Largo Inc

TSX:LGO

Earnings Call Transcript 2018-Q3

[Operator]

Good day. My name is Britney, and I'll be your conference operator today. I would like to welcome everyone to the Largo Resources Third Quarter Financial Results Conference Call. [Operator Instructions] Let me now turn the call over to Jim Sims.

[Jim T. Sims]

Thank you, operator, and good day, everyone. Today's call is being recorded, and a replay will be available starting tomorrow in the Investor's Center on our website at largoresources.com. Our third quarter 2018 results news release, financial statements and our management discussion and analysis are all available on SEDAR and on the Largo website. Additionally, an updated Largo corporate presentation in PDF format is available for viewing and downloading on the Largo website. Some of the information you'll hear today during our presentation and discussion will consist of forward-looking statements, including, without limitation, those regarding future business outlook. In addition, non-IFRS financial measures, such as cash operating costs, will also be used during this conference call. Further information regarding Largo's use of non-IFRS measures is available in Largo's third quarter 2018 earnings press release and in the company's MD&A, both of which are available on SEDAR and at largoresources.com. Actual results or trends could differ materially from those discussed today. For more information, please refer to the risk factors discussed in Largo's most recent quarterly reports, again, on SEDAR and on the company's website. Largo assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates, and all financial amounts presented today will be in Canadian dollars, except as noted otherwise. Joining us first today will be Largo President and CEO, Mark Smith. Largo's Chief Financial Officer, Ernest Cleave, will then provide additional detail on Largo's Q3 and year-to-date financial performance. And finally, we'll then open the call up to questions. So let's turn the call over to Mark Smith for opening remarks. Mark?

[Mark Allan Smith, CEO & Director]

