Largo Inc. (NASDAQ:LGO) Q3 2022 Results Conference Call November 10, 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
Alex Jackson – RBC Capital Markets
Gordon Lawson – Paradigm Capital
Operator
Good day and thank you for standing by. Welcome to Largo’s Third Quarter 2022 Webcast and 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
Good morning, everyone. Thanks for joining our third 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 website at largoinc.com. Our Q3 2022 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 the Company’s cautionary notes. The agenda for our call this morning is as follows: Paulo will provide an update on the Company’s third quarter progress; followed by Ernest, who will provide an overview of our third quarter financial results; Paulo will close the call with an update on the Company’s Sales & Trading progress, the vanadium market and the update on Largo Physical Vanadium. Following these updates, we will then open the call for questions. We ask that participants should restrict their questions to two and then re-queue if there are additional questions to allow others the opportunity to participate.
So with that, I’ll turn it over to Paulo.
Paulo Misk
Thank you, Alex. And thanks to everyone for joining our call today. First, I’d like to provide a few highlights of our operational performance this quarter as well as some further updates on the Company’s two pillars business strategy. As noted, in our production sales update in October, we encountered some operational challenges this quarter with production in July being impacted by the refractory refurbishment in the kiln and cooler and September should be impacted by lower quantities of ore mined as we transition it to the new mining contractor.
We also experienced lower sales this quarter due to ongoing shipment delays and decrease in spot market demand. For the last nine months, we have produced approximately 8,400 tonnes and sold 8,300 tonnes V205 equivalent, which includes approximately 1,000 tonnes of purchased material. We expect to land between the low end and midpoint of our production and sales guidance range of 1,000 tonnes and 1,200 tonnes for the year.
Subsequent to Q3, we produced approximately 800 tonnes of V2O5 equivalent in October, with impact mainly stemming from the effect of the mining contract transition and corrected maintenance in the deammoniator areas. Such like many of our peers, we continue to navigate similar global market uncertainties, such as inflationary pressure and challenging supply chain environment this quarter, which when combined with the previous note impact, contribute negatively to our financial performance in Q3.
On the positive note, the Company produced a safe significant amount of high purity material this quarter with 962 tonnes of high purity V2O5 equivalent being produced, representing the highest quarterly amount of high purity material produced by the Company to-date. This comes at no opportune time as high purity vanadium demands continue to increase in the aerospace and chemical sectors.
Moving on, I’d like to discuss some additional progress we have made into our two pillar strategy in Q3. Let’s begin with the mining pillar. As you’ll note in the photo on the left, we have made considerable progress on the construction of our ilmenite concentration plant located in our mine site in Brazil. We have received all required metallic flotation structures and building of desliming, flotation, filtration, warehouse and pipe rack structures. Commissioning of this plant is expected to be completed in Q2 of next year.
On the clean energy pillar, we made additional progress towards the installation of our 6.1 megawatt hour VRFB installation for Enel Green Power in Spain. We’ve completed the required stack manufacturing for the battery system think of the stack as the heart of the battery, and we have begun shipping them to deployment site in Spain, along with some storage tanks components and electrolytes.
The battery deployment site is now under construction and we expect to begin the equipment installation this month. Unfortunately, we continue to experience a number of shipping and logistical delays related to certain components of the system. And now expect to completion of the commissioning to be pushed into very beginning of the Q2 of next year.
I will also note that we’ve also commissioned a grid connected a small demonstration of VRFB in Q3, that was previously installed by VionX Energy. The Company repurchased our VRFB technology from in late 2020. This 3 megawatt hour demonstration system is located not far from our manufacturing facility in Wilmington and will be used by the Company to further optimize performance of solar shifting application.
And two quick cap of clean energy dealer update. During the last update call, we discussed the signing of a nonbinding MOU with Ansaldo Green Tech to negotiate the formation of a joint venture for the manufacturing and commercial deployment of VRFBs in Europe, Africa, and Middle East power generation markets.
