Largo Inc. (NASDAQ:LGO) Q2 2022 Earnings Conference Call August 11, 2022 1:00 PM ET
Company Participants
Alex Guthrie – Senior Manager of External Relations
Paulo Misk – President and CEO
Ernest Cleave – Chief Financial Officer
Paul Vollant – VP of Commercial
Conference Call Participants
Heiko Ihle – HC Wainwright
Lee Cooperman – Omega Family Office
Andrew Wong – RBC Capital Markets
Gordon Lawson – Paradigm Capital
Operator
Good day, and thank you for standing by. Welcome to Largo Second Quarter 2022 Webcast and Conference Call. Today’s call is being recorded. 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
Good morning, everyone. And thanks for joining our second quarter earnings conference call and webcast. On the call today is Paulo Misk, Largo’s President and CEO; Ernest Cleave, Largo’s Chief Financial Officer; and Paul Vollant, Largo’s VP of Commercial.
To accompany the call today, we have uploaded a supplemental webcast presentation, which is also available on our Web site at largoinc.com. Our Q2 financial statements, related MD&A and most recent AIF are also available on the website, as well as on SEDAR and on EDGAR.
Before continuing the call, I would like to remind you that some of the information you will hear during today’s discussion will consist of forward-looking statements, including without limitation, those regarding future business outlook. Please refer to Slide 2 for a full description of our cautionary notes. The agenda for our call this morning is as follows: Paulo will provide an update on the company’s second quarter progress; followed by Ernest, who will provide an overview of Largo’s Q2 financial results; Paulo will close the call with an update on the company’s sales and trading progress and on the vanadium market. Following this, we will then open the call for questions. We note that participants should restrict their questions to two and then requeue if there are additional questions to allow others the opportunity to participate.
And with that, I’ll hand the call over to Paulo.
Paulo Misk
Thank you, Alex. And thanks everyone for joining our call today. I’d like to start by providing a brief summary of our second quarter results as it relates to our two pillar business strategy. Let’s begin with the profitable vanadium pillar. Our team has worked hard in the face of several challenges at the start of the year. I am pleased to report that our production and sales performance improved in the second quarter. On the production side, we produced 3,084 tonnes of V205 equivalent in Q2, which is a notable increase over Q1. Following an improvement in operational stability, as well as the reestablishment of intermediate inventories. The payers also improved this quarter with 3,291 tonnes of V205 equivalent sold. Q2 was a great quarter for vanadium prices and company’s strong financial performance during this quarter reflect this. Revenues were up 56% this quarter and the company achieved net income of $80 million [our] basic earnings per share of $0.28. However, due to the operational impact experienced to date and expected [continue] of global inflationary pressures, the company has revised its production and sales force guidance for 2022. It [revised] equivalent production guidance is now 11,000 to 12,000 tonnes, down from 11,600 to 12,400 tonnes and cash operating costs, excluding guidance has increased to $4.10 to $4.50 per ton sold from $3.90 to $4.30.
We continue to actively address the challenge to additional operational improvements at our facility with an increased focus on cost management. As we noted in our Q1 update, construction of the company Ilmenite Concentration Plant began in April. This project is a part of our previously announced TiO2 pigment project outlined in our latest technical report, which can be found on SEDAR and on our Web site. An important feature of this project is that the key TiO2 content is expected to be sourced from the vanadium ore from our existing operations, meaning no new mining required. Although, we are delaying CapEx spent on this project, we expect to begin the commissioning of the Ilmenite Concentration Plant in Q2 of next year as planned. Let’s shift gears to the second strategic pillar of our business and discuss progress made at Largo Clean Energy. In late July, LTE achieved ISO 9001 certification of its quality management system, and our teams continue to pursue CE certification of our VCHARGE battery system. As previously announced in October last year, LTE was selected to receive $4.2 million in funding from the Department of Energy to scale up US based manufacturing of flow batteries and low duration energy storage system. This award was subject to the negotiation and this negotiation was concluded in early July. LTE total DOE budget is $6 million, for which DOE will provide funding of $4.2 million and we expect to complete DOE project over the next three years.
