Largo Inc. (LGO) Q4 2018 Earnings Report, Transcript and Summary

Good morning. My name is Joanna, and I will be the conference operator today. At this time, I would like to welcome everyone to the Largo Resources Fourth Quarter and Full Year 2018 Financial Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session [Operator Instructions]. Thank you. Mr. Guthrie, you may begin your conference.

Thank you, Operator. And welcome everyone to the Largo Resources fourth quarter and full year 2018 earnings conference call. Today's call is being recorded and a replay will be available starting tomorrow in the investor section on our Web site at Largoresources.com. Our fourth quarter and full year 2018 results press release, MD&A and fiscal 2018 financial statements are also available on the company's Web site and on CEDAR. 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. In addition, non-IFRS financial measures, such as cash operating costs and cash operating costs excluding royalties, will also be discussed during this conference call. Actual results could differ materially from those anticipated and risk factors that could affect results are detailed in company's annual information form and other public filings, which are available on CEDAR and with the company's Web site. Further information regarding Largo's use of non-IFRS measures are available in Largo's fourth quarter and full year 2018 earnings press release and in the company’s MD&A for the year ended December 31, 2018, which are also available on CEDAR and on our Web site. Financial amounts presented today will be Canadian dollar expect as otherwise noted. Speaking first today will be Largo's Chief Executive Office, Mark Smith. Largo's CFO, Ernest Cleave will then provide additional detail on Largo's Q4 and 2018 annual financial performance. Finally, we'll open the call to questions. I will now turn the call over to Mark Smith for opening remarks.

Thanks Alex and welcome everyone. Please I apologize upfront for my voice, I do have a slight case of laryngitis, but I think I can get through this call and to questions and as always, feel free to contact Ernest, or I at your convenience afterwards. 2018 was an outstanding year for Largo and the results largely speak for themselves. Net income for the year was $316 million with basic earnings per share of $0.61. That was the strongest annual earnings performance since operations commenced in 2014. We also set new annual and quarterly productions record in 2018. And Largo remains one of the world's lowest cost producers of standard and high purity vanadium, and this operational profile positions us to continue generating significant cash across a range of vanadium pricing environments. Our financial position also remains strong. We entered 2019 with a cash balance of $206.2 million and the company currently has only approximately $29.1 million of outstanding debt remaining. As our shareholders know, debt repayment has been a top priority for the company. Over the past 10 months, Largo has repaid approximately $120.9 million of debt, represented by our senior secured notes due in 2021. We intend to eliminate the remaining $29.1 million in debt before the end of the second quarter of this year. We look forward to expanding production in 2019 into a supply constrained market as both a low cost and debt free producer of this critical and strategic material. On the operational front, I am pleased to report 2018 production of 9,830 tons of V2O5 from the Maracás Menchen Mine. That's set new annual production record for the company and was a 6% improvement over 2017. Moreover, Q4 2018 production of 2,595 tons of V2O5 was also a new record and represented the fourth consecutive quarter of production growth at the mine. Global V2O5 recovery rates averaged 77% in 2018, which is an increase of 1.7% over the prior year. Under Paulo Misk's steady hand at the mine, our production teams are really hitting their stride and are focused on increasing both recovery rates and production output. With regard to high purity V2O5 sales in 2018, they were 1,440 tons, which compares to sales of 200 tons in 2017 that's a 620% increase. The company remains focused on developing premium vanadium products, and I'm pleased to report that we successfully commissioned new high-purity powder screening and packing automated systems in the fourth quarter of 2018. As many of you know, high-purity V2O5 is a high margin material used in high performance alloys for jet engines and other aerospace applications, as well as in chemical catalysts and vanadium redox flow batteries. It commends a price premium over standard raise of V2O5, and its production requires no additional operational costs for Largo, because of our naturally high ore grade and excellent metallurgy. I'm also pleased to report the kiln refractory replacement project is progressing as planned even better than planned. At the end of February, the company had AMV stock and work in process inventory of 326 tons, which is helping to mitigate the impact of the kilns replacement project. As a result of this inventory, the company has gained four days of production from initial estimates. Because of this replacement operation and the corresponding lower production the company expects, the cash operating costs for Q1 2019 will exceed the company's guidance for 2019 but our overall yearly projection has not changed. Our expansion project to ramp up production to 1,000 tons of V2O5 per month is progressing well. We expect the expansion ramp up to be completed during the third quarter of 2019, and to reach an increase nameplate production rate of 1,000 tons of V2O5 per month at the beginning of Q4 2019. As a result of additional equipment specification changes designed to maximize operational reliability, the company anticipates that its total expansion capital expenditures for this expansion project will be in the range of $18 million to $21 million. That is an increase from the approximately $15.5 million forecasted last year. As we outlined in December, our 2019 production guidance for V2O5 production is in the range of 10,000 and 11,000 tons, including high-purity vanadium flake and high-purity vanadium powder. Our average cash operating costs guidance for the year, excluding royalties, is in the range of $3.45 to $3.65 per pound V2O5. On the exploration front, the company's ongoing 25,000 meter exploration program for 2019 is progressing well, and we look forward to providing an update to the market in early Q2 of 2019. On December 19, 2018, the company announced that it had significantly extended Vanadium mineralization at the Novo Amparo Norte or NAN deposit by 130% to 1.84 kilometers in strike length. In January, we initiated this year's exploration program with four drill rigs following up on the results that NAN received in December. To-date, the company has completed an additional 47 diamond drill holes, totaling 5,400 meters of drilling. This exploration was primarily focused on increasing the confidence of the resource category within the deposit. Drilling has also begun on Novo Amparo target, which is located 2.8 kilometers south of and along strike from our NAN resource. Our aim there is to increase the size and confidence level of the current inferred resource. Full analytical results are expected soon at which point, the company will begin work on a new resource estimate. In summary, I am extremely pleased with the company’s record operational and financial performance in 2018. Long term, vanadium market fundamentals continue to be favorable and Largo is very well positioned to take advantage of these fundamentals as we progress toward increasing output in order to meet rising global demand of vanadium. We look forward to continuing this success to serving vanadium customers around the world and to continuing to grow shareholder value for our owners. With that, let me turn the call over to Ernest who will provide details on our fourth quarter and full year 2018 financial performance. Ernest?

