Largo Inc. (LGO) Q4 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to Largo's Fourth Quarter and Full Year 2022 Webcast and Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there’ll be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Alex Guthrie, Senior Manager of External Relations. Please go ahead.

Good morning, everyone, and thanks for joining our fourth quarter and annual 2022 earnings conference call and webcast. On the call today is Daniel Tellechea, Largo's Interim CEO and Director; Ernest Cleave, Largo's Chief Financial Officer; and Paul Vollant, Largo's VP of Commercial. To accompany the call today, we've uploaded a supplemental webcast presentation, which is available on our website at largoinc.com. Our annual 2022 financial statements related MD&A and most recent AF are also available on the website as well as on SEDAR and EDGAR. Before continuing the call, I would like to remind you all 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. Please refer to Slide two for a full description of the company's cautionary notes. The agenda for our call today is as follows. Daniel will provide an update on the company's Q4 and year-end progress with an outlook for the year ahead, followed by Ernest who will provide an overview of our fourth quarter and annual financial results, and Paul will close the call with an update on the Company's Sales and Trading progress the vanadium market and an update on Largo Physical Vanadium. Following these updates, we will then open the call for questions. [Operator Instructions]. So, with that, I'll now turn the call over to Daniel.

Thank you, Alex, and good morning, and good afternoon for those here in Toronto and elsewhere across the globe. As you know, we're going to be discussing our fourth quarter and year 2022 results today. Let me start with Slide number five. 2022 was a challenging 12-months for us and it led to an underperformance on both production and cosmetics. In Q4 we produced just over 2,000 metric tonnes of V205 at a cash cost excluding royalties of $5.15 per pound. As we noted previously in our pre-reported operational update in January, Q4 production was heavily affected by abnormally high rainfall in December, which flooded the beat and made it difficult to access for ore. With typical have sufficient stock piles to have assist with unexpected impacts to the various checkpoints along our operational route. However, our mining contractor transition in September resulted in a lack of stock piles to help mitigate the impact of heavy rains. This impacts when combined with preventive and corrective maintenance on the plant facility in Q1 ’22 and the plant kiln and cooler refractory refurbishment in Q3 ’22 made for a less and favorable annual production of just over 10,400 tonnes of V205 at an annual cash operating costs excluding royalties were $5.57 per pound. Our production came in 6% below our revised production guidance and cash costs were 2% above our revised cash cost guidance for 2022. Unfortunately, down spills affect from the rainfall in December, continue to impact production in January and February. Despite these impacts, we expect to remain in line with the quarterly production guidance for Q1 2023, likely landing closer to the mid-point of 2050 tonnes or just under. Since, I start consuming the role of Interim CEO by mid-last month, I have spent a fair bit of time with our operations team in Maracas. And I am very optimistic about the expected improvements in production levels for the remaining of the year. We expect a 10% increase in production in 2023 over 2022, which includes an aggressive high-purity vanadium production plan to meet the increased demand and expect to sell over 25 of our production into this sector in 2023. To support this production growth, management changes have been implemented in Maracas, including the promotion of Mr. Alvaro Resende from Operations Director to COO of our Brazilian operations and projects. Alvaro has spent the last seven years at our operations in Maraca and he has the full support of our operations team to get the job done. Cost management is a tough priority for Largo, and we expect cash cost, including royalties to decrease as the year progresses. With half of the year in 2023 cost being closer to the lower end of our reported guidance range of $4.85 million to through $5.25 per pound of V205 sold. Due to elevated operating costs and working capital requirements as well as growth CapEx related to our ilmenite plant, we secured additional working capital facilities in December and January to effectively manage our cash needs during this -- the first half of the year. However, we are in the process of implementing cost control procedures, including an analysis of productivity to identify areas of business where we can reduce costs and improve performance. Today, we're already seeing distribution costs ease and expect to recognize some additional cost savings on some of our key consumables this year. I will let Ernest to discuss these matters in detail later on the call. This is a good moment also to discuss some of our expected catalysts in our key priorities for the remainder of the year. In addition to growing production level this year and increasing our vanadium sales in the high purity sector Largo ilmenite plants remains on track for completion and is expected to generate a new revenue source for the company. We anticipate providing guidance on ilmenite production for the year closer to the completion of the plant starting in the second half of the year. We also remain on track with the completion of our inaugural BRF deployment for Enel Green Power in Spain and shipped the remaining six of 12 electrolyte storage container in early 2023, provisional acceptance, which include the completion of our operational testing by Enel is expected to be completed by the end of May 2023. Also, as Largo Clean Energy and Ansaldo Green Tech continues to focus on the formation of a joint venture for the manufacture and commercial deployment of VRFBs in the Europe, Africa and Middle East power generation market, as noted in our operational update in January, the company previously announced MOU has been extended to March 31, 2023, to allow for the negotiation and enter into a joint venture and other ancillary agreements. I think it's safe to say that the manufacturing and installation of our first battery project was a significant learning curve for the team at LCE. As you are aware, we have encountered some delays with this deployment, but they were confident that with this battery -- first battery project will be a crucial step forward for our Clean Energy business. And we anticipate that the completion of this project will present additional deployment opportunities in the future. With one of our most advanced VRFB technologies and a technical team that is among the most knowledgeable in the industry, we are confident that we have one of the best loan duration solutions in the world. I think it is important to note that we continue to receive and address various inquiries of our product from significant players in the sector, both in the U.S. and in Europe. As our negotiation with Ansaldo progress and we finalize the installation of our battery in Spain. I hope to share more with you regarding developments of LCE very soon. Lastly, I want to touch on Largo continues focus on ESG principles at the company. We continue to improve our overall ESG performance and public disclosure in 2022, and this is reflected in additional improved ratings and scores. This is most evident in our Standard & Poor's global CSA rating, having improved approximately by 38% placing the company in the top quartile of its mining peer group for 2022. We look forward to issuing our fifth consecutive sustainability report at the start of the second half of this year. I would like to reiterate our focus to returning to a steady state operations and cost management as we experienced in previous binary years. This year, I believe Largo is an inflection point as our production began strengthening and more of our units are placed in the premium markets. Our Clean Energy division continued its focus on delivering our first VRFB in Spain, which will -- which we believe will unlock additional potential or additional deployments in the future. This time at an opportune time as vanadium demand remains quite strong the long-term market fundamentals for the commodity looks extremely attractive, driven by the recursion in demand from the aerospace sector and from new deployments and capacity addition for new deployment of VRFBs. As we embark on the next chapter of Largo, I am confident we have the right team in place, and I look forward to assisting the company in advancing our strategy, while the Board continues its search for a permanent CEO. Underpinned by significant growth in vanadium demand as we continue the execution on our two-pillar strategy as a Tier 1 vanadium supplier with an emerging clean energy business, I sincerely believe that the we will close the valuation gap for Largo and offer considerable upside opportunity for new and existing shareholders of the company. With that, let me turn the call over to our CFO, Ernest Cleave, to review our financial performance for the quarter and the year. Ernest?