Thanks, Jim, and good day to everyone. Let's review our third quarter and year-to-date results for 2018. You can see a summary of our year-to-date financial performance starting on Slide 17 of our corporate presentation, which is available for download at www.largoresources.com. Largo delivered robust financial performance in the third quarter. Net income before tax was $91.7 million, with after-tax net income totaling $71.4 million or $0.14 per share. This compares to net income in Q3 of 2017 of $13.5 million or $0.03 per share. That is a 429% increase year-over-year. For the 9 months ended September 30, 2018, net income was $208 million compared to a net loss of $10 million for the same period of 2017. Revenues for the quarter set a new quarterly record of $149.5 million. That compares to $53.5 million in Q3 of 2017 and $103.3 million in the second quarter of 2018. For the 9 months ended September 30, 2018, revenues totaled $334 million compared to $119 million in the same period of 2017. That represents a 189% increase. Revenue growth is primarily due to record production in 2018 and the higher V2O5 prices. The average price per pound of V2O5 in U.S. dollars was approximately USD 19.66 for Q3 2018 compared to approximately USD 8.24 for Q3 of 2017. However, as of this week, the market price for V2O5 was in the range of USD 28.50 and USD 28.90 per pound. Cash provided before noncash working capital items for the quarter was $127.5 million. That was a 64% increase over Q2 2018 and compares to $29.5 million in Q3 2017. Net cash provided by operating activities was $113.4 million, which represents a 63% gain over Q2 2018 and compares to $8.1 million in Q3 of 2017. In addition to strong financial and operating results, our balance sheet continues to strengthen each quarter. The company's cash balance was $128.1 million upon exiting the third quarter of 2018. On August 2, we announced that we had repaid in full an aggregate of USD 144.1 million owed to the Brazilian Development Bank, or BNDES, and to Largo's syndicate of commercial lenders, all of which were in Brazil. On September 20, 2018, we redeemed USD 15 million in aggregate principal amount, representing 10% of the USD 150 million aggregate principal amount outstanding of our 9.25% senior secured notes due in 2021. Then on September 27, 2018, we announced that we had repaid in full BRL 80 million in outstanding debt to Banco Pine S.A. This debt was the only long-term debt that remained outstanding in Brazil following the repayment of the company's facilities in August 2018. As of September 30, 2018, the company's net debt level was approximately $35 million. On the operational front, you can see details of our Q3 and year-to-date performance on Slide 16 of our corporate presentation. I'm very pleased to report that the Maracás Menchen Mine delivered its best performance of the year in the third quarter, with record production of 2,563 tonnes of V2O5. This is primarily due to an improved operational stability and the outstanding efforts of our team in Brazil. We also achieved a record V2O5 global recovery rate in September of 82.2%. On Slide 18 of our corporate presentation, you can see details of our current expansion plan for the mine. This involves increasing V2O5 production by 25% from approximately 800 tonnes per month to 1,000 tonnes per month. I'm pleased to report that this effort is progressing on time and on budget. On November 2, we announced that we had successfully obtained our environmental license for this expansion, which was a key milestone. The targeted completion of this expansion remains Q2 2019, and total CapEx is expected to be about USD 15.5 million. At current Canadian prices, this estimated payback period on this investment is less than 6 weeks. We also continued to make progress toward increasing production of high-purity V2O5 powder and flake. This high-margin material is used in high-performance alloys for jet engines and other aerospace applications as well as in chemical catalyst in vanadium redox flow batteries. Sales volume of high-purity V2O5 flake in the third quarter totaled 260 tonnes. Year-to-date sales have been 1,080 tonnes, which compares to 205 tonnes in the year-ago period. Our targets for 2018 production of high-purity V2O5 powder and flake is now 1,500 tonnes, which is an adjustment from our original target of between 2,000 to 3,000 tonnes per year. Driving this adjustment is a simple fact that sales of this material are currently directed by our offtake partner, Glencore. We continue with Glencore to encourage greater penetration for Largo's material in these markets. While this material makes up only about 9% to 10% of total vanadium sales worldwide, it can command a price premium in the range of USD 3 to USD 4 per pound in U.S. dollars. This product requires no additional operational costs for Largo to achieve because our ore rate is naturally high and our metallurgy is outstanding. As such, we are well positioned to take advantage of the higher margin this project delivers over time. Largo's production guidance for 2018 is shown on Slide 19 of our corporate presentation. I'm pleased to report that Largo remains on track to achieve annual production in the range of 9,150 tonnes to 10,150 tonnes in 2018. As a result of the strengthening of the Brazilian real against U.S. dollar and higher royalty costs that result from higher vanadium prices, the company has increased its cost guidance slightly for 2018 to USD 4.15 per pound in U.S. dollars. One of the key reasons for our continuing operational success at the Maracás Menchen Mine is Paulo Misk, who was promoted in October to Largo's Chief Operating Officer and President. Over the past 4 years, Paulo has led the effort to increase operational efficiency and production at the mine. Paulo's many years of experience, combined with his leadership skills, will serve him well in his new role with the company. On behalf of the board and the entire Largo family, I want to extend my thanks and congratulations to Paulo on this well-deserved promotion. As Paulo would immediately say, Largo's production success is a result of the collective hard work and dedication to excellence of the entire workforce at Maracás Menchen. He is right, of course, and it is indeed an honor to be able to work with such a truly outstanding group of individuals. The people at Largo are, in my opinion, our most valuable asset by far. Looking to the future of vanadium markets. We continue to see strong demand growth in the face of global supply deficits. As shown on Slide 9 of our corporate presentation, global market struggled through an 8,000 tonne deficit in 2017 in terms of total vanadium supply. That deficit has persisted throughout 2018. Now demand in China for additional vanadium is expected to grow even stronger given the new Chinese standard for rebar that went into effect this month. This standard will require greater amounts of vanadium to be used in construction and in the ongoing infrastructure buildout in China. In short, we see the current vanadium supply deficit continuing and likely increasing in 2019. Until the market responds to stabilized pricing, we can anticipate further price strengthening in the quarters ahead. In summary, I was very pleased with the company's operational and financial performance in the third quarter and year-to-date in 2018. Vanadium market fundamentals were very good, and Largo is very well positioned to take advantage of those fundamentals as we progress toward increasing output in order to meet rising global demand for vanadium. Before I turn the call over to Ernest, let me make a few additional comments. As we've stated previously, our strong balance sheet presents opportunities to continue to build shareholder return. Our top priority has been to retire debt, as you saw with the repayment of our Brazilian debts and the partial repayment of Largo's high-yield notes over the course of our 2018. We plan to repay the remaining balance of USD 135 million in high-yield notes during the late May or early June 2019 time frame. Our second cash management priority will be to make capital investments that can achieve a significant and relatively rapid return on investment. Our 25% capacity expansion to 1,000 tonnes of V2O5 per month and our focus on producing more high-purity V2O5 product are prime examples of CapEx investments that make very strong financial sense. Finally, as we continue generating excess cash, we also believe that we should look very seriously at additional options for returning money to shareholders, such as through dividends or share buybacks or a combination of the 2. Due to practical constraints pertaining to, first, the high-yield note indenture; second, the timing of intercompany dividends; third, regarding the general corporate law restrictions in Canada; and fourth, tax issues related to moving more money to Toronto before year-end, we anticipate that the company will be in a position to make such determinations by the middle of Q2 2019. After paying back the high-yield notes, I am confident that the Largo board will seriously examine options for returning money to shareholders in a manner that the board determines is in the best interest of the organization and its stakeholders. Let me also bring your attention to the announcement that we will be making today in which the company plans to permit, without any further action on the part of warrant holders, the exercise of all outstanding unlisted warrants of the company on a cashless basis at the option of the warrant holder. With that, let me turn the call over to Ernest for additional detail on our Q3 financial performance. Ernest?

[Ernest M. Cleave, Chief Financial Officer]