LTE’s Enel contract remains a priority focus for us. And we made notable progress this quarter in the face of continued supply chain obstacles. These obstacles have had a significant impact on the project delivery timeline, and we now expect VCHARGE battery to be commissioned in mid February 2023. We are also pleased to have announced the recent signing of a non binding MOU with Ansaldo Green Tech to negotiate establishment of a joint venture for the purpose of the commercial deployment of our VCHARGE battery in Europe, Africa and the Middle East power generations market. Given the nonbinding nature of these announcements, I will note that we are limited in what we can provide in terms of details as there can be no assurance that future negotiation will lead to the execution of a definitive agreement. But if the potential JV negotiation is successful, it could address [Indiscernible] needs of the European energy sector, which is seeing extremely [growth] of the renewables [energy] integration. I’d like to provide more further information on Ansaldo.
Established in 1953, Ansaldo Energia is a leading international player in the power generation industry to reach it brings an integrated model, embracing turnkey plants and turbo machinery, including the gas turbines, steam turbines, generators and micro turbines. Ansaldo is headquartered in Genoa, Italy, has over 4,000 employees globally and recognized approximately EUR1.5 billion in revenues in 2021. It’s subsidiary Ansaldo Green Tech operates in the field of renewable energy with the view towards innovation and with the goal of developing, manufacturing, installing and servicing products for the energy transition for traditional source of energy to renewable forms of energy. Finally, I would like to touch on our fourth annual sustainability report, which was published in July. I’m proud to see the progress we have made thus far. This is reflected in higher ESG rating in the several important areas. Our sustainability journey continues and we have other improvements planned on many sustainability related performance measures and priorities going forward. Included in this progress is the release of our first TCFD report in the coming month. We are moving forward on a new and exciting path of Largo and by continue to focus on sustainability, and dedicating ourselves to the very best practices in our industry. I am confident that we are on track to become a respected leader and contributor to the planet’s low carbon future [sustainable].
Let me stop there and turn things over to Ernest for a review of our financial results.
Ernest Cleave
Thanks, Paulo, and welcome to everyone on the call today. Slide 8 provides a summary of our second quarter financial results. Q2 was a solid financial quarter for the company and we reported net income of $18 million or basic earnings of $0.28 per share. As a result of stronger vanadium prices, we generated approximately $84 million in revenues from sales of 3,291 tonnes of V205 equivalents in Q2 or $11.69 per pound sold. This represents a 56% increase in revenues over the comparative quarter last year. Cash operating costs excluding royalties were $4.23 per pound in Q2 2022 compared with $3.39 for Q1 last year. As we have noted in previous quarters, we continue to face inflationary pressures similar to the wider market, and during the first half of the year experienced cost increases for most of our critical consumables. As Paulo mentioned, we’ve updated our cash cost guidance to reflect the inflationary impacts expected for the remainder of the year. Our cash operating costs, excluding royalties guidance is now in the range of $4.10 to $4.50 per pound. With that being said, we continue to actively review and evaluate opportunities for cost reduction and cash preservation, including the review of current contracts and the renegotiating of certain supply agreements.
Paulo briefly touched on this earlier, but we’ve also adjusted a portion of our 2022 CapEx guidance, including the lowering of the Ilmenite Concentration Plant CapEx to $19 million to $21 million, and that’s from $29 million to $30 million previously, and the company’s TiO2 processing plant CapEx from $2 million to $3 million that’s from $9 million to $10 million previously. At quarter end, we had a cash balance of approximately $53 million and restricted cash of approximately $23 million for total cash flow of $76 million. Working capital in the second quarter was largely impacted by increased levels of vanadium inventory and accounts receivable balances. Given the uncertainty surrounding vanadium price movements and potential purchases of vanadium under the LPV structure towards the end of the year, it is difficult to estimate year end cash, but assuming [demand] on the sales price for the remainder of the year, the current CapEx guidance and low vanadium purchases via LPV, net cash movement is expected to be flat up to the end of the year. Every $1 change per pound in the average vanadium price for the remainder of the year would impact EBITDA and the ultimate cash flows by approximately $10 million. Such estimates also take into account the updated cost guidance, sales guidance and a Brazilian two US dollar exchange rate that averages approximately 5:1 for fiscal 2022.
Let me stop there and pass the call over to Paul.
