Largo Inc

TSX:LGO

Earnings Call Transcript 2023-Q2

[Operator]

Good day and thank you for standing by. Welcome to Largo's Second Quarter 2023 Webcast Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session.

I would now like to hand the conference over to your speaker today, Alex Guthrie, Senior Manager of External Relations. Please go ahead, sir.

[Alex Guthrie, Senior Manager of External Relations]

Good morning, everyone and thanks for joining Largo's second quarter earnings call and webcast. As with previous calls, we've uploaded a supplemental webcast presentation, which is available on our website at largoinc.com.

Our Q2 2023 financial statements related MD&A and most recent AF are also available on the website as well as on SEDAR 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 Slide 2 for a full description of the Company's cautionary notes. On the call today, we have Daniel Tellechea, Largo's Interim Chief Executive Officer and Director; Ernest Cleave Largo's Chief Financial Officer; Paul Vollant, Largo's Chief Commercial Officer; and Francesco D'Alessio, President of Largo Clean Energy.

Following the delivery of our prepared remarks, we'll open the call for questions. We ask that participants restrict our questions to two and then requeue if there are additional questions to allow the others the opportunity to participate.

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

[Daniel Tellechea, Interim Chief Executive Officer and Director]

Thanks, Alex, and welcome to everyone joining the call and webcast today. Before we dive into the operation and financial performance during the second quarter, I would like to take a moment to express our deepest condolence for the tragedy that occurred as a result of an accident, our chemical plant in July. Our thoughts and prayers go out to the affected family, and we are committed to ensuring the safety of our operations and preventing such incidents in the future.

Safety has always been a paramount focus for us in an accident that has only reinforced our commitment to maintaining the highest safety standards across all our facilities. We are conducting a thorough investigation to understand the root of the cause and will implement necessary measures to enhance safety protocols.

Our team is dedicated to creating an environment where every employee can work confidently knowing their well-being is our top priority. As I discussed last quarter, our team is working diligently to optimize our processes and streamline operations and tap into the full potential of our operations for the future.

Referring to Slide number 5, we wish to emphasize that despite not having reached our nameplate capacity yet, we continue to make considerable progress with our efforts. In June, we managed to achieve a stable production levels for the month with over 1,000 tons of V2O5 produced in July was lower than expected with 644 tons per use.

However, intermediate stocks were established throughout the plan during the month and following the release of the plan by the local labor authorities we expect to produce for above 1,000 tons per month in August. We also have reiterated our production guidance for the third quarter and for the year as a whole.

Our infill drilling campaign for '23 and '24 is now complete and will allow our team to make more informed mine planning and optimize production decisions going forward. Additionally, we have successfully completed changes and upgrades to our cash brushing process which will lower our maintenance costs in the future.

We have also successfully installed the dry magnetic separator which will allow for a heightened level of flexibility in blending various port types with the production of concentrates in the kiln.

Before we close out, it is imperative that we discuss a few challenges and opportunities that lie ahead. Firstly, we acknowledge that our mine and stripping performance is currently behind schedule and we're taking decisive action to rectify this situation and regain the necessary flexibility for future production.

Consequently, we will continue to maintain elevated mining volumes, aiming for approximately 1.5 million tons per month throughout for the remainder of 2023 and a significant portion of 2024. Furthermore, changes to our million shares which remained ongoing, aiming as reduced in silica content in our concentrate and therefore, reducing our requirements for sodium carbonate in the production process.

Lastly, we remain focused on optimizing our cost structure. We understand the importance of operational efficiency in today's competitive landscape an inflationary environment. Costs continue to remain within our guidance for 2023 and our ongoing cost reduction efforts are poised to yield tangible results with many of them set to materialize in the third quarter of 2023. These endeavors are expected to not only enhance our bottom line but also positioned us favorably against any future market volatility.

To close out, despite challenges faced in the first half of the year, we remain a state passed in our commitment to operational excellence, safety and growth. We extend our gratitude to our dedicated team, loyal shareholders and supported analysts with our high focus on higher production, cost management and strategic growth for the Company, we are confident in our ability to create value for our stakeholders.

With that, I will now turn the call over to Ernest to provide an overview of our financial performance for Q2. Earnest?

[Ernest Cleave, Chief Financial Officer]

Thank you, Daniel, and good day to those joining us on the call. I'll begin by providing a succinct overview of the financial performance during Q2. We acknowledge that the quarter represented its share of challenges for Largo, which were not unlike the difficulties encountered by most of our mining peers as commodity prices experienced a widespread decline.

