Largo Inc. (LGO) Q2 2019 Earnings Report, Transcript and Summary

Good morning. My name is Joanna and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Largo Resources Second Quarter 2019 Financial and Operational Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 second quarter 2019 results conference call. Today's call is being recorded and a replay will be available starting tomorrow in the Investors section of our website at largoresources.com. Our second quarter 2019 results press release, MD&A, and financial statements are also all available on the company's website and on SEDAR. 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 to non-IFRS financial measures such as cash operating costs, cash operating costs excluding royalties, revenue adjustment payables, revenues per pound sold, Canadian sales per pound sold, revenue adjustment per pound, and estimated revenue will also be discussed during this call. Actual results could differ material from those anticipated and Risk Factors that could affect results are detailed in the company's Annual Information Form and other public filings, which are also available on SEDAR and on the company's website. Further information regarding Largo's use of non-IFRS measures is available in our second quarter 2019 results press release and in the company's MD&A for the three and six months ended June 30, 2019, which is also available on SEDAR and on our website. The financial amounts presented today will be in Canadian dollars, except as otherwise noted. Market and industry data contained and incorporated by reference during this call concerning economic and industry trends is based upon good faith estimates of our management or derived from information provided by industry sources. In particular, we note that market data provided on this call is derived from information provided by TTP Squared, Incorporated. Largo believes that such market and industry data is accurate, and the sources from which it has been obtained are reliable. However, we cannot guarantee the accuracy of such information and we have not independently verified the assumptions upon which projections of future trends are based. Speaking first today will be Largo's Chief Executive Officer, Mark Smith. Speaking second will be Largo's CFO, Ernest Cleave, who will provide additional detail on Largo's Q2 2019 financial performance. Following Ernest, the company's Independent Consultant, Mr. Terry Perles, will then provide an update on the vanadium market. Finally, we'll open the call to questions. I will now turn the call to Mark Smith for opening remarks.

Thanks, Alex, and welcome everyone to our quarterly update and earnings conference call. Overall let me say that I'm really, really pleased with the operational performance during the second quarter though profitability continue to be impacted by the decline in vanadium price coupled with the re-measurement of trade payables under the Glencore contract. With the expansion project ramp-up expected to conclude by the end of Q3 2019, the company is well-positioned to maintain its strong operational performance in the second half of 2019. So, as I noted, I'm really pleased with the performance of our operations in the second quarter of 2019. Production for the Maracás Menchen Mine in Q2 2019 was 2,515 tons of V2O5 representing an increase of 20% over the first quarter in 2019 and 2% over the second quarter of 2018. V2O5 production of 926 tons in June set a new monthly production record following the initial expansion project ramp-up which included the start-up of the new deammoniator unit. This was then superseded in July with a monthly production record of 1,042 tons representing an increase of 13% over the June record the prior month. Global V2O5 recovery rates averaged 79.1% in the second quarter of 2019 demonstrating another quarter of strong global recoveries for the company. The good performance during the quarter is largely due to the operational stability throughout all sections of the plant and significant process control improvements made by the operations team all of which are sustainable. The expansion project to increase production capacity by 25% at the Maracás Menchen Mine continues to progress successfully following the start-up of the new deammoniator unit. The expansion project is expected to be completed during Q3 2019 with the start-up of the new ball mill and evaporator units. The ramp-up of all areas is expected to be completed by the end of Q3 2019. On June 19, we announced the appointment of Mr. Paul Vollant as the Company's Director of Sales and Trading who will lead the development of Largo's internal sales and trading business starting in September 2019. Paul brings extensive commodity sales and trading experience with a focus in specialty metals and we are extremely confident that his industry experience and knowledge especially in relation to the high purity market will be invaluable as the company evolves. On the exploration front, we announced an updated mineral resource estimate for the Novo Amparo Norte deposit or NAN as we call it, which is located approximately 6.5 kilometers north of the company's current mining operation at the Maracás Menchen Mine, Campbell Pit. The company's exploration program successfully delivered a significant increase to the overall resource base at NAN with the successful conversion of resources from the inferred category to the measured and indicated categories in addition to increasing the inferred resources. The updated resource estimate is based on approximately 12,912 meters of diamond drilling over 88 holes which included 5,404 meters in 47 drill holes completed in 2019 and 5,549 sample intervals across the deposit. Highlights of the updated mineral resource estimate for NAN include total measured and indicated mineral resources of 12.23 billion tons creating 0.88% V2O5 with magnetic concentrated grades of 2.41% V2O5. Inferred mineral resources of 11.33 million tons grading 0.9% V2O5 with magnetic concentrate grades of 2.46% V2O5. Following the successful increase to NAN's overall resource base, the company will now focus on planned exploration of the other satellite deposits during the second half of 2019. Drilling will focus on the Gulçari A Norte mineralized zone which lies to the north of the Campbell Pit and on the Gulçari A South target which lies just south of the Campbell Pit. Exiting the quarter the company had a cash balance of approximately $190.3 million and as of July 8th, 2019, the company is now debt free following the full repayment of its outstanding senior secured notes. We are extremely pleased of this accomplishment having repaid the company's total outstanding notes in about 12 months. In summary, as I stated at the beginning of my remarks, I'm really pleased with the operational performance during the second quarter though profitability continued to be impacted by the decline of vanadium price coupled with the re-measurement of trade payables under the Glencore contract. With the expansion project ramp-up expected to conclude by the end of Q3 2019, the company remains well-positioned to maintain its strong operational performance in the second half of 2019. With that, let me turn the call over to Ernest, who will provide details on our second quarter 2019 financial performance.

