Largo Inc. (NASDAQ:LGO) Q3 2023 Earnings Call Transcript

Largo Inc. (NASDAQ:LGO) Q3 2023 Earnings Call Transcript November 9, 2023

Operator: Good day, and thank you for standing by. Welcome to Largo’s Third Quarter 2023 Financial Results Conference Call. 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.

Alex Guthrie: Good morning, everyone. Thank you for attending Largo’s Third Quarter Financial Results Conference Call. Largo’s Q3 financial statements, related MD&A and most recent AF can be accessed on our website at largoinc.com 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. On the call today is 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, the President of Largo Clean Energy. Following delivery of the prepared remarks, we’ll open the call for questions. [Operator Instructions]. So with that, let me turn the call over to Daniel.

Daniel Tellechea: Thank you, Alex, and good day to those joining us for our quarterly update call. I want to begin by acknowledging that Q3 was another challenging quarter for Largo. We faced some unforeseen cos that impacted our operations, and I would like to provide you with an update on these events and how we are moving forward. For Q3, P205 equivalent production was 2,163 tonnes, which is a decrease from the 2,639 tonnes produced in Q2 2023, and the 2,906 tonnes produced in Q3 2022. For the 9 months ended September 30, 2023, V2O5 production was 6,913 tonnes versus 8,432 tonnes for the same period in 2022. In July, we were deeply serve by a traffic tragic accident at our chemical plant which resulted in a capacity bottleneck in the evaporator section.

These unfortunate incidents had to lower vanadium production furnaces in July and August. I want to express our gratitude our dedicated team for their rapid response and the safe commissioning of the evaporator circuit in early September which is now operating as its original. In addition to the accident we experienced technical delays in the commissioning of our new crushing plant, which was designed to offset the impact of lower ore grades. While this delay impacted vanadium production in Q3, our operating team is working hard to resolve those issues. I would like to emphasize that our mining operations are, in fact, proceeding as planned, with mine material being 46% higher in Q3 as compared with the same period of last year. A major prevalent wind country was a large amount of ore that remain a stockpile following failure in engineering and design in the crusher and magnetic separator stages.

Consequently, in response to the aforementioned challenges we have undertaken a change in leadership at our Maracás facility. We want to assure you that a comprehensive plan is in place to address the challenges discussed today. Our focus remains on improving our processes to ensure that they might or can be processed going forward. As a sign of improvement the crushing plant produced more than 1,000 tonnes of contained V2O5 in October despite further improvement is scheduled for November and December. We are also optimizing additional operational efficiencies at Largo for further improve our performance in the future. This include the increase of high-purity vanadium production, which now represents approximately 44% of all production in the first 9 months of 2023 versus 27% in the same period of last year.

And during the month of October, represented 72% of total production. We are also restructuring maintenance process at the mine and ramping up production to diversify our product and revenue mix going forward. Significant strides have been made in reducing costs with notable production in key consumable costs such as sodium carbonate as well as additional and head count reductions. As we continue to realize the benefit of our optimization offer, we should expect to see additional cost benefits in future quarters. These initiatives are crucial to mitigate the impact of decreasing vanadium prices. Before I hand the call over to Ernest, I will note that we have made substantial investments over the past year. These include increased waste rock, pre-stripping and infill drilling to optimize future reduction.

The commissioning of the ilmenite plant, the construction of a new magnetic separation crushing plant, progress with the delivery of our first vanadium battery to NL, our European energy storage customer. We’re also invested in ongoing at Maracás with the goal of increasing measured and indicated resources. In the first 9 months of 2023, we have completed approximately 19,000 meters of diamond deal rolls at our Campo de Alegre Lourdes [ph] in Maracás targets. We plan to provide an update on this program soon. Again, as we see this investment as critical to ensure the sustainability of our operations in a lower value price environment. In summary, we recognize the challenges we face in Q3 and the importance of the investment we have made. We remain committed to optimizing our operations reducing costs and achieving our targets.

