Largo Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 11, 2023

There are 9 speakers on the call.

Operator

Welcome to Largo's First Quarter 2023 Webcast and Conference Call. At this time, all participants are in a listen 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, and thanks for joining our Q1 earnings conference webcast and call. As of previous calls, we've uploaded the supplemental webcast presentation, which is available on our website atlargoinc.com. Only. Our Q1 2023 financial statements related MD and A and most recent AIF are also all available on the website as well as on SEDAR and EDGAR. Only.

Speaker 1

Before continuing the call today, I would like to remind you all that some of the information you'll hear during today's discussion will consist of forward looking statements, including without limitation those regarding future business outlook. Please refer to Slide 2 for a full description of the company's cautionary notes. Only. On the call today is Danielle Talichia, Largo's Interim Chief Executive Officer and Director Ernest Cleave, Largo's Chief Financial Officer only and Paul Volon, Largo's Chief Commercial Officer. Following the delivery of our prepared remarks, we'll open the call for questions.

Speaker 1

Only. Only. So with that, I'll turn the call over to Daniel.

Speaker 2

Thank you, Alex, and good day to everyone joining us today. Only. Since taking over the role of interim CEO of Largo in February, I have been committed only mode. To improving operating efficiencies at the Maracas Menchen Mine, including initiating cost reduction initiatives only mode and conducting productivity assessments. During the Q1, the company produced 2,111 tonnes only.

Speaker 2

In accordance with its production guidance and toward the light, we sold only. 2,849 tons of equivalent B205, which exceeded our quarterly sales guidance

Speaker 3

only mode for the Q1 of 2023.

Speaker 2

In addition, we produced a significant amount of high purity material in the Q1, Representing approximately half of the quarter's production. While we are pleased with this performance, only. We continue to navigate the effects caused by the heavy rainfall in December, which not only caused flooding in the Campbell only mode. And impacted operations, but also delay the company in field drilling campaign necessary to develop the company's short only. Planning for Years 2023 2024.

Speaker 2

Only. In field drilling is performed inside the Largo Campbell pit for further define the ore body prior to mining. Only. As a result of this process, a shortened mine model is developed, which sets the stage for the ensuing year mining plant. Only.

Speaker 2

In light of the heavy rains in late Q4 of 2022 and early in Q1 of 'twenty three, only. This process was postponed. And as a result, we have to adjust our annual 23 production sales and cost guidance. Only. An updated table referencing the updated guidance on a quarterly basis is provided on the current slide.

Speaker 2

On. This scenario remains the top priority for all of us at Largo and we work through this period of adjustment only. In my first update to shareholders last quarter, I made clear that I have been only. Our team with identifying cost reduction initiatives during this period of sustained inflationary pressures, only. Which have resulted in cost increases for our operations.

Speaker 2

I would like to discuss some of those initiatives on the call today. Only. First, the cost of sodium carbonate, which is used in great quantities in operation process, only. Has increased almost 2 70% since year 2021. Only.

Speaker 2

As part of our production process, our team is exploring ways to reduce the amount of silica inside the kiln, only, which in turn will be reducing the amount of sodium carbonate required in our operational process. Only. 2nd, by making certain changes and accurate to our crushing process, including the installation of a new only. Drive magnetic separator in a crushing circuit. We hope to reduce operational maintenance costs and provide more flexibility in the blending of different ores to stabilize the production of V2O5.

Speaker 2

Only. We expect to complete this installation by mid June of this year. And finally, only. We continue to analyze the productivity of certain processes at the mine site and have identified only. Some opportunities for cost reduction associated with the re handling of the material on-site.

Speaker 2

Only. Toward the Q3 of this year, we hope to begin seeing some of the benefits from these initiatives. Only. Prior to handing the call over to Ernest, I would like to highlight a few catalysts only. Expected during the year in additions to improving operational and cost performance at the mine site.

Speaker 2

Only. During the Q1, we continued to make progress and with the construction of our El Menai concentration plant. Only. Construction is expected to be completed in the Q2 of 2023 with commissioning and wrap up following shortly thereafter. Only.