Thanks, Mark, and thanks for everyone for joining the call today. The company recorded a net loss of $20.5 million in Q2 2019 compared to net income of $90.7 million in Q2 2018. This was primarily due to the decrease in revenues and an increase in operating and finance costs during the quarter. Following the $46.3 million reduction in revenues as a result of the re-measurement of trade receivables payables under the Glencore contract, the company recognized revenues of $29.5 million in Q2 2019 compared with revenues of $103.3 million in Q2 2018. Revenues per pound sold in Q2 2019 was $5.39, that's US$4.02 compared with $18.91, US$14.62 per pound in Q2 2018. Vanadium sales from a contract with a customer was $75.8 million in Q2 2019 compared to $100.7 million in Q2 2018. Vanadium sales per pound sold in Q2 2019 was $13.86 that's US$10.33 compared to $18.42 being US$14.24 per pound in Q2 2018. This decrease was primarily attributable to a decrease in the V2O5 price with the average price per pound of V2O5 of approximately $8.59 that's U.S. dollars for Q2 2019 compared with approximately US$15.44 for Q2 2018. Assuming the quarterly average price per pound of V2O5 of approximately US$8.59 and quarterly V2O5 sales of 2,480 tons, the company could have earned estimated revenue of $62.9 million that's US$46.7 million in Q2 2019. The company's trade payable balance at June 30, 2019, was $67.4 million and the revenue adjustment payable was $78.9 million. Assuming V2O5 prices remain the same as of June 30, 2019, the company's total estimated revenue adjustment payable to June 30, 2019, is $94.9 million. At the date of this press release, the company's estimated revenue adjustment payable for V2O5 sold to July 31, 2019, is approximately $99.5 million. Operating costs for Q2 2019 was $33.3 million compared to $30.2 million in Q2 2018 and include direct mine and mill costs of $22.6 million, depreciation and amortization of $9 million, and royalties of $1.8 million. The increase in operating costs over Q2 2018 is primarily attributable to an increase in production, the impact of the ramp-up in production following the completion of the kiln refractory replacement in March 2019, as well as increased HFO and diesel costs. Cash operating costs excluding royalties in Q2 2019 were $4.43 that's US$3.30 per pound compared to $4.32 again US$3.35 in Q2 2018 representing an increase of 3%. The increase seen in Q2 2019 compared with Q2 2018 is largely due to the impact of foreign exchange as well as increased HFO and diesel costs. Finance costs in Q2 2019 were $10.9 million representing an increase of $2.5 million from $8.4 million in Q2 2018. The increase was primarily attributable to the expensing of the deferred transaction costs on the long-term debt as a result of the committed redemption of the company's 9.25% senior secured notes which were originally due in 2021, and as Mark mentioned that was completed in July 2019. The company generated positive cash from operating activities with net cash provided by operating activities of $21.8 million compared to $69.5 million in Q2 2018. This decrease was primarily due to revenues exceeding direct mine and mill costs and royalties by $5.1 million in Q2 2019 compared with $80.7 million in Q2 2018. This contributed the cash used before non-cash working capital items of $7.8 million compared with cash provided before non-cash working capital items of $77.7 million in Q2 2018. Cash used in investing activities in Q2 2018 was $19 million representing an increase of $13.9 million from the $5.1 million seen in Q2 2018. This increase is primarily due to the expansion project being undertaken by the company in 2019 and which remains on budget. Expenditures of $35.2 million were capitalized to mine properties, plants and equipment for the six month ended June 30, 2019, and that includes $4.9 million of capitalized waste stripping and push-back costs. ,:

