Largo Inc.

Good day and thank you for standing by. Welcome to Largo's Third Quarter 2024 Financial Results 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, Director of Investor Relations. Please go ahead.

Thank you, Operator, and thanks to everyone who has joined us for Largo's Third Quarter Financial Results Conference Call. Our Q3 2024 financial statements related MD&A and most recent AIF are available on our website at LargoInc.com, as well as on CDAR Plus and EDGAR. Before we proceed, please note that some information discussed today will include forward-looking statements and non-IFRS measures. Please refer to the cautionary notes and non-GAAP section of the company's latest MD&A, financial statements, and AIF, which are all available online. Additionally, all figures mentioned are in the U.S. dollars unless otherwise stated. Today's speakers include Danielle Talicea, Interim CEO and Director, Celio Pereira, COO of Largo Brazil, David Harris, CFO, and Francesco D'Alessio, CCO and President of Largo Clean Energy. Following the prepared remarks, we will open the call to questions. Please limit your questions to and recue if you have further inquiries to allow everyone a chance to participate. I will now turn the call over to Danielle.

Thank you, Alex, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. In Q3, Largo continued to make positive strides on several fronts, and I am pleased to highlight a few areas where we are seeing real progress. First, we deliver our highest quarterly vanadium production in seven quarters, producing 3,072 tons, up 42% from Q3 last year. Additionally, we saw another strong quarter in ramp up our ilmenite production, contributing to our efforts in diversifying revenues at Largo. Largo's cost improvements have been equally important during the quarter. We reduced our operating costs by 31%, allowing us to maintain a competitive position within the vanadium sector. And as announced, our vanadium supply agreement which unlocks approximately 23.5 million of additional liquidity from our binarion inventories upon delivery. Now enable us to strategically manage our inventory while delivering, still meeting our ongoing future sales commitments. In terms of our commercial strategy, we have taken decisive steps to realign our sales approach to better navigate together challenging market environment. In September, Francesco D'Alessio was promoted to Chief Commercial Officer, bringing a wealth of industry experience and strategic vision to our sales leadership. With Francesco's expertise, we are implementing a refreshed sales strategy aimed at optimizing inventory, following stronger customer relationships, and positioning Largo as a trusted and related supplier in both the Manadian in the ilmenite markets. Looking forward, our recently announced technical report highlights update supports largo long-term potential with a 67% increase in mineral reserves and a 64% increase in mineral resources, extending our mine life to 2054. This strengthened resources base, paired with our production and cost initiatives, sets the stage for future value creation going forward. With that, I will hand it over to Sergio to discuss our operational progress in more detail.

Thank you, Daniel, and good morning, everyone.

This quarter, our team's hard work paid off as we reached a significant production milestone. In Q3, we produced 3,072 tons of V205 equivalent, a testament to the effectiveness of the operational enhancements we put in place earlier this year. Our global V205 recovery rate also improved to 81.1%, up from 76.9% last year. On the mining side, we achieved a 34% increase in total ore mined compared to Q3 2023, reaching 600,000 tons. These improvements highlight the changes we've made to enhance processing efficiency and address variability in magnetic and B205 arc waves. Our operations are as efficient as possible while maintaining high safety and environmental standards. Humanite production also saw strong gains. reaching 16,383 tons in Q3, an increase of 90% over the previous quarter. Finally, to maintain optimal operational continuity, we've moved our annual kiln maintenance to Q4 to coincide with the upcoming rain season, minimizing the impact of any rain-related disruptions, and consequently, Q4 production is expected to be impacted by the maintenance period. resulting lower production levels and higher operating costs for the quarter. However, we remain confident in our ability to meet our full year 2024 guidance for production costs and sales. Before concluding, I'd like to highlight quarter results reflect substantial progress in production and cost management. However, we remain focused on further optimizing our vanadium and humanite operations. Largely still, in the process of a broader turnaround initiative and aimed at driving consistent improvements across the mine. This includes enhancing operational efficiency, advancing silica control measures, and continuing recovery optimizations in our M&I plant. While we've made meaningful strides, we remain committed to further progress as we work toward fully realizing our operational goals and fostering a culture of continuous improvement across our team.

