Largo Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 9, 2024

There are 10 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to Largo's Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer session. This call is being recorded Friday, August 9, 2024.

Operator

I would now like to hand the conference over to your speaker today, Alex Guthrie, Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and welcome to everyone joining us for Largo's 2nd quarter financial results conference call. Our Q2 2024 financial statements related MD and A and most recent AIF are available on our website at largoinc.com as well as on SEDAR Plus and EDGAR. Before we proceed, please note that some information discussed today will include forward looking statements. Please refer to the cautionary notes in our MD and A financial statements and AIF available online. Additionally, all figures mentioned are in U.

Speaker 1

S. Dollars unless otherwise stated. Today's speakers include Daniel Telegia, our Interim CEO and Director Dalio Pereira, our COO of Larva Brazil David Harris, our CFO Paul Polans, our CCO and Francesco D'Alessio, the President of Largo Clean Energy. After the prepared remarks, we will open the call to questions. Please limit your questions to 2 and requeue if you have further questions to allow everyone a chance to participate.

Speaker 1

I will now turn the call over to Daniel.

Speaker 2

Good morning, everyone. Thank you for joining us today to discuss Largo's 2nd quarter 2024 results. Despite these challenges posed by persistent lower commodity prices, our team continues to focus on improvements in vanadium production, ramping up our Ilmenay concentration plant and reducing production costs. This implementation of our new operations team earlier this year, we have been significant we have seen significant progress in meeting our production targets. Our vanadium production has notably increased and our end ramp up of our ilmenite production is progressing, allowing us for a diversification to our revenues through the sale of this new product.

Speaker 2

I am also very pleased to highlight our recently published sustainability report for 2023. Last year tested our organization and we remain steadfast in our dedication to safety and sustainability. Despite such challenges, we achieved notable milestone, including executive all biodiversity management plans, focusing on high priority products and reinforcing our position as a leader supplier. We have made significant strides in our ESG initiatives, forming a decarbonization working group to reduce greenhouse gas emission and advancing transparency to our climate related disclosure. You can download Largo's most recent sustainability report on our website within the sustainability section.

Speaker 2

Let me now turn the call over to Celio to discuss our operational progress this quarter.

Speaker 3

Thank you, Daniel, and good morning, everyone. It's a pleasure to provide you with an update on our operational progress at the Maracas mentioned mine. Firstly, our focus remains on maximizing output and reducing costs. I am pleased to report that our 2nd quarter production results reflect the successful completion of the Planet Kue maintenance in Q1 and a return to expected production levels. Our V2O5 production was 2,689 tons in Q2 2024, an improvement over both Q2 2023 and Q1 2024.

Speaker 3

This achievement align with our quarterly production guidance of 2,400 to 2,900 tons. However, our global V2O5 recovery rate was 74.3 percent in Q2 2024 compared to 81% in Q2 2023, with this decline being primarily due to lower magnetic and V2O5 grades in the processed ore as expected. We mined 568,000 tons of ore with an effective virtual 5 grade of 0.69% in Q2 2024, representing a 16% increase in total ore mined over the prior comparative quarter. Additionally, total ore crushed was 640,000 tons in Q2 2024, a 24% increase over Q1 2024 and a 44% increase over Q2 2023. Notably, this crushing volume marks a record for our Malacaz operations, a necessary achievement given the processing of lower grade ore.

Speaker 3

These increases are crucial as we aim to achieve our set production targets in accordance with our 2024 minuteing plan. Our cost management initiatives remain ongoing with a focus on streamlining operations and enhancing efficiencies. Our team has implemented a number of initiatives with the goal of reducing production costs and improving productivity, including reducing haulage distance, minimizing the number of contractors and conducting a comprehensive review of all contracts. We have now finalized most of our contract optimizations, resulting in significant cost reductions and synergies. These initiatives are already yielding positive results with June 2024 costs being 10% lower than forecast.

Speaker 3

The next phase will focus on inputs, materials purchases and logistics, which represent a substantial portion of our operational costs at Malacas. We expect to see additional benefits reflected in our financial results starting Q3 2024. In a proactive move, we have also rescheduled our annual kewn maintenance from Q1 2025 to November 2024. This decision is to mitigate potential disruptions from the anticipated rainy season at the Manacaz mine site. The maintenance period is expected to last between 15 to 25 days and should not affect our annual production guideline, which is 29,000 tons to 11,000 tons of H2O5 equivalent.

