Largo Inc. (LGO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Largo's Battery Day. [Operator Instructions] This call is being recorded on June 9, 2021. I would now like to turn the conference over to Alex Guthrie. Please go ahead.

Good morning, everyone, and welcome to our much anticipated Battery Day. I'd like to go over a couple of details prior to handing it over to our Chairman, who will begin our event. 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. We also note that certain key assumptions related to today's discussion are also included within the presentation. Actual results discussed during today's call could differ materially from those anticipated in these forward-looking statements. Participants are reminded that today's call is being recorded, and a replay will be available on our website, just starting after the call. Before we get started, I'd like to go over who we have on the call today and the agenda for today's presentation. We have organized the call into 2 sections, the first section will last around 40 minutes and we'll highlight Largo's overall transformational opportunity. For this particular section, we have Largo's Non-Executive Chairman, Alberto Arias, who will give a brief introduction and highlight the Largo's rationale for strategically developing our Clean Energy division and vertical integration strategy. Following Alberto, we have Largo's newest board member, Mr. Ian Robertson, who will give an overview of the energy storage market, the VRFB advantage and our total addressable market. Next, we'll have Largo's CEO, Mr. Paulo Misk, outline Largo's strategic business opportunity, followed by Largo's CFO, Ernest Cleave, who will highlight the expected economic impact of our new energy storage business model. To end Section 1, we'll open the call to questions. The second section of Battery Day will highlight Largo Clean Energy's business overview as well as our key VCHARGE technical advantages. This section will be led by Largo Clean Energy's VP of Operations, Salvatore Minopoli, and Largo Clean Energy's VP of Engineering, Shazad Butt. This section will last about 25 minutes, and a Q&A session will follow. Lastly, before we get started, I'd like to take a moment to send thanks to all of our frontline workers, who continue to work through these challenging times. We continue to be optimistic about a brighter future as vaccines start to roll out, and our life fully returns to the new normal. And with that, let's kick off the first section of Battery Day.

Good morning, ladies and gentlemen. This is the day that we've been looking forward to. We will provide details about the business strategy and economics of our newly created U.S.-based Clean Energy division. Our vision is that these plans will be truly transformational for Largo and also potentially transformational to the vanadium industry as a whole. Largo is a vertically integrated vanadium company with a solid foundation based on the quality of its management, employees and world-class mineral assets in Brazil. Largo has the world's largest and highest-quality vanadium producer. Its Maracás mine in Brazil has a unique combination of having the highest vanadium ore grade produces the highest magnetite concentrate grade for vanadium and also have the highest quality of its final vanadium product. These characteristics makes Largo one of the lowest-cost producers in the industry and also a unique competitive advantage in the vanadium industry. The Maracás mine only started production in 2015 and is proud to have a history of excellent social and environmental stewardship and stakeholder engagement. Largo's high-quality asset allow us to continuously expand production and increase efficiencies, which has occurred since we started production. We currently produce around 6% of the world's vanadium supply and now as a leading player in the vanadium industry, we're focused on our customers, their needs and finding solutions for our customer problems using the unique characteristics of vanadium and Largo's high-quality vanadium products. One of such customers is the vanadium redox flow battery, VRFBs. This technology was invented and tested in the 1980s and has been deployed commercially around the world, but at a much slower pace than lithium batteries. The biggest challenge for these batteries has always been how to secure vanadium supply and vanadium input cost, which is by far the largest cost components of these batteries. Late last year, Largo made a strategic business transformation decision with the acquisition of patents associated with VRFB technologies and bring on board the team of one of the leading VRFB's companies. This was the inception of Largo Clean Energy, which is now the first fully integrated VRFB player in the world with unique competitive advantages in the long duration energy storage business. We have developed the clean energy storage business with the formation of our U.S.-based Largo Clean Energy division. We created the foundation of this division through the acquisition of intellectual property that had over 10 years and approximately $150 million of investments to develop a proven and commercially deployable VRFB system and hire a team with decades of experience in the energy storage business. The business model that we will be presenting today will illustrate this unique competitive advantage to our vertically integrated VRFB division and the financial benefits to Largo as a whole. The reasons of this strategic shift of being a pure vanadium producer to become an integrated vanadium clean energy storage business company was based on 3 main items. The first one was our ability to find a higher value opportunity for the company's vanadium products. Our business model shows that Largo should generate more cash flows per unit of vanadium at prices below $13 per pound of V2O5, which is our main product. $13 is by historical standards and excellent level for profitability for our company. And the current V2O5 price is around $8.30 to $8.50 per pound. The second level was the creation of an innovative business model involving vanadium electrolyte rental for its customers. This is the cornerstone of the Clean Energy division's competitive advantage and a source of long-term recurring cash flows for Largo. And this is possible due to the unique characteristics of the VRFBs in which vanadium does not look great and is easily recyclable, unlike in the case of lithium and other battery materials, and you'll hear more of this in this presentation. And the third and last item was that we believe that the success of the VRFB business model will generate additional global vanadium demand and with global growing vanadium demand, Largo is positioned to maximize the full potential value of its existing vanadium mineral assets. In other words, Largo can provide the world with increased vanadium supply through its cost-efficient brownfield expansions of our mines and ore deposits in Brazil. The transformation of Largo's business model should result in a material increase in the company's growth profile and cash flows and less volatility and also increase shareholder value as Ernest and Paulo will show later. And finally, we'll consider that Largo's strategic shift from pure, high-quality vanadium supplier to become a vertically integrated energy storage business in a fast-growing market with key competitive advantage represent a superior use of our high-quality vanadium products for society and shareholders. Our Largo Clean Energy business is the cost competitive, long-duration energy storage solution required by the green energy revolution and decarbonization needs of today's world. We consider this is a deep transformation of the nature of our company, is value for all its stakeholders in a superior business strategy in today's environment. I will now hand it off to our newest Board member, the founder and former CEO of Algonquin Power & Utilities, Ian Robertson, who will talk about the energy storage market and our total addressable market based on our competitive advantage. Ian?

