Largo Inc

TSX:LGO

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. My name is Leone, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Largo Resources First Quarter 2019 Results Conference Call. [Operator Instructions] Thank you. Mr. Guthrie, you may begin your conference.

[Alex Guthrie, Manager of Investor Relations & Communications]

Thank you, operator, and welcome, everyone, to the Largo Resources First Quarter 2019 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting tomorrow in the Investors section on our website at largoresources.com.Our first quarter 2019 results press release, MD&A and financial statements are also all available on the company's website and on SEDAR.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. In addition to non-IFRS financial measures such as cash operating costs and cash operating costs excluding royalties will also be discussed during this conference call. Actual results could differ materially from those anticipated and risk factors that could affect results are detailed in the company's AIS and other public filings, which are also available on SEDAR and the company's website.Further information regarding Largo's use of non-IFRS measures is available in the company's first quarter 2019 earnings press release and in the company's MD&A for 3 months ended March 31, 2019, both of which are available on SEDAR and on our website. The financial amounts presented today will be in Canadian dollars, except noted otherwise.In addition, the market and industry data contained and incorporated by reference during this call concerning economic and industry trends is based upon good faith estimates of our management or derived from information provided by industry sources. In particular, we note that the market data provided on this call is derived from information provided by TTP Squared, Inc. Largo believes that such market and industry data is accurate, and sources from which it has been obtained are reliable. However, we cannot guarantee accuracy of such information. We have not independently verified the assumptions upon which projections of future trends are based.Speaking first today will be Largo's Chief Executive Officer, Mr. Mark Smith. Speaking technical will be Largo's CFO, Ernest Cleave, who'll provide additional detail on Largo's Q1 2019 financial performance. Following Ernest, the company's independent consultant, Mr. Terry Perles, will then provide an update on the vanadium market. Finally, we'll open the call to questions. I will now turn the call over to Mark Smith for opening remarks.

[Mark Allan Smith, CEO & Director]

Thanks, Alex, and welcome, everyone, to our quarterly update conference call. Let me start out by saying there were 2 major financial issues for us in the first quarter of 2019: Profitability was significantly impacted this quarter as a result of the decline in the price of vanadium; and two, the remeasurement of trade receivables under the company's offtake agreement with Glencore. To this end, we have asked Terry Perles to join us today to provide his thoughts on the vanadium market. His presentation will help everyone understand the vanadium market better. Concerning the continuing issue of trade receivables, we simply note that the Glencore contract is over in less than a year as of yesterday. These 2 issues are driving our financial results more than anything else as production, production expansion and exploration continue to do exceedingly well.Now let's talk more about the quarter. Exiting the quarter, our financial position continues to remain strong. As of March 31, 2019, the company had a cash balance of CAD 190.7 million, and it is still our plan to eliminate the remaining USD 29.1 million of outstanding debt by the end of second quarter of this year. On May 3, 2019, the company issued its excess cash flow offer to purchase all of its outstanding notes at the purchase price of 103% of the principal amount thereof plus accrued and unpaid interest to but not including the purchase date. The offer was made in accordance with the terms of the notes and will expire at midnight on May 31, 2019, unless extended or earlier terminated. On the operational front. Production from the Maracás Menchen Mine during the first quarter was 2,099 tonnes of V2O5 compared to 2,214 tonnes in the same quarter last year. Lower production during the quarter was largely due to the completion of the kiln refractory replacement project, which was completed ahead of schedule during the month of March. I'm very pleased with our operations team who were able to minimize the impact of production to 11 days from 13 days as previously anticipated.Global V2O5 recovery rates averaged 80%, which is an increase of 5% over the same quarter last year and represents a new quarterly record for the company. Our expansion project will increase production to 1,000 tonnes of V2O5 per month is on track. We expect the final expansion, construction and ramp-up to be completed in the third quarter of 2019 and to reach an increased nameplate production rate of 1,000 tonnes of V2O5 per month at the beginning of the fourth quarter of 2019. High-purity sales in the first quarter were 440 tonnes V2O5, which is an increase of 80 tonnes over the fourth quarter of 2018, and an increase of 40 tonnes over Q1 2018. As we like to emphasize during our calls, high-purity V2O5 commands a price premium over standard grades of V2O5 and requires no additional operational costs to Largo because of our naturally high grade ore.On the exploration front, drilling at both the Novo Amparo Norte and Novo Amparo deposits are now complete, and drilling at the São Jose deposit has now begun. The company's work on the new resource estimate for Novo Amparo Norte is well advanced, and we look forward to providing an update to the market towards the end of the second quarter 2019.In summary, I'm very pleased with the operations team for successfully completing the kiln refractory replacement ahead of schedule as well as setting a new quarterly record for global recoveries. In addition, our operations team continues to maintain focus on cost discipline at the mine with our quarterly cash operating cost being 4% lower when compared to Q1 2018. And finally, we are committed to implementing a capital return program to return cash to our shareholders in the form of dividends and/or the repurchase of shares and/or warrants following the expiration of our excess cash flow offer and the company's ultimate repayment of the remaining debt balance of USD 29.1 million. We intend to communicate the details of the capital return program on or before our Annual General Meeting of Shareholders, which is on June 27, 2019.With that, let me turn the call over to Ernest who will provide details on our first quarter 2019 financial performance.

[Ernest M. Cleave, Chief Financial Officer]

