Good day, thank you for standing by. Welcome to Largo's first quarter 2023 webcast and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Alex Guthrie, Senior Manager of External Relations. Please go ahead.
Good morning, everyone, thanks for joining our first quarter earnings conference webcast and call. As with previous calls, we've uploaded a supplemental webcast presentation which is available on our website at largoinc.com. Our Q1 2023 financial statements related MD&A and most recent AIF are also all available on the website as well as on SEDAR and EDGAR. Before continuing the call today, I would like to remind you all that 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. Please refer to slide 2 for a full description of the company's cautionary notes. On the call today is Daniel Tellechea, Largo's Interim Chief Executive Officer and Director, Ernest Cleave, Largo's Chief Financial Officer, and Paul Vollant, Largo's Chief Commercial Officer. Following the delivery of our prepared remarks, we'll open the call for questions.
We ask that participants restrict their questions to two and then re-queue if there are additional questions to allow the others the opportunity to participate. With that, I'll turn the call over to Daniel.
Thank you, Alex, and good day to everyone joining us today. Since taking over the role of interim CEO of Largo in February, I have been committed to improving operating efficiencies at the Maracas Mine, including initiating cost reduction initiatives and conducting productivity assessments. During the first quarter, the company produced 2,111 tons of V2O5 in accordance with its production guidance. To our delight, we sold 2,849 tons of equivalent V2O5, which exceeded our quarterly sales guidance for the first quarter of 2023. In addition, we produced a significant amount of high-purity material in the first quarter, representing approximately half of the quarter's production.
While we're pleased with this performance, we continue to navigate the effects caused by the heavy rainfall in December, which not only caused flooding in the Campbell Pit and impacted operations, but also delayed the company infield drilling campaign necessary to develop the company's short-term mine model planning for years 2023 and 2024. Infield drilling is performed inside the Largo Campbell Pit to further define the ore body prior to mining. As a result of this process, a short-term mine model is developed, which sets the stage for the ensuing year mining plant. In light of the heavy rains in late fourth quarter of 2022 and early first quarter of 2023, this process was postponed. As a result, we have to adjust our annual 2023 production, sales, and cost guidance.
An updated table referencing the updated guidance on a quarterly basis is provided on the current slide. I would like to emphasize that returning to a more normalized production and cost scenario remains the top priority for all of us at Largo, and we work through this period of adjustment in our mining operation. In my first update to shareholders last quarter, I made clear that I have been tasked our team with identifying cost reduction initiatives during this period of sustained inflationary pressures, which have resulted in cost increases for our operations. I would like to discuss some of those initiatives on the call today. First, the cost of sodium carbonate, which is used in great quantities in operation process, has increased almost 270% since 2021.
As part of our production process, our team is exploring ways to reduce the amount of silica inside the kiln, which in turn will be reducing the amount of sodium carbonate required in our operational process. Second, by making certain changes and upgrade to our crushing process, including the installation of a new dry magnetic separator in a crushing circuit, we hope to reduce operational maintenance costs and provide more flexibility in the blending of different ores to stabilize the production of V2O5. We expect to complete this installation by mid-June of this year. Finally, we continue to analyze the productivity of certain processes at the mine site and have identified some opportunities for cost reduction associated with the re-handling of the material on site.
Toward the third quarter of this year, we hope to begin seeing some of the benefits from these initiatives. Prior to handing the call over to Ernest, I would like to highlight a few catalysts expected during the year in additions to improving operational and cost performance at the mine site. During the first quarter, we continued to make progress with the construction of our ilmenite concentration plant. Construction is expected to be completed in the second quarter of 2023, with commissioning and wrap up following shortly thereafter. On the clean energy front, installation of our 6.1 MWh vanadium battery in Spain continued during the first quarter of this year, with final provisional acceptance scheduled for the third quarter of this year.
We have also completed all improvements to our manufacturing facility in Wilmington, Massachusetts this quarter, and we have begun the process of restarting stock production to reach a capacity of 12.5MW per annum by the end of the year, with the goal of reaching 100MW per annum by the end of 2025. I will turn the call over to Ernest to provide an overview on our financial performance for the first quarter. Ernest?
Thank you, Daniel. Thanks to those who have joined the call today. A brief overview of the company's financial performance for the first quarter is presented on the current slide. The company's revenues increased by 35% from $42.7 million in Q1 2022 to $57.4 million in Q1 2023 as a result of increase in quantity sold and improved realized pricing achieved during the current quarter. In Q1 2023, operating costs increased substantially by approximately 60% over Q1 2022. This is primarily due to increases in direct mine and production costs, and these are particularly attributable to mining contractor costs and equipment rental costs. Additionally, a lack of production stability and the subsequent ramp up of operations following the previously discussed shutdown further negatively impact costs during the quarter.
