Largo Inc. (LGO) Q2 2021 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Largo Resources Second Quarter 2021 Earnings Webcast and Conference Call. [Operator Instructions]. I would like to hand the conference over to your speaker today, Alex Guthrie, Senior Manager of Investor Relations. Please go ahead.

Good morning, everyone, and thanks for joining our second quarter 2021 earnings conference call. On the call today is Ian Robertson, our co-Chair of the Board; Paulo Misk, our President and Chief Executive Officer; Ernest Cleave, our CFO; and Paul Vollant, our VP of Commercial. To accompany the call today, we have uploaded a supplemental webcast to presentation, which is available on our website at largoresources.com. Our Q2 2021 financial statements and MD&A are also available on the website as well as on SEDAR and on EDGAR. Before continuing the call today, I would like to remind you that some of the information you will 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 and revenues per pound sold will also be discussed during today's call. Actual results discussed during today's call could differ material from those anticipated and risk factors that could affect those results are detailed in our annual information form and other public filings, which are available on SEDAR and on the company's website. Additionally, market and industry data contained and incorporated by reference during today's call concerning economic and industry trends is based upon good faith estimates of our management or derived from information provided by industry sources. We believe 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 these assumptions upon which the projections of future trends are based. On our call this morning, Ian will provide an update to the company's corporate mission, give further highlights to our overall strategic plan and then close out with an update on our progress at Largo Clean Energy. Paulo will provide an update on the company's operational and sales results and Ernest will follow with the financial results accompanied by Paul Vollant, who will then provide an update on our sales and trading division as well as an update on the vanadium market. Paul will then conclude with final comments. We will then open the lines for questions, and we kindly ask that you restrict your questions to 2 and then requeue if you have any additional questions to allow others the opportunity to participate. And with that, I'll turn it over to Ian.