Thanks, Mark, and thanks to everyone for joining the call today. As Mark noted, profitability was significantly impacted during the quarter, and the company incurred a net loss of $2.2 million for the quarter compared to net income of $45.8 million in Q1 2018.The company recognized revenues of $44.3 million in Q1 2019 compared with $91.1 million in Q1 2018, with production of Q1 2019 of 2,099 tonnes of V2O5 being 115 tonnes lower than the 2,214 tonnes produced in Q1 2018.Vanadium sales from contracts with customers was $101.4 million in Q1 2019 compared with $73.1 million in Q1 2018. This increase is primarily attributable to an increase in the V2O5 price, with the average price per pound of V2O5 of approximately $16.34 for Q1 2019 compared with approximately USD 13.57 for Q1 2018. The overall decrease in revenues is primarily attributable to the remeasurement of trade receivables payables as the result of the decrease in the V2O5 price from Q4 2018 when average price was approximately $24.53.You can also refer to the company's press release dated April 22, 2019, in this regard.The valuation of trade receivables at March 31, 2019, resulted in a liability position and has been classified as trade payables.In addition to the 51 point -- $57.1 million, approximately USD 42.9 million reduction in revenues reported during Q1 2019 as a result of the remeasurement of trade receivables, payables under the Glencore contract, the company anticipates reporting an additional remeasurement charge of approximately $40 million, that's about USD 30 million, to its revenues over the remainder of fiscal 2019 for sales pertaining to Q1 2019.This also assumes a constant V2O5 price per tonne of $8.45 over the remainder of the year, and that is the average V2O5 price per pound as of May 10 of this year. Cash provided before noncash working capital items was $21.7 million in Q1 2019 compared to $61.9 million in Q1 2018. Net cash provided by operating activities was $95.4 million in Q1 2019, which compares to $24.9 million in Q1 2018.Operating cost during the quarter of $29.1 million improved when compared to $31.2 million in Q1 2018 and include direct mine and mill costs of $19.5 million, depreciation and amortization of $7.3 million and royalties of $2.3 million.Cash operating costs excluding royalties also improved in Q1 2019 to CAD 4.54, that's USD 3.41 per pound, and that's from CAD 4.75, USD 3.76 in Q1 2018. That represents a decrease of 4%. The decrease seen in Q1 2019 as compared to Q1 2018 is primarily due to the improved global recovery of 80% for the quarter, which was largely in turn driven by global recovery rates of 83.1%, which was achieved in January of 2019. Expenditures of $10.1 million were capitalized to mine properties, plant and equipment during the quarter including $3.8 million of capitalized waste stripping cost.With that, I will now turn the call over to Terry Perles, who will provide an update on the vanadium market. Following Terry's market update, we will open the call up for questions.

[Terrance T. Perles]

Thanks Ernest. I would like to start just looking back over 2018 and a bit of a recap on where we've been.Looking at 2018, vanadium production totaled just more than 89,000 tonnes of pure vanadium while consumption of vanadium was about 97,000 tonnes of pure vanadium. So in this year, 2018, we saw a significant deficit and global inventory drawdown.In 2018, vanadium prices as reported by Metal Bulletin publication of in-warehouse Rotterdam duty on not-paid basis started the year at $9.75 per pound of V2O5 and peaked at $29.15 per pound of V2O5 in mid-November before falling to $15 per pound of V2O5 at Christmas. Then from January to late March 2019, prices rose from $15 to $17.75 per pound of V2O5 for a second downward move in the market began leading the price down to today's levels, Ernest mentioned of $8.45. Fundamentally, vanadium production continues to lag demand, and the situation is expected to persist for several years. Given the fundamental situation, the market right now is very difficult to explain. Clearly, the data shows that there's not a tremendous amount of support for vanadium prices above $15 per pound of V2O5. At very high levels above $15, we start to see some loss of market due to substitution, and we also see some high-cost new sources of production coming to the market. For example, the Chinese stone coal mines and [ Energy Keel ] extracting vanadium from their retention ponds. So the price move from $29.15 in November down to $15 was not a surprise, although the speed of which the downward move occurred was a bit of a surprise.During the second half of 2018, Chinese steel mills built inventory vanadium in advance of the implementation of the new standards effective November for high-strength rebar, and this pressure helped push the vanadium price up to a very high level. In November and December with vanadium prices at extremely high levels and the mills having built some inventory, spot buying was very weak in China. We have a very opaque market here, and some people interpreted the weak spot business as a reflection of the Chinese mills ignoring the new rebar standard, and I believe this perception caused the price to move back down very rapidly by Christmas to the $15 level.What we can see from the data is when we have an environment where consumption is ahead of production, vanadium prices of $15 have a very strong support level, but what we saw now, January through March, we saw the price rise from $15 to about $17 on the back of, again, tight market situation before we saw the price suddenly start to collapse again.In late March, it became apparent that the Chinese steel mills were not ignoring the new standard as evidenced by rise in imports of niobium, which is the substitute for vanadium in some cases in this application. Significant increase in niobium imports led to a second industry rumor. Obviously, the standard was not being avoided or ignored or there would not have been an increase in niobium imports, but the high import levels of niobium in January led some people to believe that niobium would completely replace vanadium in high-strength rebar. It's clearly my view that this speculation is incorrect. Metallurgically, that's an impossible outcome, and I think that this misperception is what's pushed the price down to the point we have now. If you look at -- just very briefly looking at metallurgy, both niobium and vanadium impart higher strength on steel, but they do it through very different metallurgical mechanisms. Vanadium is very predictable, it's very easy and it is the best solution for this application. In some cases if we have the right metallurgical understanding, if we have a reheat furnace with the ability to get billets up to 1,200 degrees C, if we have a high-powered rolling mill and if we're producing rebar smaller than 25 millimeter diameter, it is theoretically possible to use niobium rather than vanadium. The use of niobium requires a controlled rolling practice that leads to higher energy usage, lower throughput through the mill and will result in higher quality issues, but it can be done in some cases. So we really need to understand is what's going on in terms of niobium and vanadium consumption in China. If we look at the latest data available, it will suggest that in grade 3 rebar, 38% of the rebar is 25 millimeters in diameter or larger and, therefore, cannot be produced with niobium due to the metallurgical limitations. It's also the case that grade 4 and grade 5 high-strength rebar in China must use vanadium. There's no question about it.So the new standard has an effect on 2 things. It's eliminated loopholes that allowed people to send quenched and tempered steel into this market advertised as grade 3. The quenched and tempered steel does not meet the standard for elongation and will not perform well in seismic activity. And when this use of illegal quenched and tempered steel was discovered, a research project by the Chinese Iron & Steel Research Institute was initiated and it was discovered that there were some mills of quenched and tempered steel and sending it into the market, calling it grade 3. And the revision of the standard is designed to solve that problem. Last year in China, we had about 40 million tonnes of grade 2 rebar. The revised standard eliminates grade 2 rebar. And now, in theory, all of that grade 2 rebar must be produced to meet the grade 3 standard. The revised standard also eliminates the possibility of sending quenched and tempered steel into this market. We don't know how much quenched and tempered steel went into the market last year, but circumstantially, it looks like about 10,000 tonnes of vanadium consumption per year have been impacted by the use of quenched and tempered steel in this market.So we fully anticipate that, today, the mills have started consuming more vanadium, that the grade 2 and the quenched and tempered steel is going to be and is being replaced by -- the steel that, that was, was either vanadium or niobium. As we go through the numbers and if we make the rather extreme assumption that half of the grade 3 rebar could be produced using niobium, we come up with an analysis that suggests vanadium consumption in China should increase from 36,000 tonnes of pure vanadium in 2018 to 44,000 tonnes of pure vanadium in 2019. At the same time, niobium consumption in China is forecasted in this scenario to rise from 25,000 metric tonnes of pure niobium to 40,000 metric tonnes of pure niobium. The fact that China produces almost no niobium means that imports are a very good proxy for consumption. Import data is readily available, so it's easy to see the growth in niobium imports and therefore, niobium consumption in China. Far less obvious is the impact of the new situation on vanadium consumption, given the fact that China is historically a net importer of vanadium. So the internal supply/demand changes are not readily available -- visible.Today, in China, rebar productions reached a historical high point. Inventories of vanadium that -- built at mills in late 2018 are being depleted. It's my view that both consumption of vanadium and niobium are occurring at record levels now in Chinese steel mills. We do believe that once the mills have exhausted the inventories built of late 2018, we're going to see a significant increase in buying from the Chinese steel mills. We do believe that we're going to see the price very soon move back above this $15 per pound of V2O5 support level. And we do think that there's going to be a very turbulent environment today in China this year given the situation.Also, it's important to note that today, vanadium prices in China are below niobium prices, and in that situation, there's no incentive to deal with the operational issues associated with using niobium in this application. In Western markets, we're also seeing a very weak market. In fact, we now have prices in the West that are below Chinese prices. It's a very unusual situation. I think the very high price in the end of last year did result in some substitutional loss of market share in the West, and as a result of that, the major suppliers, particularly to Europe, are facing a situation where offtake from contract customers is not as high as they anticipated, and so they're dealing with a problem of placing the last few percent of their production into a relatively thin spot market, and that has caused the western price substantially to move a bit below the European -- below the Chinese prices. It's unusual given the fact that outside of China, there's an annual deficit of about 8,000 tonnes of V and so normally the availability in prices of Chinese exports drive the Western markets.So today we're in a position where vanadium and niobium are basically at par in terms of their cost for the steelmaker. We do look for some rebar producers who moved to niobium in second half of 2018 to come back. The inventories of rebar in China are declining. Rebar production today in China has reached the high point. It's more than 20% above the levels we saw in mid-February. And so the inventories of vanadium at the steel mills are being rapidly depleted, and we do expect to see these mills coming back in, in a big way to start sourcing more vanadium. So in summary, we do think we have a very opaque market here. It's very difficult to understand what's going on, and in this environment, rumor can take on a life of its own and we do believe that the perception that niobium will replace vanadium in high-strength rebar is causing the current weakness in the market. And we expect that very soon the market is going to wake up to the fact that the consumption of both vanadium and niobium are increasing dramatically in China.And with that, I think I'll turn it back over to Alex.