Speaker 2

On the clean energy front, installation of our 6.1 Megawatt Hour Vanadium battery in Spain only. Continued during the Q1 of this year with final provisional acceptance scheduled for only. The Q3 of this year. We have also completed all improvements to our manufacturing only. Facility in Wilbon, Massachusetts this quarter.

Speaker 2

We have begun the process of restarting the stock production to reach a capacity of 12 on 12.5 Megawatts Per Anum by the end of the year with the goal of reaching 100 Megawatts Per Anum only by the end of 2025. Now, I will turn the call over to Ernest to provide an overview on our financial performance for the Q1.

Speaker 4

Ernest? Thank you, Daniel. Only. Thanks to those who have joined the call today. A brief overview of the company's financial performance for the Q1 is presented on the current slide.

Speaker 4

Only. The company's revenues increased by 35 percent from $42,700,000 in Q1 2022 to $57,400,000 only mode in Q1 2023 as a result of increase in quantities sold and improved realized pricing achieved during the current quarter. Only. In Q1 2023, operating costs increased substantially by approximately 60% over on Q1 2022. This is primarily due to increases in direct mine and production costs, and these are particularly attributable to mining contractor costs on equipment rental costs.

Speaker 4

Additionally, a lack of production stability in the subsequent ramp up of operations following the previously discussed only. As touched on earlier, the company also experienced cost increases in critical consumables in the quarter, only, including sodium carbonate as well as an increase in the consumption of ammonium sulfate when compared to Q1 of last year. Only. Our Q1 2023 cash cost performance was in line with our annual cost guidance range with cash operating costs excluding royalties being on time. $5.15 per pound sold compared to $3.97 per pound sold in Q1 of last year.

Speaker 4

However, only. Due to the reasons previously noted, we have extended the higher end of our cash cost guidance range to $5.65 per pound sold. Only. That's up from $5.25 previously. Due to the increases in operating costs during the quarter, we reported a on a net loss of $1,200,000 for Q1 2023.

Speaker 4

I'll provide some additional color on some of the other Q1 2023 costs, only, which includes a $1,600,000 increase in other general and administrative expenses. This is mainly due to an increase in depreciation only from the company's software intangible asset as well as increased IT costs associated with the implementation of the company's ERP system. Only. We also saw increased costs at LCE, which were primarily related to increased logistics as well as travel costs arising from installation activities only. In Q1 2023, the company's share based payments decreased by $2,200,000 only.

Speaker 4

Resulting in an expense recovery of $1,300,000 This is primarily due to reversals in share based payment expenditures on forfeited unvested on the market. As well as the reduced number of stock options and RSUs granted compared to Q1 of last year. Only. The company's finance costs in Q1 were $1,400,000 for the quarter, and that's up from $1,200,000 as a result of increased debt only as well as an initial financing fee on the company's new debt facilities. Finally, the company only.

Speaker 4

We completed the quarter with approximately $62,000,000 in cash and a debt of $65,000,000 and a net working capital surplus of $119,000,000 only. That concludes my remarks for today. I'll now turn the call over to Paul.

Speaker 3

Only. Thank you, Ernest, and good to speak with everyone who has joined today. We exceeded our Q1 quarterly sales target only with 2849 tons sold, inclusive of 2.45 tons of purchased material. Only. And despite the company's operational setbacks during the quarter, we delivered on our commercial commitment.

Speaker 3

Only. Following Q1 2023, we had a great month of sales in April with 1101 tons sold, only, including 78 tons of purchased material. However, as a result of the reasons mentioned earlier, only. We expect lower sales for the rest of the year and we have adjusted our annual sales forecast for 2023 from only. 10,300 to 11,300 tons to 8,700 tons to 10,700 tons.

