Largo - Q4 2023

Transcript

Operator (participant)

Good day and thank you for standing by. Welcome to Largo's Fourth Quarter and Full Year 2023 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, Senior Manager of External Relations. Please go ahead.

Alex Guthrie (Senior Manager of External Relations)

Thank you, Operator, and thanks to all those who could attend our fourth quarter and full year 2023 financial results conference call. Our annual financial statements, related MD&A, and most recent AIF 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'll hear during today's discussion will consist of forward-looking statements, including without limitation, those regarding future business outlook. Please refer to the cautionary statements and the related MD&A, consolidated financial statements, and AIF, which can be found on our website within the Investor Relations Resources section. And finally, all figures discussed today are in U.S. dollars unless otherwise stated.

On the call today is Daniel Tellechea, Largo's interim Chief Executive Officer and Director; Ernest Cleave, Largo's CFO; Paul Vollant, Largo's Chief Commercial Officer; and Francesco D'Alessio, the President of Largo Clean Energy. Following delivery of our prepared remarks, we'll open the call for questions. We ask that participants restrict their questions to two and then requeue if there are additional questions to allow the others the opportunity to participate. I'll now turn the call over to Daniel.

Daniel Tellechea (Interim CEO and Director)

Thank you, Alex. Thank you all for joining us today as we discuss Largo's performance over the past year. Despite facing a mix of accomplishments and challenges, we remain committed to ensuring the longevity and success of Largo well into the future. As we have pre-reported our result yesterday evening, I will stick to providing the important highlights before we open it up for questions from the audience. Our primary focus has been on enhancing operational efficiency at the Maracás Menchen Mine to meet production and sales targets, particularly given the current depressed vanadium prices. Despite the industry-wide pressure, we have diligently worked to control costs within Largo and believe that our lower cost profile positions us better than others to weather these challenging times.

Throughout the year, we encountered various hurdles such as delay in our infill drilling program, a traffic accident at our mine facility, and technical setbacks with equipment commissioning due to engineering and design problems. However, we remain focused on enhancing operational efficiency at the Maracás Menchen Mine, investing significantly in waste rock pre-stripping, a new crushing system, and refining our operational management practice and policies, resulting in notable improvements in the latter quarters of 2023, particularly in Q4. In Q4 2023, our V2O5 equivalent production saw a 38% increase compared to Q4 2022, with total ore mined and crushed also experiencing substantial growth. Notably, we achieved record-high purity vanadium production in Q4 2023, achieving a record production of 1,670 tons of high-purity V2O5 equivalents, representing 60% of the company's quarterly V2O5 output.

Although our annual V2O5 production is slightly dipped compared to the previous year, we remain in our annual production guidance range. Also, 2023 marked several significant milestones for Largo, including the successful construction and commissioning of a new ilmenite concentration plant. We have seen a steady improvement in ilmenite concentrate production and quality over the last quarter, which will contribute to the diversification of our revenue stream beyond vanadium in the future. Our exploration program surrounding the Maracás Menchen Mine has been an increasingly important part of our story over the last few quarters, and I'd like to spend a brief moment discussing some of the highlights. We are conducting exploration efforts in the area surrounding the camp and field to both optimize current operations and plan for future developments and expansion through the identification and conversion of resources.

Our ongoing program aims to expand our understanding of the mineralization surrounding the Campbell Pit so that we might gauge the possibility of continued mineralization north and south of the pit. As part of this program, we have also identified significant PGM grades in non-magnetic tailings ponds. The major significance of this discovery is that the higher grades of PGMs could be associated with our non-magnetic material rather than massive vanadium ore, as previously thought. We plan to conduct further studies to evaluate the potential to recover PGMs as an additional byproduct of Largo vanadium and ilmenite operations following the completion of our ilmenite concentration plant. Additionally, our Clean Energy division reached a significant milestone in 2023 following the delivery of our 6 MWh VRFB to our Clean Energy partner Enel Green Power in Spain.

