Largo Inc. (LGO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the launch of Largo Clean Energy. [Operator Instructions] Note that this call is being recorded on Wednesday, December 9, 2020, and will be 1-hour long. I would now like to turn the conference over to Alex Guthrie, Senior Manager of External Relations. Please go ahead.

Thanks, operator, and thanks to everyone for joining the call today. We are very excited to announce the launch of Largo Clean Energy and our new line of industry-leading VCHARGE vanadium redox flow battery systems. Before we begin the call, I would like to highlight the disclaimer section of our presentation, which includes cautionary notes on market industry data as well as forward-looking information. These notes are available on our website, and the webcast presentation will be uploaded in the Investor Relations section at largoresources.com following the end of the webcast. With that, I will now turn the call over to Paulo Misk, Largo's President and CEO, to begin the webcast presentation.

Thank you very much, Alex. Thank you, everyone, who are attending this call. First of all, I'd like to start with Largo Resource purpose, which is provide tech sustainable solutions for a cleaner world. We are a vertical integrated company, so we can ensure vanadium to deliver our solution. Regarding the Largo Clean Energy purpose, it's contributing to a lower carbon future to the deployment of our VCHARGE. VCHARGE is our solution for the energy storage sector. Going forward for the next slide, we have the business rationale. At the base of everything is the growing shift towards renewable energy integration will need vast amount of energy storage. VRFB are the preferred solution for sustainability, safety and long-duration applications. VRFB have a lifespan of over 20 years, and the electrolyte is reusable. That means that the electrolyte doesn't generate any scrap. We don't have any vanadium scrap with the VRFB. The Clean -- Largo Clean Energy is a vertically integrated solution that can provide one of the most advanced VRFB system to the market. We believe that the VRFB is the best solution for long duration. And just to make it clear, we are not talking about having backup power batteries or a battery to replace the energy due to high cost during the 2 or 3 hours during the day when the cost is very much higher. Those applications is short-duration discharge. We are talking about to have a sustainable grid system. We provide the solution to have the sustainable grid system, which means we can solve the -- we can ensure our system that can have a carbon-free energy and also a very safe storage energy system as well. The renewable energy storage demand has reached an inflection point. You can see in the left graph what's the curve of the projection in the energy storage capacity globally. In the right side, we see the projection of the storage capacity by duration. The duration is starting nowadays, didn't happen before, but it had a very huge long duration. Long duration, which means between 4 and 12 hours, market growth of 8x by 2025, reaching $16 billion worldwide. Global energy storage capacity could grow at a CAGR of 31%, recording 741 gigawatt-hour of cumulative capacity by 2030. Aggressive global shift towards a low-carbon future driven by Paris Agreement participants and large-scale companies' commitment. The Largo Clean Energy key values. We are an industry-leading vertical integrated VRFB business to provide clean energy storage systems to the fast-growing energy storage market. High strategic and synergetic value. World's largest producer of high-purity vanadium. We have operational excellence and proven track record of delivering on large-scale projects. We have internal commercial capabilities to capture value and growth along the vanadium supply chain. Of course, we will structure the Largo Clean Energy with very capable professionals in the marketing and other areas to ensure its success. Commercialized the VRFB system. Readily saleable VRFB system to address various industry needs. Unrivaled and patented VRFB technology, and advanced team with decades of the VRFB experience. Regarding surging energy storage demand. Long-duration energy demand is an inflection point. VRFB is a proven and ideal technology for safe and long-duration energy storage. Ambitious carbon reduction targets from government and companies globally. We really believe that we can contribute to have a cleaner world and contribute in all these sustainable programs that we're going to see from now. Largo Clean Energy, a vertically integrated VRFB business to provide a clean energy starting system. So we are adding a special piece in this puzzle. Experienced team and proven VRFB technology was available in the VionX company. It has achieved a very high-performance in low-cost battery. And that happened due to -- they improved high-density in the system of their technology, which is 3x better than any other VRFB battery available in the market. Due to this and the scalability will provide a very low-cost battery. We have the fast-growing energy storage market, and we are putting a reliable, high-purity vanadium supplier with that puzzle. That is Largo can do better than any other company. We are a unique company because we are the biggest producer of high-purity vanadium. We have a very capable team as well. And the strategy is not to compete in all of the storage battery, energy storage opportunities, but we have a long-duration and have safety and have a sustainability as a requirement. The Largo Clean Energy's executive team is: Paulo Misk, myself, as CEO; Shazad, which is the VRFB guy, came from VionX; Ernest Cleave, everyone knows already, that's our CFO; and Paul Vollant that's doing a great job as a Director of Sales and Trading. I'd like to introduce Shazad as the VRFB guy. And please Shazad, let us know your experience and all your capabilities, and thank you very much for joining us.

