Largo Q4 2023 Earnings Call Transcript

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March 22, 2024

There are 8 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to Largo's 4th Quarter and Full Year 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, 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

Thank you, operator, and thanks to all those who could attend our Q4 and full year 2023 financial results conference call. Our annual financial statements, related MD and A and most recent AIF can be accessed on our website at largoinc.com as well as on SEDAR 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. Please refer to the cautionary statements and the related MD and A, consolidated financial statements and AIF, which can be found on our website within the Investor Relations Resources section. And finally, all figures discussed today are in U.

Speaker 1

S. Dollars unless otherwise stated. On the call today is Daniel Talichia, Largo's Interim Chief Executive Officer and Director Ernest Kleeb, Largo's CFO Paul Volon, Largo's Chief Commercial Officer and Francesco D'Alessio, the President of Largo Clean Energy. Following delivery of our prepared remarks, we'll open the call for questions. We ask that participants restrict their questions to 2 and then requeue if there are additional questions to allow the others the opportunity to participate.

Speaker 1

I'll now turn the call over to Daniel.

Speaker 2

Thank you, Alex, and thank you all for joining us today as we discuss Largo's performance over the last past year. Despite facing a mix of accomplishments and challenges, we remain committing to ensuring the longevity and success of Largo's well into the future. As we have pre reported our results yesterday evening, I will stick to providing the important highlights before we open it up for questions from the audience. Our primary focus has been on enhancing operational efficiency at the Maracas mentioned mine to meet production and sales targets, particularly given the current depressed vanadium prices. Despite the industry wide pressure, we have diligently worked to control what we can within Largo and believe that our lower cost profile position us better than others to weather these challenging times.

Speaker 2

Throughout the year, we encountered various hurdles such as delay in our infill drilling program, a traffic accident, a tragic accident at our mine facility and technical setbacks with equipment commissioning due to engineering and design problems. However, we remain focused on enhancing operational efficiency at the Maracas mentioned mine, investing significantly in West Rock Restreaping, a new crushing system and refining our operational management practice and policies, resulting in notable improvements in the latter quarters of 2023, particularly in Q4. In Q4 2023, our B2O5 equivalent production saw 38% increase compared to Q4 2022 with total coal mine and crush also experiencing substantial growth. Notably, we achieved record high purity vanadium production in Q4 2023, achieving a record production of 16 70 tons of high purity V2O5 equivalent, representing 60% of the company quarterly V2O5 output. Although our annual V2O5 production is slightly deep compared to the previous year, we remain our annual production guidance range.

Speaker 2

Also 2023 marked several significant milestones for Largo, including the successful construction and commissioning of a new ilmenite concentration plant. We have seen a steady improvement in ilmenite concentrate production and quality over the last quarter, which will contribute to the diversification of our revenue stream beyond Vanadium in the future. Our exploration programs surrounding the Maracan mentioned mine has become an increasingly important part of our story over the last few quarters. And I'd like to spend a brief moment discussing some of the highlights. We are conducting exploration efforts in the areas surrounding the Kempen field to both optimize current operations and plan for future developments and expansion through the identification and conversion of resources.

Speaker 2

Our ongoing program aims to expand our understanding of the mineralization surrounding the Camber pit so that we might gauge the possibility of continuing mineralization north and south of the pit. As part of this program, we have also identified significant PGM grades in North Magnetic Tailing Ponds. The major significance of this discovery is that the higher grades of PGMs could be associated with our non magnetic material rather than massive vanadium ore as previously thought. We plan to conduct further studies to evaluate the potential to recover PGMs as an additional byproduct of Largo, Vanadium and ilmenite operations, following the completion of our ilmenite concentration plant. Additionally, our Clean Energy division reached a significant milestone in 2023, following the delivery of our 6 Megawatt hour BRFP to our clean energy partner and L Green Power in Spain.

Speaker 2

This installation represents the largest BRFB installed in Europe and has become a key catalyst in our recent announcement regarding a striking energy and Largo Clean Energy. I will let Francisco touch more on that later in the call. While the current vanadium market presents great challenges Give me one second. Great challenges to our financial performance. We remain focused on executing on our strategic initiatives, reducing costs and meeting production and sales targets in the year ahead.

Speaker 2

We appreciate continued support as we navigate through these dynamic times and remain committed to creating long term value for our shareholders. With that, I will turn the call over to Ernest to provide an overview of our financial performance in 2023.

