Largo Inc.

Good day and thank you for standing by. Welcome to Largo's first quarter 2023 webcast and conference call. At this time, all participants are in a listen-only mode. 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.

Good morning, everyone, and thanks for joining our first quarter earnings conference webcast and call. As with previous calls, we've uploaded the supplemental webcast presentation, which is available on our website at largoinc.com. Our Q1 2023 financial statements related to MT&A and most recent AIF are also all available on the website, as well as on CDAR and EDGAR. Before continuing the call today, I would like to remind you all that some of the information you'll hear during today's discussion will consist of forward-looking statements, including, without limitation, those regarding future business outlook. Please refer to slide two for a full description of the company's cautionary notes. On the call today is Danielle Talachia, Largo's interim chief executive officer and director, Ernest Cleave, Largo's chief financial officer, and Paul Vallon, Largo's chief commercial officer. Following the delivery of our prepared remarks, we'll open the call for questions. We ask that participants restrict their questions to two and then re-queue if there are additional questions to allow the others the opportunity to participate. So with that, I'll turn the call over to Daniel.

Thank you, Alex, and good day to everyone joining us today. Since taking over the role of interim CEO of Largo in February, I have been committed to improving operating efficiencies, and Demarra has mentioned mine, including initiating cost reduction initiatives and conducting productivity assessments. During the first quarter, the company produced 2,111 tons of B2O5 in accordance with its production guidance. And to our delight, we sold 2,849 tons of equivalent B2O5, which exceeded our quarterly sales guidance for the first quarter of 2023. In addition, we produce a significant amount of high-purity material in the first quarter, representing approximately half of the quarter's production. While we are pleased with this performance, we continue to navigate the effects caused by the heavy rainfall in December, which not only caused flooding in the Campbell Pit and impacted operations but also delay the company infield drilling campaign necessary to develop the company's short-term mine model, planning for years 2023 and 2024. Infield drilling is performed inside the Largo Camel Pit for further defying the ore body prior to mining. As a result of this process, a short-term mine model is developed which sets the stage for the ensuing year mining plant. In light of the heavy rains in late fourth quarter of 2022 and early first quarter of 23, this process was postponed. And as a result, we have to adjust our annual 23 production sales and cost guidance. An updated table referencing the updated guidance on a quarterly basis is provided on the current slide. I would like to emphasize that returning to a more normalized production and cost scenario remains the top priority for all of us at Largo, and we work through this period of adjustment in our mining operation. In my first update to shareholders last quarter, I make clear that I have been tasking our team with identifying cost reduction initiatives during this period of sustained inflationary pressures, which have resulted in cost increases for our operations. I would like to discuss some of those initiatives on the call today. First, the cost of sodium carbonate, which is used in great quantities in operation process, has increased almost 270% since year 2021. As part of our production process, our team is exploring ways to reduce the amount of silica inside the kiln, which in turn will be reducing the amount of sodium carbonate required in our operational process. Second, by making certain changes and upgrade to our crushing process, including the installation of a new drive magnetic separator and a crushing circuit, we hope to reduce operational maintenance costs and provide more flexibility in the blending of different ores to stabilize the production of B205. We expect to complete this installation by mid-June of this year. And finally, we continue to analyze the productivity of certain processes at the mine site and have identified some opportunities for cost reduction associated with the re-handling of the material on site. Towards the third quarter of this year, we hope to begin seeing some of the benefits from these initiatives. Prior to handing the call over to Ernest, I would like to highlight a few catalysts expected during the year. in addition to improving operational and cost performance at the mine site. During the first quarter, we continued to make progress with the construction of our Ilmenai concentration plant. Construction is expected to be completed in the second quarter of 2023, with commissioning and wrap-up following shortly thereafter. On the clean energy front, Installation of our 6.1 megawatt hour vanadium battery in Spain continued during the first quarter of this year with final provisional acceptance scheduled for the third quarter of this year. We have also completed all improvements to our manufacturing facility in Wilmot, Massachusetts this quarter and we have begun the process of restarting the stock production to reach a capacity of 12.5 megawatts per annum by the end of the year, with the goal of reaching 100 megawatts per annum by the end of 2025. Now, I will turn the call over to Ernest to provide an overview on our financial performance for the first quarter. Ernest?