In Q3 2024, Largo reported revenues of 29.9 million, including 27.2 million from Vanadian sales and 2.7 million from Illmanite sales. Revenue was impacted by lower Vanadian prices and reduced sales volumes, with the average benchmark price per pound of V2 in 5 in Europe down to $5.71 compared to $8.03 in Q3 2023. Operating costs decreased from 44 million in Q3 2023 to 29.5 million this quarter, a 31% reduction from Q3 2023. Cash operating costs excluding royalties were $3.12 per pound sold, a 43% reduction from last year. As Celia highlighted just now, these results underscore our continued focus on cost management, and I'd like to recognize the hard work from our teams who've played a crucial role in realizing these savings. The net loss for Q3 was $10.1 million, including non-recurring items of $3.3 million, which is an improvement over the net loss of $11.9 million in Q3 2023. Adjusted EBITDA for our mining operations was $2.4 million in Q3 2024, compared to $2.7 million in Q3 2023, reflecting the impact of the Venetian market conditions, but also highlighting ongoing cost management efforts. At the close of the quarter, we had a cash balance of $30.4 million and a net working capital surplus of $46.7 million. While the recently announced vanadium supply agreement is expected to contribute approximately $23.5 million upon delivery of material between Q4 this year and Q1 next year, we continue to focus on managing liquidity carefully to support Largo's financial flexibility. In addition, we are working closely with a group of banks to explore restructuring options for our existing loan facilities. These discussions are aimed at optimizing our capital structure to ensure that we're well prepared to navigate current market conditions with a continued focus on managing liquidity carefully to support Largo's financial flexibility. Before I hand it over to Francesco, I'll reiterate that we remain committed to achieving sustained cost improvements at the Maracas mentioned mine. We are closely monitoring all operational expenses as part of our broader strategy to optimize performance and enhance profitability, and we look forward to updating you on our continued progress in the quarters to come. With that, I'll turn it over to Francesco for an update on our sales and commercial activities.

Thank you, David, and welcome everyone to the call. It's a privilege to join today as Largo's Chief Commercial Officer and provide an update on our commercial activities for Q3 2024, along with a brief update on Largo Clean Energy. In Q3-24, we recorded V205 equivalent sales of 1,961 tons, which includes 124 tons of purchased material. This represents an 18% decrease from Q3-2023, driven primarily by softer spot demand in key markets, particularly Asia and Europe, where we continue to face significant headwinds affecting vanadium demand, especially within the steel sector. Low prices and an oversupply in the Chinese market have contributed to a more challenging supply-demand balance, pressuring prices across regions. The average benchmark price per pound of V205 in Europe was 5.71 in Q3, down from 8.03 in the same period last year, reflecting these ongoing market challenges. In response to these conditions, we're refining our sales approach to strengthen direct sales to end users and expand our reach, particularly in North America. With the recent appointment of Randy Doyle, an industry leader with deep vanadium experience to our commercial team, we're enhancing our sales efforts and building closer customers' relationships to solidify Largo's position as a trusted supplier of vanadium and limonite products. Our recent contract campaign for both high-purity and fair vanadium products has been successful, reinforcing our strategy to grow market share and secure stable long-term partnerships. Additionally, given current geopolitical factors and increased presence in North America, further positions Largo as a key supplier to this market, which is becoming increasingly crucial amid shifting global dynamics. While we continue to see softness in demand in Europe and expect this to extend into 2025, we are encouraged by early signs of recovery in the U.S. market, which has been less affected by low-price vanadium supply from China. This trend is reflected in the growing interest from U.S.-based then-users, particularly in sectors such as aerospace and defense, where demand is rising for reliable and secure sources of vanadium supply. These factors, along with the narrowing production supply gap globally, position Largo favorably in the current environment. On the limonite front, we achieved a strong performance in Q3 with sales totaling of 19,572 tons, a 60% increase over Q2 2024. Demand for limonite continues to grow. We remain optimistic that this trend will support revenue growth as we build a stable, diversified revenue stream alongside it of a Canadian business. Turning to Largo Clean Energy, we're advancing discussions with Stryton Energy toward the potential joint venture. This partnership will leverage Largo's expertise in Canadian flow battery technology alongside Stryton's manufacturing and market reach, positioning that strongly within the energy storage sector, particularly in North America where demand for grid-scale solutions is expanding. We remain focused on maximizing LCE's role in Largo's overall growth strategy. ensuring that our technology aligns with the rising demand for reliable and sustainable energy storage solutions. While we recognize the challenges in the Canadian market, we're optimistic about future demand prospects, bolstered by recent regulatory developments, a recovering U.S. market, and increasing demand from key sectors. Our team's strategic focus on efficient production and sales management keeps us well-positioned to meet these emerging opportunities. With that, I'll turn it back to Daniel for closing remarks.

Thank you, Francesco. As we head into Q4, Largo remains committed to improving operational efficiency, reducing costs, and diversifying our revenue streams. Despite the current headwinds in the vanadium prices, our recent technical report update and strategic agreements position us to well deliver value in the quarters ahead. Thank you to our entire team for their efforts and our shareholders for their support. We look forward to sharing our continued progress in the future. With that, we will now open the call for questions.

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 prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. And if you are using a speakerphone, please lift the handset before pressing any keys.