Perfect. Thanks, Alex. Good morning, everyone, and appreciate you taking the time to join us on the call and online. I thought it might make sense to start today with a bit of a personal introduction since I haven't spoken to you on the earnings calls in the past. At my core, I'm an unapologetic entrepreneur. For the past 2 decades I've had the privilege and an honor serving as, I guess, the first, Chief Executive Officer of a company called Algonquin Power & Utilities Corp., a company that was founded by myself and a colleague Chris Jerad. We're immensely proud of having grown this company to $12 billion organization list on the TSX and NYSE. It's included in the TSX 60. And perhaps most meaningfully, it's delivered greater than 20% total annualized shareholder return over the past decade. And while leading Algonquin was gratifying, I'm sure it's not surprising to many of you that as an organization gets to the size of Algonquin, it gets harder and harder to, I'll say, fully flex ones entrepreneurial muscles. And consequently, 3 years ago, we signaled to the capital markets that Chris and I would be seeking someone to fill our shoes at Algonquin and then last year we were able to successfully complete the exit. We founded the Northern Genesis Investment platform last year and over the past 12 months, we're gratified to be able to secure over $1 billion in investor capital. I'm proud of our first investment in electric bus and truck manufacturer Lion Electric and it's been a strong commercial and investment success. If there's one thing that my experience at Algonquin and subsequently with Northern Genesis has taught me, it's that the path to organizational success in my view, leads through and may actually be paved by a cogently articulated approach to sustainability and it's not at all surprising to me that employees and customers, investors today want to actually believe in the organizations for which they work, from which they buy and into which they invest and clear ESG alignment across the organization, I think, is part of this dynamic. When I was approached to join the Board of Largo, the initiative to transform this organization to a company that can make and will make a meaningful contribution to society's renewable energy transition really struck a resonant chord with me. In some respects, it feels like a continuation of my life's work at Algonquin and I'm really proud to be able to contribute to helping guide this organization through this really exciting time in its life cycle, which maybe is a good Segway to a few thoughts on the energy transition landscape. I'll say firstly, and I'm sure this comes as no shock at all to everyone. The global transition to cleaner, renewable energy is well underway. I will say it's being led by attractive economics of renewable energy, but really tail winded by strong societal pressures on corporations and governments worldwide to deliver more sustainable energy solutions. There's probably a couple of important trends to highlight that are evident in these secular shifts and firstly, as I mentioned it's really the economics that are driving the integration of low-cost renewable energy sources into the grid. There is no cheaper source of energy than that from a wind or solar farm, but a reliable electric energy grid obviously needs to deal with the inherent intermittency associated with these generation sources. Obviously, solar doesn't work at night. Secondly, there are clear impacts on energy demand and consumption patterns arising from phenomena such as the electrification and mobility, those - all those Teslas actually matter and climate change. And lastly, to accommodate the flexibility demanded by customer choice, which organizations like Amazon pioneered, there are continued efforts underway for grid modernization and reinforcement. Energy storage systems, which have the capability of storing electrical and in this case, we'll call it, renewable energy when it's abundant and then deliver it on demand when it's needed are going to play a key role in addressing each of these trends and specifically, you're going to hear a continued story about long duration, which we kind of define as greater than 4 hour storage that is evolving to be more valuable than that of short duration storage in facilitating the energy transition to renewables. As we look at Largo's decision to become - I'm going to say more than just a mining company by shifting its focus for its vanadium to the energy storage industry, a number of factors were considered. Firstly, Largo is confident that it has one of the most competitive long duration energy storage products available. Vanadium flow batteries based on Largo's technology obtained in the 2020 purchase of the intellectual property of a company called VionX, is superior to that of other offerings, and we believe it represents one of the lowest cost, most durable and practical solutions to long duration storage. While Largo historically competed in the vanadium commodity market, generally on cost and purity this superior vanadium redox flow battery technology will allow largo to sell a product which is now differentiated on dimensions other than cost. Secondly, Largo expects that the energy storage market presents a higher value and faster-growing use case for Largo's vanadium over the current world market as an alloy and strengthening agent and unlike the conventional market for vanadium, according to Guide House and other large market research firms the energy storage market is large and growing fast. With the long duration storage specific total addressable market forecast to grow at a compounded average annualized growth rate of more than 30% for the coming half decade. And thirdly, Largo has the unique opportunity to create sustainable competitive advantage for itself. I will say that no other producer of vanadium-based batteries enjoys the guaranteed access to high-quality, high-purity vanadium and the financial substance and stability, which is provided through the integration of Largo's energy storage business with its highly efficient and profitable vanadium production operations. I think it is important though, just to note that this opportunity for a sustainable competitive advantage really arises as a result of the company's world-class vanadium mining and production capabilities, which were developed from the dedication of Largo's existing mining professionals and accordingly, this strategic shift toward the energy storage business is really facilitated by the ongoing efforts of the Largo mining team as much as the efforts of the members of the energy storage team. And shortly - quickly, before I hand things over to Paulo, I'd like to offer up a couple of comments regarding our organizational why. There's a guy named Simon Sinek, and he's an author, and he claims that organizational stakeholder loyalty is actually created not by the what and how of one's products. But rather than the why of one's existence and he wrote a book called why start with why, which details his thoughts here and I guess my thought is that integrating Largo's vanadium production expertise with its energy storage technology, provides an opportunity for our investors, our customers, and maybe as importantly, our employees to reimagine this organization to reimagine it laying claim to being a force for good in the world to reimagine it with a bigger, more inspiring why. Specifically, our vision articulated with excitement is that Largo can now play a meaningful role in enabling the planets transition to 100% renewable energy. Our vision states the why for our business, the what and how of our business is obviously to lever Largo's experience as a successful vanadium mining company to become the leading vanadium focused energy storage company. Our mission success will come from being the supplier of choice, delivering 10% of the global demand for long duration energy storage, which, in the next 3 years is forecast by Guide House to exceed 30 gigawatt hours a year. We're going to accomplish our mission through our unique vertical integration, our responsible business practices and perhaps most importantly it's on the commitment of our talented team and we're confident this strategy represents the foundation for significant long-term shareholder value creation at Largo. If it sounds like a transformational shift is underway within Largo, you'd be right. We are committed to our plan outlined recently at our battery day back in June. In recognition of this shift to become more than just a mining company, our corporate branding change is underway. We believe that dropping the word resources from our name will help reinforce alignment between the perception of our what and how and the statement of our why. And you can see on the slide here, a sneak peek at our new name, just Largo. With that, I'll turn things over to Paulo for an update on the company's operations sales progress in Q2. Paulo?

