Largo Inc. (NASDAQ:LGO) Q1 2024 Earnings Call Transcript

Largo Inc. (NASDAQ:LGO) Q1 2024 Earnings Call Transcript May 16, 2024

Operator: Good day, and thank you for standing by. Welcome to Largo’s First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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.

Alex Guthrie: Thank you, operator, and thanks to all those who could attend our first quarter 2024 conference call today. Largo’s Q1 2024 financial statements, related MD&A and most recent AIF can be accessed on our website at largoinc.com as well as on our SEDAR+ and EDGAR profiles. 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 the cautionary statements and the related MD&A, consolidated financial statements and AIF, which can be found on our website within the Investor Relations section. And finally, all figures are in U.S. dollars unless otherwise stated.

On the call today is Daniel Tellechea, Largo’s Interim CEO and Director; Celio Para, Largo Brazil’s Chief Operating Officer; Ernest Cleave, Largo’s Chief Financial Officer; Paul Vollant, Largo’s Chief Commercial Officer; and Francesco D’Alessio, the President of Largo Clean Energy. Following delivery of the prepared remarks, we’ll open the call to questions. We ask that participants restrict their questions to two and then requeue if there are additional questions to allow the others the opportunity to participate. I’ll now turn the call over to Daniel. Daniel, please go ahead.

Daniel Tellechea: Yeah. Thank you. Good morning, everyone, and thank you for joining us today for Largo’s first quarter 2024 earnings call. As our team takes you through our first quarter financial results and discusses our strategy moving forward, I will keep my particular remarks brief. At Largo, our main focus remains on improving production efficiencies and reducing cash cost to return to profitability, especially amidst the current period of low vanadium prices. We recognize the challenges posed by the current market conditions and our commitment to improving our performance remains top priority. With a new operating team in place, we’re confident in our ability to drive productivity improvements and operational excellence going forward at our Maracás Menchen Mine.

Now I would like to introduce Celio Pereira, our Chief Operating Officer from Largo Brasil, who will provide a more comprehensive view of our operational improvement plans going forward. Our productivity initiatives, along with his operational leadership are helping us navigate through these challenges to emerge in stronger in the future. Celio, over to you. Celio?

Operator: Apology, sir, but I think you line get disconnected. Please proceed.

Daniel Tellechea: Okay. Probably the line is busy. If that is the case, I will take over Celio’s presentation. I’m going to speak in his name. It is my pleasure to speak to you today for the first time and provide insights into our operational plans moving forward at our Maracás Menchen Mine. It is very important to stress that maximizing operational output and reducing costs remain our top priorities at Largo. We are working today on four key initiatives to maximize output. Number one, we are improving our grade control capabilities to reduce dilution in mining operations and increased ore grade feeding the crushing plants. These changes were concluding in April 2024 with the installation of a dedicated drilling machine and an increased number of sampling and analysis as well as changing in operational procedures to improve grade control.

Secondly, we have been increasing our crushing volume over the last quarters, and we will add an additional 22% in crushing capacity by the end of Q2 2024 through the installation of a movie crusher as well as a dry magnetic separator. This is expected to offset the lower grades we are currently mining. Our third initiative is in the focus of an increase in M&A concentrate production and we have finished the installation of a system to pump material from not magnetic pounds to our ilmenite concentrator to support this. This will allow us for the continuation of planned production when our milling plant is expanding as well as increased grades, recovery and quality. And lastly, we will be installing screens and wet magnetic separators in the milling plant in the third quarter of this year to improve the quality of the concentrate and by doing so, improve the kiln recovery as well as reduces the sodium carbonate consumption.

These initiatives are low-cost, high-return projects in order to enhance our operational efficiencies and optimize the use of cash. To complement this initiative, we have also implemented extensive measures to reduce production cost, including the reduction and optimization of college, distance, reduction in drilling and explosive consumption, cost of inputs as well as a review of all contracts at our mine site. contract at our mine site — we have concluded a reduction in the number of contractors by 20% during April, while improving additional efficiencies through the whole operations. This included a reduction of equipment rental, increasing synergies and the testing and development of different inputs to explore lower price alternatives.

For the remainder of 2024, we expect a reduction of approximately BRL40 million in operating expenditures in approximately BRL12 million in capital expenditures. When combined with our productivity initiatives, these measures are expected to assist the company in achieving its revised 2024 cost guidance and offset some of the impact of lower vanadium prices. With regards to the operation results in Q1 2024, we conducted the planning annual maintenance at the mine, including the replacement of the kiln refractory and other maintenance actions in various sections of the plant. As expected, this maintenance impacted production resulted in V2O5 — lower V2O5 production compared to the previous year. In Q1 2024, our V2O5 of production was 1,729 tons within the lower range of the company’s quarterly production guidance of 1,700, 2,200 tons for the first quarter of 2024.