Thank you, Ernest. So V2O5 production in China in July totaled 4,879 metric tons of pure vanadium, the highest production level on a monthly basis since June of 2014. The first seven months of 2019 vanadium production in China was at an annual rate of 54,363 metric tons of V versus a rate of 44,834 metric tons of V per year in the same period of 2018. That means productions increased about 21% thus far in 2019 versus 2018. Looking at production change from January to July 2019 the V2O5 production in China has increased 7.5%. If we look at production of vanadium from stone coal in China, the total production in July was 538 metric tons compared with 349 metric tons in January, metric tons of pure vanadium. Vanadium production from stone coal in China has been flat basically from March through July at a rate of about 500 metric tons of V per month. And this compares with about 469 metric tons of V per month produced from stone coal in October of 2018 before the price spread clearly took-off. So we haven't seen much increase in production from stone coal thus far though that the price gyrations we've seen. In China vanadium carbon nitride alloy production surged in July to historical high of 3,875 metric tons of vanadium versus 2,077 metric tons of vanadium in May 2019, that's an increase of 86%. This vanadium carbon nitride alloy is the alloy that's predominantly used in high shrink rebar in China. So it seems like rebar production also is very high now in July week of June -- sorry June 14 rebar production in China peaked at 3.82 million tons slightly lower in July but year-to-date rebar production in China is up about 28% compared to last year. So, in summary, China would seem that broader compliance with the new rebar standard combined with very high rebar production is resulting in growth in vanadium consumption, while production growth has been limited due to environmental issues and relatively weak prices in the first half. As a result of all this activity ended towards V2O5 in China has been drawn down by 1,365 metric tons of V from the end of April 2019 to the end of July. Chinese exports of vanadium in June totaled 571 metric tons of V, that's up from May levels by 28%. If we look at total exports in the first half, the rate was 7,800 metric tons of V per year and that's down by 12% from the same period in 2018. On a global basis, Vanitec reports global vanadium production slightly surpassed vanadium consumption in the first quarter of 2019 for the first time in many years. On a cumulative basis, vanadium inventories globally has decreased by 12,000 metric tons of V or approximately 1.5 months worth of consumption from the beginning of 2017 till the end of Q1 2019. For 2019 we're projecting total vanadium production of 102,800 metric tons of V and we're projecting consumption of 104,000 metric tons of V. Our projections assume all the previously announced expansion plans of vanadium production in China actually occur throughout this year and next year. We also project ongoing increases in consumption [indiscernible] operation as the new rebar standard becomes universal. We project a need for 9,200 metric tons of V Chinese exports in 2019 to maintain a balanced market. In first half of 2019 exports were at a rate of 7,900 metric tons of V and we expect that rate to drop in the second half of the year. Looking at pricing in China from July 16 through August 6, Chinese V2O5 prices rose about 16% from US$8.12 per pound of V2O5 to $9.39 per pound of V2O5. Prices in China over the last week had been relatively stable pretty much either side of $10. In the West, prices reported by Metal Bulletin have risen from mid-point of $6.45 per pound of V2O5 on July 31 to US$7.25 per pound of V2O5 last Friday. We do anticipate that Western prices will follow Chinese prices up in the coming weeks. Over the balance of the year, we expect upward pressure on vanadium prices globally, as Chinese consumption continues to expand with limited supply increases possible in the near-term causing further completion of inventory and further tightness in the market. So I guess the takeaway is we did see production surpass consumption in the first quarter. We still have a massive amount of inventory that's been depleted from the system globally. And looking forward, we're seeing consumption accelerating now in China. And supply is very slowly increasing and we do expect a deficit again this year. And I think that's all I have got, Ernest -- Alex. Thank you.

We will turn the call over to the operator and open the call to questions.

Thank you. [Operator Instructions]. And your first question is from Heiko Ihle from H.C. Wainwright. Please go ahead.

Hey guys. Thanks for taking my questions. Thanks to Terry for the additional color.

Thank you.

Just a bit conceptually here, I mean we're looking at cash operating costs of $3.54 a pound, pricing isn't quite where we'd like it all to be. And some of the recent geopolitical turmoil that we're seeing around the world is probably going to spare at least some large scale investments. Obviously you still sold for about $10 a pound in the quarter and we cover precious metals most precious metals firms would do anything for more urgency mostly yours. But I mean the state of course right now are $7, $7.50 a pound, but just conceptually is there ever going to be a market at which time tougher decisions regarding production capital investments and overhead are needed. And if so what kind of price is that. Is there any more color you can provide regarding your thoughts on this?

Heiko, I will start out. This is Mark. First of all every single one of the capital expenditures strategic decisions related to sales and production are all taken seriously regardless of price. We go through those six points thoroughly at the management level and the board level. I think the point of your question is really I'm going to go back to the Glencore contract because it's very hard to make these decisions given the Glencore contract and the revision out of trade payables that we have right now. It complicates those decisions immensely versus what market prices are. And so it really -- it really makes that decision that much more difficult. But I think that we are really at this point in time and effective today, we have nine months left on that Glencore contract. We're very focused on getting ourselves ready to go with our own internal sales team where we can make decisions based on market pricing rather than on a Glencore contract pricing mechanism. And I think you'll see a lot more opportunities available for the company because we don't have to be so conservative with our cash given the payables that we have to Glencore right now. So hopefully that helps answer it a little bit. I would welcome thoughts that you may have on it as well, Ernest.