Thanks, Ian, and thank you for all the guidance regarding our clean energy division and the energy sector. And thanks for everyone to join the call today. We are very pleased to report solid year-over-year growth in most of our key metrics, including a substantial increase of 119% in revenues per pound sold and 197% increase in total V2O5 equivalent sold, supported by a very robust vanadium market. Paul Vollant will give an update on the positive developments in the vanadium market a little bit later on this call. With respect to COVID-19, the company's operating results were not materially impacted by the pandemic this quarter. Where possible, the company's workforce continued to work remotely, and we continue to employ operational measures intend to protect the health and safety of our employees and contractors. As we've noted throughout these unprecedented times, we remain fully committed to protecting the health and safety of our people and continue to maintain the necessary protocols to help mitigate the spread of the COVID-19 at our operation and throughout our local communities. I will highlight that there has been no severe case among our employees and contractors and at this time, it seems that the worst period is over as we just have confirmed case only one amongst our workforce in the last 2 weeks. Moving on to our operational sales progress in Q2, I'm pleased to report that we delivered total production of 3,070 tons and total sales of 3,037 tons of the V205, representing an increase of 20% and 197 over Q2 2020, respectively. The increase in production is attributable to the kiln upgrades and cooler improvements implemented in January 2021. On a monthly basis, V2O5 production in April of 2021 was 1,092 tons with 1,075 tons produced in May and 903 tons produced in June. The lower production too was due to a reduction in the total material mined that occurred during the transition between mining contractors. That has been already completed by at the end of June not going to impact the production at all in the third quarter. With respect to our capacity increase projects, our operation team concluded the commissioning and [indiscernible] activities during the quarter which also include improvements of the mining, crushing and milling circuits. This will support a new nameplate production capacity of 1,100 tons of the V205 per month, and we expect to reach that in Q3 2021. With regard to global recoveries, following these upgrades and commissioning just mentioned, global recoveries began to improve in Q2 2021, and we achieved 82.2% in June. We are also pleased to report that during the quarter, the commissioning of the company's V203 processing plant has begun and production is expected to end of the third quarter. V203 is an important high period of material required in manufacturing of metal alloys, chemical products and electrolytes. The addition of these products should increase the company's high-purity market share as this sector gradually recovers, and I will support the development of our clean energy vision with its use in the manufacturing of electrolytes. Before moving on to a brief update on our sustainability initiatives, the company continues to progress with the required work for its updated second report. We are confident with the unexpected delay experienced too far are confident that we will be able to release this report before the end of the year. Of course, all these potential restrictions caused most of the delays in this regard. As an update, the report is related to upgrading our mineral resource and reserves, including expanding our mineral resources, and we will look to incorporate a titanium pigment project. Finally, we continue to focus on including environmental, social and governance factors in our broader company strategy and day-to-day operations. As a result of the delays caused by the pandemic, we expect to release our updated and improved 2020 sustainability report this month. Our new report is driven by transparency, addressing a wider range of topics and new metrics, most notably the tracking of GHG emissions. Because of the associated restrictions due to the pandemic, many of the company's social programs planned for 2021 has been scaled back. Following the appropriate help guidance, we continue to work with the local community members throughout the first half of the year to ensure progress continued with such programs. These programs include local farming support in nearby communities, educational training programs for local teachers and support of local interest programs, which are responsible for producing over 600,000 masks for our surrounding communities. I'm pleased to report that we have recently committed to comply with the global industry standard on inaudible management by 2025 at the latest and we passed the Brazilian National Mining Agency inspections earlier this year. It is important to note that we recognize that importance of the work conducted by the global taken to view. Additionally, we are also very pleased to report that the company has recently achieved the ISO 9001 quality management certification for our lab and the warehouse in Brazil. To close out, we continue to remain diligently focused to deliver profitable growth in 2021, supported by a healthy balance sheet and favorable vanadium market fundamentals. As Ian noted earlier, we continue to view our entrants into the clean energy storage sector as a clear transformational opportunity to create significant value for the company, supported by the increase in sector demand and global carbon reduction targets and with that, let me turn the call over to Ernest who will provide highlights from our second quarter financial results.