Alberto, thanks very much. And as Alberto mentioned, my name is Ian Robertson, and I'd like to welcome you all to the presentation. I recently joined the Board of Directors of Largo to help provide guidance and direction to Largo management as they make this important transformation that Alberto has outlined. It's a transformation from old world, vanadium, I'll say, miner, producer, to that of a green energy transition participants through the production and sale of utility energy storage systems, systems that are needed to facilitate our collective journey to a lower carbon future. As Alberto mentioned, my professional background is that of co-founder of a company called Algonquin Power & Utilities Corp., a USD 12 billion renewable energy and sustainable utility pioneer. Most recently, my partners and I have created the Northern Genesis investment platform with a little over $1 billion focused on sustainability-aligned energy transition opportunities. I'd like to spend the next few minutes providing some background to utility energy storage systems and then wrap up with some specifics around the vanadium redox flow batteries, or VRFBs, the important role they're playing in our energy evolution towards renewables. So let's start with what our utility battery energy storage system, or BES, is and why it's important. I'd invite you to think of BES is performing the function of a bank. In this case, deposits of energy are made to the BES when there's excess energy available in the grid and then withdrawn when additional energy is needed to meet the demands of customers. The BES allows a local electric utility to store electricity that's being generated at a time when supply exceeds demand and make it available for later use by customers when needed. Maybe we can look at 3 ways of how a battery energy storage system creates value for its owner. First, I think the most obvious use for BES is what I call energy arbitrage. We put energy into the battery when energy is plentiful and therefore cheap, maybe we can withdraw and sell it when supply is constrained and fetch the higher price. You can see that such a strategy allows a BES owner to make a profit from the buy low, sell high opportunity. Second of all, there's other less obvious uses for energy storage systems. For example, utilities often use energy storage systems to enhance grid reliability. By way of example, at the Lake Tahoe Electric utility owned by Algonquin, we use batteries to provide power to the Squaw Valley Ski Resort, which was connected at the end of a long radial electric distribution line. And you can imagine that this line was subject to frequent winter storm-related outages. But using the batteries, the lights and lifts remain operational, while our crews were dispatched to repair the down lines. But lastly, and I would actually say most importantly, the application of BES is to help society lower the carbon intensity of our electricity system by allowing greater penetration of renewable solar and wind generation. Since renewable sources produce energy only when god provides the fuel in terms of wind or sun, the ability of a BES to store energy when it's produced and then withdraw it when it's needed, allows us to disconnect the time of production of electricity from its time of use, making renewable energy sources a practical reality for our electricity system. And perhaps as a good example of that. There's often excess wind energy being produced at night. When the wind is blowing, but there's low industrial load. This excess energy could be stored in a BES to be withdrawn during the hottest part of the day for air conditioning and other loads. I'd like to now spend a couple of minutes outlining some of the characteristics of a battery energy storage system. You can understand why we're so excited about the implication of Largo's commitment to flow batteries. There's 2 important characteristics of a BES as we can discuss. Firstly, how fast can energy be stored and removed from the system? Think of it as counting how many lightbulbs the BES can light up at the same time. This is referred to as the power of the BES and measured in megawatts. Secondly, a BES is evaluated in terms of how much energy it can store. And so think of this as measuring how long the BES can keep all of those lightbulbs lit. This is referred to as the duration of the system, and it's measured in megawatt hours. For example, if you hear about a 6-hour system, it means the BES can deliver its rated power for 6 hours. When energy storage systems were first used, they were generally of short duration since batteries were quite expensive. These short duration systems generally had 4 hours or less in storage, and were used to manage short-term interruptions to renewable energy sources. For example, a cloud passing over a solar farm or gusty winds at a wind farm. However, if you want to arbitrage solar or wind energy from night to day or day to night as needed for greater grid penetration of renewal energy, you require longer duration, generally classified as more than 6 hours. The emphasis on carbon reduction is making long-term storage really the norm going forward. I still get a couple of the competing energy storage technologies available for implementing a BES. Firstly, obviously, lithium-ion. They're the same batteries you use in your iPhone and your Tesla. And as you can see from the graph on the right-hand side of this slide, they're the cheapest form of short-duration storage available today. I'll say the growing use of lithium-ion in electric mobility applications is expected to drive continued efficiencies and manufacturing scale resulting in falling prices. Unfortunately, on the downside, lithium-ion batteries currently only last a finite number of charge, discharge cycles since charging and discharging these batteries damages the internal structure. The batteries generally lose their ability to store energy. And I think you probably know that from your iPhone's inability to hold a full day use charge after only a couple of years of use. When used in a BES, lithium-ion cell lifetimes are like between 7 and 10 years. And so you can see from the graph, though, there's really no appreciable economy of scale for using lithium-ion in longer duration system, since twice the duration demands twice the number of battery cells. A pumped hydro energy storage system uses water, which is pumped from a lower elevation lake to a higher elevation lake. And then it's drained back down to the lower lake through a hydroelectric turbine to produce electricity when it's needed. You can imagine that pumped hydro is very site-specific and that you need 2 lakes with different elevations. The capital costs are quite high. So I will say that the longer-duration storage just means you need to drain the lakes down more, which brings reasonable economies of scale, as you can see from the graph. Compressed air is an emerging storage technology where energy is used to compress air, store it in a tank and know that power a turbine when it's released. Unfortunately, the capital cost is quite high. So you can see from the curve on the graph, the economies of scale can be achieved for longer durations by simply building larger storage tanks, which brings us to flow batteries. Flow batteries or batteries where the electrolyte is aqueous, a liquid form, and it's stored in external tanks and pumped through a fuel cell to charge and discharge when needed. And while you can see that for shorter duration, lithium-ion is still less expensive, as duration is longer than about 5 hours are needed, the flow battery definitely comes into its own and it's the cheapest alternative. This is why we're so enthused with Largo's commitment to flow batteries. I'll spend a couple of moments exploring the different attributes of vanadium flow batteries compared to conventional systems such as lithium-ion. For long duration, a battery simply requires more electrolyte. With lithium-ion, the only way to get this is to add more cells since the quantity of electrolyte per cell is fully contained inside each cell at the time of its manufacture. By contrast with the VRFB, since the electrolyte is stored in external tanks, longer duration simply requires bigger tanks to hold more electrolyte. So unlike a lithium-ion based system, the cost of a flow battery on a per megawatt hour basis decreases quite substantially as the duration is expanded. The ability to increase duration without increasing power effectively achieves a decoupling of energy and power within VRFB systems. And lastly, an important superior attribute of a flow battery is cycle life and degradation. Conventional battery cells, as I mentioned, such as lithium-ion are prone to degradation, decay and failure mechanisms from charging and discharging cycles, giving them a finite life. As a result, it's estimated that the battery cells comprising a typical lithium-ion system need replacing every 7 to 10 years. These degradation characteristics are simply not present in VRFB, given the nature of the system, the electrolyte chemistry and it's why the lifetime of a well-designed VRFB does not depend on the number of cycles or the depth of the cycles with demonstrated useful lives of 20 or more years. While it's okay, obviously, to replace your cellphone every couple of years due to the noticeable degradation of lithium-ion cell performance, that's obviously not ideal for grid scale storage. Turning our attention to the side-by-side comparison at the bottom of the chart, I'd like to highlight a couple of the differences between VRFBs and conventional batteries. The first, in my mind, perhaps it should be in yours is one of safety. Lithium-ion batteries are definitely prone to fire and exposure risks. The architecture is eerily similar to that of a hand grenade. Although the materials required to cause an explosion or fire are tightly contained inside the cell, if something goes wrong, there is no way to stop it. Lithium-ion's nonaqueous electrolytes are both flammable and the fumes are toxic. By contrast, VRFBs are inherently safer since they use aqueous electrolytes, which are not flammable and do not react violently with exposure to air or water. Since the active materials are stored in separate tanks, in the rare event, if something does go wrong, the battery can be easily shut down by stopping the flow, which is done by simply shutting off the pumps. This safety concern, unfortunately, is not simply a hypothetical one. There have been history of multiple conventional batteries, which have unfortunately caught fire with sadly first responders suffering critical injuries. An additional attribute that I'd like to highlight is here's recyclability. It's something important as we consider our carbon reduction journey. Once again, there are big differences between conventional batteries and VRFBs due to their respective architectures. For instance, lithium-ion batteries are comprised of complex cells with many thin layers of different materials and trying to separate these materials is inherently challenging. It's maybe even worse because some of the materials are flammable when react with air. To our view, currently, lithium-ion recycling does not really make economic sense. VRFBs, on the other hand, are inherently easy to recycle. The major components of the VRFB are already separated. There's no major hazards associated with them. When you combine this with the fact that the electrolyte contained in these system never degrades and can be reused, the VRFB is the hands down winner when it comes to true recyclability. And lastly, you can see, I didn't highlight the energy density, where lithium-ion batteries acknowledged have an edge on VRFBs. However, for grid scale storage, real estate really isn't a constraint and, therefore, energy density is not as critical as it is for affordable devices or electric mobility applications. And now that we have a better understanding of why VRFBs are more suited for long-duration applications, let's discuss the total addressable market for these systems. The long-duration storage market is poised for substantial growth over the coming decade, driven by a desire to incorporate incremental low-cost renewable energy into the grid. Unlocking the full potential of renewable energy appears to be a top priority for governments and corporates around the world to meet their CO2 reduction and sustainability objectives. This is highlighted by recent government actions and policies aimed at making Europe climate neutral by 2050. Closer to home, President Biden has clearly indicated his priority in addressing carbon emitting energy sources by setting a goal to reach 100% carbon pollution free electricity by 2035 in the U.S. As I mentioned earlier, our conventional batteries such as lithium-ion have won the mobility storage application rates due to their unique energy density qualities. The VRFB is the winning long-duration storage choice for renewables integration. We expect significant long-duration market growth over the next 5 years, with the total addressable market reaching approximately $16 billion worldwide or approximately 49,000 megawatt hours. Largo's goal is modestly to capture only approximately 3% of this total addressable market in 2025 through the company's growth strategy, which will be described by Paulo and Ernest. The key takeaway here from my perspective is that the long-duration market is growing exponentially, and it's a market where our VRFB system is the superior choice. So with that, let me hand it over to Paulo to describe the strategic opportunity that exists with Paulo's -- with Largo's unique business model and its superior VRFB technology. Paulo?