Thanks Mark. And thanks to everybody for joining the call today, Largo delivered extremely robust financial performance in 2018. Net income after tax was $316 million or $0.61 per share and represents the strongest year of net income in the company's history. For Q4 2018, net income was $108 million compared to a net loss of $0.3 million for the same period of 2017. Revenues recognized in 2018 are $521.4 million set an annual record when compared to $167.7 million recognized in 2017. This constitutes the 211% increase over 2017, and is in turn the highest recorded revenue by the company for an annual period to-date. Revenues for the fourth quarter 2018 set a new quarterly record of 177.5 million, which compares to $49 million for the same period of 2017, representing a 262% increase. The significant increase in revenues over 2017 is primarily attributable to an increase in V2O5 prices and record production achieved in 2018. The average price per pound of V2O5 was approximately $18.30 for 2018 compared to approximately $6.52 for 2017. Cash provided before non-cash working capital items was $403.2 million in 2018, representing an increase of $336.1 million over 2017. Cash provided before non-cash working capital items in the fourth quarter was $134.4 million compared to $21.5 million in fourth quarter 2017. Net cash provided by operating activities was $352.1 million and 2018, which represents a significant increase of $293.5 million over the prior period. Net cash provided by operating activities in the fourth quarter 2018 was $144.2 million compared to $38.5 million in Q4 2017. As Mark noted exiting the year, the company’s cash balance was $206.2 million. Operating costs for the year were $135.7 million compared to $120.4 million in 2017. For Q4, operating costs were $37.6 million, which compares to $30.7 million in the same prior year period. Operating costs were higher in both Q4 2018 and fiscal 2018, primarily as the result of higher royalties paid. Direct mine and mill costs for the year were $82 million compared to $80.4 million in 2017. Direct mine and mill costs for the quarter were $21.3 million as compared to $19.5 million in Q4 2017. Cash operating cost in 2018 were CAD5.45 per pound compared to CAD4.72 in 2017. And cash operating costs, excluding royalties in 2018 were $4.41 per pound compared to $4.40. In U.S. dollars, cash operating costs were $4.19 per pound in 2018 is just outside the company's guidance of $4.15 per pound. In Q4 2018, cash operating costs were CAD6.16 per pound compared to $4.53 per ton for Q4 2017. Cash operating costs excluding royalties were $4.60 per pound compared to $4.14 per pound for Q4. If you look at the press release, you can see that the cash operating cost for pound on a U.S. dollar basis approximately $3.26 and $3.38 respectively. The increase in Q4 2018 when compared to Q4 2017 is largely due to significantly higher HFO prices and the loss of the Reintegra tax credit. Expenditures of $30.5 million were capitalized to mine, properties, plant and equipments during 2018, including $9.8 million of capitalize waste stripping costs. With that, we'll turn the call back to the operator and open the call up to questions.

