Largo Inc. (LGO) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Largo's First Quarter 2024 Financial Results Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Alex Guthrie, Senior Manager of External Relations. Please go ahead.

Thank you, operator, and thanks to all those who could attend our first quarter 2024 conference call today. Largo's Q1 2024 financial statements, related MD&A and most recent AIF can be accessed on our website at largoinc.com as well as on our SEDAR+ and EDGAR profiles. Before continuing the call, I would like to remind you that some of the information you will hear during today's discussion will consist of forward-looking statements, including without limitation, those regarding future business outlook. Please refer to the cautionary statements and the related MD&A, consolidated financial statements and AIF, which can be found on our website within the Investor Relations section. And finally, all figures are in U.S. dollars unless otherwise stated. On the call today is Daniel Tellechea, Largo's Interim CEO and Director; Célio Pereira, Largo Brazil's Chief Operating Officer; Ernest Cleave, Largo's Chief Financial Officer; Paul Vollant, Largo's Chief Commercial Officer; and Francesco D'Alessio, the President of Largo Clean Energy. Following delivery of the prepared remarks, we'll open the call to questions. [Operator Instructions] I'll now turn the call over to Daniel. Daniel, Please go ahead.

Yes, thank you. Good morning, everyone, and thank you for joining us today for Largo's first quarter 2024 earnings call. As our team takes you through our first quarter financial results and discusses our strategy moving forward, I will keep my particular remarks brief. At Largo, our main focus remains on improving production efficiencies and reducing cash cost to return to profitability, especially amidst the current period of low vanadium prices. We recognize the challenges posed by the current market conditions and our commitment to improving our performance remains top priority. With a new operating team in place, we're confident in our ability to drive productivity improvements and operational excellence going forward at our Maracás Menchen Mine. Now I would like to introduce Célio Pereira, our Chief Operating Officer from Largo Brazil, who will provide a more comprehensive view of our operational improvement plans going forward. Our productivity initiatives along with his operational leadership are helping us navigate through these challenges to emerge stronger in the future. Célio, I'll pass to you. Célio?

Apologies, sir, but I think his line got disconnected. Please proceed.

Okay. Probably the line is busy. If that is the case, I will take over Célio's presentation. I'm going to speak in his name. It is my pleasure to speak to you today for the first time and provide insights into our operational plans moving forward at our Maracás Menchen Mine. It is very important to stress that maximizing operational output and reducing cost remain our top priorities at Largo. We are working today on 4 key initiatives to maximize output. Number one, we are improving our grade control capabilities to reduce dilution in mining operations and increase ore grade feeding the crushing plants. These changes were concluded in April 2024 with the installation of a dedicated drilling machine and an increased number of sampling and analysis as well as changing in operational procedures to improve grade control. Secondly, we have been increasing our crushing volume over the last quarters, and we will add an additional 22% in crushing capacity by the end of Q2 2024 through the installation of a mobile crusher as well as a dry magnetic separator. This is expected to offset the lower grades we are currently mining. Our third initiative is in the focus of an increase in ilmenite concentrate production, and we have finished the installation of a system to pump material from north magnetic ponds to our ilmenite concentrator to support this. This will allow us for the continuation of planned production when our milling plant is expanding as well as increased grades, recovery and quality. Lastly, we will be installing screens and wet magnetic separators in the milling plant in the third quarter of this year to improve the quality of the concentrate, and by doing so, improve the kiln recovery as well as reduce the sodium carbonate consumption. These initiatives are low-cost, high-return projects in order to enhance our operational efficiencies and optimize the use of cash. To complement this initiative, we have also implemented extensive measures to reduce production cost, including the reduction and optimization of haulage distance, reduction in drilling and explosive consumption, cost of inputs as well as a review of all contracts at our mine site. We have concluded a reduction in the number of contractors by 20% during April while improving additional efficiencies through the whole operations. This included a reduction of equipment rental, increasing synergies, and the testing and development of different inputs to explore lower price alternatives. For the remainder of 2024, we expect a reduction of approximately BRL 40 million in operating expenditures and approximately BRL 12 million in capital expenditures. When combined with our productivity initiatives, these measures are expected to assist the company in achieving its revised 2024 cost guidance and offset some of the impact of lower vanadium prices. With regards to the operation results in Q1 2024, we conducted the planned annual maintenance at the mine, including the replacement of the kiln refractory and other maintenance actions in various sections of the plant. As expected, this maintenance impacted production resulted in lower V2O5 production compared to the previous year. In Q1 2024, our V2O5 production was 1,729 tonnes, within the lower range of the company's quarterly production guidance of 1,700-2,200 tonnes for the first quarter of 2024. Global recoveries averaged 70.5% in Q1 2024, significantly lower than the previous year. This decline was largely due to the lower grades mined during the period, impacting dry magnetic, wet magnetic as well as kiln recoveries. On the ilmenite side, we have been focused on advancing the ramp-up of this new facility and continue to make progress with this activity. In Q1 2024, the company produced 9,563 tonnes, which represented an increase of 6.6% from fourth quarter of last year. Subsequent to Q1 2024, production was at 753 tonnes of V2O5 equivalent in April 2024, with 2,500 tonnes of ilmenite concentrate being produced during the same period. Before I hand the call over to Ernest, I would like to stress that despite the challenging space in Q1 2024, we are optimistic about achieving our operational targets going forward. With our productivity initiatives underway and commitment to operational excellence, our operational team is laser focused on not only meeting our goals but delivering better results in the future. Now I will turn the call over to Ernest for a detailed financial overview of quarter #1.

