Largo Resources (TSX: LGO) – Vanadium Innovators Sitting on a Throne of Cash (transcript)

Largo Resources Ltd.
  • TSX: LGO
  • Shares Outstanding: 563M
  • Share price C$1.08 (29.07.2020)
  • Market Cap: C$608M

Interview with Paulo Misk, President & CEO of Largo Resources (TSX: LGO)

Largo Resources is a vanadium miner, but since Misk became CEO in 2019, the company has decided to abandon its roots and is morphing into a clean tech solution provider. Why? Because it has the potential to rerate the company. Misk explains how.

The company is ramping up V2O5 production, alongside Tio2 Titanium Oxide (ilmenite – pigments sector) and Vanadium Trioxide (aerospace and Chemical industrial), which would eventually double to company’s revenue whilst maintaining a high margin. We question Misk as to how he hopes to use the catalyst of removing Glencore as their trading partners to break in to new markets and capture more of the margin. Can they do it?

With c. US$200M of cash, Largo Resources will need to continue to innovate if it hopes to drive the share price up. It’s been tracking gently upwards recently after months on the downward slope from its vanadium sport price highs of 2018 & Q1/19. Let’s see what the rest of 2020 has to offer for Largo Resources and vanadium investors.

We Discuss:

  1. 2:27 – An Update of the COVID-19 Situation in Brazil
  2. 4:41 – Company Overview and Background
  3. 8:02 – Evolution vs Revolution: The Re-Development of the Business Model
  4. 15:57 – Confusion in the Market: Update on the Contract with Glencore
  5. 17:45 – Setting Largo up for VRFB
  6. 20:14 – Focus on Core Revenue: Cash Position, Debts, and Money Streams
  7. 25:55 – Plan for the Future: Growing The Company and its Value
  8. 28:50 – Masters of Their Own Destiny: Discussing Glencore Contract Terms
  9. 30:34 – Talk of Stockpiling: Views on Vanadium Price
  10. 32:40 – Allocating Their $200M and Fueling Growth
  11. 36:04 – Management Shareholding and Buying in Market

CLICK HERE to watch the full interview.

Matthew Gordon: Paulo. How are you doing, sir?

Paulo Misk: I’m very fine. Thank you.

Matthew Gordon: And how are things in Brazil?

Paulo Misk:  Brazil is going well, in spite of the COVID situation we are doing very well. We have a very good relationship with the community in the State we are Bahia. It’s a hard situation. It’s tough times, but we have been doing all the preventive measures. No, we are following all the safety and health protocols according to all the authorities and everyone. We are doing our best in that regards.

Matthew Gordon: Good, good.

Paulo Misk: As a result of it, we have kept running. We have full production since the beginning of the year; no impact at all in our performance.

Matthew Gordon: We speak to people from all around the world every day, and different countries are reacting in different ways. We see some quite high numbers with regards to COVID coming out of Brazil. What is the government’s advice to you or to its population?

Paulo Misk: In Brazil, the government is supporting mining. They find that’s the essentiality of the mining in Brazil as the raw material source for the whole industry, it is all in the basics, that’s mining. We have support from the government. We have support from the community, and of course, we need to do our work, our job. We are providing all healthy issues for the employees. And of course, what I say is, we are going to pass this crisis together, each one doing their best. That’s we are doing

Matthew Gordon: I hope the rest of the population is good. I’m hearing you loud and clear; business as usual. So look, there’s a new, well, I said, we interviewed your predecessor, Mark Smith, back in early September, shortly before he left and you took over, so we have heard a version of the story. We are going to hear a new version today. Could you give me a one-minute overview of the business for people who have not heard this story before, and then I’ll pick it up from there?

Paulo Misk: Yes, just a little background about Largo. Largo is an industry-preferred producer and supplier of Vanadium. We produce the best Vanadium in the world, of quality. We have the VPURE and VPURE+, and interestingly about these; the world market is 91% Ferro-Vanadium and the remainder 10% is aerospace industry and chemical applications and VRF B, and the benefit of having a very good product is that we can sell 2/3rds of our production in this special application market. So that gives us a great advantage because there is a premium, a very good premium for that special application. We have produced from our mine in Brazil, we have the world’s greatest, highest-grade of V205. We have the best recovery, overall recovery from the mine to the product, which testifies to our good performance and efficiency at our plant, our production.

