Largo Inc. Q2 FY2023 earnings call

• Condolences were expressed for the July accident at the chemical plant, with a commitment to enhancing safety standards and conducting an investigation. • Despite not reaching nameplate capacity, progress was made; in June, stable production levels were achieved, and they expect to produce above 1,000 tons per month in August. • Infill drilling campaign for 2023 and 2024 is complete, aiding mine planning. • Cash brushing process was upgraded, and a dry magnetic separator was installed. • Mine and stripping performance was behind schedule, with efforts to rectify and maintain elevated mining volumes. • Focus on cost optimization, with cost reduction efforts set to materialize in Q3 2023. • Financial performance in Q2 2023 included a net loss of $6 million, cash provided by operating activities of $18.1 million, and a cash balance of $64 million at quarter-end. • Sales of V2O5 equivalent were 2,557 tons in Q2 2023, with vanadium prices being weak but stabilization seen in June. • LCE made progress with Enel Green Power VRFP deployment, including electrolyte pumping, cold commissioning, and grid interconnection; a workforce reduction plan was executed to reduce costs by 50%.

In Q2 2023, Largo's revenues were $53.1 million, down from $84.8 million in Q2 2022. Sales of V2O5 equivalent were 2,557 tons in Q2 2023, compared to 3,291 tons in Q2 2022. The average benchmark price per pound of V2O5 in Europe was $8.46 in Q2 2023, a 19% decrease from Q1 2023, and the average benchmark price per kilogram of ferrovanadium in Europe fell to $33.48, a 15% decrease from Q1 2023.

• Reiterated production guidance for Q3 and the year as a whole. • Expect to produce above 1,000 tons per month in August. • Infill drilling campaign for 2023 and 2024 is complete, enabling better mine planning. • Cash brushing process upgrade and dry magnetic separator installation will lower maintenance costs. • Ilmenite sales expected to start in Q1 2024 with initial positive feedback on laboratory samples. • Production guidance for 2023 and beyond remains in place, with efforts to reach nameplate capacity.

• Accident at the chemical plant in July, which impacted production. • Mine and stripping performance behind schedule. • Weak demand in the Chinese and European steel sectors affecting vanadium prices. • Dependence on steel industry demand, which currently is weak and can balance positive trends in other sectors like energy storage and aerospace.

Q: Just wanted to talk about production. It looked like it was improving towards the end of Q2, but obviously, there was the unfortunate accident in July, which impacted production. Can you maybe just talk about how production has been trending now that operations are back up and running and your confidence level returning to nameplate in the future?

A: Yes. Let me answer that question. We -- after the accident, the plant was that section of the plant, which happens to be the -- just before putting the final production into V205. So that means most of the production continue moving around except it was a step -- we start building stockpiles at that point in the plan until the local labor authorities release the plan, so the operators can start producing. That period took about a week to get release of the plant. The plant is now running at around 30 to 30 tons per day of capacity. We are -- during the month of August, a little because of the stockpiles we accumulate, we are a little bit over budget from the month of August. We're planning to reach nameplate capacity of around 1,000 tons per month during this month. The spare part that exploded, unfortunately, will take a long period to be replaced in Germany. And that's why we are building all these additional transactions in order to continue operating without that spare parts. Production will not be affected and we continue just to waiting for the final spare parts coming back from Germany in order to run the normal side of the business. But for the time being, things continue at a reasonable base.

Q: And I just wanted to ask about the decision to accelerate pre-stripping. It sounds like it's mainly pulling forward some of that work. Does that -- what does that mean for production and also costs going forward?

A: Well, the cost of stripping will go higher. That's why we changed the guidance on stripping for the rest of the year. Right now, we are mining on a monthly basis at a rate of around 1.5 million tons per month instead of the 1.2, 1.1, 1.2 that we usually were doing in the past. Probably the main issue here is that the mining contractor being pounded by the extreme range during the month of December and January, created this scenario. But once we completed our infill drilling study, it was clear that we needed to open the mine to create the necessary flexibility for the future, because we -- for that particular reason, we decided to step up on the additional stripping for the mine.

