Largo Inc. Q1 FY2024 earnings call

Management Statement and Operational Highlights

• Operational Initiatives: Four key initiatives to maximize output: improving grade control capabilities, increasing crushing capacity by 22% by end of Q2 2024, increasing M&A concentrate production, and installing screens and wet magnetic separators in the milling plant in Q3. Also, measures to reduce production costs, including reducing contractors by 20%, optimizing inputs, and reviewing contracts. Expected reduction of approximately BRL40 million in operating expenditures and BRL12 million in capital expenditures in 2024.
• Financial Results: Q1 2024 revenues were $42.2 million, down from $57.4 million in Q1 2023. Operating costs were $49.7 million, up from $45.9 million in Q1 2023. Net loss was $13 million, with basic loss per share of $0.20. Cash balance was $45.7 million, and net working capital surplus was $70.8 million with debt of $75 million.
• Market Commentary: Sales results for Q1 2024 were in the upper end of quarterly guidance. Sold V2O5 equivalent at an average price of $6.94 per pound, a 7.8% premium to the European average. Spot demand softness in Q1 due to Chinese steel sector issues, but showing signs of improvement in May. Continued strength in the high purity sector.

Segment Performance

• Vanadium: In Q1 2024, V2O5 production was 1,729 tons, within the lower range of the company's quarterly production guidance of 1,700-2,200 tons. Global recoveries averaged 70.5%, significantly lower than the previous year due to lower grades mined. Realized vanadium price was $6.91 per pound in Q1 2024, down from $9.14 per pound in Q1 2023. V2O5 equivalent sales were 2,765 tonnes in Q1 2024, with 156 tons of purchased material, and 730 tonnes sold in April.
• Ilmenite: Produced 9,563 tons in Q1 2024, an increase of 6.6% from the fourth quarter of the previous year. Sold 513 tonnes in Q1, with over 9,000 tons sold in April, and maintained production and sales guidance for 2024.
• Clean Energy: Focus on strategic evaluations of the Clean Energy business, including negotiations for a joint venture with Straton Energy, and progress on ERP deployment in Spain for Albian Power.

Guidance

• Cost Guidance: Anticipate elevated costs in the first half of 2024, with improvements expected in the second half as productivity initiatives take effect. For the remainder of 2024, operating expenditures expected to be reduced by approximately BRL40 million, and capital expenditures by BRL12 million. Aim to be below $4 per pound V2O5 equivalent in 2025 with grade improvements and throughput unitary improvements.
• Sales Guidance: Expect to overperform market prices for the rest of the year, leveraging high-purity sales and contract structures. Maintained production and sales guidance for ilmenite in 2024.

Risks

• Market Conditions: Challenges posed by low vanadium prices and market softness, particularly in the Chinese steel sector. Impact on production and profitability.
• Operational Challenges: Dependence on successful implementation of productivity initiatives and operational improvements to achieve cost reduction and grade improvements. Delays or issues in operational projects (e.g., equipment installation, maintenance) could affect results.

Question and Answer

• Q: Realized prices performed well this quarter relative to market prices. What's contributing and outlook? A: Mainly high-purity sales (sold at premium) and contracts trailing the index. Expect to overperform market prices for the rest of the year, leveraging high purity sales.
• Q: Grades down, expectation for grade and cost into 2025? A: Grade affected by pegmatite in ore body; expected to stay around 0.75-0.80 V2O5 until pegmatite is eliminated next year. Cost guidance for second half of 2024 is $4.50-$5.50 excluding royalties, aiming to be below $4 in 2025 with grade and throughput improvements.