Speaker 3

Only. This translates into adjustments to our quarterly guidance ranges, which are provided on the current slide. Only. The vanadium market was strong in Q1 and prices increased continuously from the start of the year until mid March, only, supported by strong demand in the aerospace and energy storage industry. The average price for V2O5 in Europe only was $10.39 in Q1 2023, down 3% from $10.72 only in Q1 2022.

Speaker 3

Peruvian prices in Europe averaged $39.46 in on Q1 2023, down 15% from the average of $46.17 only. However, Largo achieved a higher on average price in Q1 compared to the same period last year, thanks to a larger portion of our sales going into high purity applications. Only. Since March, vanadium prices fell sharply, erasing all gains since the start of the year. Only.

Speaker 3

We attribute this fall to lower demand and worsening sentiment from the steel sector in China. Yes, only. We continue to be bullish on Veinjem's medium and long term fundamentals, thanks to considerable expected demand growth in the energy storage sector only with anticipated gigawatt hour of VFV deployments in China in the near and medium term future. Only. It's interesting to note that according to Vanitek, the Global Vanadium Producers Association, BRB is now the 2nd largest only and grew by almost 170% between 2020 2022.

Speaker 3

Only. I'll stop there and turn it back over to Daniel.

Speaker 2

Thanks, Paul. Since becoming Interim CEO, only. I have been focused on improving overall performance of the company through additional operational efficiencies. On. Executing on these initiatives is an important part of our commitment to deliver safe, reliable operations and maintaining on capital discipline in order to preserve our status as one of the world's largest and low cost vanadium producers.

Speaker 2

Only. Largo has an unparalleled Vanadium assets with a business model that we believe is unmatched in the industry. The opportunity to leverage these competitive differentiators is expected to drive value for our shareholders, only. And with that, this concludes our prepared remarks. Only.

Speaker 2

And now we will be happy to respond to any questions from participants on the call. Thank you.

Operator

Only. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Alone. You will hear a 3 tone prompt acknowledging your request.

Operator

Only. Only. First question comes from Heiko Ihle at H. C. Wainwright.

Operator

Please go ahead.

Speaker 5

Hey there. Thanks for taking my questions. Only.

Speaker 2

Thank you.

Speaker 5

Your guidance for production has been taken from 11,000 to 12,000 tons on to 11000 tons. We're just going through your release. There's a couple of things, planned kill maintenance is done, on. The transition to the mining contractor is done. There's probably more positives than negatives in your outlook.

Speaker 5

Only. What am I missing here? And I guess what I'm saying is, can you quantify the decline in your outlook in what factors are making it good owned by how much?

Speaker 2

Only. Well, let me try to respond that question. I think that the widening of our guidance It's basically reflecting the fact that we're planning to end by the end of June only. The in field drilling information that will be inputted into our short term model only. In order to define for the second half of the year, how much is stripping, how much only.

Speaker 2

Volumes to be produced from massive, banded and disseminated. You have to take in consideration that Largo It's not a regular mining company like the copper or the zinc that they were used to it. Largo Mining operation is a blending operations only. Where we need to blend massive with disseminated or banded with disseminated in order to produce the necessary only. V205 in the nameplate capacity of around 1100 tons per day.

Speaker 2

Only. So I don't think we're missing any particular point. Only what they were trying to direct the market is that only. We are in the process of doing the infill drilling that we postponed because of the drilling. As you said, the mining contractor is working, Exceeding our expectation, just on the Q1 of the year, we moved only.

Speaker 2

3,600,000 tons, that is one of the records on a quarterly basis for Largo. Only. Just to give you a flavor, last year in 2022, we had a material move of 3,100,000 tons. So we move in excess of 500,000 tons in order to continue opening the pit. Only.

Speaker 2

So that is the basics of our reasons for the change in the guidance. And in terms of cost, only. We are taking the consideration of increasing the cash cost excluding royalties only. Because of the fact that the sodium carbonate especially in the ammonium sulfate has not reduced in price. Only.

Speaker 2

So that's why we are moving into the cost initiatives, trying to compensate some of those increases in the price of the chemicals only. I hope that they will answer. This is a Long answer to your question, but I tried to give you the full flavor of what why we are doing this.