Thank you, Daniel. uh thanks to those who have joined the call today a brief overview of the company's financial performance for the first quarter is presented on the current slide the company's revenues increased by 35 percent from 42.7 million in q1 2022 to 57.4 million in q1 2023 as a result of increase in quantity sold and improved realized pricing achieved during the current quarter In Q1 2023, operating costs increased substantially by approximately 60% over Q1 2022. This is primarily due to increases in direct mining production costs, and these are particularly attributable to mining contractor costs and equipment rental costs. Additionally, a lack of production stability in the subsequent ramp up of operations following the previously discussed shutdown further negatively impact costs during the quarter. As touched on earlier, the company also experienced cost increases in critical consumables in the quarter, including sodium carbonate, as well as an increase in the consumption of ammonium sulfate when compared to Q1 of last year. Our Q1 2023 cash cost performance was in line with our annual cost guidance range, with cash operating costs excluding royalties being $5.15 per pound sold. compared to $3.97 per pound sold in Q1 of last year. However, due to the reasons previously noted, we have extended the higher end of our cash cost guidance range to $5.65 per pound sold. That's up from $5.25 previously. Due to the increases in operating costs during the quarter, we reported a net loss of $1.2 million for Q1 2023. I'll provide some additional color on some of the other Q1 2023 costs, which includes a $1.6 million increase in other general and administrative expenses. This is mainly due to an increase in depreciation from the company's software intangible asset, as well as increased IT costs associated with the implementation of the company's ERP system. We also saw increased cost at LCE, which were primarily related to increased logistics, as well as travel costs arising from installation activities associated with our V-charge battery deployment in Spain. In Q1 2023, the company's share-based payments decreased by 2.2 million, resulting in expense recovery of 1.3 million. This is primarily due to reversals in share-based payment expenditures on forfeited, unvested stock options and RSUs, as well as a reduced number of stock options and RSUs granted compared to Q1 of last year. The company's finance costs in Q1 were $1.4 million for the quarter and that's up from $1.2 million as a result of increased debt as well as an initial financing fee on the company's new debt facilities. Finally, the company exited the quarter with approximately $62 million in cash and a debt of $65 million. and a net working capital surplus of $119 million. That concludes my remarks for today. I'll now turn the call over to Paul.

Thank you, Ernest, and good to speak with everyone who has joined today. We exceeded our Q1 quarterly sales target with 2,849 tons sold, inclusive of 245 tons of purchased material. And despite the company's operational setbacks during the quarter, we delivered on a commercial commitment. Following Q1 2023, we had a great month of sales in April, with 1,101 tons sold, including 78 tons of purchased material. However, as a result of the reasons mentioned earlier, we expect lower sales for the rest of the year. and we have adjusted our annual sales forecast for 2023 from 10,300 to 11,300 tons to 8,700 to 10,700 tons. This translates into adjustments to our quarterly guidance ranges, which are provided on the current slide. The Venetian market was strong in Q1, and prices increased continuously from the start of the year until mid-March, supported by strong demand in the aerospace and energy storage industries. The average price for B205 in Europe was $10.39 in Q1 2023, down 3% from $10.72 in Q1 2022. Ferrovanadium prices in Europe averaged $39.46 in Q1 2023, down 15% from the average of $46.17 seen in Q1 2022. However, Largo achieved a higher average price in Q1 compared to the same period last year, thanks to a larger portion of our sales going into high-purity applications. Since March, Vanadium prices fell sharply, erasing all gains since the start of the year. We attribute this fall to lower demand and worsening sentiment from the steel sector in China. Yet, we continue to be bullish on Vanadium's medium and long-term fundamentals, thanks to considerable expected demand growth in the energy storage sector with anticipated gigawatt hour of VFB deployment in China in the near and medium term future. It's interesting to note that according to Vanitech, the global vanadium producers association, VFB is now the second largest demand driver for vanadium. and grew by almost 170% between 2020 and 2022. I'll stop there and turn it back over to Daniel.

Thanks, Paul. Since becoming interim CEO, I have been focused on improving overall performance at the company through additional operational efficiencies. Executing on these initiatives is an important part of our commitment to deliver safe, reliable operations and maintaining capital discipline in order to preserve our status as one of the world's largest and low-cost vanadium producers. Largo has an unparalleled vanadium assets with a business model that we believe is unmatched in the industry. The opportunity to leverage these competitive differentiators is expected to drive value for our shareholders both in the short and the long term. And with that, this concludes our prepared remarks. And now we will be happy to respond to any questions from participants on the call. Thank you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, please press star followed by two. And if you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Heiko Ele at H.C. Wainwright. Please go ahead.