[Alex Guthrie, Manager of Investor Relations & Communications]

Thanks, Terry. I'll ask the operator now to open the call to questions.

[Operator]

[Operator Instructions] Your first question is from Bryce Adams from CIBC.

[Bryce Adams, Analyst]

So my first question. I guess I'll throw to Terry. Thanks very much for the market update. Given everything that you've said, do you have a price outlook for 2020?

[Terrance T. Perles]

I do have a price outlook for 2020. I think that in 2019, we're going to see a lot of turbulence. We're going to see some tremendous changes in terms of consumption. The high prices that, that should drive in 2019 will have some impact on supply as well, in China, in particular. My vision, frankly, is that we're going to see prices in 2019 and 2020 much higher than what we saw in 2018.

[Bryce Adams, Analyst]

Good. And then at the same time you said that above $15 you see less support for the vanadium price.

[Terrance T. Perles]

Yes, I think in the long run, above $15, you start to bring in unusual sources of new supply. Vanadium is not actually a rare element. It's the 17th most abundant element in the earth's crust, but it is rare to find it in economically viable concentrations. Obviously, as the price moves up, some of those potential deposits become economically viable. So when you get above $15, you do get into that range where you can see vanadium start to come from some strange places, and you also start to see some destruction of consumption at that level. If you look at a 15-year inflated data, monthly pricing for vanadium, and you look at a distribution chart, you're going to see a somewhat normal distribution with a major [indiscernible] about $7, and if you're in an environment where supply is adequate to meet demand and prices are driven by the cost of production, that data would suggest that historically around a $7 price it's pretty normal. The data will also show a secondary peak of $15. And I do believe that's confirmation of the fact that we do see support, when we're in an environment where consumption is ahead of production, of prices at that $15 level.

[Bryce Adams, Analyst]

Okay. And you started by saying it's difficult to explain the current pricing -- spot pricing, but then with all the commentary that you thought on, do you think that we're making a floor here? Is there any cause?

[Terrance T. Perles]

I'm sorry, I didn't hear the end of that.

[Bryce Adams, Analyst]

Do you think that we might be creating a floor here at the current levels?

[Terrance T. Perles]

Well, I think we're at the floor at this point, frankly. I think again that given the imbalance in the market that we should see prices at or bit above $15. The historical data will suggest that the most predominant price has been about $7. I would suggest that if we're looking into the long -- I think for the short term here and my data would suggest for the next 3 years, we're going to continue to have a deficit of supply versus demand. As long as you're in that environment, I think that $15 number makes sense. When you look out longer term to the equilibrium price in the long run, you might look back at history and say history tells you that, that number ought to be about $7, but I would also suggest that if we see V2O5 prices at $9 or below, we bring the vanadium readout's batteries into an environment where it can be extremely competitive for [indiscernible] mining and it's entirely possible that technology can put a floor in the market that's a bit higher than what we've seen as an average of long-term price in the past.

[Bryce Adams, Analyst]

I might switch to Ernest now. Ernest, you mentioned the trade receivables is now in the liability position and is a trade payable. So the CAD 40 million that's expected and related to Q1, do you think most of that would be incurred in Q2?