Speaker 3

Thanks, Daniel. As highlighted on this call, the impact of declining vanadium prices on our financial performance over the last year has been significant. In Q4 2023, our revenues were $44,200,000 down 7% from Q4 2022 with revenues per pound sold of $7.69 compared to $7.77 in the same period last year. For the full year 2023, revenues stood at 1 $198,700,000 a 13% reduction from 2022, with revenues per pound sold at $8.66 compared to $9.38 in 2022. This decline is primarily attributed to the substantial reduction in the European vanadium price, which dropped by 22% in Q4 2023 compared to Q4 2022 and a 31% year over year reduction with the most recent price hitting $5.90 per pound.

Speaker 3

Despite these challenges, our focus remains on optimizing operations to mitigate costs. As discussed in previous quarters, we made notable progress in this area, seeing reductions in key consumable costs such as sodium carbonate and overhead costs through targeted headcount reductions. Our operating costs in Q4 2023 totaled $43,200,000 slightly down from $44,500,000 in Q4 2022, while for the full year 2023 operating costs were $174,800,000 compared to $169,700,000 in 20.22. Direct mine and production costs increased in 2023 due to higher total ore mined, cost impacts from low ore availability earlier in the year and planned shutdowns for maintenance. However, direct mine and production costs decreased in Q4 2023 compared to the same period last year, reflecting cost saving initiatives and softer prices for consumables.

Speaker 3

Cash operating costs, excluding royalties per pound of V2O5 equivalents sold, were $5.30 for 2023, and this compares with $4.57 last year, remaining within our revised annual guidance for 2023. In terms of other expenses, total professional consulting and management fees decreased by 9% in 2023 compared to 2022, and other general and administrative expenses decreased by 18%, primarily due to reduced activity and headcount at Largo Clean Energy during the strategic review. Additionally, technology start up costs decreased by 52% in 2023 compared to the same period last year. We reported a net loss of $13,300,000 in Q4 2023 versus a net loss of $15,600,000 in Q4 2022, which included $8,000,000 in non recurring items. For the full year, we recorded a net loss of $32,400,000 compared to a net loss of $2,200,000 in 2022, which also included $10,300,000 in non recurring items.

Speaker 3

To provide better insights into our financial performance, we've introduced a new metric to our financial reporting this quarter, adjusted EBITDA. In Q4 20 23, adjusted EBITDA increased by 138% compared to Q4 2022, reaching $1,400,000 For the full year, adjusted EBITDA was $12,100,000 and that compares with $41,600,000 in 2022. Exiting the year, we maintained a cash balance of $42,300,000 a net working capital surplus of $94,700,000

Speaker 2

and debt of

Speaker 3

$75,000,000 It's evident that our financial performance along with the broader market conditions presents significant challenges. As Daniel emphasized, our primary focus remains on implementing cost reduction initiatives driven by operational efficiencies to combat this downward pressure. I'll now turn it over to Paul for his update.

Speaker 4

Thanks, Annette, and thank you all for joining us today. I'd like to echo the sentiments shared by my colleagues regarding the ongoing challenges we face in the vanadium market, particularly with the continued downward trend in prices through 2023, culminating in a significant decline in Q4. In Europe, V2O5 ended the year 2023, 31% lower than at December 31, 2022, and ferrovanadium dropped 21% over the same period. Despite soft demand in 2023, largely driven by challenges in the Chinese steel industry, we observed continued strong demand from the aerospace and VFD sector, which presents promising opportunities for future quarters. Looking at Largo's results, we sold 2,605 tonnes of B2O5 equivalent in Q4, inclusive of 139 tonnes of purchased material, compared to 2,774 tonnes in Q4 2022.

Speaker 4

Annual V2O5 equivalent sales for 2023 totaled 10,000 396 tonnes, inclusive of 9.29 tonnes of purchased material, which is on the high side of our sales guidance of 8,700 to 10,700 tonnes. Subsequent to Q4, we maintained sales momentum with 1072 tonnes sold in January 2024, followed by 1065 tonnes sold in February. On the IMI front, we're excited about the prospect of diversifying Lagos product offering and revenues in 2024. We completed our first 500 tonnes ilmenite sale in January and anticipate selling between 18,000 and 22,000 tonnes at a healthy profit in the first half of this year. Finally, I'd like to highlight the significance of our exclusive offtake agreement with Gladion Metals Recycling signed in 2021.

Speaker 4

In December 2023, we got delivery of the first lot of vanadium pentoxide produced by Glider in Texas and after converting it in Canada, we will soon deliver our first fully American made ferro vanadium to a US customer. Largo has a 10 year offtake agreement covering the entire vanadium production from Gladio, further solidifying our presence in the American and global markets. In conclusion, despite the challenges, we remain fully committed to navigating these conditions strategically, while capitalizing on emerging opportunities to drive growth for Largo. Let me now turn it over to Francesco.