Thanks, Paulo, and thanks for everyone for joining the call today. Continued momentum across all key markets has resulted in increased vanadium demand and strong revenue growth for the company in Q2 2021. During Q2 2021, the company recognized revenues of $54.3 million from sales of 3,027 tons of V205 equivalent, representing 546% increase in revenues over Q2 2020. Revenues per pound sold were $8.14, which compares to $3.72 per pound in Q2 2020, and that represents an increase of 119%. The substantial increase in revenues per pound sold contributed to healthy cash flow generation in Q2, building upon our solid cash position. Our balance sheet remains strong and following the addition of a small working capital facility of $15 million the company exited the quarter with a healthy cash balance of $80.7 million. The company recorded net income of $8.4 million and basic earnings per share of $0.13 in Q2 2021 compared with a net loss of $7 million and a loss of $0.12 per share in Q2 2020. Looking at the cost front, cash operating costs excluding royalties, were $3.39 per pound in Q2 2021 compared with $1.89 for Q2 2020. The increase seen in Q2 2021 compared with the corresponding period last year is largely due to a significant onetime debt credit in the state of Bahia recorded in Q2 2020 as well as a reduction in the global recovery rate and the impact of higher costs arising from the planned shutdown in Q1 2021. As we announced yesterday, our 2021 cash cost guidance remains unchanged at $3.10 to $3.30 per pound, and we expect to achieve both our sales and production targets through a rigorous operating and sales program during the remainder of the year. Looking ahead, our plan is to continue capitalizing on the strong demand in the vanadium markets we serve with a goal of improving profit margins going forward. Largo is extremely well positioned to benefit from elevated vanadium pricing in the current environment, and we anticipate generating free cash in the range of approximately $40 million to $50 million for the year, inclusive of the $15 million working capital facility recently obtained in May and the repayment of our $20 million facility earlier this year. And with that, I'll hand it over to Paul for an update on our sales and trading division and on developments in the vanadium market during Q2.

Thanks, Ernest, and welcome to everyone joining the call today. We sold 3,027 tons of V205 equivalent in Q2, delivering both standard grade and high-purity V205 as well as ferro vanadium to our customers globally. Demand has remained solid in all our key markets and particularly in the steel sector. Consequently, vanadium prices continue to edge higher following limited material availability and increased demand. The average European fat market metal bulletin price per pound of V205 was $8.19 in Q2, representing an increase of 16% over Q1 2021 and 33% over Q2 2020. The current average price is $9.88 per pound of V205, and it is our view that vanadium prices should remain well above historical average throughout the second half of 2021. We've previously noted that the aerospace industry has been steadily impacted by the COVID-19 pandemic, but I'm happy to report that we saw an increase of more than 400% in our sales to this sector as compared to Q1. We continue to develop our footprint in all premium-priced sectors. In summary, supported by our world-class vanadium supply and post-COVID opportunities, we're very optimistic about Largo's commercial positioning and with that, let me hand it over to Ian for an outline on the advancements about clean energy division as we are focused on becoming a key player in the energy storage industry with a superior VCHARGE battery.