Speaker 5

Only. Yes. No, that's fair. Earlier on this earnings call, you brought up the ilmenite concentration plan.

Speaker 6

I mean, obviously, it should be

Speaker 5

done quite soon. We'll be on I mean, obviously, it should be done quite soon. We'll be halfway through Q2 on this coming Monday. On a cash basis, only. How much cash flow do you think you still need to spend from today through the conclusion of ramp up and commissioning for this asset?

Speaker 2

Only. Let me take that as well. I think that the final capital expenditures that we only. Project for the ilmenite plant is done. It might be additional on Original expenditures in order to close some of the contracts, but really it will be, I think, on a minimum size.

Speaker 2

Only. The final CapEx is done in the ilmenite plant.

Speaker 4

Only. Daniel, let me jump in here on this one real quickly. Looking at a capitalized perspective, only. There is not much left. But if you look at the impact on cash, there's probably another $10,000,000 to go on that ilmen unplanned.

Speaker 4

So you will see the impact of that cash over the next sort of 4, 5 months spread out.

Speaker 5

Only. And to be clear, you said US2 $1,000,000

Speaker 4

About $10,000,000

Speaker 5

Oh, sorry. Okay, perfect. Got it. That makes more sense. Only.

Speaker 5

Excellent. Thank you.

Operator

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

Speaker 6

Hi, good morning. So only. The heavy rainfall in Brazil occurred back in December. And the 2023 production guidance, it was announced in January only. So I'm just kind of wondering what happened only.

Speaker 6

And what changed over the past month to prompt, such a drastic cut in your production guidance for the year? Only. And then also what impact do you expect this could have on 2024 production?

Speaker 2

Only. Well, as I said at the beginning, we didn't anticipate the effects of the Not completing the infill drilling. As you very well know, when you are relying on the On larger spaces or whole spaces of drilling in order to define a mine plan, only. You can reach the different surprises. In this particular area, we actually Didn't anticipate that the effects of not counting with a closer information between drills, only.

Speaker 2

It was not going to affect us and that's why we produced the last year by the beginning of this year, the guidance for Full year that now we're adjusting. It was just that didn't anticipated that the changes were going to affect us only. In the rest of the year. Let me, however, do the following caveat. Once we have all the information for year 2020 only.

Speaker 2

By the end of June, we put it inside the model, then we will give you for more certainty

Speaker 6

Okay. And then does this does the only. The current mine area that you're in right now, is that why we're seeing the ore grade that's been trending lower for the past three quarters as well? Only. Is that part of the issue?

Speaker 2

It's part of the issue. Last year, 2022, we had an average I think it was 0.91, B2 grade and only. This Q1 was 0.81. So yes, we had an issue with the blending of the disseminated only. And that is the main reason of this decrease in grades.

Speaker 6

Only. Okay. Thank you. And then just maybe just a last one, just a free cash flow kind of follow-up. What are the free cash flow expectations

Speaker 4

only. Yes. So only. Given how much uncertainty there is at this stage in terms of the actual production level, pricing, even costs, only. It really is impossible to there could be so many different permutations.

Speaker 4

So at this stage, we can't give good guidance in that regard. On We'll try and do so later, especially after all this infill drilling and greater definition around the mine plan has been completed. Only. At that point, we'll try and attempt to create more certainty around this issue.

Speaker 6

Only. Okay.

Speaker 4

Thank you.

Operator

Thank you. The next question comes from Mike Haim at Noble Capital Management. Please go ahead.

Speaker 7

Thanks. I had a couple of questions about the guidance change, but I feel like we've only. Talked about that enough. So let me ask one about the ilmenite. You've only.

Speaker 7

Talked about commissioning and ramp up, and I think you might have heard some comments that ramp up might go to on 2025. Can you just repeat those comments or maybe give answer to the question as to how

Speaker 2

only. You got that question, Ernest?