[Ernest M. Cleave, Chief Financial Officer]

Yes. So the way to think about it is that CAD 42 million is money that we have to give back to bank or -- and we've also made a note there that just knowing what we know right now about the change in prices, there's another $30 million that we have to give back.And these are using very broad numbers, but what I can tell you is that over the course of the year, we're going to give back, for the remainder -- remaining 5 months, we're probably going to give back another USD 35 million. And again, you know it's the market is there if you call it, but I just want to kind of put something out there that indicates what it's going to do to bottom line cash. So you're going to see that impact continuously over the course of the year, but you won't see all of it, being candid. You'll probably see about $35 million. That's again assuming the price stays completely unchanged. Any variable in that price could throw that number up one way or the other. But just looking at it where we're sitting right now on a cash basis alone, is going to be a $35 million adjustment and that payable will be growing subsequent to the quarter.

[Bryce Adams, Analyst]

If prices were to stabilize or increase, then the payable -- there would be no payable. Is that correct way to think about it?

[Ernest M. Cleave, Chief Financial Officer]

It depends. It's a good question. It really would depend on the acceleration of that increase. So if the curve is steep you can recover a fair bit of these adjustments. But again, being candid, a lot of it is baked in, so the number that I've -- that we've made publicly in terms of, call it, give or take, USD 7 million, I would treat as largely baked in at this stage. So it could get worse than that if price deteriorated, but I wouldn't anticipate us doing much better than that.

[Bryce Adams, Analyst]

Yes. I mean the big number that you put, the $40 million remeasurment, if that was recognized in Q1, then you would have almost no revenue for the quarter and is that the way we should be thinking about this? And then where prices are now. Is there potential for a negative revenue situation in future periods? Might be a bit hard to explain here?

[Ernest M. Cleave, Chief Financial Officer]

I don't think that is possible, but as you saw in the quarter, if you take that CAD 44 million and you worked it back to U.S. and divided by the pounds, we implied price. I calculated it was about $7.20. So yes, if you have big price adjustments, it could be a very modest revenue on that, but I don't see negative.

[Bryce Adams, Analyst]

And given this environment, is there -- will there be repercussions if the asset was intentionally slowed down?

[Ernest M. Cleave, Chief Financial Officer]

I don't know. Mark, I don't know if you want to take that one.

[Mark Allan Smith, CEO & Director]

I think we're always looking at that, Bryce, as a possibility. But we have to remember that we do have an offtake partner here, and we have made certain commitments to them, which they have then turned into commitments with end use customers. So we've got to balance all of those things together but the thought has certainly crossed our minds.

[Bryce Adams, Analyst]

Yes. And not receiving any economic benefits at this stage, so what's the point?

[Mark Allan Smith, CEO & Director]

Yes, it's a lot of work.

[Bryce Adams, Analyst]

Just switching to the expansion CapEx, a slight increase to the budget there, what's driving that increase?

[Ernest M. Cleave, Chief Financial Officer]

Now there were a couple of things, but mostly in the electromechanical section, there are increases in the -- there are sort of increases across the board, some of the electrical work, there are increases in that. So we are also revisiting our sort of project management on this. In absolute dollars, these aren't big increases, but on a percentage basis, we think it's a unacceptable increase, so even though it's just a few million dollars. To make sure that the rigor is there in the team as well. But I wouldn't be able to point out just 1 or 2 Big Bang areas. There are a few things that look like they were slightly underbudgeted, but the 2 headline ones are probably electromechanical and then some of the -- just the general electrical rig.

[Mark Allan Smith, CEO & Director]

And Bryce, what Ernest is referring to in terms of the project management side is there's kind of 2 ways that you can put your estimates together for the budget. One is using indexed numbers and the other one is using actual quotes. To a large extent, the areas that we've got increases, those were associated with indexed numbers that were used, and we have changed our project management system on-site to ensure that we are going to be using actual quotes going forward. So we're going to minimize that issue going forward.

[Bryce Adams, Analyst]

But that's being affected in the revised budget?

[Mark Allan Smith, CEO & Director]

Yes.

[Ernest M. Cleave, Chief Financial Officer]

We're so close to completion now that we're not focused on any more variances, but yes...

[Mark Allan Smith, CEO & Director]

It was a good learning for us, and we have done the review and made the changes.

[Bryce Adams, Analyst]

My last question would relate to the capital return program. I know that details are coming out in the next month, but just with where the shares are trading at the minute in the $1.70 sort of range, $1.75, $1.80, would you do any more towards buybacks rather than dividends in that scenario?

[Mark Allan Smith, CEO & Director]

Yes. Let me answer it by saying it's, I'm sure, this question is going to be asked with some additional people on the phone here. But we are looking at everything possible at the Board level, but I think the general rules always apply, and that is that if the share price is low, that's what we ought to be doing is repurchasing shares. If the share price is high, we should be issuing dividends. So we've got to continue to take a hard look at the business environment, the market cap of the company and make the best decision we can going forward. The other issues that we look at, which are additional variables that may be a little bit more specific to Largo is that we want to be very careful about potentially impacting any of the liquidity that we've created in the company over the last 6 to 8 months. So we're trying to balance all of those things, but the Board is committed to making that final decision, and we will issue a press release on that on or before the Annual General Meeting on June 27.

[Operator]

Our next question is from Piyush Sood from Morgan Stanley.

[Piyush Sood, Former Research Associate]

My line got dropped off so it's possible that the questions may have been asked before. But I just wanted to check what capacity do you have right now for [ CapEx ] because you had a big true-up in 1Q and there is another true-up coming in 2Q and for vanadium to redo a price at $8.45 right now, free cash flow is going to stay a little bit challenged versus what we saw last year so just want to understand the overall situation. What kind of magnitude are we potentially looking at?

[Ernest M. Cleave, Chief Financial Officer]

I'll take that. Very sticky question. Mark is not on with me here. As you can see, in Q1, we actually on a net cash basis there, we actually -- there was negative cash. So if you translated that to U.S., it's sort of negative $11 million. And what I'm communicating to our investor group here is that at the current price, at the current prevailing vanadium price of $8.45, again, here, we have to make assumptions here if we're going to provide some guidance to you guys. But if we assume it stays in place for the remainder of the year, actually see on a net cash basis, we'll actually be negative cash. So we're going to be negative cash in the range of USD 35 million to USD 40 million over the course of fiscal 2019 for all the reasons we discussed on the prior call.

[Piyush Sood, Former Research Associate]

All right. That's helpful. And Terry, one question for you. I think you made a comment on niobium substitution peaking. I thought that it had peaked several months ago, but it seems like it went on longer than expected. So a, what gives you confidence it's peaked? Is it just the vanadium price at this point? Or do you think it's something to do with metallurgy or something like that?