Speaker 5

Great. Thanks, Paul. Welcome everyone and again, I appreciate opportunity to update everyone on some significant developments within our Clean Energy business. Firstly, I'd like to revisit a milestone we mentioned during our last quarterly update, which has now been officially announced by our partners this week. Back in October, Largo Clean Energy successfully deployed its 6 Megawatt hour redox flow battery at the Sonoran Landes plant in Mallorca, Spain.

Speaker 5

This deployment marks a significant achievement as it now stands as the largest energy storage deployment in Europe utilizing vanadium flow batteries. The integration of our vanadium redux flow battery system with a 3.34 Megawatt Peak photovoltaic plant at Sutterland is truly special. With a specific management system in place, the battery optimizes loading and unloading operations based on renewable production and grade requirements, thereby effectively managing demand peaks. This technological advancement is a crucial step towards establishing long term storage solutions, particularly vital for energy management in regions like Mallorca. Furthermore, the implementation of the battery system will play a pivotal role in enhancing grid stability and facilitating the increased adoption of renewable energy sources, thereby reducing reliance on fossil fuels and hastening the journey towards energy self sufficiency for the islands.

Speaker 5

Now, alongside the significant achievement, I'm thrilled to share another major development that was announced just this past Monday. Building on the success of our partnership with Enel, we've taken a significant step towards significant step forward in concluding the strategic review of Largo Clean Energy with the announcement of a proposed joint venture with Straton Energy. The proposed JV is a testament to the unique value proposition that Largo Clean Energy brings to the vanadium flow battery market, particularly in the realm of long duration energy storage. This includes our patented vanadium full battery stack technology, electrolyte purification technology and access to vanadium through Largo Physical Vanadium. Stryten's extensive experience in the U.

Speaker 5

S.-based manufacturing and their robust infrastructure, including 5 North American R and D facilities with more than 2,000,000 square feet of manufacturing space and a team of 2,500 employees make them an ideal partner to capitalize on our efforts to make thus far in clean energy. Together, we envision transforming the landscape of long duration energy storage in North America. While discussions are ongoing, it's important to note that proposed joint venture is subject to various conditions, including the negotiation of definitive agreements, completion of due diligence and regulatory approvals. Now, I'll turn it back over to the operator to begin our question and answer sessions. Thank you.

Operator

Thank you. And ladies and gentlemen, Your first question comes from the line of Heiko Ihle from H. C. Wainwright. Your line is open.

Speaker 6

Hello, Daniel, Ernest, Alex and team. Appreciate you taking my questions.

Speaker 3

Hi, Heiko.

Speaker 6

Hey, let's talk about ilmenite concentrate a little bit, a few things. First of all, how come there is some such strong variability between January February? I mean, I get that this is going up and running, but nonetheless, what's how do you think we should best model this out by quarter for the remainder of the year, please?

Speaker 2

Do you have that, Paul?

Speaker 4

Yes, sure. Thanks for the question. Just to clarify, are you mainly focusing on sales or production?

Speaker 6

I meant production, but I mean either is probably useful.

Speaker 2

I can give you the production number for the year. We are expecting to produce 88,000 tons of ilmenite during the full year of 2024. You were referring that we have some issues when during January February And the main reason

Speaker 6

I didn't see issues, I meant variability.

Speaker 2

Okay. All right. So our expectation is to produce 88,000 tonnes of ilmenite for the full year.

Speaker 6

And quarterly?

Speaker 4

And Heiko, if I can complement, maybe the variability that you are seeing, we are still somewhat in the we are at the end of our ramp up phase, right, but we're still ramping up and now that production is getting more stable with the grade that we were aiming for. There is a process of getting our product vetted by customers. We've already went through a large campaign to vet small sample from our initial production and now customers are requesting much larger commercial trials. So that's why you're going to see in the 1st month, some months with very large sales, some months with much lower sales, but over time, we are modeling that by probably the end of Q2, early Q3, you're going to see much more regular sales. We've seen it in kind of a ramp up phase.

Speaker 6

Okay. So, that's extremely helpful. So, essentially, if we start trendlining Q2, Q3 and beyond, we'll be on the same page?

Speaker 4

Yes. I think you'll see like a normal run rate by Q3 in terms of sales and probably Q2 in terms of production.

Speaker 6

Got it. Very helpful. Speaking of ilmenite, prices for globally sourced ilmenite, there is obviously some variability. I know that hedging vanadium is quite tough price wise. Is there a way to hedge ilmenite pricing?

Speaker 6

And if so, have you looked into it? And also what prices are you seeing, please? Thank you.

Speaker 4

Yes. So, there's no way to hedge ilmenite such as other kind of electronically traded commodities. But the good news is that ilmenite is a much more stable commodity in terms of price if you compare it to vanadium, right? The debaschend are much lower. We're able to secure some contracts forward at a fixed price, but we cannot really say that we're hedging, right.