Thank you [Operator Instructions]. Your first question comes from Heiko Ihle from H. C. Wainwright. Please go ahead.

Congratulations on a strong year and delivering on your promises here, I think the change in share price today, if nothing else, certainly, reflects on the good job you have done. Your Glencore off-take contract expires in May 2020. I mean, this may sound pretty far away, but philosophically, I mean, it is 14 months. Philosophically, can you just walk us through your thoughts on the renewal and changes of terms that you think you'd see given current vanadium prices and the fact that the counterparties know each other a little bit better, and all that good stuff? Just philosophically, walk us through what you're seeing if you've done it already, or what you expect to see please?

Well, not that we're counting Heiko, but it's actually 13.5 months away right now. And we are working towards just about every possible option that could result from the termination of that contract or a continuation of that contract under very different terms of what we have today. So we are in the process of hiring a sales team who could take over for Glencore, very experienced people that we're interviewing and looking at bringing on board. The timing for that is borderline perfect right now, because a lot of the conferences and whatnot where contracts for 2020 will be signed really start in the end of the third quarter beginning of the fourth quarter of 2019. So, we'll be in a very good position to do that. In the meantime, we're entertaining offers from multiple other parties who would like to step into Glencore shoes. All of the contracts that they are suggesting or proposals that they're suggesting are well within what I would call market norms for terms and conditions. And as you might suspect, we are also continuing our discussions with Glencore at their request, because they would very much like to continue this contract. So all options are on the table. We're going to work that out so that we get the best arrangement possible for our shareholders. And Ernest, why don’t I hand it over to you to talk about some of our expectations in terms of top and bottom line once the current contract is terminated?

So some of the things to think about. With Largo from Q4 onward respectively being at 1,000 tons per month run rate, so 12,000 tons per annum that translates into just over 26.5 million pounds per annum. And the way to think about the increments is the incremental gain, dollar gain per pound. So on 26.5 million pounds, we're anticipating to gain at today's prices approximately $3.75, which is in the range of $100 million that flows down to the EBITDA line. After tax you're looking at about $85 million. So how do we get there, the $0.75 is effectively the gain that we get from the difference between the commissions we currently play Glencore and the cost of actually engaging in our own logistics and marketing costs. And then the other $3, the upside that we would gain both from selling ourselves without being under the strictures of Glencore plus being able to avail ourselves much more of the high purity market. So we see it somewhere in that range $100 million on EBITDA line, call it $85 million after taxes, so very significant. And we think it's a very important next step in the company's progress and maturity. So hope that gives you some sense of what it means.

And I got one more for you and this is also slightly more philosophical question. And I'm bringing it up because Mark essentially started this conference call talking about it. You've paid off the majority of your debt, obviously, and you're actually sitting on that cash position now if you look at the $206 million in cash with $170 million of the current portion of long-term debt. And I understand that there have been mark ups continues to print money and I mean, there are some expenses with the expansion plan and all that good stuff. But I mean the expenses should be done in Q2, Q3 and you're still generating a lot of money, presumably even more after that's done. You don't, to the best of my knowledge, have any big one-time expenses in Q4 and even until then you're generating cash. What should we expect you guys to do with all of that money?

Heiko, as we noted in our press release and we'll stick to the script on that, we are as a board of directors and the strategy that the company is undertaking right now. We are absolutely focused on getting cash back to shareholders right now. And that will be in the form of either dividends or a share buyback program. But our board has been going through the educational process. They've been working very hard on the pluses and minuses of all of those opportunities that we have to get money back to shareholders. That's what we're going to be focused on. We are not focused on any M&A activities and we'll not be for the mid to near term.