At the same time, we have a very low cost. We are one of two or three low cost in the world. I’m comparing to everybody, including Chinese. It gives us a situation, a very good situation to have a very good performance, quality, low cost, and we look at the production, just to have an idea, a of flavour of that: we have been increasing our production year by year. When you look at the Q1/20 results this year, it was 35% over last year, 2019. In Q2/20, we have for production, a 2% increase over 2019 as well. It’s a very good performance. But I will tell you what: our team is responsible for most of those good results. We have a fantastic team. And I have a very good sense of that because I have been there since the beginning, since we started producing in 2014, and I have built, I have helped. We have built this team and we have fantastic people. We are improving every year. Every day, we are looking for our performance, our KPIs, and improving. It’s good. That’s the way we perform.

Matthew Gordon: Let me jump in there because it’s been all change – you have been there since 2014, and in a different role from one you are in now, you took over as CEO at the end of September last year. The business looks like it has changed. You are presenting a different company from the one I spoke to back in early September. So why the change and what was wrong with the previous model?

Paulo Misk: We didn’t change the strategy. It’s just evolution of what we have been doing before.  Mark Smith has a helped a lot, our normal progress we have, and it’s just continuous of all the strategy we have set before.

 But we have a very good news, in fact, last year we increased our production by 24%, our capacity. By the way, it’s a very small CAPEX. And just to have an idea of how successful was these expansion, we jumped from 800t to 1,000t per month of in V205. In the last 2-months, we produced more than 1,000t, 1,050 to 1,030t. We increased our production. And this year we are going to improve our, increase nameplate capacity by 10%. It is a very small cost. The CAPEX will be USD$1.3M, or a 10% increase.

Matthew Gordon: I get it. You go from 800 to 1,100, a 36%, 37% increase overall in that timeframe. These are good numbers indeed, but I want to stick with, I know you said it’s an evolution in the business, but I want to ask, are you, or do you consider yourself a Vanadium business? You have a Vanadium mine, but you are developing products. You are developing VPURE and VPURE+, and you have got other products in the line. So how are you positioning it? How in the board positioning the company?

Paulo Misk: We are today a ‘clean tech’, we provide clean tech solutions. The mine is how we source our product to provide a clean tech solution for the market. And we are working with Vanadium today. It doesn’t mean that’s going to keep producing only Vanadium. And not just this: we are approaching the market, providing more products. We are implementing next year, the Ferro-Vanadium. Also, we are implementing the V203. V203 is 50%, one third of the whole consumption of the aerospace industry and also chemical industry as well. We are approaching the market with more solutions, better products. And it’s not just these: we are developing a process to produce Titanium pigment – Tio2. That’s going to be a fantastic improvement to our business. And we are developing a technology that is going to produce these in an environmentally friendly, it is not going to discharge any fluid, any drop of a fluid into environment. We are doing disruptive improvements in Vanadium. And we’ll be in the future for Titanium as well.

Matthew Gordon: This is what interests me, okay. Because, mining is very difficult. Mining is very tough. Vanadium is quite tough, because of the erratic nature of the pricing in the marketplace, obviously in the second half of 2018, the beginning of 2019, you guys made a lot of money as the price went, shooting up, as it does every 10-years or so. Supply-demand economics on that. But what I want you to explain today is, you said it’s actually an evolution, but to me it seems like a revolution because mining is one thing, going downstream and capturing value, capturing the ability to make more money is important for you because of the way that the Vanadium market has traditionally been, i.e. erratic. Is it an evolution, as you say, or was there the need to say to the board, look, we need to be a clean tech solutions company. We need to position ourselves as something where investors can get away from this Vanadium issue and see us coming up with solutions into this, , whether it be, whichever verticals that you want to sell into, whether it be aerospace, chemicals, or even the EV component or battery storage, etc. What was that conversation like when you became CEO?

Paulo Misk: Yes, first of all, I need to say that I have the full support of the board, and I’m very grateful for that. They have been supporting us, all the projects. they contribute and they support it 100%. That is very important. And the alignment with the board and the management, it ensures that we are in the right path. But when we focus on from the metals, reduction in costs, quality, providing the best product to our customers, provide the green tech solution. When I approached the company that way, we see that we can do more. We have Titanium in our tailings, a huge amount of Titanium, by the way. We are developing that and getting the advantage of have this unique situation. When you look at our revenues and results, when you put Titanium on top of Vanadium, we have another very important revenue stream as important as Vanadium. It gave us a much better situation for facing the market volatility. Titanium is more stable. And, we started those things when we decided to have our own sales team in April, our contract was blanked over, and we did decide to face the market by ourselves. Not just with Vanadium, but it created a situation that we can face another product as well as Vanadium, and these is by this core by-product will be Titanium.