Thank you, Ian, for your guidance, for your insight on the energy market and VRFB, in particular. I am in complete agreement with you that VRFBs are the right technology right now, especially for the long-duration energy storage market, which is taking on. We believe that this provides our opportunity to shine both to our customers and to our shareholders, and we have the competitive advantage to keep the moat around our business. There are a few reasons we would like to highlight why the time for VRFB is now. The technology has significantly evolved over the last 4 years and in connection, so has the market that these batteries are ideally suited for. Largo technology has been developed for 10 years, and we believe that's the best technology among the VRFBs. Our battery is already a third-generation and it's ready to be delivered to our customers. We believe the long-duration energy storage market has reached an inflection point, driven by the secular shift in the green energy sector, which is contributing to a significant demand for this type of solution. Renewable energy source will be more and more important in our lives, enabling us to have a greener road to the non-carbon emission energy. As we know, it needs a storage energy system to adjust the time of production and of consumption, as Ian has mentioned. Largo battery brings the missing piece of this puzzle, which is, it has low cost. In January of this year during the presentation at IFBF, Sue Babinec, the Program Lead of stationary storage at Argonne National Lab said, vanadium works today. If vanadium was super low cost and it had a stable price, we could all go home. We will show today how Largo battery has a low cost. And we can ensure a stable deep price with superior technology to address the surging long-duration market demand. Vanadium can constitute between 30% to 50% of the total cost of the entire system and with vanadium being historically volatile commodity, it's a huge challenge for nonvertical integrated companies to commit delivering big batteries in 1 or 2 years' time. For our shareholders, we expect a material drive value at Largo through this unique business combination. We expect to use our vanadium in a higher value use product with our VRFBs. By using our price example that Ernest will speak to a bit later, we expect to increase the value of our vanadium product produced by 60% as compared with the historical average European Metal Bulletin price for V2O5. It means to get a present value in a range of $12.40 per pound for the vanadium that we deploy in VRFBs. This has the potential to drive long-term earnings for Largo. Secondly, part of this value will be in the form of recurring revenue via leases that becomes more stable and reliable with high-quality counterparties, such as utilities and IPPs. Largo will retain ownership of this leasing vanadium electrolyte, capturing the value of the fact that it doesn't degrade and lasts forever. Thirdly, the use of vanadium in a new industry has the potential to increase vanadium demand and could unlock the value of Largo organic growth plan in our vanadium resource at Maracás, develop its full potential. Lastly, Largo will lead a huge inventory of vanadium electrolyte, as Ernest will comment later. For our customers, Largo will provide a battery with the best technology that means not just high efficiency, but also low-cost stack as it has 5x more power density. I'm talking about kilowatt hour per square inch. So we can have less number of stacks, pumps and pipes comparing to any other VRFBs. Largo ensures the availability of the sufficient vanadium supply for large grid scale batteries. We not only want the customer for a 5-megawatt trail run. We want our customer to use that battery with the intention to scale up for larger projects once they are comfortable with our technology. Right now, we are the only VRFB manufacturer that can provide that supply security to be able to achieve of that. Largo has the lowest debt cost, but how Largo will deal with the V electrolyte costs that represent about 40% of the total cost? We have the disruptive leasing model to reduce that upfront cost to compete with any other technology and utilize 2 great aspects of the VRFB. The batteries can last for over 25 years, and the electrolyte does not degrade. All of these aspects led to ultimate results. Largo Clean Energy providing customers with a superior product at a price point similar or lower to competing technology on a CapEx per kilowatt hour basis in a range of low $200 per kilowatt hour. And on a levelized cost of storage basis in that range of $0.11 to $0.13 per kilowatt hour. This new leasing model transforms the current vanadium supply business model of Largo. Currently, our business is to mine vanadium products from the ground and sell the products into the steel, aerospace and chemical markets for onetime revenue only. The current price of vanadium pentoxide today is $8.30 per pound. And we have provided total cash cost guidance of $3.50 to $3.70 per pound for 2021. It's a good margin deal. However, deploying vanadium batteries, it will be even better. With our new energy storage business, we plan to lease the vanadium electrolyte and VRFBs are the biggest cost component to the system. Largo will retain ownership of the vanadium electrolyte and lease electrolyte to reduce upfront CapEx to compete with the existing technologies. Our energy storage business is built up on 3 sources of value that we expect to generate on aggregate approximately $13 per pound equivalent, which means approximately $5 per pound more than the current generated. Note, we have provided a 2021 midpoint guidance of sales of GBP 27.5 million of V2O5. The first source of value is the gross margin from the sales of the battery itself, sounds electrolyte. The second source of value is the present value of the future lease payments on a real asset, vanadium electrolyte, made by the battery customers. And the third source of value is the residual value of the vanadium electrolyte. This could be further deployed in another battery. By the way, it's a very low cost, just need to filter it or convert it to vanadium to be sold in any other market, as V2O5 or FeV. The sum of or the vertical integration with a secured vanadium supply, innovative electrolyte lease structure, a superior technology and a well-seasoned team is a superior VRFB product at a price that provides a competing value proposition to our customers in a long-duration storage market. We have a commercially proven VRFB technology, that's in third-generation product and has been implemented and validated. Not only is the product validated, but we can also provide strong commercial support to performance warranties and long-term operating agreements. Additionally, we expect to be at a price point that is competitive on a CapEx per kilowatt hour basis and an LCOS basis for our long life battery system. Lastly, with our security of supply of vanadium, we can ensure our customers with access to the follow-up capacities at existing batteries and large grid scale batteries. In summary, we believe that this transformation from purely a vanadium supplier to a long-duration energy storage provider will benefit Largo shareholders in multiple ways. First, we have found a new source of potential revenue that provides us with significant growth potential in a total addressable market, so much larger than the current vanadium market. Secondly, the market is not only large, it is a market where the value in use is significantly greater than today's vanadium pentox price and the historical as well. This all leads to potentially higher equivalent volume and higher equivalent price. Lastly, and not less important, as it's an upgrade of Largo purpose, we can participate in the decarbonization efforts around the world and be part of the climate change solution with our renewable long-duration storage product. I'll now, hand it over to Ernest Cleave, our CFO, to discuss the financial impact to our business over the long term and provide greater details to our business plan. Thank you.