For Largo, a sharp decrease in the prevailing vanadium price had a discernible impact on our financial results for the period. Our revenues for Q2 2023 reached $53.1 million compared to $84.8 million recognized in the same period last year.

This translates to revenues per pound sold of $9.42 reflecting a decline from the $11.69 per pound sold in Q2 of 2022. Our net loss for the second quarter was $6 million, a shift from the net income of $18 million reported in Q2 of last year. The basic loss per share stood at $0.09 per share.

In terms of cash flow, we reported cash provided before working capital items of $3.8 million compared to $25.4 million reported in Q2 of 2022. Cash provided by operating activities was $18.1 million, an improvement from the $2.9 million recorded in the same period last year. Our cash balance at the end of Q2 2023 stood at $64 million, with a net working capital surplus of $103.1 million and debt of $65 million.

As Daniel mentioned, we have undertaken proactive measures to optimize our operations and mitigate costs. At our mine site, we are meticulously focusing on a variety of cost reduction initiatives. Encouragingly, we are beginning to witness reductions in key consumable costs, which should continue during the remainder of the year.

Furthermore, we have also implemented a cost reduction plan at LCE, which will realign business critical resources and lead to cost savings. Francesco will touch briefly on this a bit later. Through these initiatives, we are focused in enhancing the productivity of our operations while remaining practical in resource allocation. These efforts underscore our commitment to managing costs across our value chain and ensuring the sustainability of our business operations.

To summarize, while we faced certain headwinds during the second quarter of 2023, we remain committed to prudent cost management and operational excellence. We understand the dynamic landscape of our industry and the importance of adapting to changing market conditions through our ongoing cost reduction initiatives and process enhancements we are confident in our ability to navigate future challenges and capitalize on opportunities.

With that, I'll turn it over to Paul.

[Paul Vollant, Chief Commercial Officer]

Thank you, Ernest, and thanks, everyone, for joining us today. During the past quarter, Largo achieved sales of 2,557 tons of V2O5 of equivalent. In line with our guidance, but down from the 3,291 tons recorded in Q2 2022. The second quarter of 2023 has been difficult for vanadium prices. The average benchmark price per pound of V2O5 in Europe was $8.46 in Q2 2023. A 19% decrease from the average of $10.39 seen in Q1 2023.

Over the same period, the average benchmark price per kilogram of ferrovanadium in Europe fell to $33.48, a 15% decrease from $39.38. Low demand in the Chinese and European steel sectors resulted in weaker spot demand especially for ferrovanadium and prices erased all gains made year-to-date. This lack of demand in the steel sector was somewhat balanced by strong demand from the energy storage and aerospace industries. This divergence highlights the importance to our market diversification and high-quality products.

I would like to underscore the increasing demand from energy storage. Recent estimates from Vanitec show an increase of 141% and from Q1 2022 to Q1 2023, and demand in this sector is projected to increase at an impressive 14% CAGR until 2030. This shift supports our forward-thinking clean energy initiatives, showcasing a promising avenue for our company's growth.

Since June, prices have stabilized, and we are seeing improvement in spot demand that let us hope that the worst is now behind us with potential for increases in the second half of 2023. We remain committed to being the preferred high-quality vanadium supplier and delivered both standard grain and high-purity V2O5 as well as V2O3 and ferrovanadium to our customers globally.

Another exciting commercial prospect is the start of our ilmenite sales that should occur in the first quarter of next year. I'm glad to report that the initial feedback on our laboratory produce samples are very promising and customers are eager to receive their first commercial deliveries. This is an important milestone to increase our market diversification as well as generate additional profitability for the Company.

Switching gears to our unique Largo physical vanadium endeavor. We're excited to share that during Q2 2023, LPV continued its acquisition of valuable vanadium assets expanding $1.5 million during the quarter. LPV forms are now over 95% deployed in physical vanadium and the Company now focuses on strategic initiative that aligned with its core business model.

Lastly, I would like to emphasize again that our commitment to excellence remains steadfast and we are strategically positioned to leverage positive trends as high purity demand picks up. We value your continued support, and I'll stop there to turn it over to Francesco.

[Francesco D'Alessio, President of Largo Clean Energy]

Thank you, Paul. I'm grateful for this opportunity to address you all for the first time on our earnings call. As we discuss our ongoing strategy, I want to begin by highlighting some milestones and initiatives that have taken shape during the second quarter of 2023.

Firstly, I'd like to share the progress we made with regards to the Enel handoff. Throughout Q2 2023, LCE achieved crucial advancements in our VRFP deployment for an Enel Green Power in Spain. We successfully completed the pumping of the electrolyte for the system and completed cold commissioning of the system, a pivotal phase in ensuring the integration of the technology in June.

