Largo Inc

TSX:LGO

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and thank you for standing by. Welcome to Largo's Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] This call is being recorded Friday, August 9, 2024. I would now like to hand the conference over to your speaker today, Alex Guthrie, Director of Investor Relations. Please go ahead.

[Alex Guthrie, executive]

Thank you, operator, and welcome to everyone joining us for Largo's second quarter financial results conference call. Our Q2 2024 financial statements related MD&A and most recent AIF are available on our website at largoinc.com as well as on SEDAR+ 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&A, financial statements and AIF available online. Additionally, all figures mentioned are in U.S. dollars unless otherwise stated.

Today's speakers include Daniel Tellechea, our Interim CEO and Director; Celio Pereira, our COO of Largo Brazil; and David Harris, our CFO; Paul Vollant, our CCO; and Francesco D'Alessio, 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.

I will now turn the call over to Daniel.

[Daniel Tellechea, executive]

Good morning, everyone. Thank you for joining us today to discuss Largo's second quarter 2024 results. Despite the challenges posed by persistent lower commodity prices, our team continues to focus on improvements in vanadium production, ramping up our ilmenite concentration plant and reducing production costs. With implementation of our new operations team earlier this year, we have seen significant progress in meeting our production targets.

Our vanadium production has notably increased and the ramp-up of our ilmenite production is progressing, allowing us for a diversification to our revenues through the sale of this new product. I am also very pleased to highlight our recently published sustainability report for 2023.

[indiscernible] tested our organization, and we remain steadfast in our dedication to safety and sustainability. Despite such challenges, we achieved notable milestones, including executive [indiscernible] 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 emissions and advancing transparency to our climate-related disclosure.

You can download Largo's most recent sustainability report on our website within the Sustainability section. Let me now turn the call over to Celio to discuss our operational progress this quarter.

[Celio Pereira, executive]

Thank you, Daniel, and good morning, everyone. It's a pleasure to provide you with an update on our operational progress at the Maracás Menchen Mine. Firstly, our focus remains on maximizing output and reducing costs. I am pleased to report that our second quarter production results reflect the successful completion of the planned kiln maintenance in Q1 and a return to expected production levels. Our V2O5 production was 2,689 tonnes in Q2 2024, an improvement over both Q2 2023 and Q1 2024. This achievement aligned with our quarterly production guidance of 2,400 tonnes to 2,900 tonnes. However, our global V2O5 recovery rate was 74.3% 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 tonnes of ore with an effective V2O5 gade 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 tonnes 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 Maracas operations, a necessary achievement given the processing of lower grade ore. These increases are crucial as we aim to achieve our set production targets in accordance with our 2024 mining 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 without any significant cost reductions and synergies. These initiatives are already yielding positive results with June 2024 costs being 10% lower than forecast.

The next phase will focus on inputs, material purchases and logistics, which represent a substantial portion of our operational costs at Maracás. We expect to see additional benefits reflected in our financial results starting Q3 2024. In a proactive move, we have also rescheduled our annual kiln maintenance from Q1 2025 to November 2024. This decision is to mitigate potential disruptions from the anticipated rainy season at the Maracas mine site. The maintenance period is expected to last between 15 to 25 days and should not affect our annual production guideline, which is 9,000 tonnes to 11,000 tonnes of V2O5 equivalent.

During this period, we plan to built our magnetic concentrate stockpile for future 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 tonnes to 50,000 tonnes and 27,000 tonnes to 42,000 tonnes, 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.

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

[David Harris, executive]

Thanks, Celio. 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 $28.6 million were significantly impacted by lower vanadium prices and reduced sales volumes. Operating costs decreased to $36.4 million in Q2 2024, primarily due to a 40% drop in direct mining production costs, reflecting a 28% decrease in vanadium sold. Our Q2 2024 financial results also include significant nonrecurring expenses mainly related to a write-down of vanadium finished products and foreign exchange losses.

The net loss for Q2 2024 was $14.5 million, which included $8.5 million in these nonrecurring items compared to $6 million in Q2 2023, which included $1.1 million of nonrecurring items. This was partially offset by decreases in professional consulting and management fees and technology start-up 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. 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 million using our vanadium finished products inventory to secure drawdowns for up to 100 days. Subsequently, in July 2024, we signed an additional inventory financing agreement for up to $10 million 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 Maracás Menchen Mine. 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.

[Paul Vollant, executive]

Thanks, David, and welcome, everyone, to the call today. I'm pleased to provide you with an update on our commercial activities for Q2 2024. In the last quarter, we achieved V2O5 equivalent sales of 1,841 tonnes, including 128 tonnes of purchased material. This represents a 28% decrease from our Q2 2023 due to lower material availability and Kiln maintenance in Q1 2024. Global vanadium demand continues to face challenges, particularly in the Chinese steel sector. The average benchmark price per pound of V2O5 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're 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 tonnes in Q2 2024, exceeding our guidance top range of 11,500 tonnes. 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.