Thanks, Paulo, and welcome to everybody joining the call today. I'm delighted to share the economic impact associated with Largo's new energy business model. It is appropriate in this instance to start with the conclusion or key takeaway from this slide. And that key takeaway is simply this, Largo believes that the potential of its battery business represents a substantially more lucrative avenue for monetizing its vanadium than selling vanadium into steel additive markets on a onetime basis as the company currently does. On screen is what Largo believes is a representative example of the economics of the 2 respective business models, our current mining business model and the energy storage business model. The numbers are on a dollar per pound basis. Focusing on the respective margins initially, you can see that the energy business model earns Largo 109% more in margin, or slightly more than 2.1x the margin of the mining business model. Let's focus next on why that is. Under the mining business model, you earn revenue from the sale of vanadium and you deduct your costs, giving you your margin. You no longer own the vanadium and you deplete your resource until it's uneconomical or fully depleted, which is why mining businesses typically attract lower valuation multiples than other sectors. More on this later. The margin in this example is $4.25. Under the energy storage business model, we would create value in 3 different ways. Firstly, we would earn upfront revenue based on the profitability of the battery business. We plan to price our systems on parity with leading alternative storage solution such as lithium-ion, for instance, that's $5.05 in the example. Secondly, we lease the vanadium and electrolyte to the customer. The cost of such leasing is expected to be highly competitive to alternative storage solutions. The reason for this is a familiar one. Batteries such as lithium-ion degrade over time, and the batteries need to be replaced periodically at great cost. Typically, 80% of the upfront CapEx with multiple replacements taking place, especially for very long duration deployments. This source of value is represented by the $4.97 per pound in the example. It's important to again emphasize that the VRFBs do not degrade in the way that other battery technologies do. The VRFB simply shuttles electrons between its different valence states and doesn't degrade. The lease cost of the vanadium is, therefore, priced competitively against the replacement cost of integrated batteries such as lithium-ion. The third and final element is the residual value of the vanadium at the end of the contract. This is a critical aspect. Largo intends retaining ownership of the vanadium, and the vanadium can be redeployed in the next VRFB system or Largo can choose to sell the vanadium, such as to the steel additive industry. This is the $2.36 per pound in the example. The energy storage business is anticipated to have a very competitive CapEx and LCOS, as shown on the screen. Altogether, Largo believes that the 3 elements add up to a more significant creation of value for Largo than its current mining business model. As Largo sells batteries, there is, therefore, a growing asset portfolio of vanadium using the example of the 1 megawatt, 10.8 megawatt hour system shown, Largo would own just slightly more than 226,000 pounds of vanadium at a market value of $7.75 per pound, which equates to $1.76 million. This asset portfolio would grow proportionally to the total deployment of battery systems over time in accordance with Largo's business growth plan. Spending a little bit more time on the concept of building the balance sheet with an asset portfolio of electrolyte rentals, we expect to build a portfolio that will generate a significant yield. The balance sheet is expected to increase from the accumulation of the leased asset portfolio. Largo intends retaining ownership of the vanadium and has the optionality to redeploy its vanadium in new VRFB systems or can sell it into the old vanadium market. Largo is essentially creating a store of value for the company's deployed vanadium in electrolyte, acting as a hedge against potential market fluctuations. As Alberto pointed out earlier, Largo has the potential to enhance its earnings cycle through our new energy business model. This is generated through 2 elements of recurring revenues, which include the rental payments for our leased electrolyte as well as our long-term service agreements for VRFBs. We believe that our anticipated recurring cash flow and predictable earnings cycle will be highly valued by the market versus the volatility typically presented by public mining companies. In summation, this is a truly unique opportunity for Largo and its shareholders. We don't believe that there is a single comparable in the market today with a similar business model. Under our new energy business model, Largo realizes value from 3 new business activities, the profit from manufacturing and selling VRFBs, the vanadium leasing revenues and the accumulated vanadium asset portfolio. Considering the economic impact of the aforementioned, there is a potential higher-value market opportunity based on the following aspects: the new business model and leasing structure discussed earlier represents an approximate 60% increase over the typical benchmark vanadium pricing Largo is generally subject to. There is a new source of revenue expected from the sale of our VRFB systems. And finally, it must be noted that this potential higher-value opportunity for Largo's vanadium is also a CapEx-light opportunity. We expect to invest $4.8 million in 2021 and $3.4 million in 2022. The final point that I'll make is that we believe there exists a significant opportunity for the re-rating of Largo stock. As stated previously, this is an extremely unique business model, which can be considered as consisting of 3 silos or can be evaluated as a sum of parts of valuation opportunity. There is the valuation associated with a green resource company. Largo is, in fact, the lowest cost, highest grade vanadium producer in the world with low impact operations and very strong ESG principles and values. Following on from that is the valuation associated with our leased vanadium electrolyte asset portfolio. Such evaluation could be considered similar to REITs. As our vanadium never degrades and can be continuously deployed for leasing income, it takes some characteristics of assets such as land or real estate. In such instances, you have low cap rates with cash flows that are inverse of the cap rate. For instance, a 4% cap rate is a 25x cash flow multiple and so forth. Finally, there is the valuation associated with clean energy businesses. Businesses such as clean tech or green energy enjoy multiples that exceed many other sectors, especially compared to the mining sector. The summation of these various multiple re-ratings represents an exceptional opportunity for the overall re-rating of Largo's stock. With that, I will now pass the call back to our operator, who will open the call to questions.