Okay, that's as much detail as you’re willing to provide presumably?

Yes.

Thank you. Your next question is from Curt Woodworth from Credit Suisse. Please go ahead.

I guess just with respect to modeling questions for the first quarter, given of course basically. Can you provide some guidance around your sales volumes for 1Q, unit costs and ASP? I assume that you would basically have those numbers by now. Just because you have some inventory that you could sell down a little bit. I would assume that your unit costs would be a lot higher 1Q relative to the rest of the year just on the fixed costs absorption.

We have announced in our press release Curt what the production figures were for January and February. So those numbers are out there. And does look like we've done way better on the kiln turnaround project, which is as we let everyone know that's an every other year type turnaround project that we have to undertake. But with that little bit of extra information, Ernest, do you want to maybe talk to what the first quarter looks like in terms of total production and average sales price?

Well, to the extent that we're only at this stage providing guidance on our annual cash cost. Q1 clearly will be higher, because of the kiln refractory replacement. We may choose to provide some additional information to the market when we put up our operational press release, which would be around about, I think, April 9th or 10th somewhere in that timeline where we can actually see the exact production of the company achieved during Q1. But at this stage, I wouldn't want to share or try and frame Q1 operating costs or production but we will have that in the market very soon so effectively, we cannot but to wait.

And just to help put that into as much perspective as we can. Curt, the kiln refractory replacement job will actually conclude tomorrow, the 28th. And in the cooler section it will be done on 28th as well. That means about 72 hours of tier time and we plan to start feeding the kiln on March 31st starting production of V205 again on April 1st. So, we will have no impact to the second quarter whatsoever.

And what do you guys calculate as the average index price for vanadium for 1Q?

We haven't closed 1Q, but we're…

Quarter-to-date, not that everyone gets the European data…

So we are currently at $13.87 as the current price. So we'll be looking at about something in $14.50 to $15 range probably by the time the quarter is all said and done but again something else that we can provide in about just over a week's time.

So you think the average index price would be $14.50 to $15 for 1Q, is that?

Yes.

And then in terms of thinking about the high priority market for you this year. Can you speak to what you see in terms of high quality premiums, your gross or net to you first line and then what level of or what percent of your volume you think would be in high purity this year?

Curt, we've been working with Glencore, because as you know they actually get it to make those decisions. All that we can do is try influence those decisions, but needless to say, we've been trying to influence them relatively hard. And it's our belief that Glencore will hit at least 2,000 tons of purity sales for us this year if not higher. And the premiums that they have negotiated with the high purity customers for 2019 appear to be somewhere about the $40 to $50 per pound range at U.S., we will get half of that amount at Largo, Glencore gets the other half, hope that helps.

And what was on the 2018 basis for premiums?

If you remember we talked about that in prior earnings calls and those premiums were largely based on two year contracts that Glencore had negotiated with their customers back in late 2016. And those premiums were in two cases, one was $0.90 a pound and the other one was $0.70 a pound and so got half of those premiums whenever our sales went to those customers.

And then may be just one final one from me here. Ernest when you talk about the $3 per pound uplift post the Glencore contract expiry. What is your assumption built into the $3 per pound for what the high purity premium is?

So that is $3 for high purity and not to be indelicate about it. But the actual current structure of the Glencore contract that would no longer be in place. So as opportunity cost gain there and the gain also on just selling high purity. So I am not providing any guidance as to how to break that down but between the two about $3.

Thank you. Your next question is from Piyush Sood from Morgan Stanley. Please go ahead.

This is Lynn on for Piyush. So a couple of questions from us. First, if we could just start more broadly on the vanadium market. Are you seeing any changes to Chinese vanadium production from the steel making side of things, assuming local iron ore production may have gone up somewhat? And do you anticipate any impact on Vanadium as China looks to use more low quality iron ore while prices stay high in 2019?