Speaker 4

Yes, sure. At this stage, we are anticipating making some of our trial shipments in Q4. Only. So there would be some revenue is what our anticipation is during Q4. It's not going to be at on Significant size, but in and around that kind of timing is what we expect right now.

Speaker 7

And do you have a sense when you might reach full capacity?

Speaker 5

Only. For

Speaker 2

capacity in the production side?

Speaker 7

Yes.

Speaker 2

Yes. Only. What my expectation is that the capacity of the nameplate capacity of Maracas will be reached only. In the Q3 of this year.

Speaker 4

No, no, he means for the ilmenite plant, I think only. Yes. By Q4, we should be approaching Our peak run rate and if not then certainly in early part of next year. But the anticipation is to be only. At or above at our run rate, run about the Q4 timeframe.

Speaker 7

Okay. And then if I could ask one more question. I was kind only. Obviously, there were some very high numbers, a change in the deferred income tax. Can you just

Speaker 4

only. Sorry, the deferred income tax expense, it's relatively consistent with last year. I don't see it as unusual, unless I'm looking at a different number.

Speaker 7

Well, I guess I'm looking at the total tax expense versus your pretax income, You're actually expensing more than your pretax income. So that's what the explanation I was looking for.

Speaker 4

Only. So those would just be timing adjustments on deferred income tax, etcetera. So it's not a one for on a relationship, which is why you get the movement in deferred income tax, but it's pretty conventional. Only.

Speaker 7

Okay. All right. Thank you.

Speaker 4

No problem.

Operator

Only. Thank you, ladies and gentlemen. Next question comes from Steve Silver at Argus. Please

Speaker 8

Go ahead. Hi, everybody. Thanks for taking my questions. I've got a couple left. First, only.

Speaker 8

The press release mentions that production into the high purity market reached about 49% of production in Q1, only. Which was up from about 42% in Q4 of last year. While I'm sure it's going to be a lumpy number over time, I'm just curious as to what your thoughts would be Based on expected demand in terms of how high that percentage might go over the longer term into the high purity markets.

Speaker 5

Only. Paul?

Speaker 3

Yes. Thanks, Steve. We So a very strong increase in high purity demand in basically since Q4 last year, only mainly in the aerospace industry, but also in the chemical industry and obviously in the energy storage industry that values on So Largo has the capacity to produce the majority of its production into high purity. So when only. The market requires it.

Speaker 3

We'll have the opportunity to produce more high purity and sell more high purity. There is no, only. I think clear target for the coming quarters. Right now, we're already at a much higher level than we were a year ago, only. And we're committed to grow this market share for Largo and become the preferred supplier in this space.

Speaker 8

Only. Great. And one more if I may. Given the pullback in the price of vanadium over the last couple of months, which has been pretty drastic, only. Curious if you have any updated thoughts in terms of at least more broadly the timeframe that it might take only.

Speaker 8

For the market to start recognizing a little bit more in terms of the demand for vanadium Into the clean energy markets, it looks like that the long term demand is still expected to outsupply the current capacity of only. So just given the fact that the price remains so volatile on steel demand, just only. If you have any updated thoughts in terms of when the market might begin to recognize that demand for the clean energy side?

Speaker 3

Only. Yes, it's a good question. And as we said during the presentation, our sentiment over the medium and long term on. Fundamentals of the vanadium market remain very strong. There are some great on.

Speaker 3

Projects in China, mainly for vanadium with oxal batteries that should dramatically change the on overall demand for the product globally. I think that the latest drop in price was really on. Got a short term demand decrease, specifically on steel sector in China. Only. Steel sector in the rest of the world are doing much better.

Speaker 3

So yes, I think it's a short term bump on the road of the growth in fundamentals for vanadium. It's always very difficult to time any only. No movement, but we remain very bullish on the medium and long term fundamentals.

Speaker 8

Only. Great. Thanks for taking the questions.

Operator

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

Speaker 1

Only. Thanks, operator. And that concludes the question and answer session and our quarterly investor conference call. Have a great day. Take care.

Operator

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

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