Thanks Mark. It's an interesting question and Heiko, thank you. I -- I'll go back to the fact that we if we're not the lowest because we're in a grapple with this but if we're not the lowest, we're one of the lowest cost producers of vanadium in the world. So I think Largo will react to market conditions only in the most extreme situations. I think if anything we should anticipate that Largo would be the survivor in adverse market conditions. So we're not looking to -- we're not looking to change our strategy but to follow on with what Mark saying I think the major opportunities for the organization lying in being able to capture additional margin through your sales and marketing division. So hopefully that's enough of an answer.

I think that’s extremely helpful and thank you for the color there. And just one quick clarification I have for you in the release you stated that with the new resource base for NAN, you have no folks in the other satellite department, can you just provide some incremental color on your drilling program regarding expenditures, People Meters and maybe even what you're expecting to see at Gulçari A Norte and Gulçari A South, please. Thank you very much.

Yes, the initial sampling that we've done out in those areas are very attractive to us. We like the ore grades we're seeing, we like the initial results we're getting from the concentrated grades as well, and hopefully as we've tried to educate people on the processing of vanadium, everyone realizes the importance of that concentrated grade because that's where we really excel compared to any other vanadium company in the world right now and that's what really keeps our costs as low as they are. But we have some pretty high hopes for those areas. We really wanted to focus on NAN to start with Tyco because we had a lot of data at that area to start and we wanted to demonstrate to the world that we have a resource base out here that we think is going to be available to us for a very, very long time. So the work on NAN was focused because we had a lot of data there already but as we do this preliminary drilling in these other areas, we're seeing things that attract us even more and we're having some second thoughts about maybe, we ought to drill those areas out a little sooner than what we thought because of those initial results look that good. And so we are redirecting the drilling program to some extent but we do and last year I think I mentioned this, we put together about a five-year drilling program for the site, and just needs kind of moving some of those parts around and doing something sooner than others is all it needs but we're still on course for a five-year drilling program that will really start to define what we think is probably one of, if not the largest resources for vanadium in the world. Ernest, do you want to talk about the dollars and cents involved?

Sure, Mark. We did about 12,900 meters on NAN. I think over the remainder of the year, we'll do another give or take 8,000 between the various deposits to gain as you release data you've continue defining and expanding and actually refining our operational plans. But we're going to be in the region of another $2 million, $3 million spent over the remainder of the year. Again they're not big dollars but they're certainly far more than we've historically been that's about it.

Thank you. Your next question is from Gordon Lawson from Paradigm. Gordon, please go ahead.

Hey, good morning everyone. Just two quick questions for you. So first can you please talk about any planned maintenance for the remainder of the year and also to hit your production target of 1,000 tons per month at around 1.5% effective grade loading assumption of 2,500 to 2,700 tons per day be in line with via the target?

Ernest, do you want to answer that?

Yes, so I don't have a maintenance number for you. We could certainly take a little fly. I don't mind sharing that, bear in mind, they're not big dollars. We have got yes -- we have got sustaining CapEx -- yes we’ve got sustaining CapEx expenditures here [ph]. I'll give it to you in U.S. dollars of between $6.2 million to $8.5 million over the remainder of the year. I know that's not maintenance. Our maintenance is fairly de-minimis over the remainder. And then in terms of your tonnages, it sounds about in the range as well.

Okay, great.

Correct. The one thing that we're pretty proud of obviously, Gordon is we've already exceeded the desired rates per month in July. So we're anticipating very similar if not better results throughout the rest of the year.

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

Thank you very much. If you don't mind I have like I think questions will be interesting to everybody. So let me just put them out there and you handle them in any order you’d like. First maybe to Terry in every cyclical business there's a concept of peak, trough, and average. I’m just curious if you have a view, I assume peak, we saw the prices vanadium 30 bucks a pound that that probably represents the peak. What do you think the trough is and looking at a year, where do you think that normalized price of vanadium is likely to be, that's question number one. Question number two, we obviously have a nice spread between our production cost and our assigned prices even in today's low price and our problem has been this down re-measurement contract which is sucking out our cash. What would you guess would be the low cash position of the company given current prices and your obligations to Glencore on the re-measurement contract? And then next question would be your comfort in replacing Glencore. We're all looking forward to getting rid of Glencore which is sucking our blood out but are we comfortable that when they're gone that we could perform their role effectively with very little incremental risk. And finally a tough question for you. As you know we're talking with a company and it's got one commodity, if I look at unrelated company but close to home. Sierra has got copper, zinc, lead, gold, silver et cetera. Have you ever thought about the virtue of diversifying the shareholder risk by being part of a larger company that might have committed to the metals business? And by the way I congratulate you guys have done a very good job in running the company in this Glencore truck contract is what it is but help me on those questions I just asked. Thank you very much.