Thanks, Mark, and good day to everyone. As Mark noted, revenues in Q3 2018 and in the 9 months ended September 30, 2018, were substantially higher than in the corresponding period of 2017, driven by expanded V2O5 production and higher V2O5 pricing. This was the primary factor behind Largo's net income of $71.4 million in Q3 2018, partially offset by deferred income tax expense of $13 million and an income tax expense of $6.9 million and higher finance costs and foreign exchange losses. In the 9 months ended September 30, 2018, the company reported net income of $208 million compared to a net loss of $10 million in the same prior year period. This change was primarily due to higher revenues and a deferred income tax recovery of $32.2 million and was partially offset by higher operating costs, an increase in foreign exchange loss, higher professional consulting and management fees and an income tax expense of $15.8 million versus null in the same prior year period. Operating costs for the quarter were $37 million compared to $30 million in Q3 2017. For the 9 months ended September 30, 2018, operating costs were $98 million, which compares to $90 million in the same prior year period. These increases are primarily the result of higher royalties. Finance costs in Q3 2018 were $15 million compared to $9.6 million in Q3 2017. The increase was primarily attributable to the amortization of deferred transaction costs on the repayment of the BNDES facility, costs incurred in the settlement of the various facilities with BNDES and the syndicate of banks in Brazil and interest on the senior secured notes. On the production side, our global recovery rate in Q3 2018 were 77.1%, which was slightly lower than Q2 2018 as a result of kiln refractory line and maintenance in July and August. For the 9 months through September 30, 2018, the global recovery rate was 77.5%. The kiln performance was -- impacted downstream recoveries as both the leaching recovery and milling recovery -- recoveries were affected by coarser grind size. The company has taken steps to implement improvements in maintenance and production practices, which have resulted on a higher level of stability through all the operational areas, as evidenced by the increased rates exiting the quarter. Following the strong operational performance during the quarter, the company postponed the kiln refractory shutdown to Q1 of 2019. The shutdown in Q1 2019 is anticipated to last for 26 days with no production expected on 17 of those days. Direct mill and mine costs for Q3 2018 were $21.3 million as compared to $19.1 million in Q2 2018 and $20.1 million in Q3 2017. Cash operating costs for the quarter were CAD 5.41, that's USD 4.14, and compared to CAD 4.97, USD 3.85 in Q2 2018 and CAD 4.47, USD 3.56 in Q3 2017. The cost per pound for Q3 2018 was higher when compared to Q2 2018, primarily due to the higher specific consumption of sodium carbonate and ammonium sulphate as well as a significantly higher heavy fuel oil price. Cash operating costs also include royalties, which vary based on the price of V2O5. Royalties for Q3 2018 were $8 million as compared to $2 million in Q3 2017. In 2018, the company budgeted and planned an exploration program that included magnetic survey, mapping, sampling and 2,000 meters of drilling. The ground magnetic survey has been completed, and mapping, sampling and the drill program have commenced and are ongoing. The work is being done to further evaluate the mineralization and to maintain the concessions. The drill program will also collect additional material that can be used in further metallurgical test work. As we have stated previously, our strong balance sheet presents opportunities to continue to build shareholder return. Our top priority has been to retire debt, with the exception of the remainder of the secured notes due in 2021 that we issued in May as part of our $150 million private placement. We now have done that. In summary, our financial position remains strong as we increase our production capacity over the coming several quarters.

[Jim T. Sims]

Thank you, Ernest. And with that, operator, let's open the call up to questions.

[Operator]

[Operator Instructions] Your first question comes from Piyush Sood from Morgan Stanley.

[Piyush Sood, Research Associate]

Few questions from me, and then I'll get back in the queue. The first one, so the main increase in cost sequentially was driven by royalties. But seems like cost may have risen from other factors also. It's small, but I just want to understand what's driving it. Is that higher sodium, ammonium costs or -- if you could just give us some color on it.

[Mark Allan Smith, CEO & Director]

Ernest, do you want to answer that one?

[Ernest M. Cleave, Chief Financial Officer]

Piyush, as a matter of fact, if you look at -- if you look the royalties we were paid in Q3, if you look at the $8 million, as you can appreciate, that's $1.41 per pound equivalent on our unit cost. So in fact, the increase in royalties is the predominant factor. And we've seen some other impacts because of not -- no longer having the Reintegra tax credits and a few other minor items. That is true, but they are incidentary, frankly, to the impact of the royalties.

[Piyush Sood, Research Associate]

Okay. Got it. And a question on the 26-day maintenance expected in Q1. You said production would be down 17 days. So when we think of sales, should we think that sales will be down a similar amount? Or is there any inventory that could offset the impact of the 17 days of lost production?

[Mark Allan Smith, CEO & Director]

There will be some level of inventory that we can use to offset that. We are also continuing, Piyush, to try to build as much [ ANV ] inventory as possible before that turnaround so that we can minimize that 17 days even further. So if we can get an extra 1 or 2 tonnes of [ ANV ] between now and the time that, that turnover or turnaround occurs, we will be in much better shape. So we understand the issue. We're doing everything in our power to make sure that we turn that around as well as possible. But this is kind of a worse-case situation that we wanted to highlight.

[Piyush Sood, Research Associate]

Okay. That's helpful. And based on the year-to-date run rate for high-purity sales, seems like there's a catchup to do in 4Q. I just want to understand that better.

[Mark Allan Smith, CEO & Director]

Yes, not so much of a catchup. We actually ended up with a very interesting issue that occurred in the high-purity market area, particularly in the aerospace alloy sector. And I just returned from a conference over in Lisbon, Portugal, where a lot of this came out into the open, and it was very interesting for us to hear. But the way that the aerospace alloy industry works is that there is a master alloyer that takes the aluminum and the vanadium and alloys those 2 materials together, and then they sell that master alloy to an entity that will add the titanium to it so that you end up with the 3 metals. And then that alloyer sells that material to jet engine parts manufacturers. And there are 2 -- at least 2 parts in that logistical scheme where there are set prices, and the master alloyer and the titanium alloyer are 2 of those areas. And they were very much caught off guard with the rapid rise in the price of vanadium, and they had significant issues with profitability. And so what happened was it was really almost a slowdown of alloy production as all of the people in the supply chain were trying to figure out how to deal with that issue, and how to incorporate these higher prices of vanadium. What I'm happy to report is that most of that appears to be resolved now. All the parties have gotten together and resolved those issues. And I think we'll see the orders for the high-purity material, particularly in the aerospace sector, pick up fairly good in the fourth quarter and then be very consistent all year next year. Remember, too, that we can't force our material to be sold into these markets. All we can do is try to influence our offtake partner, which is Glencore, to sell into these markets. So I also want to assure everyone on the call that we're in constant contact with our offtake partner, letting them know that we want more and more of our material sold into these high-purity applications. So that's the status of that one, Piyush.