Q: Sorry, on the costs, I guess what I mean is if you're pulling forward some of these costs on pre-stripping, does that mean there's less spending on that, maybe like 24, 25, et cetera?

A: So 2025, we will still see a reasonable amount of increased stripping costs. It would not be quite as high as the current rate that we're experiencing, but it will likely continue for a good part of 2024 and it will improve then in 2025. So it will be a marginal improvement, in 2024. But getting back to normalcy, I should say, will be in 2025.

Q: And congratulations on giving the ilmenite plants under commissioning. So you've mentioned before that you expect to release an updated or an economic study once it gets up and running and also a relatively slow ramp-up. So can you just give us an update as to when you expect to give us some economic data for the plant?

A: Yes. So, we look to any recognize a matching of revenue in the final quarter but we will be up and running effectively at our full capacity for 2024. So you'll see the block of the operational results will flow through in 2024 with a very, very small amount coming through in 2023. But obviously, we'd be up and running prior to that, starting with the trial shipments and various other things.

Q: Okay. And I mean ilmenite concentrate is currently selling around 10x. Is that right around what you're looking for?

A: That's correct. We understand 280 to 300 ton, but I'll hand it over to Paul, who can give you data a little bit more on that.

Q: Okay. And one more, if I may. With increased mining rates and changes in the last economic study. Can you just give us a quick update as to your life of mine expectations?

A: That information we have in our current technical plan that Campbell it's around to 2028, '29. That's what the -- according to the current mine plants that we are right now developing that's when we will start developing GaN. And after GaN, we run until the following six years, we will start developing NaN. As you probably remember, there is three deposits that are in the same line and the same as estate. The current one is Campbell and the one who is just next to Campbell is GaN, and that's more or less the timing that we have. Right now, we are working with the mining consultant in order to update the mining plans, the name of the consultant is [indiscernible], and those mining lines are under works. We're planning to finalize study on the mining plants and the development of the satellite epoxies sometime during March or April next year. So, we're in the process of updating the current information on the life of mine plant.

Q: My primary question is just any updated thinking on your part or any updated thoughts on the continued disconnect between the price of vanadium despite all the favorable demand trends you're seeing from the clean energy side as well as the aerospace side. Just -- I mean, obviously, it's going to be variable for some time. Just trying to get your current thinking on the disconnect and maybe a very broad time line as to when the demand from the energy side will help to offset the volatility from the weaker steel demand?

A: It's a very good question. We're also seeing fast growth in both the energy storage sector. I mentioned a bit earlier, 141% increase in demand in that sector, between Q1 2022 and Q1 2023. We're also seeing very good demand in the aerospace industry. That being said, steel industry and especially steel industry in China is by far the largest demand driver in our industry still continues to represent about 90% and in China and in Europe, this industry is suffering. So, a 5% to 10% reduction, a small reduction there can balance a very big improvement in the sector. So, it's been a little bit disappointing to be very frank, but it's hard to give you any time line, but we remain very confident in the prospect of vanadium prices in the medium to long run. It's very difficult to say, as you can imagine what will happen in the short term. So, yes, the fundamentals are there and we hope that this disconnect is going to shrink at some point.

Q: Okay. Fair enough. And then one brief follow-up, if I can. You mentioned the strong demand in aerospace and just trying to see if there's any read-through in terms of aerospace accounting for about 50% of revenues in Q1 versus about 37% in Q2. Just trying to get a sense as to whether there's just going to be over the long term, continued volatility in aerospace demand or if there was maybe like a large deal or something that got pushed back or delayed. Just any thoughts there?

A: Yes, there wasn't any unique or large deal. It's really -- it's a fundamental strong demand in this industry following very low demand during the COVID years. I think we've all been witness to the strong boost in the commercial aerospace industry flies a full, there's a long queue to get new airplanes that haven't been built during the COVID years. So, it's just a very, very strong demand from the travel industry and lag during the COVID time. So -- but not any particular deal, and we believe that that in the foreseeable future, Largo will continue to sell very good amounts in this industry.