Thank you, Lee, and again thanks for joining the call. Terry, you want to start out with question one on peak, trough, and average?

Sure. Thanks, Lee. I think we can be pretty sure that the $33 price we saw in China in November was probably the peak. As I do my analysis of the market, I look at a few things. When we look at a long-term market equilibrium price, I look at the inflated average monthly prices over the last 15 years. And if I look at the distribution chart, I'm going to see a major peak at $6 and in an environment when supply meets demand and the cost of production drives the market equilibrium price, I think there's a reason that that number exist $6 is probably the long-term price if we look back. We might be able to argue going forward that that long-term market clearing equilibrium price is moving up. If in fact this vanadium battery takes off but I guess we'll have to wait to see what happens there. The distribution chart will also show very interestingly a second peak at $14 to $15. And I do believe that demonstrates a stable point on the price spectrum, when you're in a situation like we are now where supply is really struggling to keep up with demand to get prices much above that we do see some destructive loss of market share through substitution and we see some very high cost strange new sources of production coming in, so I don't see a lot of stability above that level not that it can't go there temporarily. And on the downside I guess history would tell us the price in the last 15 years, we have seen prices just below $3 and that's an environment where everybody's losing money. That's what the historical data would tell us. Just to comment maybe on the question about replacing Glencore. I'm pretty confident that Largo is going to be able to be very effective and in fact more effective going into the market directly than via Glencore. There's a number of conflicts that don't allow Largo to reach out particularly to some of the higher margin, high purity applications by having Glencore standard between Largo and the customer base doesn't create an environment where Largo can put their best foot forward. And I'm sure in that market there's going to be an opportunity to dramatically improve things. And as far as the commodity side, the steel side of the industry I think Mark's well in touch with all the major consumers for the past several years and they are ready willing and able to discuss contracts from the first raw metals to the Nucor's of the world, we have been in discussion with those people and I'm ready to sit down and talk. So I don't have any concerns about Largo being able to go to the market directly.

Yes, just to follow-up on that, add to it, Paul Vollant who we brought on now as our Director of Sales and Trading as I mentioned in my remarks actually has a tremendous level of experience in the marketing of high purity V2O5 in particular and knows the master alloy business and the contacts in that business exceptionally well. And that really bodes well for our overall sales strategy which is going to be to maximize high purity sales and then fill up the rest of the sales with Ferro Vanadium in the steel industry. So I like Terry, I'm extremely confident in our ability to take over those sales. If that's the course that ultimately takes place and we are -- and we have been preparing ourselves for this for over three years. So this isn't something that is just hit us right now, we've been preparing for it. And I'm very confident the number of customers that are already contacting us directly really amazes me. And that's a guy that's got 38 years of being in this business. I'm thoroughly amazed at the number of large off-takers who are contacting us already. We have multiple additional trading companies et cetera that are also interested in helping us down the road and we certainly know how to negotiate off-take contracts a lot better and we will learn very, very well from that Glencore contract. So I'm very encouraged by that. Thanks. Thanks for that, those comments on that, Terry. Ernest do you want to handle the second --

Sure.

Question which is the low cash position we expect.

Absolutely. Just got off with some opening commentary. The one thing to think about looking at the financial statements as we record the obligation of the re-measurement in each particular period, but as you can appreciate the repayment of obligation, so when we actually physically give the money back happens on a slower pace. If you look at the cash balance at the end of Q1 versus Q2 you'll find that it basically hadn't moved, I think we were $190 million at the end of Q1 and we remained at $190 million. So my answer to the question over the remainder of the year towards year-end, you should expect the cash position to remain neutral. Then separately from that looking at the revenue adjustment payable as we now call it, we have over $190 million on the books right now. We've guided the market based on the current price assumed over the remainder of the year that that payable and these are Canadian dollars as well currently is $99.5 million. So you can see we have a lot of headroom there to actually make good on our obligation from a cash perspective. But in terms of what you should expect over the remainder of the year is effectively a cash neutral situation because we don't -- we do not repay that obligation as quickly as it is becomes normal [ph].

So I guess what I'm trying to look at it, if you look at it over six to nine months to this contract and how it has gone, cash at July 31 was CAD 90 million, US$67 million. We do expect that number to be higher or lower or about the same between now and let's say the end of the contract. And then just going on the basis that the price of vanadium stays where it is. So assuming that constant price of vanadium, would you expect your cash to bottom out around US$67 million or CAD 90 million or would you expect to go lower.

It's CAD 190 million which is about US$146 million I guess.

US$142 million.

Yes, I just use one country exchange. So by year-end that that cash balance should be approximately the same again approximately. By the time, the Glencore contract is extinguished or we actually transition to selling ourselves at that point thing, assuming the same process, the cash balance will be lower. What I can guide, what that number would be. But we have --

I'm confused -- I'm confused, Ernest I'm confused a little bit. The cash balance of $190.3 million was at the end of I guess the second quarter.