This installation represents the largest VRFB installed in Europe and has become a key catalyst in our recent announcements regarding Stryten Energy and Largo Clean Energy. I will let Francesco touch more on that later in the call. While the current vanadium market presents great challenges, give me one second. Great challenges to our financial performance, we remain focused on executing on our strategic initiatives, reducing costs, and meeting production and sales targets in the year ahead. We appreciate continued support as we navigate through these dynamic times and remain committed to creating long-term value for our shareholders. With that, I will turn the call over to Ernest to provide an overview of our financial performance in 2023.

Ernest Cleave (CFO)

Thanks, Daniel. As highlighted on this call, the impact of declining vanadium prices on our financial performance over the last year has been significant. In Q4 2023, our revenues were $44.2 million, down 7% from Q4 2022, with revenues per pound sold of $7.69 compared to $7.77 in the same period last year. For the full year 2023, revenues stood at $198.7 million, a 13% reduction from 2022, with revenues per pound sold at $8.66 compared to $9.38 in 2022. This decline is primarily attributed to the substantial reduction in the European vanadium price, which dropped by 22% in Q4 2023 compared to Q4 2022, and a 31% year-over-year reduction, with the most recent price hitting $5.90 per pound. Despite these challenges, our focus remains on optimizing operations to mitigate costs.

As discussed in previous quarters, we made notable progress in this area, seeing reductions in key consumable costs such as sodium carbonate and overhead costs through targeted headcount reductions. Our operating costs in Q4 2023 totaled $43.2 million, slightly down from $44.5 million in Q4 2022, while for the full year 2023, operating costs were $174.8 million compared to $169.7 million in 2022. Direct mine and production costs increased in 2023 due to higher total ore mined, cost impacts from low ore availability earlier in the year, and planned shutdowns for maintenance. However, direct mine and production costs decreased in Q4 2023 compared to the same period last year, reflecting cost-saving initiatives and softer prices for consumables. Cash operating costs, excluding royalties per pound of V2O5 equivalent sold, were $5.30 for 2023, and this compares with $4.57 last year, remaining within our revised annual guidance for 2023.

In terms of other expenses, total professional consulting and management fees decreased by 9% in 2023 compared to 2022, and other general and administrative expenses decreased by 18%, primarily due to reduced activity and headcount at Largo Clean Energy during the strategic review. Additionally, technology startup costs decreased by 52% in 2023 compared to the same period last year. We reported a net loss of $13.3 million in Q4 2023 versus a net loss of $15.6 million in Q4 2022, which included $8 million in non-recurring items. For the full year, we recorded a net loss of $32.4 million compared to a net loss of $2.2 million in 2022, which also included $10.3 million in non-recurring items. To provide better insights into our financial performance, we've introduced a new metric to our financial reporting this quarter, adjusted EBITDA.

In Q4 2023, adjusted EBITDA increased by 138% compared to Q4 2022, reaching $1.4 million. For the full year, adjusted EBITDA was $12.1 million, and that compares with $41.6 million in 2022. Exiting the year, we maintained a cash balance of $42.3 million, a net working capital surplus of $94.7 million, and debt of $75 million. It's evident that our financial performance, along with the broader market conditions, presents significant challenges. As Daniel emphasized, our primary focus remains on implementing cost reduction initiatives driven by operational efficiencies to combat this downward pressure. I'll now turn it over to Paul for his update.

Paul Vollant (Chief Commercial Officer)

Thanks, Ernest, and thank you all for joining us today. I'd like to echo the sentiments shared by my colleagues regarding the ongoing challenges we've faced in the vanadium market, particularly with the continued downward trend in prices through 2023, culminating in a significant decline in Q4. In Europe, V2O5 ended the year 2023 31% lower than at December 31st, 2022, and ferrovanadium dropped 21% over the same period. Despite soft demand in 2023, largely driven by challenges in the Chinese steel industry, we observed continued strong demand from the aerospace and VRFB sector, which present promising opportunities for future quarters. Looking at Largo's results, we sold 2,605 tons of V2O5 equivalent in Q4, inclusive of 139 tons of purchased material, compared to 2,774 tons in Q4 2022.