Global recoveries averaged 70.5% in Q1 2024, significantly lower than the previous year. This decline was largely due to the lower grades mined during the period, impacting dry magnetic wet magnetic as well as scale recoveries. On the ilmenite side, we have been focused on advancing the ramp-up of this new facility and continue to make progress with this activity. In Q1 2024, the company produced 9,563 tons, which represented an increase of 6.6% from fourth quarter of last year. Subsequent to Q1 2024 production was at 753 tons of V2O5 equivalent in April 2024, with 2,500 tons of ilmenite concentrate being produced during the same period. Before I hand the call over to Ernest, I would like to stress that despite the challenge in space in Q1 2024, we are optimistic about achieving our operational targets going forward.

With our productivity initiatives underway and commitment to operational excellence, our operational team is laser focused on not only meeting our goals, but delivering better results in the future. Now I will turn the call over to Ernest for a detailed financial overview of quarter number one.

Ernest Cleave: Thank you, Daniel. In face of the challenges such as our extended maintenance period and a significant decline in vanadium prices, our primary focus remains unchanged, which is to restore profitability at the company. Despite these challenges detailed on this call, we’ve been diligently working to implement strategies aimed at achieving this goal. I’ll now provide a very brief summary of the financial results we reported yesterday evening on our first quarter. Our revenues for Q1 2024 totaled $42.2 million, down from $57.4 million in Q1 2023, with the decrease being primarily attributable to a decrease in vanadium prices. With our realized vanadium prices dropping from $9.14 per pound in Q1 2023 to $6.91 per pound in Q1 2024.

Operating costs for Q1 2024 were $49.7 million, and that’s up from $45.9 million in Q1 2023. Our cash operating costs, excluding royalties stood at $6.12 per pound of V2O5 equivalents sold in Q1 2024, and that compares with $5.15 per pound, in Q1 2023. This increase can largely be attributed to the extended maintenance period, as previously mentioned, and it also includes a $4.5 million write-down of produced vanadium products. We recorded a net loss of $13 million in Q1 2024, and that’s inclusive of $4.4 million in non-recurring items compared with a net loss of $1.2 million in Q1 2023, which included $100,000 in non-recurring items. Basic loss per share for Q1 was $0.20 compared to $0.02 in Q1 2023. We exited the quarter with a cash balance of $45.7 million, and net working capital surplus of $70.8 million debt of $75 million exiting Q1 2024.

Despite the challenges faced, we’ve been actively implementing measures to reduce cost and enhance productivity, as previously pointed out on this call. While we anticipate elevated costs in the first half of the year, we expect improvements in the second half as the full effects of our productivity initiatives materialize. Now I’ll pass it on to Paul to discuss sales in the vanadium market.

Paul Vollant: Thanks, Ernest. Our sales results for Q1 2024 were in the upper end of our quarterly guidance. We achieved V205 equivalent sales of 2,765 tonnes, inclusive of 156 tons of purchased material. However, this represented a small decrease compared to the 2,849 tonnes that we sold in Q1 2023. Subsequently, we sold 730 tonnes of V2O5 equivalents in April. Speaking of prices, we sold at an average price of $6.94 per pound of V205, a 7.8% premium to the V2O5 European average of $6.44 per pound of V205. The average benchmark price expands a 0.3% decline from $6.46 per pound of V2O5 on average in Q4 2023. The average benchmark price per kilogram of ferrovanadium in Europe increased to $27.96 in Q1 2024 from $26.61 in Q1 — in Q4 2023, reflecting a 5% improvement over the period.

The most recent average benchmark price per pound of V2O5 in Europe, as of May 10, was $5.87. The softness in spot demand persisted in Q1, primarily driven by adverse conditions in the Chinese steel sector. However, spot market is now starting to show signs of improvement in May. Looking ahead, the fast growth in demand for battery applications in China and its potential to support the energy transition in the rest of the world gives us hope for future quarters. Also, we’re observing continued strength in the high purity sector, which represents promising opportunity for Largo’s products. Shifting focus to ilmenite, our sales were 513 tonnes in Q1. This is well below our guidance as we experienced initial operational and administrative delays.

Nonetheless, we’re continuously improving and sold over 9,000 tons in April. We anticipate sales to rebound in the coming months and maintained our production and sales guidance for 2024. Now I’ll hand it over to Francesco for a brief update on our clean energy base business.