Let me answer that again to the best of our ability, Lynn, that we are aware of one Chinese producer who has reintroduced domestic iron ore as their feedstock at their steel mill. And so there will be some limited amount of additional vanadium slag that is produced by that producer who will then send it to their subsidiary vanadium company and produce them vanadium from it. It will not largely impact the current supply and demand deficit that will remain the same. We are, however, starting to see -- I think there has been a couple of stone coal operating permits issued in China right now. So we do expect to see a couple of these stone coal operations start to come online later this year. The fact or the situation right now is that the supply and demand situation has not changed one bit. The steel rebar producers are in fact complying with the new Vanadium standards that took effect in November of 2018. The Chinese government is sending inspectors out to ensure that compliance. And although we do see some additional production coming online, it's going to be at the latter part of 2019. And so this supply demand deficit is going to be with us for the better part of 2019. And we expect robust pricing to remain pretty much status quo for the time being until we see how that new production comes on.

And then if we could move on to Largo's operations, a couple questions there. Could you touch on Largo's updated maintenance CapEx and expansion CapEx numbers for 2019? And how those jazz with the unchanged cash costs expectations. We would have expected the operational inefficiencies from January and February to maybe pressure 2019 costs on the high-end. But the additional expansion CapEx that you will be spending to improve operational reliability for the de-bottlenecking initiative, we might have expected to bring costs lower. So can you give us your thoughts on that?

So let me first deal with CapEx and then we'll talk about cost afterwards. So, Lynn as you know, I'll call it unconventionally and we're about $4 million U.S. on maintenance CapEx. And when we do the kiln refractory, you're generally speaking every other year then add another $4 million, so for about $8 million total in a kiln refractory replacement year. If you look at our guidance, if you built it up from let's call it base maintenance CapEx. We are looking to spend about -- and these numbers are on the MD&A, so they're all public. But we're looking to spend about $3.5 million on the kiln this year, so just shy of the $4 million that we usually estimate. In this year, in 2019, we do have some pretty significant expenditure on tailings ponds, which we won't have in future years. So that's a differentiating factor this year. There is about $2.7 million. We’re doing some crushing improvements at about $400,000 and then we're also actually acquiring some land. And there's about $1.5 million ticket on all those land purchases. So if you added it all up that gets you to about $8.1 million, you add it to the $4 million of our base maintenance CapEx that brings you to $12.1 million, which is right on the mid line of our maintenance CapEx line. As it relates to be expansion CapEx, I can't really point to anything specific that’s taking us from that $15.5 million to the '19 to '21, other than to say that we are specking the equipment with much higher standards. So there's some increases there but those are the explanations around the CapEx side. If we turn our attention to expenditures, the best I could do is maybe use Q4 operating costs per ton, excluding royalties on a U.S. dollar basis and talk about some of the increments that take us to our guidance. So if you started at $3.26, here are a couple other things that are of course in higher costs in 2019. I guess the most important one relates to mining costs. So we are mining some areas with the push backs in the place that are slightly lower quality than they were in 2018, and so there's about $0.13 impact. But again this was one sort of -- we returned to norm in 2020 onwards but in 2019, we’re seeing about $0.13. Then there is about $0.03 uptick in G&A. This relates to personnel and HR costs as we improve the lives and day-to-day running of our personal at the mine, including transportation and various other things. So, there's about $0.03 there. The other big one would be the loss of the Reintegra tax credit that happened in Q4 last year. We have no control of that, there’s about $0.06 there. And then the other item that is large to my mind would be power. The increase in power costs is not linear with our expansion, there’s some price stickiness there. So I would add in another $0.05. So you add all those factors together, you get about $0.27, which would put you at $3.53 if you bridge from Q4 costs. Now, bearing in mind that our costs on an annual basis for full year last year were $3.38, so we’re guiding $3. 45 to $3. 65 with a $3.55 midpoint, hopefully, there’s cost elements that gives you a good sense of why the increases in 2019.

So following up on that, should we expect the increased expansion CapEx to translate into lower operating costs, maybe starting in 2020?

That is correct. I'm not going to guidance during this call, but it will clearly just from a unitary impact, it will actually reduce the cost. So we can look forward to lower operating cost in 2021 onwards, especially at that 1,000 ton per month run rate and obviously, Lynn, as we appreciate we're looking to do better than 1,000, but 1,000 tons per month is what we're officially telling the world and we're going to try our best to do better than that each and every month. But it will reduce cost.