Annual V2O5 equivalent sales for 2023 totaled 10,396 tons, inclusive of 99 tons of purchased material, which is on the high side of our sales guidance of 8,700-10,700 tons. Subsequent to Q4, we maintained sales momentum with 1,072 tons sold in January 2024, followed by 1,065 tons sold in February. On the ilmenite front, we're excited about the prospect of diversifying Largo's product offering and revenues in 2024. We completed our first 500 tons ilmenite sale in January and anticipate selling between 18,000 and 22,000 tons at a healthy profit in the first half of this year. Finally, I'd like to highlight the significance of our exclusive offtake agreement with Gladieux Metals Recycling, signed in 2021.

In December 2023, we got delivery of the first lot of vanadium pentoxide produced by Gladieux in Texas, and after converting it in Canada, we will soon deliver our first fully American-made ferrovanadium to a U.S. customer. Largo has a 10-year offtake agreement covering the entire vanadium production from Gladieux, further solidifying our presence in the American and global markets. In conclusion, despite the challenges, we remain fully committed to navigating these conditions strategically while capitalizing on emerging opportunities to drive growth for Largo. Let me now turn it over to Francesco.

Francesco D’Alessio (President)

Great. Thanks, Paul. Welcome, everyone. And again, I appreciate the opportunity to update everyone on some significant developments within our Clean Energy business. Firstly, I'd like to revisit a milestone we mentioned during our last quarterly update, which has now been officially announced by our partners this week. Back in October, Largo Clean Energy successfully deployed its 6-megawatt-hour redox flow battery at the Son Orlandis plant in Mallorca, Spain. This deployment marks a significant achievement as it now stands as the largest energy storage deployment in Europe utilizing vanadium flow batteries. The integration of our vanadium redox flow battery system with a 3.34-megawatt peak photovoltaic plant at Son Orlandis is truly special. With a specific management system in place, the battery optimizes loading and unloading operations based on renewable production and grid requirements, thereby effectively managing demand peaks.

This technological advancement is a crucial step towards establishing long-term storage solutions, particularly vital for energy management in regions like Mallorca. Furthermore, the implementation of the battery system will play a pivotal role in enhancing grid stability and facilitating the increased adoption of renewable energy sources, thereby reducing reliance on fossil fuels and hastening the journey towards energy self-sufficiency for the islands. Now, alongside this significant achievement, I'm thrilled to share another major development that was announced just this past Monday. Building on the success of our partnership with Enel, we've taken a significant step towards a significant step forward in concluding the strategic review of Largo Clean Energy with the announcement of a proposed joint venture with Stryten Energy. The proposed JV is a testament to the unique value proposition that Largo Clean Energy brings to the vanadium flow battery market, particularly in the realm of long-duration energy storage.

This includes our patented vanadium flow battery stack technology, electrolyte purification technology, and access to vanadium through Largo Physical Vanadium. Stryten's extensive experience in the U.S.-based manufacturing and their robust infrastructure, including five North American R&D facilities with more than 2 million sq ft of manufacturing space and a team of 2,500 employees, make them an ideal partner to capitalize on our efforts made thus far in Clean Energy. Together, we envision transforming the landscape of long-duration energy storage in North America. While discussions are ongoing, it's important to note that the proposed joint venture is subject to various conditions, including the negotiation of definitive agreements, completion of due diligence, and regulatory approvals. Now, I'll turn it back over to the operator to begin our question-and-answer session. Thank you.

Operator (participant)

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 number 1 on your telephone keypad. You will hear a 3-tone prompt acknowledging your request, and your questions will be polled in the order you have received. Should you wish to decline from the polling process, please press the star followed by the number 2. One moment, please, for your first question. Your first question comes from the line of Heiko Ihle from H.C. Wainwright. Your line is open.