Francesco D’Alessio: Thank you, Paul, and welcome, everybody to the call today. Since our last update, our primary focus has been advanced negotiations concerning the strategic evaluation of our Clean Energy business, particularly regarding our proposed joint venture with Straton Energy, as previously announced. These negotiations remain ongoing and our crucial step forward for us as we look to enhance the value of our Clean Energy business and energy storage product offering. In addition to that, I’m also pleased to share that we have made considerable progress towards the completion of the second phase of our commissioning for our ERP deployment in Spain for an Albian (ph) Power. The completion of this phase will take place following the replacement of the inverters and the transformer. I’ll now hand it over back to Daniel.

Daniel Tellechea: Sorry, I was on mute. To close out, I want to reiterate our commitment to continue enhancing production, efficiency and reducing cost of Largo. As we have navigated through the challenges posed by the current market conditions, I am confident in the capabilities of our dedicated team and the efficiency measures that we are undertaking. The comprehensive initiative we are implemented, which includes operational enhancement, cost reduction in measurements and productivity initiatives are expected to optimize our operations and achieve profitability in the future. We thank you all for your continued support, and we look forward to updating you in our progress in the quarters ahead. Now I will hand it back — the call back to our operators for our questions-and-answer session. Thank you.

Q&A Session

Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] We have our first question coming from the line of Andrew Wong from RBC. Go ahead, please.

Andrew Wong: Good morning. Thanks for taking my questions. So your realized prices performed quite well this quarter relative to market prices. Can you just talk about what’s contributing to that? Was it high purity sales or maybe your contract prices going into the year and how do you expect your realized prices to perform for the rest of the year?

Daniel Tellechea: Paul, can you take that question?

Paul Vollant: Yeah. Sure, Dan. Hi, Andrew. Yes. We overperformed the market this quarter. That’s mainly due to two main factors. One is our high-purity sales, which is sold at premium to market price. And two, is the fact that most of our contracts trailing the index, right? So we usually deliver material in the month quoted based on the previous months price. So in a downward market like today, structurally, we’re supposed to perform a bit better than the market. That’s the two main reasons that justify this overperformance.

Andrew Wong: And for the rest of this year?

Paul Vollant: Yeah, sorry. And for the rest of this year, it really depends on the market trends if — and also sharing high purity. That’s a number we’re going to provide regularly now to each quarter for this call. So yeah, we expect to be a long market price, probably overperforming a bit.

Andrew Wong: Okay. Thank you. And then, just on the operations side, the grades have come down a bit relative to your historical levels. Is there any expectation for the grade to come back or is the expectation for the grade to kind of stay at these levels, given that you’ve installed equipment to handle more for? And then going to 2025, would your second half outlook be a good guide for cost into next year?

Daniel Tellechea: Are you in the call Celio, can you answer that question?

Ernest Cleave: Daniel, I don’t think he is.

Daniel Tellechea: He’s not on the call.

Ernest Cleave: No.

Daniel Tellechea: Basically, our — as I mentioned before, Andrew, our grade has been affected right now because of the presence of the pegmatite which appears on the center of the ore body. That is the main reason why while we mine and reduce and eliminate pegmatite from our mining operation, the grade will continue to be around 0.75, 0.80, V205. So once we eliminate the pegmatite and according to our mine launch, that should be around half of it next year our grade will be going up a little bit. So for the time being, we will continue mining and going forward with this 0.75, 0.80 V205 grade in our mining operations. Also, the other thing that has been affecting us is the grade of the magnetics on the material. Remember that Maracás Menchen Mine that we do a lot of lending between the three kinds of material, massive, bundled and disseminated.

What is happening today and the main reason of increasing our crushing capabilities is that they were mining much, we are mining and processing much more disseminated ore who has a lower grade, lower magnetics, and that is the main reason we’re in order to produce the same amount of V205 at the end of the period. We are increasing our capacity of crushing and dry mag operation, as I explained during the presentation. I didn’t hear the second part of your question, Andrew.

Ernest Cleave: I can talk about it, Daniel. Andrew, so on the cost side, for the remainder of, let’s talk about the second half of the year, we’re going to be in that $4.50 to $5.50 excluding royalties range. Looking into the new year, it’s a bit early. But with the improvements in grade, the throughput unitary throughput improvements, etc., our ambition is to be below $4 in 2025. But for now, we’re maintaining our cost guidance of the $4.50 to $5.50 with the ambition to go below post that sort of six-month period.

Andrew Wong: Okay. That’s excellent. Thank you very much for the additional color.

Ernest Cleave: You’re welcome.

Daniel Tellechea: Thanks.

Operator: Thank you. This ends our question-and-answer session for today. I’d now like to turn the call back over to Mr. Guthrie for final closing comments.

Alex Guthrie: Thank you, operator, and thanks to everyone for joining us today. This concludes the Q&A session of our quarterly call. Have a great day, everyone. Thanks again. Bye.

Daniel Tellechea: Bye.

Operator: Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.