Speaker 3

During this period, we plan to build our magnetic concentrate stock pile for further production. However, ilmenite concentrate production and sales will be impacted, leading us to revise our annual ilmenite concentrate production and sales guidance to 40,000 tons to 50,000 tons and 27 1,000 tons to 42,000 tons respectively. I would like to highlight that we continue to review and optimize the quality of our ilmenite concentrate to achieve greater revenues for this product in the future. As I close out, I'd like to commend our operations team at Largo who are extremely committed to improving production efficiency and cost management. These efforts are essential as we strive to maintain and exceed our production targets, ensuring improved operational performance in the face of challenging vanadium market conditions we currently face.

Speaker 3

Now, I will turn the call over to David for an overview of our Q2 financial results.

Speaker 4

Thanks, Silio, and welcome to everyone on the call today. As Largo's new CFO, it is a privilege to speak with you today. Although this is my first earnings call in this role, I have been part of Largo's finance team for nearly a decade, and I'm excited to contribute to our efforts as we navigate the current challenging market conditions and work towards achieving profitability. In Q2, 2024, revenues of 28 point $6,000,000 were significantly impacted by lower vanadium prices and reduced sales volumes. Operating costs decreased to $36,400,000 in Q2 24, primarily due to a 40% drop in direct mine and production costs, reflecting a 28% decrease in vanadium sold.

Speaker 4

Our Q2 2024 financial results also include significant non recurring expenses, mainly related to a write down on vanadium finished products and foreign exchange losses. The net loss for Q2 2024 was $14,500,000 which included $8,500,000 in these non recurring items compared to $6,000,000 in Q2 2023, which included $1,100,000 of non recurring items. This was partially offset by decreases in professional consulting and management fees and technology startup costs as a result of cost reduction initiatives and reduced activity at Largo Clean Energy. Cash operating costs excluding royalties were $5.97 per pound sold in Q2 2024, a 15% increase over Q2 2023. This increase is primarily due to inventory write downs recognized during the period.

Speaker 4

However, our ongoing initiatives to reduce production costs and improve productivity, such as optimizing haulage distances and reducing the number of contractors are starting to show positive results. Costs in June 2024 were 10% lower than forecast as Celio highlighted just now. In Q2 2024, we signed an inventory financing agreement for up to $10,000,000 using our vanadium finished products inventory secure drawdowns for up to 100 days. Subsequently, in July 2024, we signed an additional inventory financing agreement for up to $10,000,000 with drawdown secured for up to 90 days. Before I hand it over to Paul, I'll highlight that we are making significant progress in our efforts to reduce costs at the Maracas Menchen Mine.

Speaker 4

Our commitment to returning to profitability remains the primary focus and we look forward to providing an update on our progress in the coming quarters. I'll now turn it over to Paul.

Speaker 5

Thanks, David, Welcome everyone to the call today. I am pleased to provide you with an update on our commercial activities for Q2 2024. In the last quarter, we achieved V2O5 equivalent sales of 18.41 tons, including 128 tons of purchased material. This represents a 28% decrease from our Q2 2023 to lower material availability and paint maintenance in Q1 2024. Global vanadium demand continues to face challenges, particularly in the Chinese steel sector.

Speaker 5

The average benchmark price per pound of B2O5 in Europe was $5.93 in Q2 2024, a 30% decrease from Q2 2023. Similarly, the average benchmark price per kilogram of ferrovanadium in Europe was $26.83 a 20% decrease compared to the same period last year. Looking ahead, we are encouraged by the new mandatory Chinese rebar standard announced in June 2024, which will take effect in September. We anticipate this new regulation to positively impact demand for vanadium in the near future. On the ilmenite front, we sold 12,261 tons in Q2 2024, exceeding our guidance top range of 11,500 tons.

Speaker 5

This increase was anticipated as catch up sales from Q1 2024. Finally, it's important to note the current logistical challenges, particularly congestion and delays in Asia and the Middle East. Our team is diligently managing our supply chain to ensure timely delivery to our customers. In conclusion, despite the current market challenges, we remain optimistic about the potential uplift in vanadium demand and our strategic effort to manage production and sales efficiently. I'll now turn it over to Francesco for an update on Largo Clean Energy.