[Piyush Sood, Research Associate]

Got it. And Mark, you did touch on this a little bit, but just want to get your latest read on vanadium pricing in China. Seems like prices have flatlined a bit and for ferro-vanadium and some other similar products may have even softened a little bit. So is that accurate in your opinion? Or is there some other series that we are looking at versus what you would want us to look at?

[Mark Allan Smith, CEO & Director]

Yes. I think, Piyush, we have to be very careful in assessing anything to what happened on Wednesday of this week. Yes, there was a flatlining of this week versus last week. That's differences from week to week, and we really need to focus on the bigger picture here. And the bigger picture has not changed at all. The big issue right now is these prices are at all-time highs, and the market is trying to figure out what to do with these high prices. But I don't know we should be taking 1 data point for 1 week and making any conclusions from it yet. I think the general trend is we've got a supply deficit. The supply deficit has gotten worse as of November 1 of this year, and I anticipate higher prices moving forward.

[Operator]

Your next question comes from Lee Cooperman from Omega Advisors.

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

I have a bunch of questions. The 17 days of lost production, is that a Q4 issue or a Q1 issue?

[Mark Allan Smith, CEO & Director]

I'll be a Q1 issue, Lee.

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

Okay. Now I understand the virtue of being conservative, but I don't understand your production guidance. For the 9 months, you produced or sold 7 million -- or 7,235 tonnes. If I take your guidance literally of 9,150 to 10,150, which I might add we now hear is November 15, so you already have October and mid-November results in the pocket. If I take that little guidance, that implies fourth quarter rev production of 1,915 to 2,915. Now that's a ridiculously large range that makes no sense. So -- and then last year, we sold 9,297 tonnes, and your guidance will allow for decline in production versus the fact that I think for year to date, we're running ahead 4%. So what do you want to say about your guidance? I mean, do you want to make it relevant? Or do you want to keep it irrelevant?

[Mark Allan Smith, CEO & Director]

Well, interesting question, Lee. And I guess my answer to that would be the same as I indicated in the last conference call, which is here's a range of production that we can expect out of the company. We anticipate meeting the higher end of that range, and we still anticipate meeting the higher end of the range that we put out to the market.

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

So the higher end of the range would imply an increase in production in Q4 versus Q3. Is that what your expectation is at this moment in time?

[Mark Allan Smith, CEO & Director]

At this moment in time, yes, but we still have 45 days left.

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

I understand. Okay. Secondly, on pricing, you mentioned USD 28.50, USD 28.90. Is that number comparable to the USD 19.66 we realized in Q3?

[Mark Allan Smith, CEO & Director]

Well, the USD 19.66 in Q3 was the average price that we realized during the quarter, whereas the USD 28.50 to USD 28.90 is the price that was published by Metal Bulletin for European V2O5 pricing last Friday.

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

So I mean, extrapolating is dangerous. But the pickup in price was roughly USD 4 a tonne -- or pound, I should say, or gram or whatever the unit is, with third quarter versus second quarter, we went from USD 15.44 to USD 19.66. Could one assume that if we added another USD 4 so you could realize USD 23'24 in the fourth quarter based on what you've seen quarter to date?

[Mark Allan Smith, CEO & Director]

The simple answer is yes, if not higher.

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

If not higher. All right. So basically, what we're saying is more price, likelihood of more production. It would seem to me that we're generating cash at about almost $1.5 million a day of cash. I would assume, if that estimate is correct, that if we wouldn't had a balance sheet today, November 15, that you'd have more cash than debt.

[Mark Allan Smith, CEO & Director]

I think that's a very good assumption.

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

Okay. Now I realize we're not in a position to do anything regarding capital management of consequence until the middle of next year, but if I said to you the stock would be this price, your outlook is the outlook that you presently have for the company, do you think the board would favor returning money via repurchase or via a dividend?

[Mark Allan Smith, CEO & Director]

I think it's not a good thing for anyone on Largo's team to speculate on that, Lee. We need to see what the facts and circumstances are as that time approaches in April, May and June time frame.

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

Okay. That's reasonable. Now one last question. Explain to me the cashless exercise of option. Just say somebody had an option exercise with $1, a million shares at a $1, if you wanted a cashless exercise, you basically -- you would be issuing less shares, but you wouldn't get any money in.

[Mark Allan Smith, CEO & Director]

Correct. So we...

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

And that's all -- is that going to be publicized to the outstanding warrant holders, this decision?

[Mark Allan Smith, CEO & Director]

Yes. There should be a press release coming out today on that. We're just waiting for TSX approval.

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

Good. Okay. I'll defer to -- and one last thing. Looking at the statement, the interest expense made no sense because I think that basically, we should take the $135 million in debt at 9.25% should be your annual interest bill. So I assume there must be some prepayment penalties included in Q3.