[Terrance T. Perles]

Well, frankly, I don't think either niobium or vanadium consumption has "peaked" in Chinese steel. I think what you're seeing is the replacement of grade 2 in quenching and tempered steel with both vanadium and niobium. There's still some people out there cheating against the standard. I imagine there might be. We also know there's a nationwide inflection occurring in June and July to ensure that the steel that's out in the field is meeting the new standard. So I think what you have to recognize is that, again, niobium and vanadium get steel -- increase the strength of steel through very different mechanisms, and there is a segment of those circles that overlap, and the higher the prices are between niobium and the vanadium is, the more potential for substitution there is. There's people out there that technically can replace vanadium with niobium, but they choose not to because they understand it's going to have an impact on their productivity, on the quality of their product and the quality of rejects and energy consumption. But as you ratchet up the vanadium price relative to niobium, you push some of those people over the edge. So I think that's what we saw with the very, very high price in November. We just pushed a few more people over that edge, and that's why we saw the surge in niobium imports in January. Incidentally, the imports of niobium into China February and March were about half of the January rate. So it's a very dynamic situation. I do think we've seen a significant growth in consumption of both vanadium and niobium in Chinese high-strength rebar right now.

[Piyush Sood, Former Research Associate]

That's good to know. And last one for me, it's a two-part question. So we saw Bushveld acquire Vanchem, so it seems like they are looking to increase vanadium production through the new plant. So first question, Terry, it's for you, what do you think about the acquisition? Do you think the additional supply shows up soon? And then, Mark, over to you that does it make you think about your long-term projects differently, if you'd still be looking to raise capacity by, say, 50% or 100% in anything of a larger magnitude?

[Terrance T. Perles]

Yes, so Bushveld, Vanchem. First of all, there's just, I think, some press out, Bushveld giving guidance for this year, production of 2,800 to 2,900 tonnes of V from the Vametco project. They've in the past talked about expansion, going to 3,800 tonnes of V, but I don't see any mention of that in their latest press. The Vanchem facility, which was originally part of Highveld Steel, and Vanchem shut down in 2015 after Highveld Steel shut down and the Mapochs iron ore mine shut down. Actually, Vanchem, over the last year, has been producing at a very low level during the regime of high prices, reprocessing some tails and processing a small amount of ore stockpile that was in place. So the plant, it historically is a good plant. They have the ability to make some high-purity material and some vanadium chemicals. There hasn't been any significant investment in there for a long time. Bushveld now will have to figure out how to feed the plant. I note that in their information, they talk about a 5-year investment plan to refurbish the Vanchem plant, and they also talk about feeding the plant from the new project, the Mokopane mine. And how long will it take to develop a new mine in that area, in an environment where there are some issues with the local people? I guess I don't know. But I would look at the 5-year investment plan at the Vanchem plant, there's a -- kind of a projection from those guys as to when they think they can actually start ramping up production.

[Mark Allan Smith, CEO & Director]

Great. Thanks, Terry. I'll follow up then on the last part. Piyush, thanks for joining us today. We are -- we've been directed by our Board of Directors to really focus on organic growth, and so we are continuing to work on looking at the potential to double our production capacity at the Maracás mine. That effort is ongoing, and we will be evaluating that on several fronts. One is we're taking a look at project management's front-end loaded estimates to figure out what the capital cost would be for that and to figure out what the time would be for construction and then trying to model all that so that we understand what the unit cost of production would be as well. On top of that, we're also taking a look at the market itself, and we've hired different groups of independent market experts that are helping us try to understand what it would mean if Largo were to double its production out into the world as new supply. So we want to make sure that we're doing things in a very smart way. We don't want to be the classic mining company that has a little bit of success and then gets too big and disrupts markets in ways that don't help anybody. But at the same time, I feel very confident that Largo's project ultimately will be the lowest capital cost, it will be the lowest unit cost of production, and we can bring it on faster than anyone else. And I think that, that is absolutely a competitive advantage that will put Largo in the front seat in terms of any additional capacity.

[Operator]

Our next question is from Heiko Ihle from H.C. Wainwright.

[Heiko Felix Ihle]

I just want to point out, it's been fascinating watching you guys grow over the past few years. And I know we're pressed for time and I'll, therefore, try to limit my questions to be fair to the other analysts on the call, but I did still want to thank Terry for dialing in and giving an overview, so thank you for that. Thinking of your recovery rates, you had a recovery rate of 83.1% in January but then "only" 80% for the quarter as a whole. And Mark mentioned some of the details for that in his prepared remarks as well, but, I mean, I just want to see if you were able to elaborate on why the recovery rate dropped so much from January, and what sort of recovery rates we should be using for the rest of the year. And if you feel comfortable doing so, maybe even what you're seeing at present, call it for May.

[Mark Allan Smith, CEO & Director]

No, great question, Heiko, and there has been some variability and it was really largely driven by the kiln performance. We had outstanding kiln performance almost the entire month of January, and that allowed us to hit that 83.1%. As the refractory became thinner and thinner and closer to the replacement project time, the performance of the kiln started to deteriorate. And as we got into February and March, it was doing the best it could, but it was on a limited life at that point in time, and so the performance went down a little bit. I am happy to report that after the kiln refractory was replaced and we started back up, we're now seeing outstanding results again out of the kiln. We're seeing a very stable operating environment, and we would hope to continue to see high 70s or low 80s as a very reliable number moving forward. But that's -- it's all about the kiln right now.

[Heiko Felix Ihle]

Okay. Fair enough. Moving on from that, and this might be an Ernest question. I'm aware we're in an extremely low rate environment, but, I mean, you guys have a large cash balance sitting around or at least on a temporary basis, you've made close to the money on interest income at all. And I understand the comments that were made earlier on this call about the fiscal '19 cash flow and all that good stuff. But just thinking out loud, are there maybe intelligent ways that we can invest the funds or you can invest the funds at a slightly higher yield while they're sitting around and not being utilized?

[Ernest M. Cleave, Chief Financial Officer]

Yes. I guess you're asking the most conservative guy at the table, again, which I'm often accused of, but we're in the business of mining so certainly, from my side, I'm going to be putting that at the lowest risk categories possible. We don't have any near-term investments outside of the debottlenecking, which we're almost done with right now. If there was an investment opportunity within our plant or our existing operations, that could give us a significant return, we'd clearly do it, but otherwise, I am keeping that money safe and protected, so I don't know if that answers your question.