Your first question comes from Heiko Ehle at HC Wainwright. Please go ahead.

Hey, good morning, everybody. Hello. Morning, Heiko. Hello.

Good morning. Sorry, I heard a random little beep when I spoke. You state that recent data indicated that the oversupply gap is gradually narrowing and that there is some early indications of maybe a touch more favorable market dynamics. Where exactly is this demand coming from? I mean, early on this call, you mentioned the Americas, if I heard you correctly. And we're now halfway through Q4. Is this impact going to be showing up in the Q4 results, or is this something that's maybe more of a 2025 thing?

Francesco can do it. Yep. So it's going to mainly show in next year's contracts, right? We're in the midst of contract season right now. We're seeing the demand from mainly the aerospace sector. As you probably know, the U.S. market has several restrictions, and depending on the origin of the products, there's anti-dumping on Chinese ferrovenadium, anti-dumping on South African ferrovenadium, and high duties on Korean ferrovenadium, which puts Largo's ferrovenadium at an advantageous position for frame contracts. for the steel sector in the U.S. And in addition to that, there is high demand, much higher demand from the forecast that we're receiving from our aerospace customers, which will be reflected in 2025 contracts for next year.

Got it. And then just a clarification on the supply, the Canadian supply agreement that you signed a couple of weeks ago. I mean, it's going to sound like a fairly large-scale thing. Just a Talk to me a little bit about, in your experience, how are prices for these agreements when compared to spot pricing? Is this a bit like in the uranium space where these agreements tend to trade at a premium since people want to insure supply? Or is this just more or less market-based? Maybe not even this specific agreement, just in general.

You mean the agreement we signed recently for $23.5 million? Yes.

That's obviously one agreement, but there's presumably more of those coming.

At this particular time, this is the only agreement we have planned for something like this. This will complement our shipments for Q4. Out of the 2,100 tons in this agreement, we're planning to ship a good chunk of that that quantity during the fourth quarter and the rest. So that will complement our sales and shipments for the fourth quarter. And this is the only agreement we have in place now. The rest of the agreements for 2025 will be standard sales to the steel industry and defense and aerospace industries. It will be normal agreements. Would that respond to your question?

Yeah, no, that's pretty good. And with that, I think I will get back in queue.

Thank you. Thank you. Thank you.

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

Please go ahead.

Hey, good morning. Can you just provide maybe a bit of an outlook on where you think prices could land in 2025, given some of the improvements that you've worked on?

Francesco, can you get that question?

Yeah, I can take that, Daniel. Look, it's obviously a tricky question talking about pricey forecasts, right? If we had a crystal ball, obviously, it would tell you, but for sure – Prices in the market, for sure you're going to see a two-tiered market. You're going to see higher prices in the U.S. for the reasons that I mentioned earlier, right? Mainly driven by the fact that it's limited in terms of origins that can come into the U.S. market. So that is already being reflected. If you look at the current CRU index versus metal bulletin index, you're seeing a disparity between the two markets. And then obviously the bulk of the aerospace volume is obviously done at a premium to the industry, right? So we are expecting a faster recovery in prices in the U.S. vis-a-vis Europe or the rest of the world, right?

And what about on costs for 2025, given some of the operational efficiencies and improvements that you've worked on?

Félio, can you take that question?

Yes, for sure. We keep moving in our turnaround and increasing our efficiencies at the mine. We are now having a very strong look at logistics and input supply. So we expect that the average cost of 2025 should be had in the lower direction compared to this year.

Andrew, on the co-side, we will continue with this trend of trying to finalize analysis of each of the contracts, concentrating ourselves on logistics. So there is still a way to go in this turnaround process that we started months ago. So we expect that the cost of production will continue to take the benefits of those adjustments and those analyses for next year.

Okay. And just looking at it a little bit here, when we look at the mine plan and the resources and, you know, like what the deposits look like longer term, you know, the grades come down. Campbell bid is a lot higher grade. It's the best material, I think, that you have in your resource inventory. Does it still make sense to be depleting your best resource at relatively minimal profitability and prices today?

Can you take that question, Sergio? Yeah, thank you, Daniel.

So we have added two new peaks to our reserve vape. that we didn't have before. Campybill is our current pick that we mine. Of course, we have seen weaker prices in this last year, but our mining plan for Campybill goes until 2031, 2032. So it's a world-class asset with very high grades for the 205. And we believe that it's strategic to keep mining capital for now and for the next years until we are, you know, prepared to move to the lower grades assets and reserves peaks that we have in Maracas.

Okay. Thank you.

Thank you. The next question comes from Gordon Lawson at Paradigm Capital. Please go ahead. Gordon, your line is open. Please proceed with your question.