[Operator Instructions] First question comes from Carlos de Alba at Morgan Stanley.

Can you hear me?

Yes.

Yes. Thank you very much for this very interesting presentation. So the first question that we have is the following. In the slide that Ernest showed with -- you're comparing the economics of the traditional business model you have had up until now and the battery model -- and the battery business, where is the cost of the battery itself, the equipment that you'd be leasing or selling? And where is that included? If you can give us some comments on that, that we really appreciated. The other question, maybe for Ian, is in terms of the 3% long-duration share or market share of the long-duration market that you are trying to -- or that you believe VRFB would -- sorry, the 3% market share that Largo will gain in the long-duration energy storage market, what are you considering that Largo's share of the just VRFB batteries will be? Or in other words, what is the total market share that vanadium flow batteries will represent of the total long-duration market? And then finally, a question for, I don't know, maybe Paulo or Ernest. What are the concerns about building out over time, not only you, but maybe other VRFB producers, a very large inventory of vanadium that doesn't degrade and that eventually, if a battery technology replaces for the long-duration market, the VRFB, what will happen to prices and how can you meet the vanadium prices and, therefore, the value of that inventory and the net present value of your future vanadium sales, how can you get some hedges there or protect yourself in case of that scenario?

Thank you, Carlos, for your question. So Ernest, you want to go ahead and answer those 2 questions, and then we'll have Ian answer the last one on the market share?

Yes. So in terms of the cost of the battery, Carlos, the -- if you look at the example that we showed, you're looking at about $214 per kilowatt hour. We're not specifically highlighting what the cost of that battery is. But if I'm being candid, you could infer it out of the example because if you look at our upfront revenue of $5.05, you can understand then that the cost being $3.50 would be a margin there of 30%. So I will just -- I will leave it at that. In terms of your question regarding hedging, et cetera, what we're looking to do at Largo with the new battery division is essentially build long-term value. So we're focused on the long-term pricing of vanadium in our VRFB systems. So we're not focused on short-term disruptions to the vanadium market. If we need to be opportunistic, we can do so if vanadium prices are very high. But as you will recall, those cycles typically last 6 to 8 months. So our focus is on supporting and maintaining the vanadium redox flow battery business as we believe that our returns are much greater in that business than in the conventional steel additive market. So the difference there, you could see it yourself from the example, faster profitability. So it's not that we will -- that we won't ignore opportunities in the market that we could potentially take off from time to time. But broadly speaking, we would like to continue supporting this VRFB business because of the long-term returns that we receive.