We believe that if successful, the potential JV could address identified needs in the European energy sector, which are being compounded by the ongoing geopolitical conflict. However, we are limited in what we can discuss. But I can say that the negotiations remain ongoing, and we will look to provide an update when appropriate.
Lastly, I’m very pleased to report that Largo published its inaugural 2021 task force on climate-related financial disclosures, climate report in October. Our initial client report is largely qualitative, but it demonstrates that the Company understands its current market and client expectation for climate-related transparency and underscores its commitment to the improving Largo’s ESG strategy.
You can download this report through the sustainability section on our website. Additionally, we are very proud to announce that we are — we are the recipient of the Company of the year in the mining sector for Largo works in social governance given by Brazilian magazine.
This recognition is the result of our team’s dedication to fulfilling our social responsibility policy, focused on sustainable development mainly in the areas of education, culture, employment and income, sports and leisure.
To close out, despite next uncertainties, the long-term fundamentals for vanadium and our outlined growth opportunities remain highly attractive. And though we remain quite undervalued compared to our mining and energy peers.
I’m very optimistic that as global conditions improve, and we further execute our strategy we expect that upside from our two-pillar strategy will create positive momentum for new and existing large shareholders.
Now I’ll turn the call over to our CFO, Ernest Cleave, to review our financial performance. Ernest, please?
Ernest Cleave
Thanks, Paulo. Slide 8 provides a brief summary of the Company’s third quarter financial performance. As Paulo mentioned, production issues, increased costs and lower sales impacted the financial performance of the Company this quarter.
In Q3, we generated approximately $54 million in revenues from sales of 2,796 tonnes of V2O5 equivalent or $8.80 per pound. Revenues from Q3 2022 were largely in line with revenues of $53.9 million in Q3 2021, while revenues per pound sold decreased approximately 3% year-over-year.
Operating costs increased 42% to approximately $46 million in Q3 2022, largely driven by increases in direct mine and production costs and product acquisition costs. The increase in product acquisition cost reflects the Company realizing costs from the sale of purchased vanadium material in Q3.
With lower sales of our produced material, cash operating costs, excluding royalties, were $4.86 per pound in Q3 2022 compared with $3.53 for Q3 2021. This increase is primarily attributable to production impacts during the quarter and cost increases in critical consumables, mainly sodium carbonate and heavy fuel oil.
For the nine months ended September 30, 2022, cash operating costs, excluding royalties, were $4.36 per pound sold. As we’ve stated before, we continue to actively review and evaluate opportunities for cost reduction, but it is likely that on a unit cost basis, we will land in the upper range of our cash cost guidance of $4.10 to $4.50 per pound sold for the year.
Other G&A expenses were $4.1 million in Q3 2022 with $1 million in Q3 2021, which is primarily attributable to a further $2 million increase in legal provisions. Professional consulting and management fees were $7.2 million in Q3 2022 compared with $4.9 million in Q3 of last year.
This increase is primarily attributable to costs incurred in Q3 2022 in connection with Largo Clean Energy which was not fully operational in Q3 2021 as well as transaction and listing-related costs incurred by Largo Physical Vanadium in connection with the completion of its qualifying transaction.
With that being said, the Company recorded a net loss of $2.6 million in Q3 2022 or a basic loss per share of $0.04. I’ll note that this is inclusive of approximately $3 million in nonrecurring expenditures, such as legal and listing costs for LPV as well as the increase in legal provisions.
Moving on to the balance sheet. Cash at the quarter end was approximately $63 million, and the Company had a net working capital surplus of $114 million. I’ll note that vanadium held by LPV will now appear as a noncurrent asset on the balance sheet, and you will see it flow through investing activities on the cash flow statement.
Cash used in investing activities was $17.7 million in Q3 2022 compared with $6.1 million for Q3 2021. The increase in expenditures primarily relates to the ilmenite project costs associated with software implementation and cash outflows for vanadium assets.