I'm also happy to highlight that the system was interconnected to the grid and the system inverter was effectively utilized to form the chemistry during the quarter. As of now, the battery is undergoing charge discharge cycles as part of the hot commissioning phase, which we're diligently working to conclude in the third quarter of 2023. This phase, along with the anticipated provisional acceptance of the Enel system represents a substantial step forward in the realization of our collaborative efforts.

Looking at our broader strategic direction, it is imperative to emphasize that we continue to evaluate a range of strategic options for the business. We are wholeheartedly committed to maximizing the unique value proposition that LTE brings to the energy storage sector, including access to our LPV structure, our U.S.-based manufacturing capabilities and battery stack technology. This evaluation encompasses several facets including strengthening and formalizing existing industry relationships, forging new collaborative partnerships and assessing alternative deployment strategies and undertaking a comprehensive review of our cost reduction measures.

As a first step of this process, we executed a workforce reduction plan last month in July. This strategic adjustment is in alignment with the corporation's broader cost reduction strategy and as Ernest mentioned, we'll realign our business critical resources of the business. As a result of these measures, the Company is poised to realize a 50% reduction in LCE costs going forward.

In closing, I'd like to express my sincere gratitude to our dedicated team, our supportive shareholders and our partners who share our vision for a cleaner and more sustainable energy future. We remain committed in our pursuit for excellence and our dedication to shaping a brighter tomorrow.

Let me now hand it back over to the operator for our question-and-answer session.

[Operator]

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from the line of Andrew Wong from RBC. Your line is now open.

[Andrew Wong, RBC]

Just wanted to talk about production. It looked like it was improving towards the end of Q2, but obviously, there was the unfortunate accident in July, which impacted production. Can you maybe just talk about how production has been trending now that operations are back up and running and your confidence level returning to nameplate in the future?

[Francesco D'Alessio, President of Largo Clean Energy]

Yes. Let me answer that question. We -- after the accident, the plant was that section of the plant, which happens to be the -- just before putting the final production into V205. So that means most of the production continue moving around except it was a step -- we start building stockpiles at that point in the plan until the local labor authorities release the plan, so the operators can start producing. That period took about a week to get release of the plant. The plant is now running at around 30 to 30 tons per day of capacity. We are -- during the month of August, a little because of the stockpiles we accumulate, we are a little bit over budget from the month of August.

We're planning to reach nameplate capacity of around 1,000 tons per month during this month. The spare part that exploded, unfortunately, will take a long period to be replaced in Germany. And that's why we are building all these additional transactions in order to continue operating without that spare parts. Production will not be affected and we continue just to waiting for the final spare parts coming back from Germany in order to run the normal side of the business. But for the time being, things continue at a reasonable base.

[Andrew Wong, RBC]

Okay. And I just wanted to ask about the decision to accelerate pre-stripping. It sounds like it's mainly pulling forward some of that work. Does that -- what does that mean for production and also costs going forward?

[Francesco D'Alessio, President of Largo Clean Energy]

Well, the cost of stripping will go higher. That's why we changed the guidance on stripping for the rest of the year. Right now, we are mining on a monthly basis at a rate of around 1.5 million tons per month instead of the 1.2, 1.1, 1.2 that we usually were doing in the past. Probably the main issue here is that the mining contractor being pounded by the extreme range during the month of December and January, created this scenario. But once we completed our infill drilling study, it was clear that we needed to open the mine to create the necessary flexibility for the future, because we -- for that particular reason, we decided to step up on the additional stripping for the mine.

[Andrew Wong, RBC]

Sorry, on the costs, I guess what I mean is if you're pulling forward some of these costs on pre-stripping, does that mean there's less spending on that, maybe like 24, 25, et cetera?

[Ernest Cleave, Chief Financial Officer]

So 2025, we will still see a reasonable amount of increased stripping costs. It would not be quite as high as the current rate that we're experiencing, but it will likely continue for a good part of 2024 and it will improve then in 2025. So it will be a marginal improvement, in 2024. But getting back to normalcy, I should say, will be in 2025.

[Operator]

Your next question comes from the line of Gordon Lawson from Paradigm Capital. Your line is now open.

[Gordon Lawson, Paradigm Capital]

And congratulations on giving the ilmenite plants under commissioning. So you've mentioned before that you expect to release an updated or an economic study once it gets up and running and also a relatively slow ramp-up. So can you just give us an update as to when you expect to give us some economic data for the plant?