[Mark Allan Smith, CEO & Director]

Ernest, do you want to address that?

[Ernest M. Cleave, Chief Financial Officer]

Yes. So there are other things -- you are quite correct, Lee. There's amortization of debt. There's other interest that were captured there as we retire debt. So it's not just the notes. The notes out of that portion are a small number in that sort of -- on a quarterly basis, it's basically just over USD 3 million or CAD 4 million.

[Operator]

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

[James Young, Investment Analyst]

During the call, you mentioned and alluded to the drilling program that's underway. Can you give us a sense as to the preliminary results with respect to the quality of the ore that you're discovering at this time? Is it at a similar rate as the current Campbell Pit, lower, higher? And secondly, is the areas where you're currently conducting a drilling, is that also subject to the royalty that you're paying at the Campbell Pit?

[Mark Allan Smith, CEO & Director]

Well, I'll start out by saying that we can't really make any -- or provide any speculation of that drilling right now, Jim. The drilling, most of the surveying has been done, but we are actually literally receiving sample results starting today, and we'll continue to receive those over the course of the next month or so. So there's very little I can say in terms of quality. But there has been a lot of work done, and I think we're very anxious to get these analytical results back and start modeling them into our reserves and our resources. And then on the issue of royalties, it's an outstanding point, and there are several parts of our property where we have almost 0 royalties that apply. And so obviously, as we put together these new -- all this new information and put the new resources and reserves together and modify our mine plan to take all this into account, we obviously will take a hard look at those non-royalty areas because that can offer a tremendous top and bottom line improvement for the company.

[James Young, Investment Analyst]

Okay. So would we expect to be able to hear results before the end of this year? Or is that going to be a 1Q '19 issue?

[Mark Allan Smith, CEO & Director]

I think that way we're looking at it right now, Jim, is that as we get the analytical data back in, I think it's highly probable that we will issue some sort of a press release before the end of the year, but it would be a very limited press release, and it would indicate things like drill hole 1, 2, 3 showed a 10-meter cross sample of massive magnetite or something like that at -- and it will list the grade of the material that we found. But that's about all that you could do until the modeling itself is done, and I do anticipate probably more of a first quarter report out in terms of increases in resource or increase in reserves.

[James Young, Investment Analyst]

So that 1Q report, would that be a 43-101 report then?

[Mark Allan Smith, CEO & Director]

The answer is maybe. It'll certainly be in that style, but it's very interesting. Because the company is where it is right now in its maturity level, we have a different set of rules that applies to us in terms of how we report those results. But we will make sure that however it's done, it will meet any requirements for NI 43-101.

[James Young, Investment Analyst]

Okay. Great. And then my last question pertains to the overall vanadium cycle. As you mentioned, Mark, that you expect the supply deficit to increase in '19, and possibly go higher. A lot of people, although, are questioning given the sharp ramp-up in the price of vanadium, that we'll see some additional supply coming on fairly in the near future over the next year or 2. Others think that this is going to be in an extended cycle, and the durability and sustainability of this cycle could last 5-plus years. Could you just share with us how you're thinking about that? What you're seeing? And any other insights into the durability and sustainability of the cycle?

[Mark Allan Smith, CEO & Director]

Yes, but that's a great question, and most of it you really just have to put your best guess forward on most of this information. But our view of all of the announcements that have come out recently in terms of some of the junior companies that want to start production and take advantage of this cycle is, my first comment is good luck. To the extent that any -- that we see any production coming out of these smaller, junior companies, it will would be very small, and it will be for a short period of time. So it really can't take care of the current supply deficit that we have. And if you kind of think about all the different announcements coming out right now from various parties, and then you compare that to the Largo expansion that we plan to have up and running in the second quarter of 2019, our expansion is probably close to 10x more production than any other junior developer out there in terms of pounds of vanadium at the end of the day. And then, of course, there are quality issues that we have to talk about as well. So we are still in the camp where we believe this is going to be an extended cycle of high pricing, but maybe there'll be some stone-cold production coming on in late 2019, but we haven't seen any of that production come on yet. That usually takes a minimum 9 to 12 months to bring online. And remember, they -- before they come online this time, they actually have to meet some environmental requirements. So there's going to be some time that's required before any new production can come on. And then if we take a look at greenfield mining operations, I try to be as nice as I can and suggest that it might be a 3-year period before they're online. But in reality, we know these projects take 5 years or longer to get up and running. So we think we're going to be in a high-pricing environment for some time frame. All that being said, we've also been in the mining industry for a long time, and we know that when you get into these high-pricing environments, the predictability of a lot of things isn't as sharp as it normally is. So we have to continue to monitor everything that's going on out there. But our opinion right now is this -- we're in this high-pricing environment for some time to come.

[Operator]

Your next question comes from Adam Brown from Seaport Global.

[Adam Brown]

Following up on Lee's question on cashless exercise of warrants, is that essentially going to be reducing the share count because they're obviously all in the money? You're going to cancel the warrants by paying people the difference between the stock and their warrant price?

[Mark Allan Smith, CEO & Director]

Yes. That's -- it basically does not require the holder of the warrant to pay the company any cash. But the warrant holder then uses the shares that are issued as the form of payment [indiscernible]. And so we do end up with less dilution as a result, and that was one of the primary drivers that allowed us to make that decision.