Matthew Gordon: Let’s look at this, because it’s really important because when we were doing this research, people were confused because there are a lot of new things and there are a lot of variables. First of all, you are no longer a Vanadium miner, you are clean tech solutions company – number one.  You have a Vanadium mine clearly, but that’s one product. Secondly, you are looking at Titanium-oxide, ilmenite, for pigments and that thing, as a second revenue, a non-correlated revenue stream. Is that right?

Paulo Misk: Yes.

Matthew Gordon: You have talked about Vanadium trioxide, which is to be able to sell into the high purity end of things, which is the aeronautical chemicals, et cetera line as well. These are small markets, but they’re high margin markets, so I can see why you got that. But the thing which people haven’t understood, properly is obviously with Glencore, the contract finishing earlier this year, you built your own sales and trading team. What does that mean? What are you now capable of doing, and what’s that done for your bottom line?

Paulo Misk: We joined a very good sales team, experienced people, competent, and I’m very happy with them, very confident with all the capabilities and they have been performing in a very, very good way. We joined them in the middle of last year. It was part of our strategy as well. And it means that we’re going to get all the opportunities, and value that sales opportunities provide. And for us, it’s essential to have our own path and to know about how we going to face to market and provide the best solutions. There is no other way. We are not just a producer. We are not just a project with, which was six years ago, but now we are a company that’s providing clean tech solutions and not just for aerospace or chemical applications, we are looking very closely at all the VRF B opportunities. I don’t know if everyone knows about that.

Matthew Gordon: Vanadium reflux batteries, we have talked about that a bit on our shows, we have done a few interviews on the topic. It is a nascent industry. It is very early days, but you need to set yourself up for that. So again, without wanting to bounce around too much, what are you doing with regards to setting yourself up for Vanadium redox flow batteries?

Paulo Misk: Yes. I said that Largo is a unique company that can supply Vanadium for these applications because we have the quality enough, not everyone has the quality. If you look at the whole production of Vanadium, it’s 70% is slag, which doesn’t provide enough quality. Our product, which we can apply to VRF B. And at the same time, we are expanding our production. We don’t need to put this extra production into the Ferro-Vanadium market, which may not have a good impact on the price, but we can drive this extra volume of Vanadium to an application of Vanadium redox flow battery, which is a storage energy. It is a completely new, disruptive improvement in the market. When you see all the green generation of energy, electricity, solar, wind farms, they need some device to store energy. Nobody uses energy late at night, or the bigger consumer consumption is not at noon. You need to keep the energy producing during those periods and discharge it when people use most. And the VRF B provides that solution,

Matthew Gordon: Vanadium electronic for VRF B, it’s coming, but it’s early days. So, years of business. You need to plan for it, but you can’t plan for the revenues that it may generate yet because it’s some way down the line because people need to be taken up in the marketplace. People need to come up with designs which they’re able to sell into market for you to be able to sell into that market. So right now, you are focused on your core revenue streams. Which is selling what? Where is the bulk of the money that you are going to be focused on coming from now and for the next couple of years?

Paulo Misk: Yes. Right now, we are not producing Ferro-Vanadium, because we convert some partners. Vanadium pentoxide, especially the high purity, the V Pure plus. Increasing the V203 as well, because they have the capacity to increase our sales in aerospace and chemical by 50%, only having this material. And it’s interesting because our customers are asking us that we need to have V203, because they’d like to have our Vanadium, high, pure quality in the whole Vanadium needs. So that’s the way we are going to approach and make the results.

Matthew Gordon: So that’s the core focus for the next couple of years. You have got to focus on money, you have got to be making money. Okay. So, and with your sales team on board, your margins, well, presumably your margins have increased because you are not giving it away to a Glencore anymore. Can we talk through your finances? Because, you make a big thing of the amount of cash that you’ve got available. How much of that is free cash and where does it come from in terms of operations versus financing?

Paulo Misk: We have a very good cash position. Very good. It is a unique situation. By the end of the last quarter, our cash position was in a range of USD$147M. It is a very comfortable situation. We have enough cash to pay all the debt that was with Glencore. There are some payments we have done but we have a very comfortable situation to face in the new projects, to face in all the period with COVID. Of course, there is some impact in Europe and the US mainly. China today is launching and producing, it is US crazy, and we are getting independent of that. We are selling material to China today. If you look at the price in China of V205, it is in the range of USD$7 per pound. It is a very strong market and we are getting the advantage of that market, which is really hot, really excited, but also Europe and the US, we will rescue all of the industry and as production, I expect, by Q4/20 this year. That is the way we are making good for the investors.