Sorry, I was on mute. So the beat on cash costs this quarter was pretty significant and really stands out. what should we expect for now? You've already talked about what to expect in terms of, uh, eating this year, but, um, how much should we add to cost for the Illmanite production on a, uh, per pound basis?

Can you take that question?

Yes.

Uh, if we consider that, uh, Illmanite, uh, is a new revenue stream that we do in the, in the ramp-up phase and optimizing recoveries and production. I believe when we reach our full capacity at Humanite and optimize all of its process, I think we'll be talking, we'll be seeing 30 cents to 50 cents range in terms of vanadium production costs.

That's quite cheap. So, On that front, then, the $22 million investment to double the production of ilmenate seems like a rather low threshold. So what parameters are behind the sanctioning decision in terms of lining up customers versus return on investment?

Elio, can you take that question? Most of this is in the technical reporting, so we can – get the information from there?

Yes.

Sorry, I didn't understand the investment side of the question. Can you please repeat?

Well, it seems rather inexpensive to double the production. So I'm just wondering if this is an issue of lining up customers for the product or whether there's more to it beyond a simple ROI.

Yeah, the strategy to double the production is linked with the vanadium side as well because the imonite is produced from our non-magnetic things from our current milling that produces the vanadium concentrate. So the strategy is linked with a 20%, actually it's 33% expansion in our current kiln happening first. And then we will have, of course, an upgrade in the milling and crushing together with this kiln expansion. And after that, we will have more material to process and do the full expansion of the humanite. So that's more because of the Banyadian strategy. We also link this humanite strategy ramp up in expansion in the future.

So the grades of the pits beyond the Campbell pit, that's... That's obviously playing much more of a role than lining up the customers, as I stated?

Yes, correct. Okay. Okay, thank you.

Thank you, ladies and gentlemen.

As a reminder, should you have any questions, please press star 1. The next question comes from Gary Brick at North Insight Asset Management. Please go ahead.

Good morning. Could you tell me how much debt on the balance sheet is attributable to the Mallorca storage facility? Could you discuss how it's working and whether you're generating any revenue from it? And could you compare that vanadium technology to other battery technologies that you may be competing with? And I have one other question, which I've asked for the last five years. Could you discuss the elasticity of demand for vanadium?

Can you take that one, Francesco?

Yes. So elasticity for demand for vanadium, are you referring to a specific industry, or what would you like me to elaborate on?

Well, if you understand elasticity, maybe you could explain how prices would change if you, for example, reduced your production of vanadium.

Well, most of the Canadian market pricing, obviously, are driven by the two largest producing countries, right, which is Russia and China. So you can understand, obviously, the current geopolitical situation has affected one of those origins. And then the current softness of the market in China has caused the price to drop this year, right? The exports from China have drastically increased. So if you look at the supply-demand dynamics, they're drastically affected by China. the exporting units from the Chinese market, right? But our strategic positioning within the US market is why we've diversified our strategy in going after a region that is not subject to those effects of the Chinese units, right?

Maybe we can take this question offline. I don't think you understand it. Could you discuss how much debt is on your balance sheet attributable to the Mallorca storage facility? Could you discuss how it's functioning? Could you discuss whether you're generating any revenue from it, whether you're generating any potential sales of new storage facilities? And could you discuss your vanadium storage technology to other storage technologies?

Yeah, I'll take the first part of the question. I'll take the second one. Yeah, just on the debt. There's no debt on the balance sheet that relates to the battery storage facility in Mallorca. That's all been self-funded, so there's no debt attributable to that. But didn't you borrow $95 million to buy the technology in the first place?

No, that's not correct. What is correct?

The IP that we have that was acquired, that was acquired for approximately just over $4 million in 2020, and that was sort of a shared non-cash purchase that was done at the time. Any other funds that have gone in have just been funding the LCE activities as a whole. In terms of the delivery of the project, I mean, as you'll note in our MD&A, the final tests and commissioning activities have not been completed. the project has not been delivered in such that we have not recognized revenue from delivery of that project as at this time. But perhaps, Francesco, you can just comment a bit more in terms of the status of the ramp-up and commissioning of the ENL project.

Yep. Sure. So we replaced the inverter and the transformer, so those activities have been completed, and we're now undergoing the final FAT factory acceptance testing for the final commissioning of the battery system. So we're in the final stages of final hot commissioning of the system.

Okay. Thank you. I'm sorry. I thought you had this facility running two years ago. So it's a good update for me. Thanks.

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

Thank you, operator. This concludes our Q&A session of the quarterly call. Thank you, everyone, and have a great day. Bye now.

Ladies and gentlemen, this concludes the conference for today.

We thank you for participating and we ask that you please disconnect your lines.