[Adam Brown]

So that is essentially a share buyback that you will be doing?

[Mark Allan Smith, CEO & Director]

I think that, that's a very good way to view this, Adam.

[Adam Brown]

Okay. And is it mandatory? Are you saying that you're calling people's warrants? Or you're just giving people the option to do that.

[Mark Allan Smith, CEO & Director]

The option to do that. So if people do not want to do that and they, instead, would like to exercise them and send money to the company, either one is fine. It's entirely up to the shareholder.

[Adam Brown]

But can they hold their warrant and do neither? That's perhaps my question. Are the warrants going away one way or the other?

[Mark Allan Smith, CEO & Director]

No. The warrant holder can hold the warrants for the life of the warrant.

[Adam Brown]

Okay. Or they can do the cashless exchange. Okay. Great. Second question is you talked about paying down debt and then doing quick big payback CapEx projects. Are they -- are those projects similar to the one that you're undertaking now with the -- or is there a potential that you're going to do a major expansion?

[Mark Allan Smith, CEO & Director]

The answer is it'll be more along the lines of what we're doing currently, where they are smaller capital-intensive projects. But we are taking a very hard look at this time at what the CapEx would be, what the timing would be for a major expansion of this facility, and that would include a market study as well. Because the mining industry has a very -- the mining industry has a long history of not being so smart in terms of bringing additional production on too fast or in too big of a slug. And so we want to make sure that any major expansion that we undertake at Largo is done with a lot of market information at the same time to make sure we can absorb it.

[Adam Brown]

Is that a 2019 decision? And if you made a decision to go forward, are we talking about 3 years for that capacity to come on?

[Mark Allan Smith, CEO & Director]

Well, that's what we're doing the study for. We're certainly hoping to have the front-end engineering effort done in 2019, but we need to see the data then before we can make any decisions. And I have no idea whether this is a 3-year or a 2-year or a 4-year project, and that's why we're doing the front-end engineering. We need data.

[Adam Brown]

Last question is just a technical question. You said vanadium prices were something around USD 29 this week. Am I looking at the wrong price? Because I see something closer to USD 33.90.

[Mark Allan Smith, CEO & Director]

Yes, you're looking at the Chinese V2O5 price, and it is higher than the European Metal Bulletin price. And I would like to take just a couple of seconds, if I may, to kind of talk about that a little bit. Because, historically, China has been an exporter of vanadium to the rest of the world. And as a consequence, the European price is almost always higher than the Chinese price. By seeing what we're seeing today, where the Chinese price is actually significantly higher than the European price, it actually suggests 2 things: One is there is no incentive for anyone to export material from China to anywhere else in the world right now because they can get more money for the material in-country. It also suggests that China has the same supply-and-demand problem that the rest of the world does. And I strongly believe and have said many times, I believe China will become a net importer of vanadium. And that price differential, where it's higher in China than it is in the European markets right now, suggest that, that's exactly where this is headed.

[Adam Brown]

And so you're realizing the European price? And I guess, if that's the case, why not the Chinese price?

[Mark Allan Smith, CEO & Director]

We have a thing called a contract between us and Glencore specified to European Metal Bulletin price. So don't get me wrong, I would love to ship everything we make into China and get USD 33, but I don't have that opportunity right now. But the Glencore contract does expire May of 2020, and we'll have many more options at that point.

[Operator]

Your next question comes from Piyush Sood from Morgan Stanley.

[Piyush Sood, Research Associate]

The first one, the remeasurement of receivables. I would guess there is high royalty associated with it, and there's a small offset. But any other cost that goes with it? Or does it fall directly to the bottom line?

[Mark Allan Smith, CEO & Director]

Ernest?

[Ernest M. Cleave, Chief Financial Officer]

Yes. So Piyush, that number you're seeing there, it's all vanadium sales, and it's all basically the result of adjustments in the Glencore contract, which, as you know, we can't really talk to. But the change in quantum in the quoted vanadium price is the largest driver in the increase in the receivable.

[Piyush Sood, Research Associate]

And no -- well, sure. I just want to understand that it's a revenue item, and there is no cost associated with it. It falls directly to the bottom line. And maybe a little bit of an offset could just be royalties and nothing else.

[Ernest M. Cleave, Chief Financial Officer]

That is correct. So royalties and our revenue line item on our income statement is net of commissions. So if you're looking at our income statement, looking at the revenue line item, that's -- that already includes the commissions. They're netted off in there. But you're correct, there would be a royalty impact further down the line.

[Piyush Sood, Research Associate]

Yes. Understood. And last one for me, and it's a China-related question. What are your sources telling you about inventories on the ground? And if there's any stockpile shown up anywhere, either in China or outside of China, if it's something you've heard about?

[Mark Allan Smith, CEO & Director]

Again, I just came back from Lisbon, and we're constantly asking those questions, Piyush. And what we're hearing from the customers of the Chinese producers right now is that the Chinese producers are able to only meet the longer-term contract volumes right now, and that there is virtually nothing available for spot market sales in China. So we can't find any inventory anywhere, and what we're hearing from the Chinese customers is that they have no spot material available, and they're barely able to meet the long-term contract requirements.

[Piyush Sood, Research Associate]

Anything that's something similar outside of China where inventories are mostly depleted.

[Mark Allan Smith, CEO & Director]

We strongly believe that outside of China.

