Largo Inc. (LGO) Earnings Call Transcript & Summary

Hello. Good morning, everyone. Good afternoon, good evening, depending on where you're joining us. Thank you for joining this fireside chat with Largo Resources. It's a pleasure to have Paulo Misk, President and CEO, with us today. Before we begin, Paulo, I will have to read some disclosures. You're familiar with this. So just bear with me. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley's employees only. This webcast is not for member of the press, members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please visit the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. Well, with that out of the way, Paulo, again, thank you very much for joining the conference and also for doing this -- having this conversation with us and with investors over the Internet and in video. So...

Thank you very much. Carlos, It's a pleasure to be here and thank you for all the one that take your time to listen us.

Great. So Paulo, I thought that we could begin maybe with an update regarding COVID and your operations in Brazil. Clearly, the cases in Brazil spiked significantly. They had been coming down a little bit more recently, still at a relatively high level. But it doesn't seem that there have been any material disruptions to the mining industry. But if you could comment on the specific situation of Largo, that will be very useful, please.

Yes, Carlos. Thank you very much. We -- since beginning of March, we have implemented all the safety and health protocols in our site. Our first is to keep our employees safety and healthy. We don't open any discussions regarding this. It's something that we take very seriously. And as a consequence of all protocols, our employees have been stated that they feel safer working at Largo plant than in their own home or in the town. But we didn't just take care of our employees. We take a look very seriously into the community. So we try to help the municipality as much as possible. We make available 4 ventilator for the hospital. We donate more than 6,000 [indiscernible] for COVID. We donate all the PPEs necessary for the healthy team, all the masks, safety glass, gloves, boots, and a full, let's say, to have a protection for these people can work in a safely mode. Just to have an idea how we have done the interaction we do with the community, we set some barriers in the room Maracás, the main road that reached there. And we hired 31 people to keep giving safety advices and some orientation, some guidelines how they should behave. And if the people from City comes to Maracás, they need to stay 1 week in quarantine. Why Maracás didn't have any case, by the way, let make clear. And the municipality helps a lot and check if everyone is following these procedures. I just want to give a sense that we are engaged with the community and the municipality. Another project that we have, we call Active Women. It's -- we have the project that happens before, and we have donate some machines, the device for them to switch, cloth and uniforms and everything. But for this period, we donate all material for them to produce masks. And we pay for the masks produced. To have an idea, we have produced and donated more than 300,000 masks. Remember, Maracás have just 23,000 people, but we have donate for the whole region. And it's nice to see how the community can be engaged to make something good for the people, to let them protect themselves and face this pandemic in a good way or at least in a more safety way. So we are very happy to have the recognition from our employees that they are working in a safety place and recognition also from the community that understand that the company is doing as much as possible to keep them safe and are contributing to have a better situation in Maracás. For that reason, we didn't stop any big moment to keep losing and to give delivering material to our customers. So all the responsibility in terms of safety and social allow us to comply every commitment we have with our customers and keep delivering good material.

Fantastic, Paulo. And can you comment on the run rate of the -- currently of the operation? How is it ramping up? How are the recoveries? Any update that you can provide, that will be very useful.

We have -- we just improved our nameplate capacity last year, by the end of last year to 1,000 tonnes per month. Just to recap, our production in 2013 was 9,830 tonnes, which is more than nameplate capacity at that time. And 2019 was 10,577. It's much more than the nameplate capacity at that time, that's 9,600. We have produced already 5,000 and almost 400. And we had 15 days that we stopped the flake production due to the maintenance. There's no connection with COVID at all. And if you look at the last 4 months, we have produced more than a tonnes per month in the range of 1,050. That shows that we are producing already more than nameplate capacity. We just come up in the end of last year. And we have a plan for this year to increase our production. So we expect to have the 1,100 tonnes of V2O5 produced per month. And if you look at other things such as recovery. The last we had was 80.8%. If you remember, when we talked the first time, the benchmarking when we implement the plant was 72%. So we are having a very good performance and efficiency at the plant. Using as much as more than we can. And as a consequence of that, the cost is getting lower and lower. So if you look at the how we are performing in terms of cost, it's also fantastic. So yes, sir, just to give you some flavor. Our cash cost in the -- excluding royalties, the last -- let's say, the Q2 2019 was 3 [indiscernible] politics. The first quarter of 2020 was $2.79. And the second quarter of this year, $1.89 -- 89. We have a benefit of a tax recovery as well and the FX, which in our favor at that time. But reducing very good amount with a very good cost control, good recovery allow us to have the lowest cost number. We believe, Carlos, that the main fundamentals or the results for the creation, which is production, quality, Will allow us to provide a good results for our shareholders.