Thank you. Thank you, Paulo and the Largo organization. I and my team are very excited to be part of this organization. We do believe that this acquisition now uniquely positions us and fully enables us to participate in a very exciting market opportunity. I come with 21 years of experience in clean energy. I began this work at Ford Motor Company, working on hydrogen fuel cells and electric vehicle technology. I started my work there in research and worked through a complete production vehicle program on the basis of the Ford Focus hydrogen fuel cell electric vehicle. And then also had, toward the latter years there, a leading role in development of Ford's core technology in relation to hydrogen fuel cells and electric vehicles. I exited Ford to join A123 Systems as A123 was interested in developing an automotive product line. I and a few others were hired out of Ford to -- as founders of the automotive product line, develop that product. And over the course of 5 years, also held -- ended my career at A123 -- or my stint at A123 in a very large operational role owning the production -- higher-volume production of battery packs all the way from electrode production all the way through battery pack production, that'd be electrode cell, module and pack production -- high-volume production in Michigan -- that existed in Michigan. After that 5-year stint at A123, I became very interested in actually grid -- in the grid space. And left Michigan and spent the short time at Ambri, another grid scale company in developing a grid storage product. Short time there in the capacity of VP of Manufacturing and Engineering. But then came upon this very unique opportunity at VionX. VionX, 5 years ago, and at that time, made a significant pivot. Previously, they were premium power and working on zinc bromide flow battery technology with -- which had significant technical hurdles. But made a pivot at that time to vanadium. And after exclusively licensing IP from UTRC, that really put vanadium redox flow battery back on the map. This technology was disruptive technology that enabled utilization of vanadium redox flow battery. And I was hired on, at that time, to actually lead the team to develop that commercial product. And I'm happy to say that, that's where we are today and have designed and validated the commercial product. In terms of the work that was done to develop product, was targeting a grid scale product and the long-duration space. Until even recent, I mean, the vast majority of storage deployments in the world today are served by lithium ion, and in markets that require less than 4-hour duration. These markets served use cases such as frequency regulation, peak shaving, some capacity markets as well. However, full-scale integration of renewables for development of microgrids and delivering baseload required a very different set of requirements. And these requirements are actually -- the requirements are heavy cycling, meaning that a minimum of 1 full cycle per day. Lifetime targets for grid applications are 20 years and greater and beyond. The requirement for full renewable integration from a duration standpoint is 4 to 10 years. And all these requirements, these 3 key requirements as well as well others have to be delivered at enabling costs. This market that Largo Clean Energy product targets occupies the upper right-hand quadrant of that chart on this slide. VionX began the development of this product 5 years ago. And at that time, the industry position also was that 4 hours was sufficient. This is one of the reasons actually that inhibited VionX' success. However, as Paulo also pointed out, there has been a very significant change in that market perception over the course of the last couple of years, where it's now widely recognized -- clearly recognized that there is a need for long-duration -- and we specify long duration as being greater than 4 hours. There is a need for a long-duration storage solution. And actually, lithium-ion does not occupy that space. Lithium-ion makes sense from a cost perspective, up to 4 hours and lower life solutions. But when taking these criteria into consideration, meaning heavy cycling, heavy use, long-life and long-duration, that's where VionX really has developed a product that claims the space, and that space is in the upper right quadrant of the chart here listed on the slide. Largo Clean Energy is pleased to be in a position where we can take full advantage of this new market opportunity and has developed a validated product to do so. So the VCHARGE product is the most advanced VRFB product in the market today. The vanadium flow batteries, however, are not new. The fact is that NASA has demonstrated flow batteries in the 1970s. Sumitomo has had vanadium redox flow batteries operating for over 20 years. Nonetheless, they were not commercialized. And there were a few reasons for that. One was performance, durability and cost. The VCHARGE system, the product, was developed leveraging a combination of 2 areas of disruptive IP and the application of automotive design