As touched on earlier, the company also experienced cost increases in critical consumables in the quarter, including sodium carbonate, as well as an increase in the consumption of ammonium sulfate when compared to Q1 of last year. Our Q1 2023 cash cost performance was in line with our annual cost guidance range, with cash operating costs excluding royalties being $55.15 per pound sold, compared to $3.97 per pound sold in Q1 of last year. Due to the reasons previously noted, we have extended the higher end of our cash cost guidance range to $5.65 per pound sold. That's up from $5.25 previously. Due to the increases in operating costs during the quarter, we reported a net loss of $1.2 million for Q1 2023.
I'll provide some additional color on some of the other Q1 2023 costs, which includes a $1.6 million increase in other general and administrative expenses. This is mainly due to an increase in depreciation from the company's software intangible asset, as well as increased IT costs associated with the implementation of the company's ERP system. We also saw increased costs at LCE, which were primarily related to increased logistics as well as travel costs arising from installation activities associated with our VCHARGE battery deployment in Spain. In Q1 2023, the company's share-based payments decreased by $2.2 million, resulting in an expense recovery of $1.3 million. This is primarily due to reversals in share-based payment expenditures on forfeited unvested stock options and RSUs, as well as a reduced number of stock options and RSUs granted compared to Q1 of last year.
The company's finance costs in Q1 were $1.4 million for the quarter. That's up from $1.2 million as a result of increased debt, as well as an initial financing fee on the company's new debt facilities. Finally, the company exited the quarter with approximately $62 million in cash and a debt of $65 million and a net working capital surplus of $119 million. That concludes my remarks for today. I'll now turn the call over to Paul.
Thank you, Ernest, and good to speak with everyone who has joined today. We exceeded our Q1 quarterly sales target with 2,849 tons sold, inclusive of 245 tons of purchased material. Despite the company's operational setbacks during the quarter, we delivered on our commercial commitments. Following to Q1, 2023, we had a great month of sales in April, with 1,101 tons sold, including 78 tons of purchased material. However, as a result of the reasons mentioned earlier, we expect lower sales for the rest of the year, and we have adjusted our annual sales forecast for 2023 from 10,300 tons-11,300 tons to 8,700 tons-10,700 tons.
This translates into adjustments to our quarterly guidance ranges, which are provided on the current slide. The vanadium market was strong in Q1, prices increased continuously from the start of the year until mid-March. Supported by strong demand in the aerospace and energy storage industries. The average price for V2O5 in Europe was $10.39 in Q1 2023, down 3% from $10.72 in Q1 2022. Ferrovanadium prices in Europe averaged $39.46 in Q1 2023, down 15% from the average of $46.17 seen in Q1 2022. Largo achieved a higher average price in Q1 compared to the same period last year, thanks to a larger portion of our sales going into high purity applications. Since March, vanadium prices fell sharply, erasing all gains since the start of the year.
We attribute this fall to lower demand and worsening sentiment from the steel sector in China. We continue to be bullish on vanadium medium and long-term fundamentals, thanks to considerable expected demand growth in the energy storage sector, with anticipated gigawatt hour of VFB deployments in China in the near and medium-term future. It's interesting to note that according to Vanitec, the Global Vanadium Producers Association, VFB is now the second largest demand driver for vanadium and grew by almost 170% between 2020 and 2022. I'll stop there and turn it back over to Daniel.
Thanks, Paul. Since becoming interim CEO, I have been focused on improving overall performance at the company through additional operational efficiencies. Executing on these initiatives is an important part of our commitment to deliver safe, reliable operations and maintaining capital discipline in order to preserve our status as one of the world's largest and low-cost vanadium producers. Largo has an unparalleled vanadium assets with a business model that we believe is unmatched in the industry. The opportunity to leverage these competitive differentiators is expected to drive value for our shareholders, both in the short and the long term. With that, this concludes our prepared remarks, and now we will be happy to respond to any questions from participants on the call. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the 1 on your touch tone phone. You will hear a 3-tone prompt acknowledging your request. If you would like to withdraw your question, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Heiko Ihle at H.C. Wainwright. Please go ahead.
Hey there. Thanks for taking my questions.
Thank you.
