challenges discussed on the call today. I'll now turn it over to Paul for his update.

Speaker 4

Thanks, Anast, and thanks, everyone, for joining the call. The 3rd 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 Vistrofib 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 as per 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 tons of V2O5 equivalent, Which is a decrease from the 2,796 tons sold in Q3 2022, But we remain in line with our annual guidance.

Speaker 4

As Daniel mentioned, We're excited to have signed our 1st sales contract for Immunite. Subject to any operational delays, We should record the sale at the shipment date from Brazil by the end of November, which beats our original estimate of Q1 2024. We have developed a strong sales pipeline and are confident in our ability to place these units Either locally or internationally, other productions ramp up. This new income stream is of utmost importance Thank you for your time, and I'll

Speaker 5

Thanks, Paul. I'll focus my time on a few key updates we made on Our Clean Energy business during the Q3 and some made subsequent to the quarter end. 1st and foremost, we're pleased to announce that our 6 Megawatt hour vanadium redox flow battery deployment Farnell Green Power Spain was validated to operate on test conditions according to EGPE in October. This is a fairly significant milestone Achieved both for Largo and LCE, it showcases the adoption and use case of our VRSP technology and the clean energy storage solution that LCE While this deployment faced delays, it demonstrates our team's ability to successfully implement a grid scale battery, And we believe it is expected to provide an important catalyst for our strategic evaluation process for Elsewhere. To that point, Our ongoing strategic review to unlock and maximize the value of Largo Clean Energy continues to gain momentum.

Speaker 5

We're pleased to report that our efforts have attracted interest from various Reflecting the potential of our VRSP technology holds within the industry. As mentioned by Daniel, LCE is not immune to the need As part of these measures, we've instituted a reduction in headcount at LTE, And we'll continue to explore additional efforts to reduce costs at this subsidiary going forward. We acknowledge that 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-up by saying that we look forward to updating you on our progress in the continued coming quarters, and thank you for your continued support. I'll now hand it over to the operator for our question and answer session.

Speaker 5

Thank you.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. First question comes from Andrew Wong at RBC. Please go ahead.

Speaker 6

Hi, good afternoon. Thanks for having me on. Just and sorry if this might have been already answered, I came out 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?

Speaker 2

I can take that call, Ernest.

Speaker 4

Okay.

Speaker 2

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 1,500,000 tons of material mine From the mine every month in order to continue stripping the mine and create Additional flexibility in the future operations. We are planning To produce 11,000 tons of V2O5, that's about an average Between 900,950 tons per month, and we're planning to create Around 3,600,000 tons of B2O5 In stockpiles, in order to prevent issues with the bottlenecks Into the future. So that's how we look into 2024 production at the mine. In terms of cost, I still don't have the final information.

Speaker 2

But Because we are right now working on our forecast for 2024. So I will

Speaker 6

Okay. That's understandable. It's great to see the ilmenite plants Wrapping 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 for And how are prices that you would realize, how does that look like relative to the market? Thanks.

Speaker 2

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

Speaker 4

Sure. Hi, Andrew. Ilmenite prices today are between $2.50 to $3.50 per gig China. 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 quantify our material to the relevant Customers and also to achieve the desired quality.

Speaker 4

So We will see increase in prices as we improve our production quality, and we realize Slightly lower prices before, but yes, that's the current prices are between $2.50 to 3.50.

Speaker 6

Okay. Thank you.

Speaker 2

Now in terms of volumes, as we are moving forward with the commissioner of Between the Q1 in the Q1, we're planning to produce around an average Of around 300, 500 tons per month. And starting April of next year, we expect that the plant will be completed, terminated on this commission on time, And we should be producing between 8,000 to 9,000 tons per month.

Speaker 6

Okay, great. Thank you.

Operator

Thank you. The next question comes from Steve Silver from Argus Research. Please go ahead.

Speaker 7

Thank you, operator, and thanks for taking the question. 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 Remaining surprising that vanadium prices are being as tied to China steel demand without finding support at some level from this pent up demand

Speaker 2

Can you give us The price environment, Paul?

Speaker 4

Yes, sure. Hi. Well, obviously, forecasting prices is always Very difficult, right? But I want to say that at this point of time, we think prices being under pressure. As mentioned before, it's mainly due to low performance in the Chinese and European Steel Industries.