Speaker 6

Thank you, Paul, and good morning, everyone. Since our last update, our primary focus has been on finalizing the requisite items related to our strategic evaluation of the Clean Energy business. We have been actively moving negotiations forward concerning our proposed venture with Straton Energy as previously announced. This partnership aims to leverage our combined strengths and drive innovation and market penetration in the clean energy sector. We are optimistic about reaching the final stages of this process soon.

Speaker 6

Additionally, we are completing the 2nd phase of our commissioning for our VRSP deployment in Spain for Enel Green Power. This phase includes the replacement of the inverters and transformers. This project is a testament to our commitment to advancing clean energy solutions and demonstrates the practical application of our VRFP technology. Looking forward, we remain dedicated to advancing our clean energy initiatives and are excited about the potential of our partnership with Stride Energy. We believe this will position us strong in the U.

Speaker 6

S. Market and enhance our ability to deliver sustainable energy storage solutions. Thanks for your attention. I will now turn the call over back to Daniel for closing remarks.

Speaker 2

Thanks, Francesco. In summary, Q2 2024 was a period of progress for Largo, marked by operational improvements and strategic initiatives aimed at long term growth despite market challenges. I am pleased to highlight that our mining segment achieved positive adjusted EBITDA for both Q2 twenty 4 and for the first half of the year ending June 30, 2024. This indicates that we are on the right track in successfully completing the turnaround of our mining operations at Maracas. On the market front, we are optimistic about the future banalion demand due to the new Chinese standards and strategically look forward to advancing our clean energy initiatives to our potential partnership with Triton Energy.

Speaker 2

Thank you for your continuous support, and we look forward to updating you on our progress in the coming quarters. I will now hand the call back over to the operators for our question and answer section.

Operator

Thank you, Daniel. Ladies and gentlemen, we will now begin the question and answer Your first question comes from the line of Haikou Ihle of H. C. Wainwright. Please go ahead.

Speaker 7

Hey there. Thanks for taking my questions. Hope everybody is doing well.

Speaker 8

Hello?

Speaker 2

Hello. Thank you.

Speaker 7

Perfect. Yes, for longer clean energy, any idea how much to venture is currently costing you on a cash flow basis? I mean, I know there is the reduced headcounts and reduced activity you discussed in the release. But still maybe if you could quantify how that has progressed by quarter and what you see cash wise for

Speaker 9

the remainder of the year?

Speaker 2

David, can you take that question?

Speaker 4

Yes. Hi, Heiko, it's David. Yes, I would say with the reduced headcount and all the focus being on completing the D and L project, I mean, I'm sure you can imagine that the cash burn is greatly reduced on that one. I'm not going to quote exact numbers, but it's certainly not the significant drawdown on our cash balances at the moment. We're just focused on getting the agreement signed and closed with Stryten and moving forward with StoreRail.

Speaker 7

Okay. Maybe not a specific number, but a specific number, but you want to maybe give

Speaker 9

us a range or like a ballpark?

Speaker 4

Cash burn, I mean it's with the focus just being on some of the milestones and getting the equipment in place at Enel, I mean, it's sort of lumpy, but in some months, we're sort of down at the sort of 200 ks range in terms of cash. And if there's a piece of equipment that's needed to be purchased or paid for, then you might see a bit of a doubling at most, but certainly nothing more than that of the current level of activity.

Speaker 7

Okay, that's good. My number internally was actually higher. So that's good to know. And then just a quick clarification, can you give some color, speaking of costs, can you give some color on costs for the kiln maintenance that you plan to do next quarter? So the actual cash outlay is pretty limited, it's just a

Speaker 9

little bit of downtime, right?

Speaker 4

Yes. Salio, maybe you want to provide a little bit more color on the kiln maintenance and your projections on that one?

Speaker 3

Yes, sure. So it's our annual standard kiln replacement. We are just moving what we first planted for February. We are moving to November. We believe that's going to be an optimization given the rain season starts on early December.

Speaker 3

So usually our cash burn on this kiln maintenance, it's between $2,000,000 to $3,000,000 per year.

Operator

Your next question comes from the line of Andrew Wong of RBC Capital Markets. Please go ahead.