[Heiko Felix Ihle]

Well, I mean, 3-month T bills are trading north of 2%, right? I mean, just as one idea.

[Ernest M. Cleave, Chief Financial Officer]

Well, we're doing better than that.

[Heiko Felix Ihle]

Okay. And then last but not least, I was going through your MD&A earlier today and I noticed some remarks on Northern Dancer and Currais Novos. And clearly, you're not developing a tungsten project anytime soon, but, I mean, are these projects just marketed for sale? Or is there a game plan to hold on to them and see what happens, maybe spin them out? It seems like you aren't spending much if anything at these sites right now anyways.

[Mark Allan Smith, CEO & Director]

Yes, we are spending basically 0. It's minimum maintenance is all it is. We have been very -- we've been very open-armed and we've welcomed people who express interest in these projects, but we're very focused on vanadium and very focused on the Maracás Menchen Mine right now.

[Operator]

Our next question is from Curt Woodworth from Credit Suisse.

[Jung-Yung Lim Chang]

This is actually Jon on behalf of Curt. Just a question for Terry, and apologies if this comes off the wrong way, but just for the whole thing of disclosure and clarity. Do you happen to have any entities controlled or owned by you or have any sort of exposure to the price of vanadium?

[Terrance T. Perles]

Sorry, do I have any entities or exposure to the price of vanadium?

[Jung-Yung Lim Chang]

Right, yes.

[Terrance T. Perles]

So I have 2 businesses. One is TTP Squared and TTP Squared acts as a consultant for producers and consumers of vanadium, so I do have income based on consulting work in the vanadium space. I have a second company, MoTiV Metals, which is a very small trading company that deals with some of the specialty vanadium products, and our activity is extremely low. We're talking about less than 1 container of material a quarter. And as I sit here today, I don't have any exposure. I don't hold any inventory of physical vanadium. I also don't any equities in the vanadium space.

[Operator]

Your next question is from Lee Cooperman from Omega Advisors.

[Leon G. Cooperman, President, CEO & Chairman]

I have a bunch of questions. Let me just, kind of, give it to you upfront and you can answer them in any order that you want. Number one, what is the amount of excess cash in the company? If I start with the $190 million at the end of the first quarter, I subtract that to $30 million of debt you're going to pay back and this $40 million negative cash flow because of the Glencore arrangement, that's $120 million. How much cash do you feel you need to have to run the business, your minimum cash, your comfort level? That would be question number one. Question number two, you're running a cash deficit but I assume that's because of the Glencore deal. Your production costs are something between $4 and $5 a pound. So even at the current price level, you should be generating cash, so explain to me that situation. Third, Terry said something, which is just technically incorrect. He said he expects the vanadium back to a support level of $15. If it's $8.45, support isn't $15. You just expect the price to move back to $15 from the current price of $8.45, which you didn't forecast. But I wouldn't call $15 support, since you're almost half of that right now. And next question would be on the share count. There's a little confusion you have on -- I'm not sure what the page number is, but you have basic shares went up by about 9 million to 527. Diluted shares went down quite a bit. I assume that's because the stock price dropped on some options that were warrants that might be struck above the current market and no longer in the share count. But what is the actual number of shares outstanding presently to address that confusion? And then lastly, if the vanadium deal -- if the Glencore deal didn't exist and you didn't have this extra complication, what would that add to our results beyond 2020 when the deal expires? Because I'm having a little trouble understanding the significance of Glencore. Any help you could give would be appreciated. And then I have one other comment I'll make, but after you answer these questions.

[Ernest M. Cleave, Chief Financial Officer]

All right. So Lee, thank you for the questions as usual. So let's just -- let's -- I'll try and I think get them in order here. So in terms of cash, just looking at the end of the quarter, assuming, and I stated, we intend paying off the debt, so we're -- while we haven't made a formal decision to do so, I think we've clearly communicated that we would like to do so. But assuming for a second that we do that, the net cash is in the region of $112 million. So moving on from that point, that's at the end of the quarter. As I mentioned, over the full year and I'll get to how this arises, we're probably looking at a negative cash or cash generation, free cash flow of about $35 million to $40 million, and a large part of that is driven by this price adjustment mechanism that we have under the Glencore contract. So we will -- at the current price, we will certainly make profits, as you mentioned, but if you then layer in the CapEx, the repayment of the debt and the $35 million in, essentially, repayment of the price adjustment back to Glencore, we actually do get in a negative free cash situation for the year. So in terms of your question, how much is usable, if you looked at that and you'd say, okay, well, I probably have in the region of about $70 million that you could effectively use before looking at working capital for the operations. So the answer is nuanced around what the price actually does. But ultimately, it's going to be in that range of $50 million to $70 million is what you could probably play with. And again, these are super headline numbers. I mean there's a lot of assumption baked into those but...

[Leon G. Cooperman, President, CEO & Chairman]

Which probably less than $50 million to $70 million because you have to keep some amount of cash to run the business.

[Ernest M. Cleave, Chief Financial Officer]

Yes, that's what I'm saying. We are -- again, it depends on there's working capital implications as we potentially take on the sales and marketing function after the Glencore contract has expired, so that actually could potentially add to your cash needs. So we are considering all of this. I'm not trying to avoid the question, but the Big Bang number is not $100 million like we were thinking before. It's certainly much more modest than that now and that's just the kind of [ trend we're seeing ] and we're probably in that region of $50 million to $70 million. And again, it depends on what the past does. So that's -- but that's the cash situation. Just in terms of the number of shares, et cetera, the reason you see them, it's effectively the same number in the financials as when you're in a loss situation and you actually take fully dilutive. It has an anti-dilutive impact, so you don't actually take fully diluted when you're in a loss situation. That's the only reason. But if you go back to the year-end, our fully diluted was in the region of 642 million so -- and then the current undiluted number is about 529 million.

[Leon G. Cooperman, President, CEO & Chairman]

It gets back to the first question. I mean, at $50 million or $70 million, I assume you're going to have a certain minimum amount of cash needed to run the business. So there really isn't that much money available to buy back stock or pay dividend?

[Ernest M. Cleave, Chief Financial Officer]

No, sir. Again, assuming we're staying in this current situation, but yes, I agree.