Yes.

What I'm really looking for is a number after you payoff Glencore and that liability is extinguished.

Right. I understand.

That number now is CAD 90 million, US$67 million, do you have any sense of the price of vanadium stayed where it is whether that number at the end of the contract will be higher or lower. You're obviously generating earnings because you're selling the commodity at a higher price than your production cost and you're giving back money to Glencore. Do you have any idea or you just can't answer that. You just don't know the answer.

No, No I can answer it. If the price remains as is it shouldn't really fundamentally change from the $99.5 million. So remember that we've bifurcated that plant what we call the revenue adjustment payable out of our total receivables payables, so that $99.5 million as of today, it doesn't change you will pay that back over the course of this year and the remainder of next year. But I don't see that changing as long as the price doesn't go down from this point forward.

Got it. Okay. And at what price we will have to recover to with the longer re-measurement would not even be an issue, if we got to Terry said in the second peak at 14 or 15, if we got to 14 or 15 vanadium basically with the re-measurement not be an issue anymore after you paid-off your deal?

No, because launching most of that is already baked in candidly, so, yes, you're going to maybe grow the receivable side at the time which is really just the periods of time that you're waiting to get paid by Glencore. But looking at the payables side that we've sort of I wouldn't say accrued but became obligated for up to this point. That's not going to change dramatically as the price do not vary suddenly over the next couple of months, we probably crave it down a little bit. But I wouldn't expect too much. So from conservatism, I would just stick with that number and assume that that's getting paid back between now and the end of May 14.

All right. Let me elaborate on the fourth question which you have not gotten to with regard to get to. You have -- you guys are doing a good job in running the company. You have what looks to be like a strategic asset, high quality vanadium, long live reserves, it seemed to me that you know one way of diversifying your shareholder risk is to be part of a company where they have multiple commodities they sell rather than being reliant upon one commodity. What do you think the activities of the board and management towards a strategic combination assuming you can get a reasonable price for the assets? Does that make any sense to you guys or you rather just go it alone?

I think we would serve our shareholders Lee in the best way possible and we would evaluate any offer that was brought into us particularly by a sophisticated mining company who's looking to diversify. So we will try to maximize shareholder value period in all of our decisions including potential offers from other companies. But along the lines on a single commodity, we don't talk about it very much but in our ore deposit, we also have titanium, and we also have iron ore. And the company internally is working on multiple programs to recover that titanium and make it available for sale and that is a very sought after product and we think that we can probably potentially get into the TiO2 pigment business where the pricing of that material is quite favorable. We're also working very hard on trying to clean-up the iron ore enough so that we can optimize pricing for that iron ore as well. So we are looking at trying to expand our product base. And I think that we've got some very good projects that are being worked on right now that all have very good indications for success that the metallurgy takes a little bit of time to figure out on these things and we're going to continue to work on those and hopefully have some good news in the near future on some additional product source.

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

Hi, thanks for taking my question. Just on page 19 of your MD&A, I'm trying to reconcile the -- maybe you can just make me understand the vanadium sales from a contract with the customers listed as 5,467,000 pounds but in the V2 sold subject to re-measurement thousands of pounds is 4,564 in Q2. I'm just trying to understand why only 83% of the V2 sold is subject to re-measure, is that just the price it was sold or based on the year-end, quarter-end mark. Maybe you can just help me understand that?

No, they're looking at different periods, so the one you’re looking at what’s actually sold in the reporting period. The re-measurement relates to adjustments for sales that were made in prior periods and they could be across many periods. So as a consequence, there's no comparability between those two numbers. So I would just make that note in our various documents as well there. If you try to do it on a unit basis then for that reason alone it won't sum. But if you just look at on a -- on the dollar basis, obviously it does work but that's the reason Brian.

I'll call you offline maybe; I don't want to take some other people's time on this. Hi guys, this is a follow-up. In terms of your high purity sales basically flat year-over-year just wonder what activity the company is taking to pre-qualify with -- you see a lot of inbound increases there a pre-qualification process that you go through that can potentially help increase those high purity well -- will just step as high purity but at least be able to sell it as high purity?

Brian, there are four vaster alloy producers that take high purity V2O5 alloy with aluminum in the world and we are qualified at all four of those entities, we've been qualified for a year-and-a-half to two years. So we've got that done very early. The part that we have zero control over right now is how our material once we sell it to Glencore, they get to take it upon themselves to figure out how they want to sell our high purity to those customers and we have very little influence over that. But from today we'll have a lot of influence over that.

Thank you. Your next question is from Randy Rochman from West Family. Please go ahead, Randy.

Thank you. Congratulations Mark and Ernest wonderful job handling the things you can't control. As Lee said we can't get -- can't wait to get out from under this contract [indiscernible] with Glencore.

Thank you.