So far this year, we spent approximately $9 million in ilmenite plant CapEx and expect to spend another 9 million by year’s end. Next year, we expect to spend approximately $17 million to complete the project.
In October 2022, the Company secured an additional debt facility of $20 million for the bank in Brazil. The facilities for three years with equal principal repayments due after 18, 24, 30 and 36 months, if necessary, the new facility allows the Company to repay its existing debt facility and provide some additional flexibility to its working capital position going forward.
Looking ahead, if we consider a vanadium price of $8 per pound, our sales and cost guidance, no LPV purchases of vanadium assets Brazilian to U.S. dollar exchange rate that averages approximately 5:1 as well as the latest debt facilities, we estimate exiting the year with a cash balance of approximately $75 million to $80 million.
On a net debt basis, that is a range of $40 million to $45 million. Importantly, I highlight again that these cash estimates assume no purchases of vanadium assets. Cash with an LPV at the end of September was approximately $22 million.
The Company’s intention is to spend most of this cash on vanadium assets before the end of this year. And should that actually transpire Largo’s overall cash would be reduced by the amount of the spend.
I’ll close out by mentioning that the Company has been actively exploring opportunities to avail itself to portions of the recently passed inflation Reduction Act in the U.S. which includes approximately $60 billion of clean energy manufacturing tax credits and $30 billion of tax credits for state and electric utilities to adopt clean energy and energy storage.
Although this is by no means guaranteed, we believe that our U.S.-based clean energy business is a suitable candidate to qualify for some of these credits, and we will look to provide additional updates on our efforts as they progress.
I will now turn the call over to our VP of Commercial, Paul Vollant.
Paul Vollant
Thanks, Ernest, and thanks, everyone, for joining today. We sold 2,796 tonnes of V205 equivalent in Q3, which included 351 tonnes of purchased products. We continue to deliver both standard grade and high purity V205 as well as ferrovanadium to customers and completed our first high-purity V205 sales this quarter.
Sales are up slightly over the same period last year but were lower than expectations due to ongoing shipment delays and lower spot demand. Purchase product sales increased this quarter. I expect it to decrease in the fourth quarter as tensions are easing. Subsequent to Q3, we sold 1,056 tonnes of V2O5 equivalent in October, which included 74 tonnes of purchased products.
Demand in the steel market softened in Q3 2022 due to geopolitical uncertainties and concerns over energy prices and availability, most notably in Europe. However, I’m pleased to report that high purity demand continues to recover from the lows of 2020, supported by renewed optimism in the travel and aerospace industries.
Vanadium prices also softened this quarter compared to the same period last year, with the average benchmark price per pound of V205 in Europe being $8.23 in Q3 as compared to $9.40 in Q3 2021. This also marks a 26% decrease from the average of $11.08 seen in Q2 2022.
On the ferrovanadium side, the average benchmark price per kilogram of ferrovanadium in Europe was $33.85 in Q3, a 12% decrease from Q3 2021 and a 24% decrease from the average of $44.22 seen in Q2 2022.
However, we continue to see healthy demand in our materials as we navigate through the final stretch of long-term contracting season. Lastly, I’m excited to report that Largo physical Vanadium commenced trading on the TSX Venture Exchange in September under the symbol VAND.
LPV’s business model is an important innovation in the vanadium and long-duration energy storage industry by solving one of the biggest challenge for the commercialization of the RVs, the high cost and volatility of vanadium prices.
With LPV, we can solve this problem by segregating and maintaining ownership of vanadium use in the VRFBs. To date, LPV has purchased contracts for approximately 940 tonnes of V205 equivalents, and we continue to purchase additional units when possible.
We launched a new website for LPV that includes weekly NAV calculation and displays quantities of health vanadium. You can access this at www.lpvanadium.com.
I’ll stop there and turn it over to the operator for questions from our analysts.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from Alex Jackson with RBC Capital Markets.