Certainly good news. Now you had started also recently a new commercial strategy. And you're just elaborated and mentioned that from a production perspective, mining and production, things are going quite well. Can you comment now as to how this new commercial strategy that is fully managed by the company, how is that going?

Carlos, it's going basically as was planned. We have implemented that team. We have Paul Vollant as our director and Francesco, as Head of Sales in Americas, and they are doing a great job. We -- when we started last year, September, October with such frame contracts, which allow us to have a continuous performance as before in terms of volume. And this year, despite of the COVID, there is some lower trades, lower volume in U.S. and Europe. That's true. But we are in is hot sales in China, which is the -- it's very exciting market for vanadium at this time. And that's the beauty of having a different commercial proposal -- structure. What we are allowed to get advanced of the higher price in China. Just to have an idea. The price there last week -- last month was $7 per pound. In Europe, $5.35. Can we divert all the material available to China? Before, we didn't have a chance to do those things. So we now we can get all the opportunities that the market can provide for a margin, bigger margin and high premiums as well. Just have another idea, we didn't, we are only tonnes for industry before. We now are selling to this sector as well. For aerospace, we got the full bridge. It's getting a tough situation because the aircraft is not being produced at that time, but it's going to recover next year. And we will be able to increase our production for high-purity 50%. And we are implementing the V2O3 plant, high purity, which just is producing that material. Just for aerospace, will allow us to increase 50% more. So we are having all the commercial things in our hands is part of the strategy to provide more value to Largo to create more opportunities and make sense in our strategy business plan.

Yes. And you just alluded to some aspects of the market, but if you could maybe broaden a little bit more, what do you think that the market in China is doing quite well. And what are the prospects for a recovery outside China? And I just got a question from the audience asking your thoughts about why do you think that V2O5 prices remained stuck around $3.30, $3.40 per pound in Europe.

Yes, that's a good question. Just to give you a perspective in China. China start the COVID of the whole world. As a consequence, they could recover. They could start recovering their production level earlier as well. So day-to-day, how -- if I look at the numbers in China, in the first quarter of 2020, first, there is a -- was impacted in the beginning of the year, the pandemic. For the first quarter, the steel production have increased by 3%. The crude steel year-by-year, okay, first quarter 2020, first quarter, 3%. If you look at the rebar production, in 2020 first quarter -- first half, sorry, sorry -- first half, it's 2.3% increase higher than first half of last year. Assumption in the first half of 2020 is 4.5% higher than 2019. So China came from this COVID period stronger than before, more than the prior pandemic period. If you can ask me why, just the stimulus program to recover the account in China, they dedicated $100 billion to reactive the economy. It's not small. And most of those investments are for infrastructure. If you look at the U.S., we are not doing differently. It's just a case of its -- the phase of recovering the industry in the steel production, it will start in this second half of 2020. It's not exactly the same act will be almost the same. They have a very high stimulus program as well. So I'm very confident that the production of steel in U.S. and Europe will recover and to do the stimulus program, they will be higher than before. And that's very good news for vanadium. And all the price that we have in China should recover in Europe as well. And U.S. is the same. So I believe that we're going to have, by the end of the year, fair price, not just in Europe and U.S., but also in China. Because today, the whole world is selling vanadium in China. But when they need to sell in Europe or U.S., to be balanced and all the high consumption we reflect in the price. 2018, of course. But I can see very in a very -- there is the fundamentals to get $8, $8.50 in that range for next year. Sorry, I not hear you. I don't know why.

Sorry. How much incremental production have you seen of vanadium in China as a consequence of the increase in steel production in the country?

Yes, that's a good question as well. The vanadium in China is being produced not because the price of vanadium. In a -- if you talk about the coal, stone coal from the stock of production, okay, it depends on price, if it is higher than $10, $9.50, okay, these guys stop producing. But for -- so when you talk about the by-product from the steel industry, not from the lag, it is higher right now because with the iron ore price is $120 in a -- the Chinese can produce iron ore more than before. But look at the -- they have increased their -- they still in -- still grew by 3% and the consumption of vanadium, 4.5%. So there is some -- I could say about 3% increase, the price in the vanadium being produced by slag, but the consumption from vanadium is higher than that. So there is some space to increase price because the production will not be as well. And I can take statistic to support that. China, historically, has been import vanadium, not big amount, export vanadium, 2,000 tonnes of the average, 3,000 tonnes average, that range. If you look at the results on this year, they have increased their [indiscernible]. And if you look at June and July, the imports of vanadium was higher than exports. So China is requiring more material than before. It's a good sign for vanadium.