And we also add, Lynn that some of the increase in the expansion capital has to do with decisions that we made operationally to improve the reliability of the plant. That means more units being produced on a more regular basis and that’s all for the betterment of shareholder value as well.

And then just two more quick ones. In the press release, you'd mentioned that the company expects to see a significant negative re-measurement of trade receivables in the first quarter, because of pricing trends. Can you quantify that to some extent for us? I think that the Largo has really only had one prior quarter of negative re-measurement of trade receivables and that was very small. So, how should we be thinking about it for the first quarter?

I saw that that’s already coming out this morning. So the number that you showed in your note there, I think it was a Canadian dollar number, I think 34 million or so…

Yes, 34 million…

That is in an order range and again because I can't speak about the Glencore contract away for our other investors to think about it to just simplify it because we won't realized the full accounts receivable that relates to trade receivables at the year end of CAD55 million, but a lower. So something in that 30 million to 35 million range is not to untoward Canadian.

And then final question can you give us a little bit more detail on unanticipated averages back in January and February? And what caused those, can they recur again and what preventative measures is Largo is taking to make sure that that doesn’t happen?

There are unanticipated power averages that come from our local supplier, and there is actually nothing in our control on those. So we are looking at ways that we can minimize those impacts, Lynn. And I won't get into a lot of the details. But it does include having the capability of generating our own power, possibly storing our own power and trying to avoid those types of uncontrollable or unanticipated situations. The vanadium business and production is a very complex chemical operation, and I think the general rule that we all live by is engineers in this operational world is you always want to keep that plant running, it's an airplane, the only time that you really have issues is start up and shut down. So you want to make sure you minimize those activities. And some of what we are talking about earlier for slight increases in capital for the expansion project and improving reliability that will help us keep that plant online in a more reliable way, day-to-day and that is our goal right now. But those all are unanticipated, we continue to work with our local power provider on ways that we can help them with some of their continuing maintenance programs to keep the grin as fully functional at all times as possible.

Thank you. Your next question is from Lee Cooperman from Omega. Please go ahead.

I'm a little confused about couple things. You mentioned you had cash of $26.2 million, debt of $29.1 million. Is that currently or that year-end? And if it's a year-end, what does that current net cash position? With the current level of production and pricing, what amount of cash will be generating on a monthly basis? I had previously calculated $20 million a month of free cash flow. I don't know where that is with current prices, but that'd be question number one and two.

So the cash, the $206 million is here in to-day to year-end of CAD117 million, so the net Canadian was 89 million odd. On a U.S. dollar basis, that’s $67 million, $68 million at year-end. So that number that we have provided is current but we haven't provided a cash number, and…

Mike, why don't you do it now, I mean, everybody has equal footing…

No, we're going to close the quarter and then we'll tell everybody what our cash is. So what I can guide you, Lee, is to think about the cash generation. So if you're starting on a net basis during the $67 million, $68 million as you can appreciate with a reduction in price, we have some lofty heights generating close to $20 million. At the current pricing you're more in the $12.5 million per month give or take very rough. But I mean that'd be a good number to use.

So basically roughly speaking, there'll be about $125 million of net cash come June when you're in a position to do something. Is that about right?

That's correct except for the other thing that's you got to remember is we had receivables at year-end. So as I said to Lynn earlier on the call, we're not going to recover the full 55 but there will be some -- there will be another $20 million odd there from receivables that will obviously flow into cash. But excluding that that impact, yes, you're 100% correct.

And what amount of minimum cash you need to run the business?

That’s about $20 million to $25 million.

So roughly speaking doing the round numbers maybe $100 million available for dividends or stock repurchase or whatever?

Yes, a bit more, $100 million to $120 million but in that range, yes.

And are you guys surprised at current prices, because I had a feeling we speak to a consultant, you speak to the same guy looking for materially high prices. Are you guys surprised and what do you see as the outlook for pricing?