We believe this action put us on the path to stabilize operation and cost of production in a safe environment. and we appreciate your continued support as we navigate through these challenges. With that, I will now turn the call over to Ernest to provide an overview of our financial performance for Q3.

Ernest Cleave: Thank you, Daniel, and thank you to those that could join us on the call today. Taking a closer look at the financial performance for Q3 2023, it’s clear that we faced significant headwinds during the quarter. I’ll now provide a summary of our financials for Q3. Revenues for the quarter totaled $44 million, a decline from the $54.3 million recorded in Q3 2022. This decline can be attributed to 2 primary factors, lower vanadium prices and reduced vanadium sales volumes. This also translated to revenues per pound sold of $8.34 compared to $8.80 in the same period last year. On the cost side, we recognized operating costs of $42.5 million in Q3 2023, which is a reduction from the $45.6 million incurred in Q2 2022.

A steel rod, bent and contoured to the exact specifications of the company.

The decrease in operating cost is primarily a result of the lower overall sales volumes in the quarter. This includes a reduction in the sale of purchased products and lower royalties due to lower sales. As Daniel pointed out, we are actively focusing on reducing costs across the organization. At our mine site, this includes a reduction in our fixed cost structure through various initiatives including contract renegotiations and optimizing key operational areas. This also involves a further examination of our mining operations, maintenance procedures, equipment, rental and consumables. As noted earlier, we are committed to enhancing efficiency across the board. In terms of cash flow, we reported cash used before working capital items of $4.4 million in 2023 and this compares to cash provided before working capital items of $4.3 million in the same period of 2022.

As of the end of Q3 2023, our cash balance stands at $39.5 million, with a net working capital surplus of $91 million and a debt of $65 million. To close out, while we did face a challenging quarter, our team is actively working on strategies to adapt to these market conditions, optimize our cost structure and enhance our financial resilience. We remain focused on our long-term goals are looking diligently to navigate through the challenges discussed on the call today. I’ll now turn it over to Paul for his update.

Paul Vollant: Thanks, Ernest, and thanks, everyone, for joining the call. The Third Quarter continued to be difficult for vanadium prices with the overall market facing headwinds, especially from the steel industries in China and Europe. Prices have further decreased over the past months and the short-term outlook seems challenging. The average benchmark price per pound of V205 in Europe was $8.03 in Q3 2023, a 2.5% decrease from the average of $8.23 in Q3 2022 and was $6.65 at the publication last Friday. On a positive note, we continue to see strong growth from the aerospace and energy storage sectors, further highlighting the importance of our ability to adapt to new market demands and produce high-quality vanadium products.

In the past quarter, we sold 2,385 tonnes of V2O5 equivalent which is a decrease from the 2,796 tonnes sold in Q3 2022, but we remain in line with our annual guidance. As Daniel mentioned, we’re excited to have signed our first sales contract for ilmenite. Subject to any operational delays, we should record the sale at the shipment date from Brazil by the end of November, which is our original estimate of Q1 2024. We have developed a strong sales pipeline and are confident in our ability to place these units either all or internationally other production ramp up. This new income stream is of utmost importance to diversify our revenues and increase the profitability of our main assets. Thank you for your time, and I’ll stop there and turn it over to Francesco.

Francesco D’Alessio: Thanks, Paul. I’ll focus my time on a few key updates we made at our Clean Energy business during the Third Quarter and some made subsequent to the quarter end. First and foremost, we’re pleased to announce that our 6-megawatt hour Canadian Readers [ph] flow battery deployment for new Green Power Spain was validated to upgrade as conditions according to EGP in October. This is a fairly significant milestone achieved both for Largo and LCE as showcases the adoption and use case of our BISP technology and the clean energy storage solution at LCE offers to the market. While this deployment face delays, it demonstrates our team’s ability to successfully implement a grid-scale battery that we believe is expected to provide an important catalyst for our strategic evaluation process for LCE.