[Leon G. Cooperman, President, CEO & Chairman]

Yes. So it would seem to me the prudent thing to do is until you have a real handle on the price of vanadium, which we've been wrong on, maybe the best thing to do is pay off your debt and do nothing and just sit there and watch.

[Ernest M. Cleave, Chief Financial Officer]

That's usually the advice the CFO gives, but I guess the Board will make whatever decision they want to, but I agree wholeheartedly.

[Leon G. Cooperman, President, CEO & Chairman]

Yes. Yes. And tell me about Glencore. So, let's say, 18 months now, Glencore doesn't exist in terms of Largo Resources, what would that mean to our cash flow and profitability?

[Ernest M. Cleave, Chief Financial Officer]

So there's -- you go back to just looking at our profitability on a per pound basis, so if we look at -- let's just make an assumption around, call it, 12,500 tonnes per annum production, that's about 27.5 million pounds. So every dollar in vanadium price is effectively on the EBITDA basis, it's about $27 million, give or take. So to the extent that we can improve over the current prices that we realize with Glencore, every dollar is going to be roughly $30 million there, $27 million to $30 million to your bottom line. We believe that because of the actual structure of the Glencore contract and our ability to avail ourselves of higher prices in the specialty space, and I'm purposely not breaking down the 2 components, but we'd like to think there's probably a $3 gain, especially if we are putting close to 100% of our production through the high purity or into the high-purity section. So we know that there's opportunity cost baked into this contract. And don't get me wrong, this -- the contract with Glencore was important for Largo, especially at the time of us raising money, it served its purpose. Glencore's a good partner for us. It was paid on time, et cetera. So we expect Glencore to be a rational actor and always do what's in their best interest. But if the contract had -- were to expire, I'd like to think there is, between opportunity costs and the ability of Largo to avail ourselves of the additional premiums, there's probably $3, maybe more, which is why we're saying we like to think about $100 million, and maybe that's generous, but that could easily be if you just look at the price impacts that we've seen recently on the price adjustment side. I don't think those numbers look too egregious. So that's my view around just the headline numbers.

[Leon G. Cooperman, President, CEO & Chairman]

That answered the question. And getting back to the price of the commodity, Terry's forgotten more about vanadium than I'll ever know, but bottom line is we've been wrong. Nobody was saying that $30 was a ridiculous price, but what we're saying is the long-term price is like $7, but we think that the odds are it'll trade at $15 before it trades at $7. Is that kind of what we're saying and that the current price seems to be artificially low?

[Terrance T. Perles]

I do believe the price today is well below fair value given the market balance, and I think it's -- there's a perception that niobium's going to replace vanadium entirely in Chinese rebar, which is absolutely incorrect. When I talk about $15 as a support level, that's based on historical data, and it's a function of the cost of production and what happens at very high prices in terms of demand, substitution of niobium for vanadium as well as new sources of production. And we can see very clearly that environments where supply is challenged to meet demand, there certainly is a stable point at about $15, and I think the reason we've run through that is this misperception that vanadium is on its way out in Chinese rebar.

[Operator]

We have a follow-up question from Piyush Sood from Morgan Stanley.

[Piyush Sood, Former Research Associate]

So lots of numbers on the call. Just wanted a clarification that do you have a sense of your earnings power at spot? I'm not asking for the EPS guidance but just some rough numbers that, let's say, if there were no drags from remeasurement of receivables, could you give us some sense around earnings power? And if I could extend it a little bit that do you have a free cash flow breakeven price in mind for V2O5, either for right now or for post the Glencore contract?

[Ernest M. Cleave, Chief Financial Officer]

Sure. Let me cunningly try and avoid your question by only talking about the remaining 9 months of the year. At the current price, I think you'd be looking at an EBITDA, give or take, of about $80 million, right? So it's much more modest from the hallowed days of $30 vanadium but -- and I think if you -- whatever you have in your model for the -- obviously, you have our current results, I would -- for the remaining 9 months, there's about $80 million there of EBITDA. I'm not really sure that we should provide any more than that. I don't know if that helps you. Does that provide you with enough?

[Piyush Sood, Former Research Associate]

No, I think that's good enough. Appreciate the help.

[Operator]

Your next question is from Brian Nunes from Gramercy.

[Brian Nunes, Senior VP & Research Analyst]

The question for Terry just on the market commentary, you made a comment that when we have these high prices, sort of nontraditional sources of supply come into the market and you specifically mentioned the Chinese stone coal producers. With the rise up in last year and then briefly at the beginning of this year, would it be fair to say that those guys have come back in? And then the follow-up to that is how quickly do they stay in? Because we know Chinese producers to produce at a loss for a while in other industries. Just wanted to understand how long that market distortion could take.

[Terrance T. Perles]

Great. So Chinese stone coal really became a significant source of vanadium after the price hike in 2004 and 2005, which came at a time in China where there was a lot of hot money around and people looking for things to invest in, and a lot of private money went into stone coal mines at a relatively small operations at that time. And the mines worked for a few years. In 2010, we saw vanadium prices drop down below $10 per pound of V2O5 and we started to see the stone coal mines shutting down. But the peak production from the mines was close to 6,000 tonnes of vanadium here. If we go now back -- forward 2017, '18, as the price is moving up, people are looking at the situation and trying to project where the price is going to go and decide whether they should try and reset their operations. And so people began the efforts long ago, it's 2 years ago, and what they've run into is some serious issues with environmental and operating permits. These facilities are [ hype ] orders. The government has made a decision that the stone coal mines are not permitted to discharge any wastewater anymore, and before they can get an operating permit they have to address that issue. So there's significant investment required for these projects to get back online. A lot of them are private entities that aren't well financed, and they need capital to invest to address the process changes that are necessary to meet the new standards. But they're having trouble getting investment because they don't have an operating permit, and so it's a bit of a chicken and egg game. They need the permits to get the investors, but they can't get the permits until they've made the investments to do what's necessary. So that's the dilemma they've been facing for a while. And what we saw last year was an increase in production, primarily from 3 stone coal mines, 2 near Xi'an in Shaanxi Province and 1 in Hunan. And the plans for this year are the same as the plans for the last 2 years. All of these guys that I go and visit tell me they're going to be up and running in 6 months, but it's all predicated on getting their permits in place. And so now we're sitting at a point were, essentially, all of these guys are under water. But that's for the stone coal mines. The 2 guys in Shaanxi have cash costs of just below $9 per pound of V2O5, so we do -- we are now seeing some of the stone coal mines in Hunan throwing in the towel. I think that what we're going to see is the 2 guys, at least in Shaanxi, will continue. These 2 mines are part of a potential entity that has a significant balance sheet, and they're going to think a bit more strategically. The vast majority of the rest of the stone coal mines are private entities, and it's going to be important for them to be able to generate cash month in and month out for the project to make sense. So I guess what we're seeing right now is some of these guys deciding not to continue to fight the fight to try and get their permits in place given where the market's at right now. The other things that we've seen in China, some people who, when the price was very high, thought the guys making pig iron, thought maybe they should make some vanadium slag as well. I don't think they've actually thought through that process very well from a technical standpoint. There are some serious issues. The reason why the guys that make slag are the ones that do it and the people that don't make vanadium slag don't do it. And I think that those guys, in theory, if the prices are $15 or $16 or $17 can probably make a dollar or 2 trying to extract some vanadium from their operations, but clearly, in this environment, it doesn't make any sense at all.