discipline to address the inherent roadblocks to commercialization. This [ IDFF ] power density IP was what VionX had licensed from Raytheon some 5 years ago to develop this product. And it is disruptive IP. It created an improvement in power density that ranges from today 3 and forward -- going forward up to 5x compared to our competitors. The result of this is a reduction of a battery system size, and inevitably, also a reduction in cost. Just as a key factor in driving cost down and enabling this technology. And then an additional key invention that VionX was able to successfully develop was this development of high-purity -- capability of developing low-cost, high-purity electrolyte. Purity of electrolyte in redox flow batteries is critical to their performance and it enables long-duration discharge. VionX has developed its proprietary purification process and has proven it at commercial scale -- its capability of commercial scale. And actually, it can -- it has the capability of eliminating key contaminants at parts per billion levels that actually enable these batteries use in duration -- in the long-duration space. So the combination of this IP, both the power density IP and this purification IP and with the application of automotive discipline, we were able to develop a product and develop this product to achieve durability targets of 20 years, also required by the grid. VionX and the VCHARGE system has been proven to have stack durability out through 40 years, demonstrated at accelerated testing. And also have deployed systems now to the field for over 5 years that have all demonstrated stable performance. And last but not least -- and absolutely not least, safety is very key in requirement -- a very key requirement in grid applications. The vanadium redox flow battery is inherently safe as a result of the electrolyte being nonflammable and nonexplosive. So it carries with it this inherent feature of being nonflammable. And another very key point in regards to this electrolyte is it does not degrade as a function of use or time. And that's also a feature that was created with this IP -- this purification IP that we hold. But we have developed this capability also of being able to deploy a safe battery solution. It's nonflammable, it's nonexplosive, electrolyte does not degrade over the course of time. Vanadium actually has not changed over the course of time. So the vanadium and the flow battery on day 1 is exactly the same as the vanadium in the flow battery at year 20. And that vanadium at the end of its life can be taken out of the system and actually repurposed into a new system at that time. So these -- all these differentiations and product attributes position this product to be the most advanced solution to serve this market today. And the rendering of the system in the middle of this slide is depiction of our current containerized commercial product. This product has been well validated. We've taken -- from a design perspective, we've taken advantage of this inherent ability in flow batteries to independently scale both power and energy. The 2 long containers in the center are power-generation containers, and the containers alongside that, the shorter 20-foot containers are simple storage containers for electrolyte. So based on the amount of electrolyte or storage containers that you deploy with the power container, you can vary the duration of the battery, and hence, provide that independent saleability. So the VCHARGE product line actually is one in which we take full advantage of that independent saleability. The specifications of the product are listed on this slide. And you can see that we can span a range of 4 up through even 12 hours of duration with this product, depending on the power at which the system is operated. The product has been designed also from a standpoint of a lifetime to be a minimum of 20 years, and we've actually offered 25-year -- big 25-year projects in this regard as well. The efficiency of the product is 68% round-trip at the AC terminals. The product has been designed to work in a wide operating -- thermal operating range and ambient operating range of minus 40 degrees C to plus 45 degrees C. And this is also a very significant attribute to flow batteries in that they can operate in this wide ambient range, whereas competitive technologies, such as lithium, are restricted. So all in all, I'll wrap things up here on my side in that as a summary that we have designed, developed and validated a product that can be optimized for grid applications, the product, alongside the development and validation of that product, we're also able to establish an Asian-based, low-cost supply chain, and are very excited now to have the support of Largo behind us and availability of vanadium, which now unlocks these inhibitors that prevented us from actually entering this market. But we're very excited now to be at the doorstep of an emerging market and with a product that's ready to go. And I'll transition now to Paul, who can talk a little bit more about that market.