Perfect, and thanks very much, Paul and before we open it up to the Q&A portion, which I'm sure is the most interesting portion from your perspective. I do want to give a quick update on our energy storage growth initiatives. Not surprisingly, we are seeing strong and growing demand for energy storage systems, driven by, I think, a global carbon emission reduction objective. I think there's a particularly notable shift in demand towards the longer duration energy storage applications, which from my perspective is presumably to facilitate the integration of more renewables into the grid. I think we see this market trend as supportive of our proprietary V charge system. It has clear operational and economic advantages for long duration storage applications over other competing battery technologies. You would have noted that the company is proud to have outlined or announced its first VCHARGE battery sale with an organization called a [indiscernible] Power in Spain and under the contract, Largo is going to deliver a 5 hour 6.1 megawatt hour VCHARGE system for [indiscernible] with expected commissioning in Q4 of 2022 and while we're moving full steam ahead on this project, I think I'd note, we're also keen, obviously, to expand our presence here in North America and especially in California, where we're seeing the most activity given the focus on renewables in the state and I can outline that we're in active negotiations with an industry-leading energy developer for one of their major projects, and we're excited that the product is being recognized in the industry for what it is. From a delivery standpoint, we're focused today on finalizing the required regulatory certifications, and those certifications are on track to be received by the end of the year and we're confident that the manufacturing capacity of our Boston facility, from which I'm speaking to you today, is going to be sufficient to satisfy our production requirements through 2024. And so I guess in summary, before we open the lines up, I look forward to bringing my industry experience to assist Largo and executing on its exciting strategic transition. And I'm honored to be actively involved in the energy business where we conduct a formal search for our permanent president of our renewable energy or energy storage business. And so with that, operator, I'd like to open the line up for questions, if you'd be so kind.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first question comes from Heiko from H.C. Wainwright.

This is Marcus Giannini calling in for Heiko thanks for taking my question. Given the increase in trade receivables, can you walk us through where you stand as of today what you expect to have at the end of the quarter and if you have some visibility as to where you anticipate ending the year?

Ernest, go ahead.

Yes. So in terms of our trade receivables, we do not see any significant changes between now and year-end. We anticipate being in approximately the same kind of range. Q2 was a more standard quarter if you compare to Q1 where we had the shutdown, et cetera. So we will continue and are sort of expecting something in and around that same kind of range.

Okay. Great. That's helpful. And then just to clarify, your professional consulting and management fees at mine properties almost doubled from $435,000 in Q2 2020 to $949,000 in Q2 2021. The number in Q1 2021 was also higher at about $1 million. Is this sort of the new baseline we should be using going forward? And what exactly is the cash being used for?

Yes. Absolutely. So the answer is partially yes. We have seen, over the past 2 months, we were involved, including from a mining side, they've been involved in various regulatory initiatives that had caused higher growth on the G&A side. I would anticipate large reductions in G&A at that particular divisional level going forward. So again, for that as well. I think it's reasonably represented.

Your next question comes from Andrew Wong from RBC.

Maybe before some questions on the quarter, I'd like to ask a bit more broader question strategically. So Largo spends last several years focused on becoming a Tier 1 vanadium miner, which mostly I think, has been accomplished, given the recent expansion is pretty much done. And Ian, I appreciate all your comments on the company's shift towards being an integrated battery producer. So does this mean looking forward, there will be a more meaningful focus on the clean energy business for the company versus the traditional mining business and how do you kind of balance that given the battery business is still pretty early stages, whereas the mining business is what's providing a lot of the funding and the capital for that shift?

Well, isn't it such a - isn't that the great thing about combining these two organizations. We've got the experience and expertise and profitability of a very successful mining operation, but the opportunity to be on the cusp and in the right place at the right time for the development of energy storage products, which candidly represent I'll say, a higher economic. We can even argue societal value for our vanadium, but this is a shift. This isn't a switch that gets turned on or off. And so our current customers will continue, obviously, to get served by our vanadium products, and we're obviously mindful of that. But as the energy storage business continues to ramp up, and I'd mentioned that 30% CAGR a year, I think there are going to be increasing opportunities for us put some portion of that vanadium to a higher and better use in the energy storage business. So I think, Andrew, I've actually really stated as - this isn't - we're not changing our stripes from to spots. This is really an organization that one plus one is equal to 3 by combining, as I said, this superior energy storage technology, right place, right time, together with a successful and profitable miner. I don't know if Andrew if that's responsive to your question because maybe I'm just repeating what I said earlier, but happy to add more if that didn't get to the mark.