Alex Jackson
My first one is just on the ramp-up of the new mining contractor at your operation. I was wondering if you could talk to how that’s going. And if you expect sales and shipments to sort of maintain at the levels that they were in October and November, December.
Paulo Misk
Thank you, Alex. Regarding the mining contractor, it was a concern that we were facing during the year. And we are very happy with the performance with this company in the first month. The transition starting September and October already it produced more than we planned.
So, we are very happy with the performance of the new contractor and expecting that we’ll have no problem at all with our supply along the year and next year going forward. Paul, could you take the shipment question, please?
Paul Vollant
Yes. On the shipment side, the good news is that we are seeing an improvement across the board from availability, pricing, so all the logistics on the logistics side, it’s definitely a better picture than where we were six months ago, although still recovering from to get back on track to previous situation before COVID.
Alex Jackson
That’s helpful. And then the other one I had was just on the ilmenite plant. I was curious if you could provide any details on kind of a ramp-up time line? I know you’ve outlined that commissioning would be sort of complete in Q2. I was wondering if there’s any sort of production that you might be able to provide us a cadence of production throughout next year.
Paulo Misk
Yes, ilmenite concentration plan is our first step of the titanium business. We expect to conclude that plan in Q2, specifically May. So you start we are expecting to have three, four months of hump up until reaching 145,000 tonnes of ilmenite being produced. As we are running about two years with a pilot plant at site with the current material that we have been mining, we have already trained our employees.
We have a very good knowledge on all the technical issues. So I’m in a very smooth commissioning and ramp up for this production. I think it’s really material to start developing our titanium project, which will optimize the mining asset in Maracas.
Operator
[Operator Instructions] And our next question will come from Gordon Lawson with Paradigm Capital.
Gordon Lawson
Can you please elaborate on the high volume of vanadium trioxide in terms of if production is simply limited to contract demand from your aerospace and chemical customers? Or is there a plant capacity level?
Paulo Misk
Thank you, Gordon. I will take Paul Vollant to answer your question because it’s primarily regarding sales please.
Paul Vollant
Gordon. Today, the limiting factor is our contracting ability. We only started commercial production this year. And as you know, vanadium contracts are done on a yearly basis for the following year, usually in Q4. So we’re actively negotiating at this very moment for contracts in 2023.
However, as I said earlier, we delivered our first quantities in Q3, and we’re also very hopeful for Q4 this year. There is a very good demand and the market is received extremely well. The Largo is coming to this market. So, we’re hopeful that this sales campaign will be successful for next year volume and we can increase high purity V205 sales next year.
Gordon Lawson
And the $4 premium is in line with expectations?
Paul Vollant
Sorry?
Gordon Lawson
The $4 premium over the V205, is that in line with expectations?
Paul Vollant
I’m not sure we’ve mentioned $4 premium. That’s out of the market. It’s not — we’re not getting $4 premium.
Gordon Lawson
Okay. Okay. Well, switching over to ferrovanadium, I mean obviously, prices decreased they’re still healthy versus previous quarters. Can you provide some color on your European buyers and what you’re expecting in terms of volumes for 2023?
Paul Vollant
Yes, sure. It’s a good question. Ferrovanadium is in and around the long-term historical average. If you account for inflation, we’re actually a little bit below it. And we all know about the latest strong inflation that has impacted everyone in our industry from — in terms of cost and energy is an important input cost for ferrovanadium.
So I expect prices to be well supported in the coming quarters for ferrovanadium. And for Largo, we — the steel industry is always our largest sales sector for our products. So, we expect to continue to sell good quantities in ferrovanadium from.
Operator
And that does conclude the question-and-answer session. I’ll now turn the conference back over to Alex Guthrie for any additional remarks.
Alex Guthrie
Great. Thanks. That concludes the Q&A session, everyone in our quarterly investor conference call. Have a great day. Bye now.
Operator
Thank you. And that does conclude today’s conference. We do thank you for your participation. Have an excellent day.
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