Matthew Gordon: I’m just looking at your presentation; you talked about Q1/20 numbers, the operations contributing, it’s USD$11.6M, but you have got USD$35.8M provided by financing activities. Can you just help us understand the difference between those two?

Paulo Misk: Yes, that is because we are positive in cash and we are getting advantage out of the situation, but of course, the best investment for our cash is our operation. We have great results and we provide much better results by investing in Largo and all these projects and expanding all of our operations and solutions for the customer.

Matthew Gordon: But what things does it cover? Because that is a good return, given them amount of cash that you’ve got – USD$5M is quite nice. What sorts of things were you doing there, given you paid off a big chunk of debt to Glencore, you are now debt free. Is that true?

Paulo Misk: Eventually, we got some cash in the market, some loans. Just to, we didn’t know how COVID-19 would impact our business. It is an unpredictable situation. We got a small portion just to be safe. And we could see that we didn’t have any problem with operations, sale, so it was just to be safe.

Matthew Gordon: Okay. But you had no problems raising that loan or that debt in the marketplace because you are producing cash and people want to give you money? Is that what you are telling me?

Paulo Misk: Yes. That’s a fact. We have a very good situation. We have cash and that’s the perfect situation to get some money from the market; when you don’t need it, you get a very nice interest rates and that’s the way we did it.

Matthew Gordon: Banks love to give you money when you don’t need it. That’s the time to ask for it. Again, I have built up a picture of where the company was in September and what you have done in terms of migrating it through to a solutions provider. I get it. And I can understand why that might have a higher multiple as far as investors are concerned, certainly institutional investors, once you get those revenue streams going. Can you talk to us about how quickly you think those new revenue streams are going to be able to kick in with meaningful revenue? What does the next five years look like for you? And if you can give us some sense of where, as a percentage, where the revenue is coming from, how much is trading going to contribute as a percentage? How much each of the new product lines going to contribute?

Paulo Misk: Yes. Well, we didn’t disclose those figures so I cannot give you the details about it, but I can give you an overview. We are going to keep growing the revenue and the margin with Vanadium by providing better products like the V203. When you get this Titanium pigment, it’s not even supplies, it is pigment. We expect that, it is our objective and aim to double our revenue stream, any to be basically 50:50 Vanadium/Titanium pigment; that’s our aim. And when you look at all the production from Titanium, we just need to add the processing, ore processing. I’m not including crushing, not milling, because it has already been done, this phase, but just the produced the ilmenite from flotation, adding a chemical plant, in a sequence. And you are going to get the lower cost Tio2 pigment in the world. Because we have already spent all the mining and milling, which is an expensive step. It will be in a very good margin as well.

Matthew Gordon: It is Titanium-oxide, ilmenite pigment used in food and in all sorts of applications, paints, etc. That will double your revenue, but as a percentage of your margin, you think it’s going to be quite a high margin product?

Paulo Misk:  Yes. That is going to keep high, as much as we are doing Vanadium. But that’s our expectation. We need to fulfil all the studies steps and there’s a lot of work to do. We expect to have this package done, all of the studies done by Q1/21 next year. In Q1/21, I will be able to provide all the numbers and exactly forecast for what we are going to do in all of our plants.

Matthew Gordon: Understood. It is not such a long runway if you are talking about Q1/21 next year, so that’s not too far away. We will listen out for those numbers as and when you start to understand them better.

Sorry to keep coming back to the trading, but, such a big deal was made of the fact that Glencore would be removed and you would be  masters of your own destiny at that point, but can you give us an idea of what you think that should do to your bottom line? I mean, if you are now in charge of your own sales process, I mean, how much was Glencore taking off the top?

Paulo Misk: Yes. again, I cannot give you details about the agreement with Glencore, but we don’t get the full premium when you sell the high purity. Now we have, the full one. So, it is an advantage to be alone, but not just that; we are increasing our share in the high purity, I’m talking about aerospace, although this sector is facing a very hard time, but also for chemical. We didn’t sell one pound for chemical applications before, but we have done this already. We are selling material to the chemical applications. That is our focus, because the premium is even higher than aerospace. So just not having Glencore doing our sales, we get more premium and we increase the VPURE+ sales. It is big advantage. Glencore was a very nice partner of Largo, but they are also a Vanadium producer s there is a conflict of interest.