Heiko Ihle (Managing Director)

Hello, Daniel, Ernest, Alex, and team. Appreciate you taking my questions.

Francesco D’Alessio (President)

Hi, Heiko.

Heiko Ihle (Managing Director)

Hey, let's talk about ilmenite concentrate a little bit, a few things. First of all, how come there is some such strong variability between January and February? I mean, I get that this is going up and running, but nonetheless, how do you think we should best model this out by quarter for the remainder of the year, please?

Daniel Tellechea (Interim CEO and Director)

Do you have that, Paul?

Paul Vollant (Chief Commercial Officer)

Yes. Thanks for the question. Just to clarify, are you mainly focusing on sales or production?

Heiko Ihle (Managing Director)

I meant production, but I mean, either is probably useful.

Daniel Tellechea (Interim CEO and Director)

I can give you the production number for the year. We are expecting to produce 88,000 tons of ilmenite during the full year of 2024. You were referring that we have some issues during January and February. And the main reason is that the issues.

Heiko Ihle (Managing Director)

I didn't mean issues. I meant variability.

Daniel Tellechea (Interim CEO and Director)

Okay. All right. So our expectation is to produce 88,000 tons of ilmenite for the full year.

Heiko Ihle (Managing Director)

And quarterly?

Paul Vollant (Chief Commercial Officer)

And Heiko, if I can complement, maybe the variability that you're seeing, we're still somewhat at the end of our ramp-up phase, right? But we're still ramping up. And now that production is getting more stable with the grade that we were aiming for, there's a process of getting our product vetted by customers. We've already went through a large campaign to vet small samples from our initial production, and now customers are requesting much larger commercial trials. So that's why you're going to see in the first months, some months with very large sales, some months with much lower sales. But over time, we are modeling that by probably the end of Q2, early Q3, you're going to see much more regular sales. We're still in kind of a ramp-up phase.

Heiko Ihle (Managing Director)

Okay. That's extremely helpful. Essentially, if we start trendlining Q2, Q3, and beyond, we'll be on the same page?

Paul Vollant (Chief Commercial Officer)

Yeah. I think you'll see a normal run rate by Q3 in terms of sales and probably Q2 in terms of production.

Heiko Ihle (Managing Director)

Got it. Very helpful. Speaking of ilmenite, prices for globally sourced ilmenite, there's obviously some variability. I know that hedging vanadium is quite tough price-wise. Is there a way to hedge ilmenite pricing? And if so, have you looked into it? And also, what prices are you seeing, please? Thank you.

Paul Vollant (Chief Commercial Officer)

Yeah. So there's no way to hedge ilmenite such as other kind of electronically traded commodities. But the good news is that ilmenite is a much more stable commodity in terms of price if you compare it to vanadium, right? The variations are much lower. We're able to secure some contracts forward at a fixed price, but we cannot really say that we're hedging, right? We can fix prices two to three months ahead, maybe as long as 6 months ahead, but not much more. And yeah, so our strategy is also to follow the market. But again, I mean, this price is much more stable than what you've been used to in vanadium. In terms of price level, it's still somewhat we're still in a price discovery phase because the price of ilmenite is not increasing linearly with quality.

Actually, you've got massive premium for higher quality product, which is where we're getting to now. So the prices that we achieved in our initial sales for, let's say, material that we produce during the ramp-up at lower quality should be very different in a few quarters when we have stable production at higher grade. So we can probably give you more color on that in the next either next quarter or the following one.

Heiko Ihle (Managing Director)

Very helpful answer. Thank you all. I'll get back in queue.

Paul Vollant (Chief Commercial Officer)

Thanks.

Operator (participant)

Your next question comes from the line of Andrew Wong from RBC Capital Markets. Your line is open.

Andrew Wong (Equity Research Analyst)

Hi. Thanks for taking my question. So with prices hovering in the $5 to $6 per pound range, how close are we to marginal cost? And does that provide some downside support to prices at this level? And how does Largo think about the production decisions as those prices are nearing your cost structure? And then just broadly, what's your outlook for prices for the rest of this year? Thanks.