Thanks, Shazad. Welcome to the team, and thanks, everyone, for joining our webcast today. Commercially, Largo Clean Energy will drastically augment Largo's universe of opportunities as well as highlight our long-term commitments to the battery market and a green future. Having multiple sector applications is essential to carry on with our strategy to grow market share in high-purity markets. Along with the start of our V2O5 reproduction in 2021, we are expanding our ability to service all high-purity applications in order to get the highest final price for Largo's premium-quality products. Sales in the energy storage market will now be our focus, along with the traditional high-purity markets of aerospace and chemicals. In terms of sales pipeline, we have already identified readily available opportunities for over 7.5 gigawatt-hour in the Americas, Europe and Africa. Largo Clean Energy technical experts will take full advantage of the synergies provided by Largo to hit the ground running with our VCHARGE product line. With the fast-growing demand for long-duration and safe energy storage solutions, the time is now, and Largo is ideally placed to seize commercial opportunities to dramatically scale and create value along the vanadium redox flow battery supply chain. And with that, I will now pass it on to Ernest for conclusion.

Thank you, Paul, and welcome, everybody. Following up on Largo Energy's service offering. We believe that with the planned technical optimizations by Largo Clean Energy that VRFBs will be competitive and the preferred technology for long-duration and safe energy storage at a much higher V2O5 price than today, well above even historical average prices of V2O5. When addressing whether VRFBs are a viable, sustainable and profitable business opportunity, it is very important to note that when comparing our fledgling VRFB business with existing business lines, we anticipate that quoted vanadium prices would need to be $10 per pound or above to meet or exceed the anticipated profitability of Largo Clean Energy's long-duration and clean battery storage business. We believe for this reason and the many operational reasons that our team elucidated today that our business venture into VRFBs through Largo Clean Energy represents a transformational business opportunity for Largo. With that, we will now open up the call to questions.

Ladies and gentlemen, we will now go to any questions that may have arrived from the webcast.

Thanks, operator. The first question comes from Andrew Wong at RBC. What is the competitive landscape for VRFBs? How does the VionX technology compare to other solutions? And have there been any installations of VionX?

Shazad, could you please address that question?