I'll answer that one, Lee. We absolutely really are having a hard time figuring out what's causing things to happen in the market the way they are right now, because the fundamental supply deficit has not changed one bit. And in fact orders for vanadium are going up in China as a result of this rebar standard. So, it's very, very difficult to explain what's going on. But I think that the general consensus that we're reaching in the industry is that there is an anticipation for additional production coming on in the latter part of 2019 and that has just caused a mood shift in the market. But the fundamental supply deficit has not changed and in fact, is getting worse every day and inventories do not exist. So, I still expect that we're going to see the sacks of the market take over and the mood part of this thing is going to go away, because there just is not enough vanadium.

If I could make a suggestion for you, and I'm not telling you what approach to take or what decision to make. But I think you guys have to decide what you think your business is worth, assuming normalized pricing. And if the stock is materially below the value of your business, I think one -- and I don't know Canadian low, so I maybe saying something that’s not practical from the Canadian standpoint. But you have so many different series of warrants with different strike prices, determine the price you prepared to buy your stock back if the determine buying stock takes press into over paying a dividend, and put a different price each warrant series to take the warrants out. This way you don't affect the liquidity of the common stock and you take out the warrant guys essentially getting a free ride. And they have to put up their money to exercise the stock. And I would look at that as a post to stock repurchase, in other words for each different warrant outstanding give a specific price you prepared to pay for that warrant, taking to account the exercise price of the warrant, minimize your use of cash, it still give you a position to buy back more stocks should the stock not respond favorably to the buyback. But I'm happy to talk more about that offline if you like.

You welcome those discussions whenever we get them with you, Lee. So we will we will set up a separate call on that.

Your next question is from James Young from West Family Investment. Please go ahead, James.

My question pertains to the recovery rates, and I believe for '18, you had mentioned that you had recovery rates about 77% with the kiln refractory when that's completed. What would you expect the normalized recovery rates to be on an annual basis? Thank you.

I think the way to look at this right now is that 2018 was one of our better years for recovery. And I'm very proud of what the operations team was able to do during the calendar year, particularly knowing that they had to struggle with a refractory problem in the kiln for most for 2018. With that issue now being addressed through this turnaround that will be completed tomorrow, you'll see that recovery rates start to come in a lot stronger, a lot more reliably and it will be less volatile during the course of the year. So our goal as a company is still to pursue recoveries that are 80% or higher. And that recovery rate is just free money to the company. So it's a huge focus that we have at the operational level and we want to bring that recovery in with less volatility as we continue to learn how to operate our plant better and better every day.

And 1% change in the recovery, what does it mean to production on a monthly basis?

Jim and I've had this discussion before, so I hesitate to answer that. But it can be on a book basis it's about 100 tons in fact. And what Mark was saying that we haven’t provided guidance and just to [Technical Difficulty] 2018 is our big recovery year. So I think let's being fair to ourselves and treat that is the baseline and we're going to try and work towards 80. So, I know that’s a pretty broad range. But as you can appreciate, those 1% upticks have a very significant impact, so upwards of 300 tons. So if we can achieve it, we'll do our best to actually get to that level, let's see how we go about. But we're going to be in and around that range.

And just to add a point that Ernest just made that 77% was our best ever. And based on looking at other vanadium operations in the world that is considered absolute world class operation, so we'll be improving upon on our world class situation if we can get it above 77%.

And then the last question is in your production guidance for 2019, what were you assuming for recovery rates?

We basically assume the same as for 2018. So we are in an around that 77% range.

Thank you. Your next question is from Brian Nunes from Gramercy. Please go ahead.

Couple of questions from me, I am seeing in the MD&A, you'd note that there's going to be no acquisitions planned M&A. But there is a big exploration program underway to further define the resources in the various properties. And there was talk of potentially doubling the size of existing operation. How does that -- has that tabled for now, if the talk is returning value back to shareholders rather share buybacks or dividends, or is that still on the table for the board to decide?

The project that we are undertaking to look at potentially doubling the production capacity, we throw that into category of organic growth, Brian, and that is absolutely on the table and that effort is continuing. We hope to be able to publish some results on the engineering, the exploration and the market study efforts that we're undertaking in the near future here. So that is all on the table. The note in the MD&A and in the press release really talks about and is designed to make sure that we make it clear that M&A activity in terms of buying other companies or other assets outside of what we have in Brazil is not on the table and the board has been very specific in their direction on that point.