Speaker 8

Hey, good morning. What's your view on the margin cost of production in Canadian? I know it's a bit hard to tell, given a lot of the non mine primary production. But is there any sense of are we kind of getting there in terms of pricing and could there be any support at these levels?

Speaker 2

Can you take that question David?

Speaker 4

On the sorry, I thought it was a question relating to the price of vanadium. Yes, I mean, we're seeing good progress as we highlighted in our sort of prepared remarks in terms of costs coming down. June was one of the best months we've seen in a long time on the cost side. So obviously, there's a bit of a lag between production and sales. So we're waiting for that to sort of flow through and be seen in sort of more impactfully in our financial results.

Speaker 4

But perhaps in terms of the views on the vanadium market, Paul, maybe you just want to provide a little bit of color and input on the vanadium market in that regard.

Speaker 5

Sure. Hi, Andrew. On the marginal cost of production, it's very hard to say. As you know, about 80% of the vanadium supply comes as a byproduct with difficult transparency on the actual cost. But what we can say is that, at the moment, there's quite a lot of transparency at the primary producers level, where you can see that in the current price environment, people are loss making and we are also starting to see some cutbacks in production in Asia.

Speaker 5

So, we're definitely in a very low pricing environment

Speaker 4

at the

Speaker 5

moment where supply is going to start to get adjusted if prices do not recover pretty quickly.

Speaker 8

Okay. Thank you for that. And just a question on working capital use. It looks like that's gone up this year quite significantly. Does that reverse in future quarters?

Speaker 8

And why has that gone up so much?

Speaker 4

Yes, I mean, I'll take that one, Andrew. I mean, as you've seen, we've seen some variability in production at the beginning of the year, and also the impact on sales coming in and our production is ramping up. Obviously, it's sort of taking up more and more working capital in that regard. We're focused on getting costs down and maximizing our sales efforts and sort of getting sales and production more aligned. And we're constantly looking at new opportunities that on restructuring our existing debt facilities.

Speaker 4

So looking and working with our lenders in that regard as well. So I think things are moving, we're aiming for things to move in a positive direction. But yes, we've seen some, I'd say some hiccups and challenges in the early part of this year.

Speaker 8

Okay. Thank you.

Operator

Your next question comes from the line of Gordon Lawson of Paradigm Capital. Please go ahead.

Speaker 9

Hi, good morning, everyone. Can you provide some additional color on the decrease in V203 and ferrovanadium sales and what we should expect in the next few quarters?

Speaker 8

Paul?

Speaker 5

Yes. Hi, Gordon. Yes, decrease as I mentioned earlier, decrease in Q2 sales were very much linked to availability of material. So, our sales cycle is about 3 months. So, our quarterly sales will very much represent the previous quarter's production.

Speaker 5

And as you have seen, this Q1 production and Q2 sales were quite aligned. In terms of ferrovanadium, that's still where we believe we'll see most of the liquidity and demand for the spot market. V203 demand is more linked to contracts that are for a year or more usually. So, there's usually quite good visibility there, but our sales will essentially represent our production over the long term.

Speaker 9

Over the long term, but with these contracts, can you is there any I mean, I know you don't like to give guidance here, but again someone else for a range for V203 in particular in the second half of the year?

Speaker 5

Yes. I don't think we provide guidance on such a granular basis, but VITO3 is very much linked to high purity demand. High purity demand for Largo should probably be between 20% to 30% of our total production. So, yes, V2 and 3 will be a portion of that. Okay.

Speaker 9

One of the hard balls here. So, I mean, what options are you considering during this low price environment sort of last another 12 months? I mean, would that include care and maintenance to reschedule some significant mill upgrades or additional financial levers? What do you have on the table here?

Speaker 2

Well, let me take that question. Basically, the options that we are doing right now is to continue reducing cash costs. And we have been done tremendously efforts and we had advanced extremely in order to reduce our cash cost of operation. That is key in order to face this low price environment. We have already completed analysis of most of our contracts.

Speaker 2

We have completed our headcount reduction. Now we are embarking reducing inputs to the plant. So that's basically the strategy we have in place.

Speaker 9

Okay. Thank you.

Operator

Ladies and gentlemen, there are no further questions at this time. I'd now like to turn the call back over to Alex for final closing remarks. Please go ahead.

Speaker 1

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

Operator

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

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Largo Q2 2024
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