Your guidance for production has been taken from 11,000 tons-12,000 tons to 9,000 tons-11,000 tons. I mean, just going through your release, there's a couple of things. You know, planned kiln maintenance is done. The transition to the mining contractor is done. You know, there's probably more positives than negatives in your outlook. What am I missing here? I guess what I'm saying is, can you quantify the decline in your outlook in what factors are making it go down by how much?
Well, let me try to respond that question. I think that the widening of our guidance is basically reflecting the fact that they were planning to end by the end of June, the infield drilling information that will be inputted into our short-term model in order to define for the second half of the year how much stripping, how much volumes to be produced from massive, banded and disseminated. You have to take in consideration that Largo is not a regular mining company like the Copper or the Zinc that they were used to it. Largo mining operation is a blending operations where we need to blend massive with disseminated or banded with disseminated in order to produce the necessary V2O5 in the nameplate capacity of around 1,100 tons per day.
I don't think you're missing any particular point. Only what they were trying to direct the market is that we are in the process of doing the infill drilling that we postponed because of the drilling. As you said, the mining contractor is working exceeding our expectation. Just on the first quarter of the year, we moved 3.6 million tons. That is one of the records on a quarterly basis for Largo. Just to give you a flavor, last year in 2022, we had a material move of 3.1 million tons. We move in excess of 500,000 tons in order to continue opening the pit. That is the basics of our reasons for the change in the guidance.
In terms of cost, we are taking the consideration of increasing the cash cost excluding excluding royalties because of the fact that the Sodium Carbonate, especially, and the ammonium sulfate has not reduced in price. That's why we are moving into the cost initiatives, trying to compensate some of those increases in the price of the chemicals with additional efficiencies in running our operation. I hope that will answer. This is a long answer to your question, I tried to give you the full flavor of why we're doing this.
Yeah. No, that's fair. Early on this earnings call, you brought up the ilmenite concentration plan. I mean, obviously, it should be done quite soon. We'll be halfway through Q-two on, you know, this coming Monday. On a cash basis, how much cash flow do you think you still need to spend from today through the conclusion of ramp up and commissioning for this asset?
Let me take that as well. I think that the final capital expenditure that we project for the ilmenite plant is done. It might be additional expenditures in order to close some of the contracts, but really it will be, I think on a minimal size, the final CapEx is done in the ilmenite plant.
Daniel, let me jump in here on this one real quickly. If you're looking at a capitalized perspective, you know, there is not much left. If you look at the impact on cash, there's probably another $10 million to go on that ilmenite plan. You will see the impact of that cash over the next sort of four or five months, spread out.
To be clear, you said $2 million?
No, $10 million.
Oh, sorry. Okay, perfect. Got it. That makes more sense. Excellent.
Yeah.
Thank you.
All right. Bye .
Thank you. The next question comes from Andrew Wong at RBC Capital Markets. Please go ahead.
Hi, good morning. I mean, the heavy rainfall in Brazil occurred back in December. The 2023 production guidance, it was announced in January, and it was reiterated a couple of times since. I'm just kind of wondering, like, what happened and what changed over the past month to prompt such a drastic cut in your production guidance for the year? What impact do you expect this could have on 2024 production?
Well, as I said at the beginning, we didn't anticipate the effects of the not completing the infill drilling. As you very well know, when you are relying on the larger spaces, hole spaces of drilling in order to define a mine plan, you can reach the different surprises. This particular area, we actually didn't anticipate that the effects of not counting with the closer information between drills, it was not going to affect us. That's why we produced the last year, by the beginning of this year, the guidance for the full year that now we're adjusting. It was just that didn't anticipate it that the changes were going to affect us in the rest of the year.
Let me, however, do the following caveat. Once we have all the information for year 2023 by the end of June, and we put it inside the model, then we will give you for more certainty how the final numbers will show for the second half of the year.
Okay. Does the current mine area that you're in right now, is that why we're seeing the ore grade that's been trending lower for the past three quarters as well? Is that part of the issue?
It's part of the issue. Last year, 2022, we had an average grade of around, I think it was 0.91 V2O5 grade. This first quarter was 0.81. Yes, we had an issue with the blending of the disseminated and the massive, and that is the main reason of this decrease in grades.
Okay. Thank you. Just maybe just a last one on just the free cash flow kind of follow-up. Like, what are the free cash flow expectations for this year now with the new guidance?