No. I think that makes sense, and I appreciate that. Maybe just more on the vanadium market itself right now. Obviously, we're seeing pretty strong vanadium prices. How do you balance wanting to sell into relatively strong vanadium market versus ramping up that battery business?

Well, let me, I guess, give you a couple of comments. One is, obviously 100% of our revenues and earnings are coming from vanadium sales to applications other than batteries. And so obviously, I am going to say today, there isn't a balance. I think as the battery business continues to grow, and we find a higher, I'll call it, better use for that vanadium. We will shift some of that supply over to the energy storage business. I think one of the things that's really notable about Largo as a producer of vanadium is the quality and purity of this product. And I think that's a massive distinguishing characteristic of Largo as a producer of vanadium, but also as a producer of vanadium for the energy storage business. Purity really does matter and so I think - I'm not sure that there's a - that we're going to have to make a Sophie's choice at this 10 seconds. And then the other thing is our opportunities for production of vanadium aren't limited in scope. And I think clearly, the opportunity to participate in this energy storage business may well justify and support expanding our sources of supply and so I think our vanadium production business is definitely not limited by what we're doing today. And again, if I didn't get to the mark, happy to go and Andrew?

No. I think that helps answer the question. Maybe just a little bit on the quarter. It looks like there was a little bit of iron ore sales this quarter. Can you talk about the volumes associated with those sales and what we can expect going forward? Thank you.

Paolo, is that something you want to jump in and handle or Paul?

Yes. I think - Paul, you there?

Yes, I'm here, hi Andrew.

Okay. Take it.

Yes. Andrew, we sold limited amount of iron ore this quarter. We had to deliver many sample and trial quantities to various customers in Brazil and outside of Brazil. We're definitely expecting to run that up depending on market condition. As you know, iron ore prices have been quite volatile over the past 6 months. But given prices and market remain as strong as it is today, we're going to continue and increase the sale of this commodity.

Your next question comes from Carlos De Alba from Morgan Stanley.

So if I may, could you be a little bit more specific on the iron ore outlook for volumes, please? I mean, at this point, you must probably know how much the byproducts from your operations are going to be and given that a lot of investors got quite excited last quarter on this alternative or complementary revenue stream, it will be appreciated if you can be a little bit more detail on your answer on that. And the other question I have, if I may, is on the sustainability of the July production. In the last few months, obviously, it was a little bit before several reasons that you already explained, production was a little bit lower than we were expecting. So I would like to explore how do you see the sustainability of the July production throughout the second quarter - sorry, throughout the third quarter and the implications that may have for cost. In other words, do you expect - you kept your guidance for production in the year, but do you expect to see a much heavy fourth quarter in terms of output versus the third quarter? And then if I may ask on the battery business, can you maybe Ian elaborate a little bit more on the certifications that you are trying to obtain in the fourth quarter of 2021? How much that is? And how much would that represent in potential sales volumes for next year?

Sure. Well, Carlos, you snuck 3 questions in for one, but we won't call you out on that one. So before I turn it over to Paul, why don't I answer the easy one first, which is the certifications that are outstanding. There's the standard, I'll say, underwriters, labs certifications and it's really we're a long way down through the process and so - but it is a requirement for the delivery of our first system off to Spain, together with some CE jurisdictional approval. So it's a process that's underway. It shouldn't be understated though because it's - we've been working on it for months and months and months, but we are confident that by the end of the year, we'll have them in hand. In terms of contributions to the business going forward, I think the market is growing fast. There's obviously an opportunity for us to expand the pipeline. I'd mentioned in my prepared remarks that we are in active conversations in California, which is a hugely fertile ground. As you're probably aware, the amount of solar in the state has really very much changed the pricing curve associated with energy and consequently there is a huge opportunity to create value through long duration energy storage, and we're in the conversations with a leading developer to - so I'll say, stay tuned for that one. And so I think in terms of contributions, we're obviously excited to be printing as many transactions as we can going forward. I think we are a little bit sensitive of sharing margins at this 10 seconds. You can appreciate that it's a competitive marketplace, and we obviously want to - but I think you can do - I'll say the math fairly simply by kind of looking at the broad - where energy storage systems are trading. And I use lithium-ion as a reference point. But what the nice thing about our system as you start to get to longer durations, we are definitely more competitive in lithium-ion. So Carlos, I'll leave it there and turn it over to Paulo to talk to - Paulo, if you want to speak specifically about the iron ore, Paulo?