Hey there, thanks for taking my questions. Thank you.

Your guidance for production has been taken from 11,000 to 12,000 tons to 9,000 to 11,000 tons. Just going through your release, there's a couple of things, you know, plan kill maintenance is done, the transition to the mining contractor is done. You know, there's probably more positives than negatives in your outlook. What am I missing here? And I guess what I'm saying is Can you quantify the decline in your outlook in what factors are making it go down by how much?

Well, let me try to respond to that question. I think that the widening of our guidance is basically reflecting the fact that we're planning to end by the end of June the infill drilling information that will be input into our short-term model in order to define for the second half of the year how much stripping, how much volumes to be produced from massive, banded, and disseminated. You have to take in consideration that Largo is not a regular mining company like the copper or the zinc that they were used to. Largo mining operation is a blending operation. where we need to blend massive with disseminated or banded with disseminated in order to produce the necessary B205 in the nameplate capacity of around 1,100 tons per day. So I don't think we're missing any particular point. Only what they were trying to direct the market is that they were in the process of doing the infill drilling that we postponed because of the drilling. As you said, the mining contractor is working exceeding our expectation. Just on the first quarter of the year, we moved 3.6 million tons. That is one of the records on a quarterly basis for Largo. Just to give you a flavor, last year in 2022, we had a material move of 3.1 million tons. So we move in excess of half a million tons in order to continue opening the pit. So that is the basics of our reasons for the change in the guidance. And in terms of cost, we are taking the consideration of increasing the cash cost excluding royalties because of the fact that the sodium carbonate especially and the ammonium sulfate is not reducing price. So that's why we are moving into the cost initiatives, trying to compensate some of those increases in the price of the chemicals with additional efficiencies in running our operation. I hope that they will answer. This is a long, long answer to your question, but I try to give you the full flavor of why we're doing this.

Yeah, no, that's fair. um early on this earnings call you brought up the lma concentration plan i mean obviously it should be done quite soon we'll be halfway through q2 on you know this coming monday on a cash basis how much cash flow do you think you still need to spend from today through the conclusion of ramp up and commissioning for this asset let me take that as well i think that the uh

The final capital expenditures that we project for the Illmanite plan is done. It might be additional expenditures in order to close some of the contracts, but really it will be, I think, on a minimal side. The final cap is done in the Illmanite plan.

Daniel, let me jump in here on this one real quickly. Looking at a capitalized perspective, you know, there is not much left. But if you look at the impact on cash, there's probably another $10 million to go on that Ilma 9 plan. So you will see the impact of that cash over the next sort of four or five months spread out.

And to be clear, you said $2 million U.S.? No, $10 million. Oh, sorry. Okay. Perfect. Got it. That makes more sense. Excellent. Thank you. All right.

Thank you. The next question comes from Andrew Wong at RBC Capital Markets. Please go ahead.

Hi. Good morning. So the heavy rainfall in Brazil occurred back in December. And the 2023 production guidance, it was announced in January. And it was reiterated a couple of times since. So I'm just kind of wondering what happened and what changed over the past month to prompt such a drastic cut in your production guidance for the year? And then also, what impact do you expect this could have on 2024 production?

As I said at the beginning, we didn't anticipate the effects of not completing the infill drilling. As you very well know, when you are relying on larger spaces, whole spaces of drilling in order to define a mine plan, you can reach different surprises. And this particular area, we actually didn't anticipate that the effects of not counting with the closer information between drills, it was not going to affect us. And that's why we produced the last year, by the beginning of this year, the guidance for the full year that now we're adjusting. It was just that didn't anticipate it that the changes were going to affect us in the rest of the year. Let me, however, do the following caveat. Once we have all the information for year 2023, by the end of June, and we put it inside the model, then we will give you for more certainty how the final numbers will show for the second half of the year.

Okay. And then does this,

Does the current mine area that you're in right now, is that why we're seeing the ore grade that's been trending lower for the past three quarters as well? Is that part of the issue?

It's part of the issue. Last year, 2022, we had an average grade of around, I think it was 0.91 B2 grade, and this first quarter was 0.81. So, yes, we had an issue with the blending of the disseminated and the massive, and that is the main reason of this decrease in grades.

Okay, thank you. And maybe just the last one, just a free cash flow kind of follow-up. What are the free cash flow expectations for this year now with the new guidance?