And it's Ian Robertson speaking. Happy to kind of give you some thoughts on, I'll say, the long-duration storage market and Largo's, I'll say, aspirations to participate in. And first, let me start by saying this is a market which is under transformation. It's one that's poised for growth. As I kind of mentioned in my prepared remarks, the thesis, the primary driving thesis for long-duration storage is to facilitate greater penetration of renewables. We all know that the Achilles tendon or Achilles heel for renewable is the intermittency that comes from the fact that we're not exactly sure when the wind is going to blow or whether it's going to be a sunny day or a cloudy day. And so clearly, a low-cost, long-duration storage mechanism is the holy grail to support renewables. And I think that's fully appreciated by the developers of renewable energy, but also governments who are trying to encourage the penetration of renewables. And so the market that we outlined there, the 49,000 megawatt hours, that is our estimate of the percentage of the broader storage market that it's -- that would be, I'll say, the total addressable market for long-duration storage. And as we kind of look at the penetration of renewables and what the objectives are, that's kind of what's informing that market forecast. In terms of Largo's penetration, in some effects, candidly, I think, given that, as you heard from Ernest, we have the flexibility of being able to price our product, I'll say, competitively against the alternative. And so it's hard to imagine as a guy who ran a utility for -- and built utilities for most of his life, cost is important. You're obviously trying to maintain cost for customers. And if you have a product, which has superior performance characteristics and better cost, it's hard for utility not to buy. And so the fact that Largo has the flexibility of pricing its product competitively against lithium-ion, sort of says, it's hard to imagine if one was putting a utility battery energy storage system in, why one wouldn't choose a flow battery in general, and specifically, we're thinking Largo VRFB in particular, given the proven nature of the technology. And so -- but it's a long way to say that I think what's going to limit the growth and the penetration of Largo into the long-duration storage market, it's actually our manufacturing capacity, which you're going to hear a little bit more from Sal and Shazad a little bit later. But really, so it's about our access to vanadium. Obviously, I think the hope is that this business model allows us to economically expand the resources that we have in Maracás. But the fact of the matter is we only produce so much vanadium. And so I think in some respects, that's going to be one of the limiting factors together with our manufacturing capacity. So I'm not sure if that's particularly informative as to why 3% of 49,000 megawatts, but that's kind of where the background as to where it came from. Happy to kind of answer further if -- Carlos, if it wasn't responsive to your question.

And just to highlight, also, we have Paul Vollant on the line if there is any more need on commercial aspects or questions. Paul, would you add anything to that answer or do you think that's enough?

Thanks, Alberto and Ian. I think the answer from Ian was very good. I don't have anything specific to add on this subject, but happy to take any other commercial questions.

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

Thanks for the very comprehensive presentation on this business. Maybe a question for Ernest. I just wanted to dig a little bit into the $12.39 equivalent pricing. It looks like Largo is using a discount rate at about 5%. Can you talk about the rationale for using that discount rate versus like a more typical rate that's a little bit higher for Largo's more traditional mining businesses? And I think I can kind of wrap my head around it using a lower discount rate for sort of the leasing portfolio. And if that's the reason why, can you talk about how long it might take to kind of prove out that model so we start seeing that valuation bump?

Andrew, thanks for your question. Great question. We did go through those quite significantly back and forth thinking about discount rates, et cetera. And candidly, had even considered discount rates below 5%. And the reason for that is simple. We are essentially creating a store value. We're creating a portfolio of leased electrolytes or high-quality portfolio with recurring cash flows. But very importantly, the counterparties are high-quality creditworthy counterparties. So if you look at -- even if you look at subordinated debt issued by some of the utility organizations that we'd be dealing with, they would sometimes issue subordinated debt below 3% in any range between 2% and 5%. So if anything, we felt we were walking the middle road, so to speak, like a good broader state basically, but we went to 5%, but we could certainly make the case for much lower discount rates. But that's the reason why. And just -- Andrew, just your second question, just please remind me?

Sorry, say that -- could you -- do you want me to repeat the second question?

Yes. Just your second question again, please.

Yes. So I mean -- so obviously, that 5% discount rate would be kind of dependent on our confidence on that sort of leasing portfolio being built up over time. So what kind of milestones should we be watching core? And what's the time line for building that up over -- is that over 1 year, 2 years? Is that 5 years? Can you talk about that?

Sure. Yes. So essentially, what we're looking at is that 5-year horizon to get to 180 megawatts or 1.4 megawatt hours. So the growth is reasonably rapid. Obviously, we will not be deploying batches this year. We may enter into a number of contracts this year. But the deployments will start next year and then they'll ramp up significantly after that. So for next year, we're looking at 40-megawatt hours, it's about 5 megawatts worth at 8 hours. But in the growth to occur over that 5-year period, such that we're ending at the 1.4 megawatt annual deployment of vanadium redox flow batteries over that 5-year period. So I'd say that the proving ground is somewhere in the middle there over the next couple of years.

Okay. And as those businesses start coming in, how will Largo report that business? Like how should we think -- like how should we evaluate how that business is working versus kind of baseline that you've put out?

Sure. I think the way to model it, Andrew, would be to -- in your models would assume the upfront margin as we've displayed it there. And then amortized, I would suggest maybe just annually over an average useful life of these projects, let's say, 20 years, 25 years and return is the remaining cash flows. But that's how I would recommend you to it.

Okay. And just one last one, I guess, it's more for Ian, actually, since we have him on the call. You've been in the energy business for a really long time. You have a lot of experience on the renewables and energy system side. Can you just talk about some of the challenges that have come up in the past for adopting these kind of energy storage solutions? And how that's changed in the last couple of years? And also just have you seen like a shift from the utilities to focus more on longer duration as opposed to the shorter duration, like we've seen a lot of installations of lithium-ion storage, but not so much on the longer duration side of the redox flow batteries?