[Ernest Cleave, Chief Financial Officer]

Yes. So, we look to any recognize a matching of revenue in the final quarter but we will be up and running effectively at our full capacity for 2024. So you'll see the block of the operational results will flow through in 2024 with a very, very small amount coming through in 2023. But obviously, we'd be up and running prior to that, starting with the trial shipments and various other things.

[Gordon Lawson, Paradigm Capital]

Okay. And I mean ilmenite concentrate is currently selling around 10x. Is that right around what you're looking for?

[Ernest Cleave, Chief Financial Officer]

That's correct. We understand 280 to 300 ton, but I'll hand it over to Paul, who can give you data a little bit more on that.

[Paul Vollant, Chief Commercial Officer]

Yes, Gordon. Yes, you're spot on. We're looking at the market between $250 to $300, as you might know, the ilmenite market is a bit difficult. So that's what we're looking at in the short term with potential upside in the medium to long run. But that's what we expect for our product. The reality is we still need to go through a commercial trial to finalize that, but we'll update the market as soon as we have a better definition of our product and potential price.

[Gordon Lawson, Paradigm Capital]

Okay. And one more, if I may. With increased mining rates and changes in the last economic study. Can you just give us a quick update as to your life of mine expectations?

[Francesco D'Alessio, President of Largo Clean Energy]

That information we have in our current technical plan that Campbell it's around to 2028, '29. That's what the -- according to the current mine plants that we are right now developing that's when we will start developing GaN. And after GaN, we run until the following six years, we will start developing NaN. As you probably remember, there is three deposits that are in the same line and the same as estate.

The current one is Campbell and the one who is just next to Campbell is GaN, and that's more or less the timing that we have. Right now, we are working with the mining consultant in order to update the mining plans, the name of the consultant is [indiscernible], and those mining lines are under works. We're planning to finalize study on the mining plants and the development of the satellite epoxies sometime during March or April next year. So, we're in the process of updating the current information on the life of mine plant.

[Operator]

Your next question comes from the line of Steve Silver from Argus Research. Your line is now open.

[Steven Silver]

My primary question is just any updated thinking on your part or any updated thoughts on the continued disconnect between the price of vanadium despite all the favorable demand trends you're seeing from the clean energy side as well as the aerospace side. Just -- I mean, obviously, it's going to be variable for some time. Just trying to get your current thinking on the disconnect and maybe a very broad time line as to when the demand from the energy side will help to offset the volatility from the weaker steel demand? And Paul, can you answer the question?

[Paul Vollant, Chief Commercial Officer]

It's a very good question. We're also seeing fast growth in both the energy storage sector. I mentioned a bit earlier, 141% increase in demand in that sector, between Q1 2022 and Q1 2023. We're also seeing very good demand in the aerospace industry.

That being said, steel industry and especially steel industry in China is by far the largest demand driver in our industry still continues to represent about 90% and in China and in Europe, this industry is suffering. So, a 5% to 10% reduction, a small reduction there can balance a very big improvement in the sector.

So, it's been a little bit disappointing to be very frank, but it's hard to give you any time line, but we remain very confident in the prospect of vanadium prices in the medium to long run. It's very difficult to say, as you can imagine what will happen in the short term. So, yes, the fundamentals are there and we hope that this disconnect is going to shrink at some point.

[Steven Silver]

Okay. Fair enough. And then one brief follow-up, if I can. You mentioned the strong demand in aerospace and just trying to see if there's any read-through in terms of aerospace accounting for about 50% of revenues in Q1 versus about 37% in Q2. Just trying to get a sense as to whether there's just going to be over the long term, continued volatility in aerospace demand or if there was maybe like a large deal or something that got pushed back or delayed. Just any thoughts there?

[Paul Vollant, Chief Commercial Officer]

Yes, there wasn't any unique or large deal. It's really -- it's a fundamental strong demand in this industry following very low demand during the COVID years. I think we've all been witness to the strong boost in the commercial aerospace industry flies a full, there's a long queue to get new airplanes that haven't been built during the COVID years. So, it's just a very, very strong demand from the travel industry and lag during the COVID time. So -- but not any particular deal, and we believe that that in the foreseeable future, Largo will continue to sell very good amounts in this industry.

[Operator]

There are no further questions at this time. I will now turn the call back to Alex. Please continue.

[Alex Guthrie, Senior Manager of External Relations]

Thank you, operator, and that concludes the Q&A session in Largo's quarterly investor conference call. Have a great day, and take care.

[Operator]

Thank you for your participation. You may now disconnect.