[Francesco D’Alessio, executive]

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 Stryten 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.

Additionally, we are completing the second phase of a commissioning for our VRFB deployment in [indiscernible] 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 demonstrate the practical application of our VRFB technology. Looking forward, we remain dedicated to advancing our clean energy initiatives and are excited about the potential of a partnership with Stryten Energy. We believe this will position us strongly in the U.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.

[Daniel Tellechea, executive]

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 2024 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 vanadium demand due to the new Chinese standards and strategically look forward to advance our clean energy initiatives through our potential partnership with Stryten Energy. Thank you for your continued 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 operator for our question and answer section.

[Operator]

[Operator Instructions] Your first question comes from the line of Heiko Ihle of H.C. Wainwright.

[Heiko Ihle, analyst]

For Largo Clean Energy, any idea how much the venture is currently costing you on a cash flow basis? I mean, I know there is the reduced headcount 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 the remainder of the year?

[David Harris, executive]

Yes, Heiko. It's, David. Yes, you say with the reduced head count and all the focus being on completing the D&L project, I mean, I'm sure you can imagine that the cash burn is greatly reduced on that one. Not going to quote the exact numbers, but it's certainly not a significant drawdown on our cash balances at the moment. And we're just focused on getting the agreement signed and closed with Stryten and moving forward with [indiscernible].

[Heiko Ihle, analyst]

Okay. Maybe not a specific number then, but do you want to maybe give us a range or like a ballpark?

[David Harris, executive]

Cash burn. I mean it's -- with the focus just being on some of the milestones and getting the equipment in place [indiscernible], I mean the -- it's sort of lumpy, but in some months we are just sort of down at the sort of $200,000 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 bit of a doubling at most, but certainly nothing more than that at the current level of activity.

[Heiko Ihle, analyst]

Okay, that's good because 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? [indiscernible] actual cash outlay is pretty limited. It's just a little bit of downtime, right?

[David Harris, executive]

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

[Celio Pereira, executive]

Yes, sure. So it's our annual standard kiln refractory placement. We are just moving what we first planned for February, we are moving to November. We believe that's going to be an optimization given the rainy season starts from early December. So usually, our cash burn on this kiln maintenance is between $2 million to $3 million per year.

[Operator]

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

[Andrew Wong, analyst]

What's your view on the margin and cost of production in vanadium. 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?

[David Harris, executive]

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 the -- in our sort of prepared remarks in terms of costs coming down and 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 we've seen in sort of more impactfully in our financial results. But perhaps in terms of the views on the vanadium market, Paul, maybe you just want to provide a little bit of sort of color and input on the vanadium market in that regard.

[Paul Vollant, executive]

Sure. Andrew, on the margin and 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 with this quite a lot transparency at the primary producers level, where you can see that in the current price environment, people are loss-making. And we're also starting to see some cutbacks in production in Asia. So we're definitely in a very low pricing environment at the moment, where supply is going to start to get adjusted if prices do not recover pretty quickly.

[Andrew Wong, analyst]

Okay. And just a question on working capital use. Looks like that's gone up this year quite significantly. Does that reverse in future quarters? And why has that gone up so much?

[Daniel Tellechea, executive]

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 the impact on sales coming in. 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 on restructuring our existing debt facilities. So looking and working with our lenders in that regard as well. So I think things are moving -- we're aiming for things to [indiscernible] in a positive direction. But yes, we've seen some, I'd say, some hiccups and challenges in the early part of this year.

[Operator]

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

[Gordon Lawson, analyst]

Can you provide some the additional color on decrease in V2O3 and ferrovanadium sales and we should expect in the next few quarters.

[Paul Vollant, executive]

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. And as you have seen, the 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. V2O3 demand is more linked to aerospace and chemical as well as battery sector demand. So these are more long-term usually 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.

[Andrew Wong, analyst]

Over the long term, with these contracts, can you -- is there any -- I mean, I know you don't like to give guidance here, but again, someone asked for a range for V2O3 in particular in the second half of the year.

[Paul Vollant, executive]

Yes. I don't think we will provide guidance on such a granular basis, but V2O3 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, V2O3 would be a portion of that.

[Andrew Wong, analyst]

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

[Daniel Tellechea, executive]

Well, let me take that question. Basically, the options that we are doing right now is to continue reducing cash costs and we have done tremendous 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. 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.

[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.

[Alex Guthrie, executive]

Thank you, operator, and thanks, everyone, for joining us today. This concludes the Q&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.