Given how much uncertainty there is at this stage in terms of the actual production level, pricing, even costs, it really is impossible. There could be, you know, so many different permutations. At this stage, we know we can't give good guidance in that regard. We'll try and do so later, especially after all this infill drilling and greater definition around the mine plan has been completed. At that point, we'll try and attempt to, you know, create a, you know, more certainty around this issue.
Okay. Thank you.
Yeah.
Thank you. The next question comes from Michael Heim at Noble Capital Markets. Please go ahead.
Thanks. I had a couple questions about the guidance change, but I feel like we've talked about that enough, so let me ask one about the ilmenite. You've talked about commissioning and ramp up, and I think I might have heard some comments that a ramp up might go to 2025. Can you repeat those comments or maybe answer the question as to how long it will take to actually get to sales?
Did you get that question, Ernest?
Yeah, sure. At this stage, we're anticipating making some of our trial shipments in Q4. There would be some revenue is what our anticipation is during Q4. It's not gonna be, you know, a significant size, but in and around that kind of timing is what we expect right now.
Do you have a sense when you might reach full capacity?
Full capacity in the production side?
Yeah.
Yes.
Yeah. What, my expectation is that the capacity of the nameplate capacity of Maracas will be reached in the third quarter of this year.
Okay.
No, no. He means for the ilmenite plant. I think, you know...
Yeah.
Reasonably by.
ilmenite.
Yeah. By Q4, we should be approaching our peak run rate. If not, then, you know, certainly in early part of next year. The anticipation is to be at or above, you know, at our run rate, round about the Q4 timeframe.
Okay. If I could ask one more question. I was kinda interested with the tax expense this year. Obviously, there was some very high numbers, a change in the deferred income tax. Can you just kind of explain what's going on and why that number was so high?
Sorry, the deferred income tax expense?
Correct.
relatively consistent with last year. I don't see it as unusual, unless I'm looking at a different number.
Well, I guess I'm looking at the total tax expense versus your pre-tax income, being you're actually expensing more than your pre-tax income. That's the explanation I was looking for.
Those would just be timing adjustments on deferred income tax, et cetera. It's not a one-for-one relationship, which is why you get the movement in deferred income tax, but it's pretty conventional.
Okay. All right, thank you.
No problem.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star one. Next question comes from Steve Silver at Argus. Please go ahead.
Hi, everybody. Thanks for taking my questions. I've got a couple left. First, the press release mentions that production into the high purity market reached about 49% of production in Q1, which was up from about 42% in Q4 of last year. While I'm sure it's gonna be a lumpy number over time, I'm just curious as to what your thoughts would be, based on expected demand in terms of how high that percentage might go over the longer term into the high purity markets.
Paul?
Yeah. Thanks, Steve. We saw a very strong increase in high purity demand in basically since Q4 last year, mainly in the aerospace industry, but also in the chemical industry and obviously in the energy storage industry that values high purity products. Largo has the capacity to produce the majority of its production into high purity. When the market requires it, we'll have the opportunity to produce more high purity and sell more high purity. There is no, I think, clear target for the coming quarters.
Right now we already at a much higher level than we were a year ago, and we're committed to grow this market share for Largo and become the preferred supplier in this space.
Great. One more, if I may. Given the pullback in the price of vanadium over the last couple of months, which has been pretty drastic, curious if you have any updated thoughts in terms of at least more broadly, the timeframe that it might take for the market to start recognizing a little bit more in terms of the demand for vanadium into the clean energy markets as it looks like that the long-term demand is still expected to out-supply the current capacity of the industry. Just given the fact that the price remains so volatile on steel demand, just if you have any updated thoughts in terms of when the market might begin to recognize that demand for the clean energy side?
Yes, it's a good question and as we said during the presentation, sentiment over the medium and long-term fundamentals of vanadium market remain very strong. There are some great projects in China, mainly for vanadium redox flow batteries that should dramatically change the overall demand for the product globally. I think that the latest drop in price was really kind of a short-term demand decrease, specifically on steel sector in China. Steel sector in the rest of the world are doing much better. Yeah, I think it's a short-term bump on the road of the growth in fundamentals for vanadium.
It's always very difficult to time any, you know, movement, but we remain very bullish on the medium and long-term fundamentals.
Great. Thanks for taking the questions.
Thank you. There are no further questions. I will now turn the call back over to Alex Guthrie for closing comments.
Thanks, operator. That concludes the question and answer session and our quarterly investor conference call. Have a great day. Take care.
Ladies and gentlemen, this concludes your conference for today. We thank you for participating, and we ask that you please disconnect your lines.