Paul Vollant
Thanks Ernest and thanks everyone for joining today. We had a very strong second quarter of sales with good volume, approximately 3,291 tonnes of V205 equivalents sold, as well as high prices. The average benchmark price per pound of V205 in Europe was $11.08, an increase of 3% from the average of $10.72 in Q1 2022 and an increase of 35% from the average of $8.19 seen in Q2 2021. However, consumption of vanadium in the steel sector has been slowing down recently and we actively monitor this situation as it is by far the largest driver of volume in our industry. We likely think the FX of inflation and slower economic growth, which has impacted vanadium prices recently. The average price benchmark for V2O5 in Europe was $8 per tonne of V2O5 as of August 2022.
On a positive note, we’ve seen strong increase in demand from the smaller aerospace, chemical and energy sector. This market drive lower volumes but are very important for Largo, as they require high purity products that are ideally placed that we are ideally placed to supply. These markets are a key focus to drive important diversification and extra profitability for the company in the coming quarters. Lastly, I know you’re all patiently waiting for an update on LPV, but I’m afraid we can only reiterate that it remains subject to standard TSX Venture Exchange regulatory approval, and we look forward to providing an update on LPV stages once the approval process is complete. I’ll stop there and turn it over to the operator for questions from the analyst.
Question-and-Answer Session
Operator
[Operator Instructions] And we will go first to Heiko Ihle of HC Wainwright.
Heiko Ihle
I think a bit longer term here. Can you give some catalysts for the clean energy division? I mean in our viewI the primary catalysts obviously are, first, VCHARGE battery system, which is going to happen next quarter. But I mean just longer term, can you maybe just provide a 24 month roadmap for the division if you’d be so kind?
Paulo Misk
Could you repeat your question again, please?
Heiko Ihle
So with the clean energy division, there is a number of shorter term catalysts. There’s VCHARGE, the battery system is going to come in the fourth quarter. But just longer term, can you provide a bit of a roadmap for the next 24 months for that area of your business, please, catalysts that you expect to see?
Paulo Misk
At LCE, we are focused right now to deliver now. We’re going to complete the commissioning on February next year. We are also focused to establish this JV that we are — we intend to establish with Ansaldo in Italy. I think it will be very important initiative to — in our strategic plan for LCE. Also we still continue to get opportunities in US there’s very good opportunities. We are not expecting something for next year but for 2024. So all those plans, including some initiatives to reduce the cost of our battery, improve efficiency, we are working on the [CAM2] [BiSB] battery. So all those measures will ensure you’ll be able to have a very competitive battery and also a very good solution for the storage energy systems.
Heiko Ihle
You revised the Ilmenite Concentration Plant downward to $19 million to $21 million, so down [essentially] 10 million bucks, but I mean that’s just delays in [painting] timing. I don’t know how locked in is pricing there? I mean, with inflation should we expect the absolute amount of money that you’re going to spend to get this thing up and running to be higher, and if so by how much? And building on all of that, is there a potential [bottlex] /delay in getting all the equipment.
Paulo Misk
No, in fact that we postponed some of reimbursement cycle, we are — the implementation are in line with our plan. We will deliver in — we start — start up will be Q2 next year. We have [following] our purchase and the main equipment, so the CapEx expected is updated. We don’t expect an inflationary impact on the Ilmenite project plant. So it’s in line what we are planning and we are very confident that it could be a very important step making our mining business more competitive, improve results and really optimize our mining business.
Operator
And we’ll go to our next question from Lee Cooperman with Omega Family Office.
Lee Cooperman
Just a couple of questions revolving around the same issue. How much, if any stock, have you brought back on your normal course issuer bid, why are you buying it? And the reason I ask that, given the recent adverse trends in your business, why are you buying back stock? And secondly, what is your view of normalized earnings in the existing business lines, and what is the profit potential from Largo Clean Energy and the titanium dioxide business? So in a sense what I’m saying, putting everything together, what is a realistic goal, not a forecast but a goal for, say, 2025 earnings?