Yes. Thank you Carlos for your question. Carlos, we have been trying to sell the iron ore we did huge efforts. Paul, myself, have been reaching many companies in Brazil and firstly, initially, we thought that our high-grade of titanium and so do iron ore, it will be just a matter of diluting them. If we plan, let's say, 10% of our material all the containments we adjust to the specification and that's it, it can be accepted in any place, especially in China. That was our thought and when we disclosed the first sales, it was a big amount. And we thought that's going to continue in a very big way as we have huge producers and exporters of iron ore. So the amount of iron ore that we would like to sell, it's almost nothing compared to the amount of all the big companies in Brazil are selling to China. However, when this material reached China, they - not titanium, titanium was okay because there is others iron ores with high titanium especially in China. So they are not - they didn't bother about this, but they really concerned about the sodium. Sodium is not an element, a material naturally in the iron ore, titanium has potassium like some iron ore from Chile, but not sodium. So the customers are not accepting higher sodium or even low, even below specification. And so they are not accepting to have sodium in their material. They are complaining. For that reason, this blending strategy didn't work. We try to sell our materials directly to China. However, the lab has been classified as a solid waste, which is the reality. So somehow, which we think it will be easy to sell, considering the high price. We have been giving some discount. But it's not that easy. Maybe some specific customer if we find them but to be frank, I will not count to sell the iron ore this year going forward. We'll keep trying. We will be looking for not a strategy, which will be developed a process to produce the big iron at sites and recover the titanium slag and vanadium slag and feed them into our production. So we didn't give up but selling iron ore, I don't think it will be the case. Going to the production, in Q2, we have produced more than 1,000 tons per month of V205, and we are expecting in Q3, to have an average more, let's say, 1,100 average per month. So we are very confident that everything we have done in the beginning of the year and all the condition and improvements in overall plant, we got a very good results in Q3. So we are very confident. We are in line with the guidance that we have reported and we are very optimistic, the market is good. So everything is in favor.

Our next question comes from Lee Cooperman from Omega Family.

I have four questions. Let me just throw them out there. Can you share with us your earnings expectations for the year? Do you have a budget Ernest that I see consensus is $0.51 next year, $1.07? Do you think the consensus has got it right? Do you think the consensus is wrong? Second, directionally, could you talk about the margins on the clean energy contract higher or lower than the corporate average, to give us some insight into profitability. Third, the economics of the vanadium trioxide processing plant, if you could discuss that? And do you expect to generate cash in the second half of the year? And if yes, order of magnitude?

Cleave go ahead.

Yes. I'll try and take as many of those as I can. Let me start with - let me start with the easy one, the cash flow expectations. So the free cash flow expectation for the year is $40 million to $50 million, which means that I anticipate us ending the year just with the cash number of something in the region of $120 million to $130 million. And I think that's borne out, but just the cash flows that you saw in the quarter as well. So I feel pretty confident with that. That's the same number that we guided in Q1 and so we're going to be sticking with that guidance. As it relates to earnings expectation, Lee, to be honest, we specifically avoid doing like sort of earnings guidance and what we substitute is our cash cost per pound guidance. We have kept that intact. The only thing that would really aggregate the results, if you look at revenue minus anticipated cash operating costs. There are things such as conversion cost and product acquisition costs over the course of the year. So those are hard to predict because we generally be reactive on those things. Conversion costs there are some increases. But I think we will see improvements in earnings in Q3 and Q4 because we didn't sell quite as much of our produced vanadium in this quarter as we would have liked. We sold a fair amount of purchased vanadium. Obviously, you don't make the same kind of margins on that product as you would do on your own products. But I think in terms of the earnings guidance for the year, I think we're going to get in and around that number. I hope to exit the year. So we're cautiously optimistic. This has been a little bit of a transition quarter so we will undoubtedly see improvements as long as we stay in the kind of current vanadium pricing levels in Q3 and Q4. So I'm cautiously optimistic. I was quickly scribbling down here. So hoping [indiscernible]. The margins in the key energy business, we want - go ahead. You take it.