So just to make it crystal clear, part of the $100 million to $125 million available cash spend to be earmarked towards developing an expansion of the existing operation?

Yes.

And I suppose we will get updated results from the drilling on our next call or before?

Hopefully before, and we're very excited about that that's been a major undertaking. And our geology team has been working literally round the clock time to get this data together. But it is a very large undertaking, a lot of meters are being drilled and we're getting pretty excited to finalize all the review of that data and get it out to the public.

You mentioned that there is some stone coal mines that are being given licenses that could potentially come back on at the end of this year. Given the steps shift in the amount of tonnage that requires vanadium import and steel making with the introduction of these new rebar standards. Do these operations offset the existing supply deficit? It's my understanding that the supply deficit potentially loss at least a year, year and a half, two years. And that maybe is a little bit of change from that view. Just if you could expand a little bit on what you see as the potential production coming online from these stone coal mines?

Brian, part of the problem as always is the data you get from China, you need to really sit and think about for a while. But the stone coal production numbers that we're getting from the actual stone coal operators themselves those numbers are numbers that have never been physically achieved at any of these mining sites. And so we have to take those numbers and try to put some reality into them. And it is our opinion that although there will be some increased level of production by the end of calendar year 2019, it will not take care of the supply deficit that we have, not only in China but around the rest of the world as well. And the sum total on production versus demand worldwide remains in deficit. So our opinion hasn't changed there. The deficit maybe slightly less than what we thought, because of the new production coming on towards the latter part of the year, but we also don't believe that the stone coal operators will be able to produce anywhere close to what they're suggesting, because they never have. And remember too that the stone coal production that's coming on, I think this is a very important point as well. The stone coal production that is starting to get some life that will be very expensive production as well. So, in some ways it starts to reset what that minimum market price would be for the materials, because they are the marginal producers.

And I was scratching my head looking at your share price to be honest as I'm sure you do to. And part of the thinking here is we see in other industries maybe targeting a different investor base, maybe resetting the targeting a larger investor base. And having your primary listing in Canada, in fact still strategic for the company when it's some presume producer, let's be honest, and it’s a new technology producer in terms of vanadium and what the uses that can be. And maybe a listing in a more developed market might get you better coverage on your stock price, on stock by the analyst pool and maybe drive a larger investor base towards you. Have your board been discussing this or is this something that the board could undertake?

It’s actually something that the board has discussed and will continue to discuss. We think those types of ideas are good ideas. They're welcome, Brian, and the board has had those discussions. So we will continue to evaluate that. And as the decisions are made by the board, we will announce those. But we do welcome those ideas.

And then just the last thing, getting on the power and the previous called talked about it a bit. And power costs going up, seeing disruptions that are outside of your control. Is it something like your own power generation, specifically targeted as a use of cash this year, or is there something that you're still concentrating? I mean, we've seen lots of mine programs now, mine companies especially look at South Africa with the troubles of the state utility has starting to develop their own power solo programs and stuff like that. It seems to me being at your mine that there is definitely space and capacity for you to do something similar.

First of all, let me note that our power provider doesn't have anything close to the issues that South Africa has for power…

No, I am not suggesting that…

We aren’t anywhere in that category at all. But we do look at producing every day what we want to produce every day as being a primary target of every employee in the company. And if that means that we need to look at ways to avoid these unanticipated power disruptions then we get our engineering team to start evaluating different ways that we can do that. I don't anticipate any type of significant expenditure or whatsoever in that category this year, but we are a constantly evolving organization and we learn from our past. And so as we take a look at these power disruptions, we look at it as yet another opportunity to take a look at the issue of reliability and ability to produce regularly and we will evaluate that. But I don't anticipate anything other than engineering studies this year. The performance has actually been pretty good by our local utility providers. We had more than a regular number of power outages in the first quarter but we don't anticipate that continuing at all, and they've had [Technical Difficulty].

Thank you. That concludes today's Q&A. I will now turn it back over for closing remarks.

Thank you, operator. And thanks to everyone for joining us today. As we noted, Largo’s fourth quarter and full year 2018 results press release, financial statements and MD&A and our updated corporate presentations can be found in the investor relations section of our Web site at largoresources.com. That concludes our call. Have a great day, everyone.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and I expect you please disconnect your lines.