Ernest Cleave
Let me try and answer some of that. So in terms of the number of shares brought back, we’ve repurchased about 805,000 shares. We’ve been purchasing every day since the last kind of two days of June. All told, that’s about $5.5 million. Again, it reflects our view, and the share price is not reflective of what we think the underlying fundamentals are. We candidly will be reviewing that going forward as we look at cash. And we will manage that somewhat fluidly, if we feel that the [medium] outlook starts going very negatively in a direction, we will curtail those purchases. As to a long term EBITDA expectation, we’ve always felt that $100 million of EBITDA or maybe more depending on premiums in the market. But just on the long term price of vanadium is a reasonable expectation, 100 to 120 and could be much more when times are really in our favor, as you’ve seen in the past. On the titanium business, as it’s described in the 43-101, there’s some very substantial EBITDA that are elucidated in that document. We are reviewing a bunch of strategic opportunities. I hate to put a number on that right now. Same with the battery business and so fluid. But from my perspective, we’re building from that base of $100 million and everything on top of that if we can get to a couple of hundred million in the future, that would be wonderful. But I don’t have that an exact [Indiscernible] and I think it’d probably be wrong [with me] to kind of lead people down a path. But it’s just off the top of my head, but I have [Indiscernible].
Operator
And our next question comes from Andrew Wong with RBC Capital Markets.
Andrew Wong
Can you talk about what you’re seeing high purity market, and if there are any improvements there with more airplanes flying now? And could we see some of the high purity higher price like higher premiums benefit on the price realizations going forward?
Ernest Cleave
High purity market has been very strong for us in the first half of this year, definitely we’re seeing a strong increase in demand compared to the lows of 2019 and 2020. Vanitec has recently published a statistics where they see Q1 2022 demand from aerospace industry more than 30% above Q1 2021. So that’s reflecting that. And as you know, Largo is in a unique position as one of the only producer approved by all the aerospace companies to supply high purity products and we are definitely benefiting from that. I mentioned in my speech earlier that this is a key focus for Largo and we see that as a real benefit to help us diversify our revenue and also increase with extra profitability from the premium. We will see where premium go. But right now the focus for us is to grab larger volume [detectors]. So yes, it’s truly a bright spot for us in this year.
Andrew Wong
And then just maybe on operations. Obviously, the guidance was lowered on production, because of some of the earlier year issues. Going forward how much confidence do you have in the stated 1,100 tonne per month run rate and what kind of actions are you looking to implement just to make sure that the facilities run at that level sustainably going forward?
Paulo Misk
We are very confident. We have taken all the measures to solve the problem that we face this year. I’m talking about the heavy rain falls the beginning of the year, end of last year and beginning of this year. So we have all the measures to prevent any future heavy rains. Also the refractory at the kiln we have — we faced some problems and we have done all the correct and replacements beginning of July. So we don’t expect any more stoppage on the kiln or any other area of the plant. So we are pretty much confident that we will keep running stably and achieve the production and the guidance. So it’ll be pretty much good.
Operator
[Operator Instructions] We will go next to Gordon Lawson with Paradigm Capital.
Gordon Lawson
Two of my questions are already answered, so I’m just going to stick with, if you can comment on the vanadium trioxide production in the quarter and are you able to break out those numbers or perhaps suggest a premium we could add to our baseline price assumptions?
Paulo Misk
We start producing V203, in beginning of the year. We spent some time this first half with approving the quality and certifying the customers. Our production you know we are increasing it according to the orders we are receiving. We are very excited with how the aerospace industry is reacting right now. I will ask Paul Vollant to complement his expectations on the Q3, just to give a sense of how it will be going forward in terms of sales. Please Paul.
Paul Vollant
V203 is very much linked to all of our high purity market, whether it’s aerospace, chemical or even in energy storage. So adding the production of V203 to a portfolio is really essential for us to drive more volumes in this high purity market, and this high purity market drive premium. Just in terms of price, the way you should look at it is that V203 is priced on a V205 equivalent. There is about 21% more V205 — more V in V205 than in V203. So essentially 1 tonne of V203 is sold at 21% premium to a tonne of V205. But again, you get less volume for V203 than V205, so roughly it’s equivalent and there’s no real arbitrage there.
Gordon Lawson
But do you get a benefit for the conversion costs?
Paul Vollant
Conversion with what?
Gordon Lawson
Our cost to…
Paulo Misk
…get to produce the V203 or V205 is the same, there is no difference, both come from the same source of raw material. So there is no — we don’t produce the V203 from V205, but from [A2B], so there is no additional cost to produce V203.
Operator
And with no other questions in queue, I would now like to turn the call over to Alex Guthrie for closing remarks.
Alex Guthrie
Great. Thanks. Thanks for joining everyone. And that concludes our question and answer session and the quarterly investor call. Until then, take care. Bye now.
Operator
Again, this concludes today’s call. Thank you for your participation. You may now disconnect.
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