Absolutely. Sorry about that. So in terms of the competitive landscape. As I pointed out, the core IP that we have is disruptive IP. And what that does is position us from a power density standpoint, be today 3x and within a couple of years, 5x that of our competitors. The direct result of that is a reduction in footprint, size of system, number of components. Within a system, significant reduction -- reduces the number of components, and hence, reduces our cost structure. And that's what enables us actually to be very competitive in the long-duration landscape, competitive from a cost perspective with our competition, both from a standpoint of lithium-ion as well as other flow battery developers. And we believe that we are by far, at least 3 to 5x more competitive in that space. In terms of the systems that we've deployed, we have deployed 3 systems to date. The longest-running system has been running for over 5 years now. It's a 160-kilowatt system with a 4-hour duration. That system is deployed at Fort Devens, Massachusetts in conjunction -- at a military base near a medical center. It's -- the target of that system was to actually demonstrate resilience. But with that system, we also demonstrated the capability of delivering -- capability of performing and meeting requirements of a dozen different use cases tied to the grid. The system has been cycling continuously and in operation continuously for the past 5 years. And alongside demonstrations within our test many -- multiple testings in our laboratories, where we have demonstrated on our longest-running system, over 30,000 hours of operation on a stack without degradation. This system that's been grid-connected for 5 years is also demonstrating the same with commercial stacks. So we have that as our longest-running system and demonstrating durability, improving our durability of our product. We have a second system that was deployed in Worcester, Massachusetts. That is a 500-kilowatt fixed-hour system and that was in conjunction with a wind turbine at that Worcester site. That was deployed in 2017. It's been running successfully also since then. And we have successfully demonstrated our capability of long-duration discharge at that site, where we ran 10-hour discharges continuously for months on end. And again, showing no impact of electrolyte degradation or degradation of the system in that regard. And then the third system that we have deployed is actually in Shirley, Massachusetts. That's where we've deployed our commercial design. And the system in Shirley, Massachusetts is a 500-kilowatt, also 6-hour system of the commercial VCHARGE design. And that's a system in which we successfully completed both UL1973 and UL9540 certification. And I'm pleased to say that within 2 weeks of commissioning that system, we were able to complete that testing successfully. So those are the 3 systems that we have deployed to date. We have additional systems that were in the process of being in the commercial sales that we had secured and we were in the process of these deployments. And those have been paused in the midst of this acquisition, and we are looking forward to actually reengaging with those customers and potentially restarting those projects going forward.

The second question comes from Chris Berry from House Mountain Partners. Of the 731 gigawatt-hours of potential energy storage opportunity, how much do you think can be captured by VRFBs, and how much would Largo be looking to capture? Congratulations on the new venture.

Shazad, if you can have another go at that. I think most of the questions are going to be for you today. So please, go ahead.

No problem. Happy to take that. In terms of that 700-gigawatt-hours, I would say that we are in a position today where we are the most advanced the VRFB -- technically advanced VRFB solution in the world. And now, we have just -- now we've been acquired by the leader in the space of vanadium production. So we are in the high -- production of high-purity vanadium that's also required for redox flow batteries. So I'd say, first and foremost, we are very uniquely positioned today with disruptive technology and capability from a vertical commercialization standpoint that is unique in the industry. Now we are at the footsteps of an emerging market. And specifically, if you look at the chart that we specified, identifying this $16 billion market by 2025, that's specifically a long-duration opportunity. That's from 4 hours up to 12. And today, in the world, as leaders in this space and those that have developed and validated it and are prepared to move forward with a product that uniquely addresses that, we believe that we can absolutely have us take on a significant portion of that market. We're leaders in this space. We're ready to it -- we're actually prepared and ready. The product is ready to go after that market. So as the store is open, with this acquisition, now we're just enabled to go after it and capture it. So we're very excited. And I believe that from a standpoint of applying a percentage, that's -- I would be comfortable in -- at this point, if we could applying -- assuming a percentage of 5% of that market would be one in which one could safely assume as a leader that we could -- we have the potential of going after and capturing.

Thanks, Shazad. The next question comes from Heiko Ihle from H.C. Wainwright. Can you provide some color on the amount of dollars invested into the venture thus far and your expectations over the next 12 months?

I can take that as well.

Okay. Go ahead.

I'm assuming that that's specific to the fund -- the moneys that have come in to VionX to develop the product, and I can address it from that perspective. There has been about $150 million, $170 million, in that range, of funding that's coming into development of that product. The predecessor device [Audio Gap] Premium Power. And Premium Power has been working to develop flow batteries since, I believe, 2004. So at least $70 million to $80 million of investment came into Premium Power, which then later became VionX as we made the pivot -- acquisition of the UTC IP and the pivot to vanadium. Thereafter, the additional funds were invested into the company. The -- so the balance of that would have been invested into VionX. Now although there was a change in chemistry, the Premium Power product was also a flow battery product, and we were able to leverage -- not only retain those that developed that product on our team but also retain the control knowledge and IP that was developed during the Premium Power days, which then directly applied into the flow battery that was developed at VionX. So in terms of all the funds that were deploy -- invested into the company, into the development, it did come over the course of both Premium Power and VionX. And VionX was very fortunate to be able to leverage the controls development -- the systems and controls development work that was done in the Premium Power days to take advantage of that investment as well. And in terms of going forward, the key activity at this space is to move forward in terms of our -- complete the product readiness stage. There is some work that has to be done to, let's say, reestablish the supply chain. Because we've gone through now this acquisition, we have to reconnect with the supply chain as Largo Energies and reestablish that capability as Largo Energies going forward. And then during the course of the next year, we plan on deploying a few projects. There are some commercial projects in our pipeline with customers that are very interested and eager to proceed. There are projects that have been awarded but not contracted. We would follow through with completion of those contracts, and then begin the course of deploying those projects over the course of next year. And that means engaging with supply chain and ramping that capability up -- and reestablishing and ramping that capability up to deliver on those projects. That would be the focus of the next year.