Yeah, so given how much uncertainty there is at this stage in terms of the actual production level, pricing, even costs, it really is impossible to, there could be so many different permutations. So at this stage, we can't give good guidance in that regard. We'll try and do so later, especially after all this infiltrating and greater definition around the mine plan has been completed. At that point, we'll try and attempt to create more certainty around this issue.

Okay. Thank you.

Thank you. The next question comes from Mike Heim at Noble Capital Management. Please go ahead.

Thanks. I had a couple of questions about the guidance change, but I feel like we've talked about that enough. Let me ask one about Eliminate. You've talked about commissioning and ramp up, and I think I might have heard some comments that ramp up might go to 2025. Can you repeat those comments or maybe answer the question as to how long it will take to actually get to sales?

You got that question, Ernest?

Yeah, sure. At this stage, we're anticipating making some of our trial shipments in Q4. So there would be some revenue is what our anticipation is during Q4. It's not going to be, you know, a significant size, but in and around that kind of timing is what we expect right now.

And do you have a sense when you might reach full capacity?

For capacity in the production side?

Yeah, yes.

Yeah. My expectation is that the capacity of the main plane capacity of Maracas will be reached in the third quarter of this year.

No, no, he means for the Illmanok plant.

I think, you know, reasonably by Q4 we should be approaching our peak run rate, and if not then, you know, certainly in early part of next year. But the anticipation is to be at or above, you know, at our run rate, run about the Q4 timeframe. Okay.

I could ask one more question. I was kind of interested with the tax expense this year. Obviously, there were some very high numbers, a change in the deferred income tax. Can you just kind of explain what's going on and why that number was so high?

Sorry, the deferred income tax expense?

It's relatively consistent with last year. I'm I don't see it as unusual, unless I'm looking at a different number.

Well, I guess I'm looking at the total tax expense versus your pre-tax income, being you're actually expensing more than your pre-tax income. So that's the explanation I was looking for.

So those would just be timing adjustments on deferred income tax, etc. So it's not a one-for-one relationship, which is why you get the movement in deferred income tax, but it's pretty conventional.

Okay. All right. Thank you. No problem.

Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star 1. Next question comes from Steve Silver at Argus. Please go ahead.

Hi, everybody. Thanks for taking my questions. I've got a couple left. First, the first release mentions that production into the high-purity market reached about 49% of production in Q1, which was up from about 42% in Q4 of last year. While I'm sure it's going to be a lumpy number over time, I'm just curious as to what your thoughts would be based on expected demand in terms of how high that percentage might go over the longer term into the high-purity markets.

Paul? Yeah, thanks, Steve.

We saw a very strong increase in high-purity demand in basically since Q4 last year, mainly in the aerospace industry, but also in the chemical industry. and obviously in the energy storage industry that values high purity products so Largo has the capacity to produce the majority of its production into high purity so when the market requires it we'll have the opportunity to produce more high purity and sell more high purity. There is no, I think, clear target for the coming quarters. Right now, we're already at a much higher level than we were a year ago, and we're committed to grow this market share for Largo and become the preferred supplier in this space.

Great, and one more if I may. Given the pullback in the price of vanadium over the last couple of months, which has been pretty drastic, I'm curious if you have any updated thoughts in terms of, at least more broadly, the timeframe that it might take for the market to start recognizing a little bit more in terms of the demand for vanadium into the clean energy markets as it looks like that the long-term demand is still expected to outsupply the current capacity of the industry. So just given the fact that the price remains so volatile on steel demand, just if you have any updated thoughts in terms of when the market might begin to recognize that demand for the clean energy side.

Yes, it's a good question. And as we said during the presentation, sentiment over the medium and long term fundamentals of the Venetian market remain very strong. There are some great projects in China, mainly for Venetian redox flow batteries that should dramatically change the overall demand for the product globally. I think that the latest drop in price was really kind of a short-term demand decrease, specifically on steel sector in China. Steel sector in the rest of the world are doing much better. So yeah, I think it's a short-term bump. on the road of the growth in fundamentals for vanadium. It's always very difficult to time any movement, but we remain very bullish on the medium and long-term fundamentals.

Great. Thanks for taking the questions.

Thank you. There are no further questions. I will now turn the call back over to Alex Guthrie for closing comments.

Thanks, Operator. And that concludes the question and answer session and our quarterly investor conference call. Have a great day. Take care.

Ladies and gentlemen, this concludes the conference for today. We thank you for participating and we ask that you please disconnect your lines.