To that point, our ongoing strategic review to unlock and maximize the value of largenergy [ph] Clean Energy continues to gain momentum. We are pleased to report that our efforts have attracted interest from various parties, reflecting the potential of our VRP technology holds within the industry. As mentioned by Daniel, LCE is not immune to the need for cost-cutting measures at the organization. As part of these measures, we’ve instituted a reduction in head count in LCE, and we’ll continue to explore additional efforts to reduce costs at this subsidiary going forward. We acknowledge that a substantial investment has been made in LCE and we remain confident that our strategic review process will optimize the value proposition of LCE and allow us to actively participate in the clean energy transition, with vanadium playing a pivotal role as a critical material.

And with that, I’ll close up by saying that we look forward to updating you on our progress in the continued coming quarters, and thank you for your continued support. I’ll now hand it over to the operator for our question-and-answer session. Thank you.

Operator: [Operator Instructions]. First question comes from Andrew Wong at RBC.

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Q&A Session

Andrew Wong: Thanks for having me on. Just sorry if this might have been already answered, I came on a little bit late. Could you just talk about some of your early expectations for 2024 in terms of production and cost. It sounds like some of these improvements might start picking up steam into next year and start contributing? And how does that look like versus what we saw this year?

Daniel Tellechea: I can take that call, Ernest. For 2024, we are expecting as we already have the infill drilling, so I can give you the final mining information. We are planning to produce around 1.5 million tonnes of material mine from the mine every month in order to continue stripping the mine and create additional flexibility in the future operations, we are planning to plus 11,000 tonnes of V205. That’s about an average between 900 and 950 tonnes per month, and we’re planning to create around 3.6 million tonnes of V205 in stockpiles in order to prevent issues with [indiscernible] into the future. So that’s how we look into 2024 production at the mine. In terms of cost, I still don’t have the final information because we are right now working on our forecast for 2024. So I will skip for the time being that particular information.

Andrew Wong: Okay. That’s understandable. It’s great to see the ilmenite plant ramping up here. Can you talk about what sort of financial contribution we might be expecting as we go into next year, what do prices look like or the night today and how are prices that you to realize how to develop like relative to the market?

Daniel Tellechea: Paul, can you take on the prices, and I will take at the end, the volumes that they were expecting?

Paul Vollant: Sure. Hi Andrew, ilmenite prices today are between $250 to $350 [indiscernible] and that price really depends on the quality. Without targeted quality, we believe we’ll end up around the middle of that range. But that will take a bit of time for us to qualify onto the relevant customers and also to achieve the desired quality. So we will see increase in prices as we improve our production quality and we realized slightly lower prices before. But yes, that’s the current prices are between 250 to 350.

Daniel Tellechea: Now in terms of volumes, as we are moving forward with the commission of the plant between the First Quarter — in the First Quarter, we’re planning to produce around an average of around 300, 500 tonnes per month. And starting April of next year, we expect that the plan will be completely terminated on his commission and time, and we should be producing between 8,000 to 9,000 tonnes per month.

Operator: The next question comes from Steve Silver from Argus Research.

Steven Silver: From the prepared remarks, it sounds like the company is now planning for lower vanadium price environments to continue over the near term, than maybe you might have previously envisioned. I guess I’m just asking broadly, whether it’s remaining surprising that vanadium prices are being as tied to China steel demand without finding support at some level from this pent-up demand for Clean Energy and battery applications.

Daniel Tellechea: Can you give us the price environment, Paul?

Paul Vollant: Yes, sure. Well, obviously, forecasting prices is always very difficult, right? But I want to say that at this point of time, we think prices being under pressure. As mentioned before, it’s mainly due to a low performance in the Chinese and the European steel industries. But you’re right, I mean, the brighter picture is with high purity demand on both the aerospace industries and also the battery sector. We’ve seen a number of very big announcements on the sector in the past few quarters. So we’re also hoping that this demand will help to balance the supply-demand in the more longer term, we look historically, we were in a very low price environment today, right? So there’s a good chance that we see a rebound at some point. It’s just very hard to predict when that will happen.