[Operator]

Your next question comes from [ Gary Kirk ] from [ Great Dale Resources ].

[Unknown Analyst]

Just if you could throw some color at me. SEDAR filing on the warrants the other day, was that just a straight change of ownership? Or was that to do with the cashless where you're headed? And just on the same thing for structural purposes. You've got significant shareholders, I think, who have declared that they want to cash in, come out of their positions and all that. Have you got any color to add on what we can expect all in there?

[Mark Allan Smith, CEO & Director]

Ernest, do you want to maybe address the SEDAR issue?

[Ernest M. Cleave, Chief Financial Officer]

Well, the SEDAR filings are just conventional warrant option exercises, so there's no -- it doesn't relate to cashless warrants or anything else we've been talking about. It's just treasury issuances.

[Mark Allan Smith, CEO & Director]

Then we -- just to answer the second part of your question, [ Gary ]. The company tries to stay in communication with its largest shareholders on a consistent basis. But it's probably not appropriate for us to add any color one way or the other to what those individual shareholders want to do with their holdings. And I think it's probably the best answer for now.

[Operator]

Your next question comes from Lee Cooperman from Omega Advisers.

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

Just to follow up. I assume that you guys have studied this cashless option exercise program. I believe at the end of September, there were 148 million warrants outstanding. If everybody elected to do the cashless exercise, how much would the share count be reduced by that action?

[Mark Allan Smith, CEO & Director]

Ernest, do you want to answer that?

[Ernest M. Cleave, Chief Financial Officer]

Yes. So the straight dilution is, I think it in the region basically at 148 million. Depending on where the price is, this is what's really going to define it, versus how many...

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

Take the current price.

[Ernest M. Cleave, Chief Financial Officer]

Yes. So taking current price, you're probably going to save in the region of about 50 million shares out of that.

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

50 million, 50 million shares. Okay. Second question, at current prices, allowing for the expansion of capacity. How many years of reserves do we have? The public material talks about 10-year reserve life. But I think it's much longer than that, is it not?

[Mark Allan Smith, CEO & Director]

Well, there's a whole bunch of very important definitions here, Lee, and I won't bore you with them any more than I need to. But in the world of geology, there's a thing called proven and probable reserves, and that's the 10-year life that we have that we list in our 43-101 on our website and everything else. Then you have the next level of category of material, which is called resources. Now you can have measured, indicated and inferred resources. Measured and indicated, for all practical purposes, is not exactly the same, but it's almost the same as proven and probable reserves. There are differences, but if you take a look at the numbers, they're actually pretty close. And so you really need to take a look at the inferred resources at that point in time. And it's our inferred resources that show another 15 to 20 years of mine life, and we are -- that's a major part of the drilling program that we're undertaking right now. Inferred resources basically means that you need to put more holes in between the holes that exist out there so that you can define with more certainty that, that ore actually exists in the ground. So you go through the process of putting infill drilling in, which allows you to change your inferred resources to either measured and indicated resources or proven and probable resources -- reserves. So that's where the drilling program is headed. This is a very, very large ore body. The 10-year life that we have is associated with the Campbell Pit. And the Campbell Pit takes up about 1.5 kilometers of a 40-kilometer-long strike length, where we have very solid magnetic surveyance that has been completed already. So we do need to put the holes in the ground to make sure that in that magnetic zone, there is vanadium. And that's what all the analytical work does as we pull the cores out of the ground. So a lot of work to be done, but we anticipate being here for an exceptionally long time.

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

Got you. Anyway, one last question. I know you're reluctant to talk much about Glencore, but in May 2020, when you look at the various alternatives that one would contemplate, I would assume that in all scenarios, that the expiration of the contract would put this -- will be additive to whatever results we're producing at the time.

[Mark Allan Smith, CEO & Director]

Correct, Lee. Our best guess at that, just given what we know from history and taking a look at markets versus what we received for revenue, we think that there's probably a 10% to 15% gain, top and bottom line, by doing this sales on our own.

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

It's -- that's a big number, 10% to 15%, top and bottom line.

[Mark Allan Smith, CEO & Director]

Correct.

[Operator]

Your next question comes from [ John Hardy ] from [ VN 100 Group Ltd ].

[Unknown Analyst]

Some questions from me on detail, really. Just on the royalties, first of all. In Q2, those royalties were about $3.5 million. This quarter, they're $8 million, even allowing for the price increase and the EBITDA production expansion. So that's a big change. Why is that?

[Mark Allan Smith, CEO & Director]

Ernest, do you want to address that? It's mostly -- but -- because of price.

[Ernest M. Cleave, Chief Financial Officer]

Yes. So it's mostly price, but it's not only price. We made a prospective change to your reporting in the quarter as well where we captured all our royalties in one place. Some of those royalties were captured in official administration price, which still got added to our cash cost, so it's not like the -- it changed the overall profile. But putting another bucket, it's all now in one place, so actually related to a royalty that's owed to a U.K. entity. So that also contributed to the change. It's not just -- it's obviously price, but it's not just that, as you noted.

[Unknown Analyst]

Okay. So that's the Anglo Pacific 2% plus other elements, is it?

[Ernest M. Cleave, Chief Financial Officer]

Yes.

[Unknown Analyst]

Okay. And so that gives us an indication of the scale of numbers we can be looking at for Q4 with -- based on October further increased production and cost increased pricing leading to an increased number of royalties. Is that correct?