Maybe I can just add something to that, Shazad. I think the other thing -- Heiko, thanks for reaching out today again. One of the important points here is that this is a proven commercial solution. We're not in the business of going and doing additional R&D on the product that we can already offer. So this is a product that is commercially ready and ready to go. So while we may be establishing supply chains and all the good things that you need to do to restart a business or start it in a fledgling state, those things need to happen. But our technology is the lowest-cost technology in the market right now as it relates to VRFBs. This is vital. The second thing that I would say is, if you look at projects, we have no intention of bidding or engaging in projects that do not earn Largo a profit. So we have great expectations for this business, but we will not be making any R&D or loss-making investments going forward into 2021 and beyond. So I'd like to make those 2 additional points as well, Shazad.

Thank you, Ernest.

The next question comes from [ Liu Lee ] from [ Quick Channel. ] I was wondering if you could just further explain the transaction details in terms of a technology standpoint as well as the licensing agreement.

Thank you, Lee. Ernest, I think you are the best guy to explain and report the transaction, please.

Sure. So in essence, VionX has very recently gone through an insolvency process, an assignment for the benefit of creditors. We've been working with VionX and their various investors over the past 5 months to actually secure certain assets of the VionX organization. The most important component of those assets is, obviously, the IP that relates to the purification of vanadium electrolytes. This is a critical component that has been, in turn, used in conjunction with the stack technology that we obtained by our licensing agreement with Raytheon. So really, in terms of what we've acquired by way of assets, we've acquired IP from VionX, we've acquired some assets, some test stands and some other equipment, software, et cetera. But mostly, it relates to the actual IP. And then, of course, the people that we brought along. We've been paying for the employees of the VionX business along the way here. We haven't waited until we've actually acquired the business to keep them close. We believe in this team. So the transaction has been structured around simply acquiring assets. We have acquired no liabilities and no other exposures that potentially resided within the VionX group. So it's a clean acquisition of assets. It's not a merger of 2 organizations. It's the acquisition of assets, very simply, for shares and warrants as we laid out in our press release.

Thanks, Ernest. The next question is from Lee Cooperman. There's three, so I'll just list them here quickly. Is Largo changing its name or its Largo Clean Energy a division of Largo Resources? The second one is, are you thinking about the potential of adding EV experts to your Board or renewable energy experts to the Board? And as management believes that stock is undervalued and you issued stock and warrants at the time that you had excess cash, why not use cash?

Thank you, Lee. It's -- we have a clear view that is Largo Clean Energy, it's an inflection point for Largo itself. It opened a huge avenue for how we approach solutions, technical and sustainable solutions for the world. We really believe that this historic energy solution will create many opportunities, and it's a completely different deal what have today. We are now doing the adjustment in our restructuring. We think about the Board members and how we have in our Board, we still have one seat available. But I need to talk this in this regard with our Board to be well prepared for this new phase. We do not have this solution yet. But we start thinking about it and discussion about those things. We will define in the future. What's the first question, please, Alex?

The first question was, is Largo changing its name or is Largo Clean Energy a division of Largo Resources?