So I want to follow-up on Brian's comments regarding the high purity segment. I was recently talking with some people from Stratcore and looking at different premiums that higher premium vanadium end-product receives gifts and I've seen numbers end between five and 15. Obviously it's got to undergo some chemical transition. From what I understand right now is you're sharing basically about a $2 premium on as you just commented on a very low quantity as permitted by Glencore. So how do you envision that changing come May of next year?

Well a couple of points there, you're being a little bit generous. From what we understand the premium is actually about a $1.45 right now and Glencore negotiated with their customers and we get half of that right now. So what changes Randy we no longer are under the Glencore contract is first of all whatever the premium is we get 100% of it rather than 50% of it and we'll be in a better position to negotiate that premium differently. And there are different sectors of high purity uses where the premium can be significantly greater and that $2 figure and the $1.45 figure that I'm talking about is really in the master alloy sector of the business. When you start getting into some higher purity requirements because of chemical catalyst production or something like that, the premiums could actually go up more and they could get upwards of $3 to $4 per pound. Terry, you’re on the line, you've done this for 30 years. Do you want to maybe expand on that a little bit?

Yes, so I think you're right Mark on the titanium side, there is four consumers of V2O5 end user to produce vanadium aluminum alloys for the titanium industry. And we're in a position right now where Glencore some of their production will meet their requirements but not all but they control the channel, they control the negotiation, and the relationship with the customers. So we get whatever they can't supply basically and when Largo is going directly that dynamic changes. The other markets for high purity are typically chemical and catalyst applications where they need a powder. Largo does have a powder product and it is suitable for many of those applications, not all of them. There is some that maybe Largo can't meet but there are a huge number of opportunities in the chemical and catalysts area and the premiums may differ depending on the quality requirements. If you're looking at something that's lower on the run of specification requirements, the premium should be down closer to that $1, $1.50 area, there's some V2O5 grades where premiums are $4 to $5 and then there's opportunities to take the V2O5 powder downstream into other chemical derivatives if that makes sense, polarides, oxalate, sulfates and those are all very, very high margin products. And then of course just the battery takes off the opportunity to take that product into electrolyte for the battery is also there. So I think right now Glencore doesn't sell a powder product, they don't know anything about that market. The market's very fractured they have hundreds of users. So there's a lot of work involved in going out and getting on top of that market and that's not their cup of tea. So I think when the situation changes, we can have a much better opportunity to present ourselves to that market.

So can anyone make -- want to make any guesses on when left to your own devices and instead of doing this yourself as opposed to relying on Glencore, what kind of percentage volume we might see going to these markets in total?

Well, and again Terry can answer this with a lot more specific information than I can. But these markets that we're talking about that use high purity V2O5, if you combine all those markets together it more, I mean, we don't produce enough to fill all of those markets. So from my perspective, there's plenty of room in the market. And it's just a matter of taking the time to work out the specifications that these different high purity users require because they are very, very different in each situation. But we will want to build up our sales over time and our whole goal, Randy, is to maximize high purity sales. And if I can ultimately get our sales division to sell 100% of our material as high purity then that's what we're going to do because that's where the extra money is.

I might argue very slightly what Mark had suggest 80% to 90% as a good target. It's always nice in a market like you saw last fall could be on the commodity side, a little bit. And the commodity side does help you deal with variations in demand or production month-by-month, where the chemical and titanium customers are going to want assurance of delivery. And so you need some way to manage the business and have a 10% or 20% that's more or less on a spot basis into the commodity market gives you the ability to ramp sales up or down to manage inventories.

And Terry knows I agree with him on that. I think it will be very difficult to achieve 100% of our sales for high purity any way but we definitely want to minimize all the risks as we move forward and having a good split will be part of that minimization.

Thank you. Your next question is from Jim Young from West Family. Please go ahead, Jim.

Yes, hi, I got a couple of questions. First off just in the continuation of the question about the high purity sales, can you help us understand the process going forward, as I recall this from conferences upcoming this fall and like in these negotiations that will take place to get a better sense as to what the 2020 contract and how it looks like for Largo? Thank you.

Yes, Jim, we start out by saying that we have had an unbelievable number of potential customers contacting us since the early part of this year because they know that May of 2020 is the end of that Glencore contract. So they've started contacting us very early on in the year about starting discussions for direct off-take with us. And so we've been having those discussions. Terry and I actually spent a week over in Europe visiting all of those folks who are interested in that. So the discussions have been going on for some time. But the part that you're talking about is kind of the normal contracting process in the vanadium industry where the first industry conference occurs in China, the second week of September and there's another conference in Chicago, the last week of September. Then we get into conferences in Miami and another one in Budapest. And these are all conferences where negotiations will be occurring this fall for those direct off-take agreements starting for us at least in May of 2020. And we will be heavily participating in those conferences and in fact we are a sponsor of the Budapest Conference, a very large sponsor in that Budapest Conference in trying to get a very prominent role speaking and meeting wise and name wise, marketing wise to make sure that we get out there in a prominent way and our new Director of Sales and Trading will be in all of these conferences. I will be at most of those conferences and Terry will be at most of those conferences as well. So we're anxious for that process to get going and we're setting up meetings for all of those conferences as we speak because the customer base is that excited to start talking to us directly.