Speaker 4

We can fix prices 2, 3 months ahead, maybe as long as 6 months ahead, but not much more. And yes, so our strategy is also to follow the market, but again, I mean this price is much more stable than what you've been used to in Panadium. In terms of price level, it's still somewhat we're still in a price discovery phase because the price of ilmenite is not increasing linearly with quality, actually you've got massive premium for higher quality product, which is where we're getting to now. So, the prices that we achieved in our initial sales for material that we produce during the ramp up at lower quality should be very different in a few quarters when we have stable production at higher grades. So, we can probably give you more color on that in the next either next quarter or the following month.

Speaker 6

Very helpful answer. Thank you all. I'll get back in queue.

Speaker 2

Thanks.

Operator

Your next question comes from the line of Andrew Wong from RBC Capital Markets. Your line is open.

Speaker 7

Hi. Thanks for taking my question. So, with prices hovering in the $5 to $6 per pound range, how close are we to marginal cost? And does that provide some downside support to prices at this level? And how does Largo think about the production decisions as those prices are nearing your cost structure?

Speaker 7

And then just broadly, what's your outlook for prices for the rest of this year? Thanks.

Speaker 3

Daniel, I'll take the first part.

Speaker 2

Okay.

Speaker 3

Andrew, as you know, we've guided on cost $4.50 to $5.50 Obviously, at the current prices, we're seeing $5.90 in the market. We will not be making cash at those levels. But it's very hard for us to forecast where things go. We want to see and I think as I've mentioned to you before, we want to see a couple of months of production at our full production run rate to actually fully assess cost. We have an ambition to get to the lower end of our cost guidance.

Speaker 3

But obviously given where the price is right now, this is not a cash positive territory for us. So I'll leave it at that and I'll let Paul talk about his expectation on prices.

Speaker 4

Yes. Thanks, Andrew. As you know, we do not give guidance on pricing. The only thing that we can do is just looking back, we are well below historical average. We are seeing also primary producer really struggling to turn a profit at these levels.

Speaker 4

Altogether, primary producer represent about 20% of the global supply. So we hope at some point that prices will allow to turn a profit otherwise we will see other events happening to adjust. So we're well below historical average. We don't know when we'll revert to the mean, but we believe we're in a very low price environment especially accounting for all the inflation that we had in the past few years.

Speaker 7

And could you maybe just talk about what marginal cost looks like for the industry right now?

Speaker 4

No, sorry, I cannot do that in June.

Speaker 7

Can you talk about what marginal cost looks like for the industry?

Speaker 4

Yes, it's very hard to say. The only let's say producer that are publishing straight forward prices are the primary producer, Largo, Bushveld, the other primary producer in South Africa is not publishing its pricing directly and you can see that people are losing money at these levels. The other type of production either from steel slag or what we call secondary sources from oil and gas manufacturing, It's indirect cost, which is very difficult to have clarity on. But yes, we're seeing the oil industry struggling at the moment.

Speaker 7

Okay. Just maybe switching to the JV with Trenton, can you just talk a little bit more about that potential partnership? How does that benefit LCE? What do both parties bring to the JV? And how do you see this as a path to kind of commercialize the technology for BRFVs?

Speaker 7

Thanks.

Speaker 5

I'll take that.

Speaker 2

You'll get the answer, Chazelle?

Speaker 5

Yes, sure. So as you know, Strine Energy brings large scale manufacturing domestic presence in the U. S. They've been in the battery space for over 100 years. So these are key essential factors when trying to establish a go to market strategy, large scale availability of these technology for utility scale deployment and C and I applications as well, right?

Speaker 5

Combined with LPV, our STACK technology, proprietary purification and capabilities to set up our electrolyte facility, pretty much you control all the aspects of the deployment for this technology in the Western world, which as you know has made great strides in China that has struggled in the last 20 years to make headway in the Western world. And with the growing demand of long duration energy storage, specifically here in the U. S. For domestic content and a lot of incentives being provided by the DOE, we feel that this partnership really complements the skill sets of both companies to achieve this target and provide a viable alternative for a long duration energy storage solution for the U. S.

Speaker 5

Market.

Speaker 7

That's great. Thank you very much for taking my questions.

Operator

Thank you. And there are no further questions at this time. I would like to turn it back to Alex Guthrie for closing remarks.

Speaker 1

Thank you, operator. And with that, that concludes our question and answer session of the quarterly investor conference call. Have a great day everyone. Thanks.

Speaker 5

Thank you. Bye bye.

Speaker 4

Thank you.

Operator

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Largo Q4 2023
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