Well, no, I guess - yes, I'm happy to kind of - I think there's, I'll say, a bit of a broader answer Lee to that one. And so I mean, the profits that are earned from the operation of a clean energy business really come from 2 sources. One is, I'll just say, manufacturing and selling the hardware associated with a battery energy system and in nice round numbers, 60% of the cost of a battery energy storage system is that hardware. And in the case of a vanadium flow battery, the other 40% is actually just vanadium. And so again, without getting into, I'll say, commercial sensitivity on the margins on the hardware side, I think it's going to be - it's consistent with I would say, normal electrical equipment manufacturing. I think where the real opportunity lies and the thing that I think touches me as you think about combining these businesses, is the price point for the vanadium, which is now going into a battery energy system is no longer compared against the price of, the value of vanadium as a steel additive. And so I think at our battery day, we were hope clear sort of showing that the use of vanadium in a - for a battery energy storage system where the price point is determined by alternatives for long duration energy storage actually represents a material increase in materially higher value than that associated with even the current market, which is obviously strong for vanadium as a steel business. And so I think the way I might leave it to you is every pound of vanadium that we're able to sell in a battery energy system brings a higher value than that pound if it was sold as a steel strengthening agent and also as accompanied with the normal production and manufacturing margins associated with producing the balance of plant around the vanadium in a battery energy storage system. And Lee, if I missed your question, and I appreciate you have 2 more parts, but maybe I'm happy to finish that off or continue that dialogue if that would be helpful.

Well, you're very long on every ferry kind of responses, but very short on a quantitative response. Is there a margin of consequence on the contractor? Are you giving this stuff away to buy yourself into a business? That's the question.

Well, first of all, I'm not sure that the erie-ferry, obviously, there's commercial sensitivity here, and you're not the only people, it's not only our shareholders who are listening in and so we're obviously sensitive to it and obviously, in short, the Board, of which I'm a member would not be approving us participating in a business that we weren't going to - that was going to be equally or more profitable than our current business.

I think one of the other things - one of the other questions you had, Lee, I think was around the V203 processing point. I mean, I've got that wrong, but the economics around it. And I wouldn't want to lead this led you straight on that one by Paulo to talk in, after me. But really, you're looking at just a different finishing process for our V203. So the overall cost of V203 versus V205, there isn't a cost differential of any kind of significance. But Paulo, please, if that's incorrect, then please jump in.

I guess the question is - is the return on investment, what kind of return on investment is that the processing plant indicating?

Oh god, this is - it has a payback of less than a year of that project, so.

Yes. It's very short payback Lee, and we don't have any additional cost to produce V203. It's just a different product because we produced V203 not from V205. It's from [indiscernible].

How big a market - high margins, high rate of return, what's the volume possibility? What are you looking at in terms of volume for V203?

The application for V203 is the aerospace, with the company's - all the application for space they take 2/3 in V205 and 1/3 of V203. So we're going to increase 50% of our sales in the aerospace sector, which has the premium and also for chemical industry. And despite that, that's the perfect material to do the electrolyte. So we are diversifying increasing.

Ladies and gentlemen, there are no further questions at this time. Please proceed, Alex.

Thanks, operator. I'd like to turn it back over to Paulo for some closing remarks. Paulo?

Sure. Happy to. Then, look, I'm happy to wrap up. It sounds like Paulo has got some connectivity issues and so look we very much appreciate everybody's time. Obviously, we're excited by our story and hope our passion for it shines through and that we feel that, as I said, we have such an opportunity to combine a couple of businesses where one plus one is definitely eating more than 2. And so on behalf of everyone here at Largo, thanks, I'd like to thank you for your time and look forward to sharing our progress on the next quarterly earnings call. So thanks very much, and everyone's stay safe.

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