Sure, Andrew. Thanks for pointing out how old I am, really appreciate that. That's great. I appreciate it. I'm just kidding. Yes. So obviously, Andrew, just the basis of your question, my background with Algonquin that has obviously seen me be a pioneer in renewable energy. And as I'd mentioned in my answer to Carlos, let's face it. The biggest thing that has prevented penetration of renewables has been its intermittency. I will say that before Elon Musk really got going with Tesla, driving down the cost of lithium-ion batteries, there really wasn't practically a nonsite specific way to manage that intermittency. And so while utilities have started or at least over the past decade started to embrace renewables, there was really no way to manage the intermittency. Well, 2 things have happened. One is the cost of renewables has now fallen to the point where there is no cheaper form of generation than renewables. If you need another kilowatt hour and you're a utility managing a grid system, there is no cheaper way to get it than a renewable. That's just the fact today. But you have to manage the intermittency that comes with it. And then the other thing that's been happening is, as I mentioned, Elon Musk has started to drive down the cost of lithium-ion storage. But I think that there is a growing appreciation, both on the part of utilities, maybe on the part of public utility commissions, that recognize that 4 hours of storage, which has kind of been the norm that when a renewable developer builds a solar farm, there's lots of guys who have been co-locating 4 hours of energy storage. That's really not enough to, I'll say, manage and support and address that. Certainly, the data night arbitrage and probably even the intermittency that comes with it. So there's been a push for, but the economics haven't supported longer-duration storage well into flow batteries. Flow batteries, and while it's a technology that's been around for a while, candidly, it hasn't been very practical until, I'll say, the past 3 to 5 years, probably even less than that. I think Largo has been incredibly fortunate to be able to find an organization that had put $150 million and a decade into researching vanadium flow batteries and managing the technology. Paulo had mentioned we're on like generation #3. So I mean, it's not simple technology. Let's not kid each other. The concept is simple, but executing it maybe like many things in this life, isn't trivial. And I think, Largo has been very fortunate to find both an engineering group and a technology IP stack, which has solved it. And so I think we're sitting in a very interesting position from the utilities perspective that there is now a practical, economically and technologically supported mechanism of long-duration storage that makes greater penetration of renewables practical. And I think, as I said, lowest cost source of new generation supported by public policy, man, what's not to like about the positioning of this right now. I don't know if, Andrew, if that's response to your question. I'm happy to continue on. Obviously, there's been a passion of mine for, as you pointed out, a very long time.

No, no, that's great. Thanks for all that color and background. And I appreciate your experience, not so much age, but it's experience that we all know, and I'll leave it there.

The next question comes from Bryce Adams at CIBC.

I've got a few questions here. I might throw them -- run through them one at a time, if that's okay. The first one is, you compared the product to lithium-ion. I'm just wondering what would a comparison to zinc hybrid or solid-state batteries look like. Would that be a similar comparison?

I guess and not -- I'm not wanting to kick the question down the road, but I think Sal and Shazad would have sort of some very specific comments on the technological considerations of different chemistries. But I think clearly, the holy grail of battery chemistry is to find something that doesn't degrade, has reasonable energy density, is not hazardous and has a high recyclability. And right now, VRFBs appear to be that right technology, but I'm going to pause there, and I don't know if Sal or Shazad want to speak to those specifically on those 2 chemistries.

I can certainly provide some insight here. This is Shazad. In terms of our competitive position against those, really, I mean, as I've mentioned in the past as well, other technologies they're trying to develop, they're way to a solution currently. And that makes sense. I think bromide, for example, a technology has been around for a long time. Actually, prior to VionX, VionX was Premium Power. Obviously, the LTE acquired the VionX technology. VionX was historically Premium Power working on zinc-bromide technologies and well understands the technical issues associated with it. It was actually abandoned because of these technical concerns, one of which is vanadium redox flow batteries are true flow batteries, where the electrolyte remains in a liquid state. There's no phase change. With zinc bromide type of technologies, there's a phase change that occurs during a discharge. And as a result, there's plating a material that's very difficult to control. And if you can't control it, it actually affects durability of the product significantly. So that technology was abandoned because of its technical issues, and there are many -- yes, zinc is cheap. But there are technical hurdles that need to be overcome, and there are -- those out there that are attempting to do so. But what I -- the reason I mentioned that is that with our chemistry and our product, it's a proven product. It's a proven product, and we have a solution that combines IPs that's very disruptive in the space that enables us to lower our DC system cost as well as this unique business model that enables us to compete in a fashion, where risk is minimal as opposed to these alternative chemistries that are in the process of being developed. So my point is that, yes, there is an opportunity for others to come into this space, but there are hurdles that need to be overcome and technical -- specific technical hurdles that need to be overcome to enable those other technologies, where we have a solution that works today, proven technology. Vanadium redox flow batteries have been around for decades. Sumitomo was proving them at grid scale for decades. So it's not -- and we're able to leverage a proven chemistry and apply over and above that IP that significantly drives our system cost down. So -- we're in a very different commercial position, because of leverage -- the technology advances that we've made on the back of a proven chemistry and a business model where others are trying to invent their way or develop their way to be in that position.

Okay. Got it. My next question is longer term. And I mean, based on that 3% market share that you're aiming for, what volume of Largo's production does that represent? Is that the majority of it being transferred to Largo Clean Energy?

Paul, would you like to answer that question?

Yes, sure, sure, Alberto. Yes. The capacity of the plant that we're building is 1.4 gigawatt hour. This compares approximately to the current production at Maracás, but we have extension capacities at the mine. And if we see a need to expand production, I think we have option to do so. So at current production, this will equate to about our production.

And fairly balanced then. Okay. Just thinking about the longer-term strategy as well. Going into these long lease agreements, have you started to think about counterparty risk and where the growth of that strategy would be? Is it U.S.-focused to manage that risk?

Paulo, would you like to answer that question?