[Piyush Sood, Former Research Associate]

Okay. Turning to Ernest, I just want to understand. On the balance sheet, you got your receivables, [ cash products ], payables. Does that relate to the charge-back on December or Q1? Because you referred to another $30-odd million payment that you might have to make. Is that everything that you make captured on the balance sheet or are there additional [ preorders ] you might expect?

[Ernest M. Cleave, Chief Financial Officer]

Good question, Brian. Thank you. So that's everything up to Q1. So that's up to the reporting date and so there are impacts that both relate to last year and Q1 without getting into the details of our Glencore agreement. But all the adjustments that were required within the period have been met, which is at CAD 57.1 million that's reflected in various documents that these things are. The 30 additional that we've given to the market is our attempt to say, well, given where we know the market is right now and again, these are not GAAP numbers, but we see an additional "remeasurement" right now. If we were to close the books today, that's where we would see how [ we'd be heading ]. So that's just trying to be...

[Piyush Sood, Former Research Associate]

So that's post Q1 activity?

[Ernest M. Cleave, Chief Financial Officer]

Yes. We're trying to be as transparent as possible, and again, that could -- if prices were trending down over the remainder of the year, that number would grow, but that's -- put it this way, it's a bare minimum 30, but we hope that helps people think about how this contract, more or less, functions within the organization.

[Piyush Sood, Former Research Associate]

Right. And so just following up on Bryce's comment to you guys. The -- I know you have a take-or-pay, they take 100% of what you produce. Do they contract with you volumes for the year?

[Mark Allan Smith, CEO & Director]

They are anticipated buyers that we share with them, I think, around October of the year before, and then we do work with them pretty much hand-in-hand, month-to-month and quarter-to-quarter, and that's all part of the idea of cooperation and Glencore having certain contract requirements that they enter into before the year starts so that we don't get them into any kind of trouble. So it's very cooperative along those lines. But bottom line is, is that there is no requirement for Largo to produce anything, and there's no penalty if we don't; whereas anything we do produce, Glencore has to buy.

[Piyush Sood, Former Research Associate]

You don't -- rarely look at prices suggestion. These guys are killing you. No sane player would agree to these terms given the position where you are and the balance sheet that you have to withstand it for a period of months.

[Operator]

Your next question is from Jim Young from West Family Investments.

[James Young, VP & Investment Analyst]

A couple of questions. First, on the 440 tonnes that you sold into the high-purity markets this quarter, what was the premium that you realized, and I recognize that it's like a 50-50 split with Glencore currently?

[Ernest M. Cleave, Chief Financial Officer]

I think it's in the region of sort of $0.50 or $0.60. It's not spectacular. Again, we don't control the numbers that they're done at, but there certainly is a premium.

[James Young, VP & Investment Analyst]

Okay. So say for the $1 to $1.20 realized total premium in the market, what do you think the current market is for the high-purity V2O5 in today's environment?

[Mark Allan Smith, CEO & Director]

Terry, do you want to answer that one?

[Terrance T. Perles]

Yes. So when you talk about high-purity V2O5, you've got a continuum of applications and specifications. And those, as you get to the more rigid specifications, there's fewer potential suppliers and typically higher premiums. So I think that what we have in the market today, we have 2 basic market groups where high-purity vanadium is used. One is titanium alloy production, and the second is just the general chemical catalyst deals. In the titanium alloy market today, the premiums that the producers of the vanadium master alloys of this industry are paying are a scaled premium that depends on where the market's at. When prices are very high, those premiums pop out at about $1.25 today, and when we're in price regimes like we're at today, the premiums are as high as $2. When we go into the chemical industry, we've got another kind of set of situations. Again, you've got specifications that vary. On the easy end of the spectrum, it's something like sulfuric acid catalysts where premiums are typically $1 to $1.25. And on the other end of the spectrum, you've got things like [ malachian ] hydra catalysts where, even today, materials are being sold at $17 or $18 into those markets.

[James Young, VP & Investment Analyst]

Okay. And second question is the kiln refractory replacement process that you completed and you guys did a great job on, did that have a direct benefit to the kiln recovery rate that you guys -- that the company realizes? Because again, your goal recovery is 80% which you show cut you don't change the first quarter is made up of, what, 5 segments of which kiln recovery is one component of it. So does that kiln recovery refractory replacement have a direct benefit to the kiln recovery rate?

[Mark Allan Smith, CEO & Director]

So it absolutely does, Jim, but there's multiple variables within that kiln as well. So really, what replacing that refractory did was to allow us to continuously and stably operate that kiln without having to shut it down and do little minor refractory repairs, which then upsets the system for just a couple of days or more, but it still impacts that total recovery. So by being able to run it on a very reliable, stable basis, we can now settle in on the other variables and continue to improve recoveries through that kiln. And I went through a review with the team today on last month's performance and the kiln is operating very well.

[Operator]

Thank you. Please proceed with closing remarks.

[Mark Allan Smith, CEO & Director]

Thank you, operator, and thanks to everyone for joining us today. As we noted, Largo's first quarter 2019 results, press release, financial statements, MD&A and updated corporate presentation can be found in the Investor Relations section of Largo's website at largoresources.com. That concludes our call. Have a great day, everyone.

[Operator]

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