Speaker 4

But you're right, I mean, the brighter picture is with high purity demand on the both the Aerospace Industries and also the battery sector, we've seen a number of very big Announcement on the BRFP sector in the past few quarters, so we're also hoping that this The demand will help to balance the supply demand. In a more longer term, when we look historically, We're 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 We'll take when that will happen.

Speaker 7

That's helpful. Thank you. And one last one, if I can. You had 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 What metrics that you're looking at besides sodium carbonate that you're watching that could kind of get in the way of a more sustained consumable [SPEAKER CANDIDO BOTELHO BRACHER:] Costs declined moving forward.

Speaker 2

Yes. There are another 2 that they were watching Very closely, one is sulfuric acid that has been almost even Between 20222023, that is an important one. And the other one is The cost of the reagents that they were using in order to recover the ilmenite, So those are the ones that we have been noticing that it has been coming down from our original projections in that particular case. But in the case of the plant, because silica is the enemy in the recovery of the kiln of anadium, That is the most important one that they were following. Visavis, just to give you an idea on the sodium carbonate, In 2023, visavis our original budget, we have around BRL10 1,000,000 of savings compared between the real price we are getting vis a vis our budget And around BRL4.4 million compared to 2022.

Speaker 2

So sodium carbonate, Which is the main one, has been softening incredible in our favor. So folic acid, as I said, is almost even In our cost structure.

Speaker 7

Okay. It's very helpful. Thanks again for taking the questions.

Operator

Thank you. And the next question comes from Mike Heim from Noble Capital Markets. Please go ahead.

Speaker 2

Thank you. You've taken several steps to improve the grade issues. My question is how quickly should we expect to see Grade improvement. 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 Considering the grades, the magnetics that they were mining in Campbell for 2023 is around 19 We are expecting according to our infill drilling That will increase to 22% in year 2024 2024. Now, what the Largo has been doing in order to offset the effect of the lower magnetics In the last quarter of 'twenty three and 'twenty four is the main reason why we invest in the new Drive Mag, Which means that all the disseminated ore that they were mining and will continue mining is being concentrated In the dry bag, in order to keep the same rate or the same grade that we need for feeding The concentrates into the kiln.

Speaker 2

So that is more or less the way we are looking into the future grades And the guidance for this last quarter.

Speaker 1

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?

Speaker 2

Well, if you're talking about the mine, I think that with the change in the contractor last, It was July, August of this year and our latest negotiation with them, We attain that we will continue mining in the order of 1,500,000 Tons per month. So that is already negotiated. That is already in place. The equipment and the Manpower to run the mine from the contractor point of view is there and negotiated. We got a discount On a tamper move mine, so that is already there.

Speaker 2

So I don't see any major issues in the performance of the bank of the mine For the last quarter or going forward. Now in respect to the plant, most of the issues And things that you are going to see in the last quarter and basically by January of next year Is number 1, an increase in capacity in the milling that will require a minimum investment In order to put the 2 mills in parallel, instead of changing what the way they are working Today, which is one after the other. And what is happening is that the 1 mill is fully loaded and the other one is kind of loaded by half. So we're planning to do that between now and the end of January to increase the capacity Of producing concentrates for the kiln. That will require only a small additional CapEx for that particular Project, but they will not require nothing else.

Speaker 2

In respect to the rest of the plant, Most of the additional things that we're planning to do is the following. Increase our capacity in the high grade and the That is basic because the way the market is now Selling and converting B205 into ferrovanadium is at a discount on the B205 price. So the more we sell into the High market on the high purity market that goes for a premium that makes all the sense. So we're going to Our investments and capacity in the B203 plant as well on the powder B205 in order to gain and increase our sales mix on those two products. So those are the main elements that we're thinking.

Speaker 2

I don't see even with the headcounts that We are reducing today in the contractor side. I don't see any danger or any major negative effect By those reductions, because what they were doing is going back to the headcount we had a couple of years ago, An increase because of the construction of the ilmenite plant and the crushing system. For now that Most of those projects are being finished. It makes all the sense in the world to go back to the headcount we had in the past.

Speaker 4

Okay. Thank you.

Operator

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

Speaker 1

Thank you, operator, and thanks everyone for joining the call today.

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.

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Earnings Conference Call
Largo Q3 2023
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