Yes. Thank you, Alberto. Thank you, Bryce. It's -- yes, we expect to have -- the main focus is in U.S. market. We are also in advanced discussions with without the U.S. as well. But we expect that roughly 25% of all batteries will be deployed in Europe, 75% in the U.S. And in terms of use, we are focusing on IPPs and utility applications and also in C&I. So that's the main focus on that. Bryce, could you repeat the beginning of your question, please?

I was just -- it was all sort of one question, but counterparty risk and where you would want those counterparties to be located globally? I missed the 25%. You said 75% U.S., what was the 25%?

Europe. Basically, Europe is the major office. Although we are looking at some opportunities in Africa as well, even Australia. So I think there is some opportunity there for batteries. And always, we are talking about long-duration storage energies.

Of course, yes. Okay. My last question, Alberto and Ernest both spoke to revaluation opportunities. Thanks for this presentation. We can start to see the step change in the earnings potential. But what about the multiple and where the company could trade at? Have you looked at key competitors in the battery space and what that multiple might look like relative to a primary producer?

I'm not abating the question, by the way. But I'm encouraging you to think about the valuation in a slightly different way. So if you consider our peak production, just Americas right now since expansion or any other measures. It's about 13,200 tonnes, which is 29.1 million pounds that translates into additional margin based on the example that we showed on Page 18 of the slide of about 135 million. So depending on the discount rate that you use, a 5% discount rate on 135 million, essentially add in some item, because you get to redeploy that the netting over and over again, there's $2.7 billion of additional value. And as Ian just commented, it's just shy of $2 billion. So obviously, the valuation multiples in green tech companies are often in the range of 25 to 30 and sometimes are on multiples of cash flow. But there are so many vagaries and so many differences amongst companies, but they certainly enjoy a very high multiple. But I would encourage you to think about just that additional value that's created in the organization. The other -- and it's not related to this question, but just when you do your modeling, something very simple for you to use, Bryce, is every kilowatt hour of deployment is 21 pounds of vanadium. Just that would help you sort of transmogrifying your models and actually using it. But that's my answer on valuation.

Yes. If I could add something, as you know, I used to be a research analyst for 13 years, and I follow a number of mining companies, and I look across my career, companies that did have that multiple re-rating. And a good example was Alcoa. Alcoa back in the 1990s came out with the view that they wanted not to think themselves just as an aluminum producer, but something more closer to their customers and trying to solve the customer problems with the unique characteristics of aluminum, and that led to faster growth and a multiple re-rating of Alcoa, which was very impressive and a leader in the aluminum industry. For Largo and the vanadium, there was not such a leader. At least that's my view. And as Largo entered the vanadium world, they wanted to take that leadership position, and we found this opportunity and it's an exciting opportunity, and we are evolving into something similar to what happened with Alcoa and aluminum. I think we are creating something new. And in this new creation, we're solving a very important problem that the world has in terms of energy storage. So I think that's what makes this investment quite unique. And I have not seen across my career a company that has done such a big transformation as what we are announcing today, at least that's my view.

The next question comes from Lee Cooperman at Omega Family Office. Next question is from Jim Young at Midwest Investments.

My question is, given the technology that you talked about, the economics that we're discussing and the opportunities available, can you give us a sense as to where we are with respect to the contracts that we're -- you're currently working on? Do you have any of that you can share with us? And what does the sales pipeline look like?

Paulo, you want to take on that question?

Yes. Thank you, Alberto. Thank you, Jim. That's -- you pointed on crucial thing for us and that we are really focused to get the first contract, but not just the first one. We are in touch with 20 opportunities, so among -- to deploy batteries along '22, '23, '24. But to get the first contract, we are in really substantially advanced discussion, which our batteries have been already elected in terms of technical and economical point of view. We have discussed all the details of the contract. So we are just waiting that this contract being signed. But of course, it's a very big cooperation, which have their own procedures to signing a contract. So it's been taking longer than expected, but it's going to be very imminently to be signed. So -- but anyway, we will update the market when we have this signed and with the appropriate press release, which is expected to be seen.

And then maybe the sales pipeline, maybe, Paul, if you can just briefly speak about the sales pipeline?

Yes, sure. Regarding the sales pipeline, we're currently pursuing actively about 20 projects on a global basis, that it is totaling several hundred megawatt hour that are in the various phases of commercial development. And we know this commercial discussion have a much longer sales cycle than in our traditional market, but we have opportunities -- we have several opportunities that we hope we can close in 2021. As Paulo said, there is one particular opportunity that we hope to conclude in the very near term. And the most active region are the U.S. for most of these opportunities, and we have also very good lead in Europe, Australia and Africa. Yes. So this is the overall outlook for our pipeline currently.

Next question comes from Lee Cooperman at Omega Family Office.

I was trying to express the question before. At the beginning of this conference call, the Investor Relations person said that this was a much anticipated Battery Day call. I think the only thing that's more anticipated is the orders. So show me the beef, where are the orders? I mean I can't believe we have this conference call without any orders to announce. So what is the status of showing orders, which is the proof-of-concept in the market?

Paulo, you want to take on that call -- that question?

Yes. Thank you, Alberto. Thank you for your question, Lee. We -- when we scheduled this Battery Day for today, we really expected to have this contract already and the orders, we cannot disclose these until we have the approval from our customers. So that's why we -- we cannot say more details about it, but we are 100% confident and all the details regarding technical or economics with these contracts, which will be, got a great example of validation of our concepts, which will be -- we're to going disclosure very soon. So it's it delayed more than expected. It's true. You are right. I agree with you 100%. Just we ask you to be a little bit more patient to get that news, which we're going to issue very soon. But I think that all our strategy is really supported not just by the Largo team originally, but all the new guys from the energy sector, which support and validate those issues. And any content -- commercial contracts that we are taking, all the companies are very optimistic and very happy with our proposition. Because that's opportunity to get a solution for a long-duration storage energy in a very robust way, solving the problem of technical, solving the problem of economics and providing them the opportunity to have a green energy and producing without carbon emissions.

Well, you sound like it's a sure thing, and it's taken so long. I'm very dubious, to be honest with you. When do you think you'll announce the contract?

I think...

A month away, a week away, a day away? Where is it in the process?

I expect to announce next week or close it is.