Matthew Gordon: Tell me a little bit about stockpiles, creating stockpiles. What is the idea? Sell everything that you produce out of the mine as quickly as possible, or do you stockpile and say, there’s price recovery in the market to come in. And what’s your view on the Vanadium pricing in the market, for instance?

Paulo Misk: In Q2/20, we built some inventories because you need to put some material in the warehouses around the world. We are converting to V203, but the build-up we have done this step already. Q2 is a very important one. And that is the thing to have a very good cash position because it doesn’t, hit the company. We built the inventories, we are ready to supply all customers around the world with Vanadium Pentoxide, high purity, and Ferro-Vanadium, as when they need it, because we have already built those inventories in Q2. We are ready to –

Matthew Gordon: What is the value of those stockpiles that are sitting around the world? What are they down on the balance sheet as?

Paulo Misk: It is about, let’s say 2000 tons overall of V205. If you look at our production guidance, it’s 12,000 tons of V205 this year, but our sales guidance, is about 2000 tons less. That’s why we planned that situation and we are performing as planned.

Matthew Gordon: Say you produce that 2,000t at around, let’s say a cost of USD$3.25. So that gives us a sense of how much money, net, is available to you sitting around the world in stockpiles. I just want to understand what else do you do with your USD$200M? You have got a lot of different new projects at various stages, requiring markets to develop, requiring you to deliver things like, especially like run the Titanium oxide project. So how much net cash have you got and how do you plan to spend that? How do you keep driving this growth? Have you got enough projects on the go?

Paulo Misk: It is one step at a time. I would not say exactly what cash position we have today, just because it has not been disclosed yet, but we have enough cash now to run the V203 plant. We will implement that. That is our priority, by the way. We postponed the FEV plants, by the end of last year. We have time to do both in a very good way, no problem at all. And the Titanium implementation will take a little bit longer because we’re going to have, next year, all the things done. And we have started already talking to the market to see how we can fund this for the Titanium project. So, let’s build all the projects one at a time and adjusting our cash situation and finance and getting partners. All the strategies are not definite as yet, but I have no doubt when you have good things to sell, it is much easier to get partners and people to help you. And all of our shareholders support all those actions. I have been talking to them and they are very happy with what we are doing with the company and how we are going to make it happen.

Matthew Gordon: There are some very, very big plans in there. And I appreciate that the change of positioning of the company could be dramatic in terms of the institutions’ view of you. I get that. That’s good. But you are going to be building up a big debt position to be able to get these things going. I presume it’s going to be mostly debt, is it?

Paulo Misk: Yes. We didn’t define the strategy for these yet, but probably it is going to be that.

Matthew Gordon: You have got the revenues to be able to pay the coupons. So why not?

Paulo Misk: And by the way, that’s the perfect situation because the interest rates are very low. You asked, for example, the expectation for this interest rate for next three years to be the same level. It is unbelievable, and we have never seen this situation in history before. It’s a good time. We have a good project to raise money and help the economy to re-establish at the previous level. And we will be part of that and take advantage of all situations.

Matthew Gordon: Stay in touch with us and let us know how that’s getting on. Because that’s quite important because with growth comes growing pains, and the cost of finances is important, as you say. The board, have you been buying shares in the market? I know you were pre-COVID, but what have you been doing since then?

Paulo Misk: I have been buying shares because the price is ridiculous, by the way, it’s very low price. And I expect, I’m not an analyst, but it values much more, in the current basis. I’m not talking about the projects. I’m not talking about the improvements that we are going to implement, but in the current basis, performance, this price is very under-valued. It’s a good moment for buying and I’m doing this.

Matthew Gordon: Your shareholders would agree with you. They don’t understand what has been happening with the share price, because obviously, since the highs of, towards the end of 2019, it has been in steady decline as the price has fallen away, obviously. But they are looking for you to lead from the front and tell them why the future looks good. What I’m hearing today is there are future revenue streams that you are planning for. And the possible re-rate, if the market buys your story that you are no longer a Vanadium company, for sure. Well, Paulo, that’s a nice run through for the first of the new story. It’s the first time we have spoken or met, so I appreciate you spending your time explaining that. People are unsure about Vanadium, but maybe what you are doing, the plans that you have in terms of capturing more of the value downstream might be more appealing to a lot of your current investors and a lot of new investors as well. Thank you very much for your time.

Paulo Misk: Thank you very much. And thank you to the audience. It has been a pleasure talking to you and keep safe, please.

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