[Ernest M. Cleave, Chief Financial Officer]

Yes. actually the royalty are -- well, depending if prices stayed where it is right now, it's going to be north of $1.50 on a unit basis per pound.

[Unknown Analyst]

Okay. Understood. Second question is to do with the revenue recognition and on a question there on the remeasurement of trade receivables, very big number in this quarter. Am I correct in understanding that is linked with price movements following the end of the previous quarter leading to an adjustment? And if that is correct, given the price movements since the end of September, is there likely to be a similar remeasurement in the upcoming quarter?

[Ernest M. Cleave, Chief Financial Officer]

Yes. So let me take that one as well. And so I'll preface this by saying that anything I can say about our Glencore contract is severely limiting in terms of detail because it's -- we have very tight nondisclosure on that. Having said all of that, if you look at the remeasurement of trade receivables, that relates to the functioning, ultimately, of the Glencore contract as to where we sit with pricing. But what I would advise you, from a reader's perspective, if you go look at the revenues on the income statement and you're going to compare them to the actual average prices for V2O5 per London Metal Bulletin, you can see that -- I think if you looked at London Metal Bulletin, you'd get about USD 115 in revenue and on a U.S. dollar basis. And if you translated that Canadian, which obviously is inclusive of commissions, you'd get $111. So in this rising price environment, I think the readers should just focus on the actual average London Metal Bulletin price. We're going to realized it through the revenue line item. The adjustments that you see on the balance sheet relate to the functioning of the Glencore contract, and where the price adjustments are taken. So I'm not going to say it's insignificant because, clearly, it's a significant number. But I'm not actually in a position to explain to you how that actually comes about. But it doesn't -- it's not going to adjust top line revenue. I think that's where the focus should be. The rest of it is really functioning of the contract.

[Unknown Analyst]

All right. You do have some comment, equally not expansive comment in the MD&A on adjustments to revenue.

[Ernest M. Cleave, Chief Financial Officer]

Yes. Correct.

[Unknown Analyst]

Okay. Following up then on the finance costs. Mr. Cooperman picked up on that about the Q3 costs. Given the cleaner position now on the debt structure for the company, for Q4 onwards, are you really looking at, for want of better expression, purely noninterest in the financial costs or likely other elements as well?

[Ernest M. Cleave, Chief Financial Officer]

Yes. So from Q4 onwards, and I think as Lee noted, it's going to be much cleaner. So you're not going to have to concern yourself with deferred transaction price or any of the costs that relate to the repayment of the BNDES facility and settlement of some of the other debts in Brazil, because that will all be behind us. So the interest expense is predominantly just going to relate to the interest on the notes outstanding. So it would be a much smaller number and much more predictable.

[Unknown Analyst]

Right. So that should be, say, $5 million or less, but you don't seem to comment on that. Is the repayments mentioned about time line for debt repayment, is that linked in with the provision you have in your notes about the excess cash flow in the 125 days and so on and so forth? Or is it -- that's just the time line you're looking at?

[Ernest M. Cleave, Chief Financial Officer]

One of the issues. And I think as Mark alluded to, there are a number of issues that we have to look at before we can actually pay dividends or repurchase shares. And clearly, our -- the net realizable value of our assets and our stated equity has to be larger than the company's liabilities on an entity basis. So that's one of the gating factors. Moving money out from Brazil, we have to do intercompany dividend. As you can appreciate, that has to be after the year-end, after it's measured and gone through the bureaucratic processes in Brazil. So it's not just related to the indenture. That's one of the issues because we do have to keep money assigned for the free cash flow offer that we have to make. So it's sort of a triumvirate of reasons there, all of which lands you in that sort of May time frame before you can adequately deal with a return to shareholders.

[Unknown Analyst]

Indeed. And given the way things stand at the moment, given that the company is currently, I think being said, net cash positive now, it's going to be, all things being equal, substantially cash rich come the middle of next year. So look forward to that. And just a final question, possibly with Mark. On the expansion, in the past, I think you commented about the expansion being 1,000 tonnes per month, but actually, other elements taking it towards 1,100 tonnes per month. Is that still the case? Because it seems to have dropped out of current communications.

[Mark Allan Smith, CEO & Director]

Yes. We still -- our goal will never be the design basis. And remember the design basis of 800 tonnes per month, we're exceeding by anywhere from 5% to 10% each month right now. So as I was told as a very young engineer in my first day of classes, any good engineer can figure out how to get 10% more out of a plant. So that will be the activity level that you'll see once the expansion project is done. We know there are certain things we can do in the kiln to improve our recoveries there. And so we've got some things in mind that we'll be shooting for, certainly above the design basis, and we do think 1,100 is possible. But in our conservative nature, we're telling you what the design basis is for that expansion.

[Operator]

We have run past our hour for the call. There are no further questions at this time. Please proceed.

[Jim T. Sims]

Thank you, operator, and thanks to everyone for joining us today. If we did not get your questions, we apologize. We've ran out of time today. But please get in touch with us, and we'll get to your questions. You can either call the company at [phone] or send us an e-mail to [e-mail]. As we noted before, our Largo's Q3 news release, financial statements, MD&A and an updated PowerPoint presentation can be found on our website at largoresources.com. Thanks, everyone. This will conclude our call today, have a great day.

[Operator]

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