Paul Vollant (Chief Commercial Officer)

Well, Daniel, I'll take the first part.

Daniel Tellechea (Interim CEO and Director)

Okay.

Ernest Cleave (CFO)

Andrew, as you know, we've guided on cost $0.045 to $0.055. Obviously, at the current prices we're seeing, $0.059 in the market, we will not be making cash at those levels. But it's very hard for us to forecast where things go. We want to see, and I think, as I've mentioned to you before, we want to see a couple of months of production at our full production run rate to actually fully assess cost. We have an ambition to get to the lower end of our cost guidance. But obviously, given where the price is right now, this is not a cash-positive territory for us. So I'll leave it at that, and I'll let Paul talk about his expectation on prices.

Paul Vollant (Chief Commercial Officer)

Yeah. Thanks, Andrew. As you know, we do not give guidance on pricing. The only thing that we can do is just looking back, we're well below historical average. We're seeing also primary producer really struggling to turn a profit at these levels. Altogether, primary producer represent about 20% of the global supply. So we hope at some point that prices will allow primary producer to turn a profit. Otherwise, we'll see other events happening to address. So yeah, we're well below historical average. We don't know when we'll revert to the mean. But yeah, we believe we're in a very low-price environment, especially accounting for all the inflation that we had in the past few years.

Andrew Wong (Equity Research Analyst)

Could you maybe just talk about what marginal cost looks like for the industry right now?

Paul Vollant (Chief Commercial Officer)

No, sorry. I cannot do that, Andrew.

Andrew Wong (Equity Research Analyst)

Can you talk about what marginal cost looks like for the industry?

Paul Vollant (Chief Commercial Officer)

Yeah. It's very hard to say. The only, let's say, producer that are publishing straightforward prices are the primary producer, Largo, Bushveld. The other primary producer in South Africa is not publishing its pricing directly. And you can see that people are losing money at these levels. The other type of production, either from steel slag or what we call secondary sources from oil and gas manufacturing, it's indirect cost, which is very difficult to have clarity on. But yeah, we're seeing the oil industry struggling at the moment.

Andrew Wong (Equity Research Analyst)

Okay. Okay. Just maybe switching to the JV with Stryten, can you just talk a little bit more about that potential partnership? How does that benefit LCE? What do both parties bring to the JV? And how do you see this as a path to kind of commercialize the technology for VRFBs? Thanks.

Francesco D’Alessio (President)

Maybe I'll take that.

Daniel Tellechea (Interim CEO and Director)

You'll get yours, Francesco?

Francesco D’Alessio (President)

Yeah. Sure. So as you know, Stryten Energy brings large-scale manufacturing, domestic presence in the U.S. They've been in the battery space for over 100 years. So these are key essential factors when trying to establish a go-to-market strategy, large-scale availability of this technology for utility-scale deployment and C&I applications as well, right? Combined with LPV, our stack technology, proprietary purification, and capabilities to set up our electrolyte facility, pretty much we control all the aspects of the deployment for this technology in the Western world, which, as you know, has made great strides in China but has struggled in the last 20 years to make headway in the Western world.

With the growing demand of long-duration energy storage, specifically here in the U.S. for domestic content and a lot of incentives being provided by the DOE, we feel that this partnership really complements the skill sets of both companies to achieve this target and provide a viable alternative for a long-duration energy storage solution for the U.S. market.

Andrew Wong (Equity Research Analyst)

That's great. Thank you very much for taking my questions.

Operator (participant)

Thank you. There are no further questions at this time. I would like to turn it back to Alex Guthrie for closing remarks.

Alex Guthrie (Senior Manager of External Relations)

Thank you, operator. With that, concludes our question-and-answer session of the quarterly investor conference call. Have a great day, everyone. Thanks.

Francesco D’Alessio (President)

Thank you. Bye-bye.

Paul Vollant (Chief Commercial Officer)

Thank you. Bye.

Operator (participant)

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.