Okay great. And then my second question pertains to the recovery rates in the June quarter, you posted a global recovery of 79.1% yet for the month of June, it was 80.9% and the question is has that trend continued in July or even improved and how is it even performing into August so far month-to-date?

Yes, recovery is continuing to perform exceptionally well and remember the early part of the second quarter is when we were finishing up in the June refractory replacement job and so there was some instability in the kiln as you go through the refractory replacement and then started up. And we have now in the last couple of months, two to three months actually the stability of the plant has actually been what I would call remarkable. I mean we are seeing some of the best stable performance out of this plant that we have seen. Of course my hope is, is that that recovery continues to increase because that just means lower unit costs at the end of the day for us. But I would say 80-plus-percent is certainly world class right now. And the additional increases that I hope to see will be minimal just because you do get the kind of an anecdotic curve at a point in time and we're pretty quickly approaching that. But our operations team remains extremely motivated, extremely energized and it's amazing to me what they come up with for new ideas to increase overall recoveries not just in the kiln but overall recoveries and again placing us in that world-class position.

Okay. And on that kiln recovery rate though in the first quarter it was 89.2%, second quarter you posted 88.8%, what is a -- now that your -- the kiln work is all completed. What's a normalized recovery and sustainable kiln recovery rate going forward?

87% would be more of a difficult rate and that's what I intending to say, when I provide that number which is lower than what you'd indicated that we're achieving is our operations team never accepts the status quo. They continue to look for ways to improve things and they're doing just that and they're achieving recovery rates out of that kiln on a sustainable basis, 88% and higher. That's remarkable. There are not many vanadium kiln operators that can talk about recovery rates that are that high in that section of the plant.

Mark, I might just add, sorry I might just add that typically if you're running a roasting operation using slag which is an order of magnitude higher and concentration vanadium but a typical recovery for those guys from the kiln right through to V2O5 is going to be 82%.

Okay. And then my next question is regarding your cost guidance for the full-year 2019, your guidance excluding royalties is $3.45 to $3.65 in the first quarter, you reported $3.41 and then most recently you did a great job in bringing down to $3.30. So the question is why are costs expected to increase in the second half of the year, now, are you in a position to formally lower your cost guidance at this time? Thank you.

Ernest, I will have you answer that, after I provide a little color on that. Jim, we have a group of people out at the plant that just never stopped trying. And I have, as the CEO of the company, my job is to continue to push and push and push and get the maximum performance out of our operations team that we can. And so we will be striving to continue to lower those costs day in and day out. But then we also have the public company side of our business and I'll have Ernest talk to kind of why we say, what we say in our financial statements, in our MD&A, because we have to be conservative, I think by definition. But Ernest you want to maybe -- well probably know that.

Yes, Jim. So the six months number on unit cost ex-royalties is $3.35, so we're about $0.20 of our mid-range. Where I think we're going to take a little bit of a wait and see approach here for a while longer and see how it goes as we run the operations at 1,000 tons or more, but we'll have another look but I don't think you would begrudge just the $0.20 buffer that we have right now. So we'll take it under advisement.

Okay, great and then my last question is when I Googled Glencore and litigation corruption scandal, there's a litany of examples there both past and present confronting Glencore. And I recognize the strategic importance and the partnerships that you've had with Glencore with your business. But I'm kind of curious as to the price discrepancy as posted by past markets Metal Bulletin every Friday and the actual detail of five transactions that you're seeing in the marketplace and from your perspective what accounts for this differential and how did that really -- how did that impact Largo at this time?

I think that your question is very interesting, Jim, and very educated. I think our best position right now is probably not to comment on that issue and instead to make sure that we comply with our contract with Glencore to the fullest extent for the next nine months and then move on. That's what's going to be best for the company and let's not forget as difficult as all this Glencore issue is, it was that off-take agreement that that really kind of help secure the financing to construct the project. So I guess what can change a little bit of a price to pay to get that financing in place. But we also feel like we've paid the price and it's time to move on. But they've been -- they've been a very good partner in terms of sending us the payments that they owe us when they are due, never had any problems with that. There's just certain provisions of the contract that obviously are not necessarily in our favor and we've had to pay the price but we're just about done. We got nine months left.

Thank you. There are no further questions. You may proceed.

Thank you, operator, and thanks to everyone for joining the call today. As we noted, Largo's second quarter 2019 results, press release, financial statements, and MD&A can be found in the Investor Relations section of our website at largoresources.com. And with that, 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 ask that you please disconnect your lines.