Thank you, Daniel. In face of the challenges such as our extended maintenance period and a significant decline in vanadium prices, our primary focus remains unchanged, which is to restore profitability at the company. Despite these challenges detailed on this call, we've been diligently working to implement strategies aimed at achieving this goal. I'll now provide a very brief summary of the financial results we reported yesterday evening on our first quarter. Our revenues for Q1 2024 totaled $42.2 million, down from $57.4 million in Q1 2023, with the decrease being primarily attributable to a decrease in vanadium prices, with our realized vanadium prices dropping from $9.14 per pound in Q1 2023 to $6.91 per pound in Q1 2024. Operating costs for Q1 2024 were $49.7 million and that's up from $45.9 million in Q1 2023. Our cash operating costs, excluding royalties, stood at $6.12 per pound of V2O5 equivalent sold in Q1 2024 and that compares with $5.15 per pound in Q1 2023. This increase can largely be attributed to the extended maintenance period, as previously mentioned, and it also includes a $4.5 million write-down of produced vanadium products. We recorded a net loss of $13 million in Q1 2024, and that's inclusive of $4.4 million in nonrecurring items compared with a net loss of $1.2 million in Q1 2023, which included $100,000 in nonrecurring items. Basic loss per share for Q1 was $0.20 compared to $0.02 in Q1 2023. We exited the quarter with a cash balance of $45.7 million, a net working capital surplus of $70.8 million, debt of $75 million exiting Q1 2024. Despite the challenges faced, we've been actively implementing measures to reduce cost and enhance productivity as previously pointed out on this call. While we anticipate elevated costs in the first half of the year, we expect improvements in the second half as the full effects of our productivity initiatives materialize. Now I'll pass it on to Paul to discuss sales in the vanadium market.

Thanks, Ernest. Our sales results for Q1 2024 were in the upper end of our quarterly guidance. We achieved V2O5 equivalent sales of 2,765 tonnes, inclusive of 156 tonnes of purchased material. However, this represented a small decrease compared to the 2,849 tonnes that we sold in Q1 2023. Subsequently, we sold 730 tonnes of V2O5 equivalent in April. Speaking of prices, we sold at an average price of $6.94 per pound of V2O5, a 7.8% premium to the V2O5 European average of $6.44 per pound of V2O5. The average benchmark price expands a 0.3% decline from $6.46 per pound of V2O5 on average in Q4 2023. The average benchmark price per kilogram of ferrovanadium in Europe increased to $27.96 in Q1 2024 from $26.61 in Q4 2023, reflecting a 5% improvement over the period. The most recent average benchmark price per pound of V2O5 in Europe as of May 10 was $5.87. The softness in spot demand persisted in Q1, primarily driven by adverse conditions in the Chinese steel sector. However, spot market is now starting to show signs of improvement in May. Looking ahead, the fast growth in demand for battery applications in China and its potential to support the energy transition in the rest of the world gives us hope for future quarters. Also, we're observing continued strength in the high purity sector, which represents promising opportunity for Largo's products. Shifting focus to ilmenite, our sales were 513 tonnes in Q1. This is well below our guidance as we experienced initial operational and administrative delays. Nonetheless, we're continuously improving and sold over 9,000 tonnes in April. We anticipate sales to rebound in the coming months and maintain our production and sales guidance for 2024. Now I'll hand it over to Francesco for a brief update on our Clean Energy base business.

Thank you, Paul, and welcome, everybody, to the call today. Since our last update, our primary focus has been advancing negotiations concerning the strategic evaluation of our Clean Energy business, particularly regarding our proposed joint venture with Stryten Energy as previously announced. These negotiations remain ongoing and are a crucial step forward for us as we look to enhance the value of our Clean Energy business and energy storage product offering. In addition to that, I'm also pleased to share that we have made considerable progress towards the completion of the second phase of our commissioning for our ERP deployment in Spain for Enel Green Power. The completion of this phase will take place following the replacement of the inverters and the transformer. I'll now hand it over back to Daniel.

Sorry, I was on mute. To close out, I want to reiterate our commitment to continue enhancing production, efficiency, and reducing cost of Largo. As we have navigated through the challenges posed by the current market conditions, I am confident in the capabilities of our dedicated team and the efficiency measures that we are undertaking. The comprehensive initiative we implemented, which includes operational enhancement, cost reduction in measurements and productivity initiatives are expected to optimize our operations and achieve profitability in the future. We thank you all for your continued support, and we look forward to updating you in our progress in the quarters ahead. Now I will hand the call back to our operators for our questions and answer session. Thank you.

[Operator Instructions] We have our first question coming from the line of Andrew Wong from RBC.

So your realized prices performed quite well this quarter relative to market prices. Can you just talk about what's contributing to that? Was it high purity sales or maybe your contract prices going into the year? And how do you expect your realized prices to perform for the rest of the year?

Paul, can you take that question?

Yes, sure, Daniel. Andrew, yes, we overperformed the market this quarter. That's mainly due to 2 main factors. One is our high-purity sales, which is sold at a premium to market price. And two is the fact that most of our contracts are trailing the index, right? So we usually deliver material in the month quoted based on the previous month's price. So in a downward market like today, structurally, we're supposed to perform a bit better than the market. That's the 2 main reasons that justify this overperformance.