Thank you, Daniel. Good afternoon to those on the call today. Presented on Slide 10 is a brief overview of the company's financial performance in the fourth quarter and year-end 2022. I'll begin with a review of our consolidated financial results before touching on our 2023 guidance and the balance sheet. The year was marked by favorable increases in vanadium prices, which led to top line growth of 16% in 2022 over 2021, particularly driven by revenues recognized in Q2 of last year. In 2022, revenues per pound sold were $9.38, and that represents a 19% increase over 2021. In Q4 of 2022, we generated $47.5 million in revenues from the sale of 2,772 tonnes of V205 equivalent or $7.77 per pound sold. Revenues decreased around 6% when compared with Q4 2021, while revenues per pound sold were largely in line with the same comparative period last year. I think last year can really be defined by costs, both from an inflationary perspective but also from increases and operational impacts and write-downs throughout the year. For 2022, operating costs increased 28% to approximately $170 million. This was largely driven by a 26% increase in direct mine and production costs and a 73% increase in distribution costs. The increase in direct mine and production costs were largely driven by increases in our critical consumables and including HFO ammonium sulfate and sodium carbonate, which was fairly compounded by the increased consumption of these critical consumables, due to operational impacts throughout the year. The increase in product acquisition costs reflects the company realizing costs from the sale of purchase vanadium material during the year which was require to effectively manage customer contract commitments. As Daniel mentioned earlier, as we move through the year and our unit costs should begin to decrease, ending closer to the lower range of our guidance by year end. We’re already seeing some transportation costs easing this year and are expecting additional savings on sodium carbonate as the year progresses. For 2022, I think what's important to note is that the company's core mining business was profitable with net income of $23.5 million. The company incurred various non-reoccurring expenditures of around $15 million, including approximately $5.1 million in legal provisions and approximately $6.4 million, which related to an inventory write down at LCE. The increase in legal provisions relates to a supply agreement for the Maracas mentioned mine, which was filed with the court's way back in October, 2014, and the ruling requires the company to pay amounts due, plus interest in legal fees. Additionally, the company wrote down battery component inventory to the expected net realizable value, which relates to our first VRFP project at our Clean Energy Division. As Daniel mentioned, this is the case for most first-time endeavours and is not uncommon in this particular sector as these type of demonstration projects generally exhibits learning opportunities and development growth. Moving to Slide 11, we plan to invest approximately $50 million on capital expenditures in 2023, including $13 million to $14 million on sustaining CapEx, $12 million to $13 million on capitalized stripping, and $17.5 million to $18.5 million on completing the ilmenite plant. The increase in sustaining CapEx is largely driven by maintenance required at the crashing and V203 circuits with increases for caps stripping being driven by the movement of waste in the pit in accordance with the mine plan. We've also allocated a few million dollars to purchase an additional dry magnetic separator, which will provide greater throughput and flexibility in the processing of ores. Moving on to the statement of financial position. Cash at year-end was approximately $54 million, with debt of $40 million and a net working capital surplus of $116 million. Subsequent to year-end, we acquired additional debt of $25 million, as was described in the annual financial statements. I'll close out by mentioning that management has made the decision to postpone the company's existing plans to develop its titanium plant until additional funds are made available either internally or externally. At this time, we continue to explore alternative debt financing or strategic association options with advisers, and we will provide an update as things progress. Let me now turn the call over to Paul.

Thanks, Ernest, and thanks, everyone, for joining today. Moving on to Slide 13. I'd like to briefly discuss our sales results for last year and move on to some very exciting developments in the vanadium sector. Annual sales were within our revised guidance range and we sold 11,091 tonnes of V205 equivalent in 2022, which included 1,057 tonnes of purchase materials. Sales for the year are down slightly compared to 2021, largely due to production impact throughout the year. As Ernest mentioned, our purchased product sales increased this year quite significantly in order to meet contractual obligations. However, as we begin to normalize production level, and expect purchase product sales to be lower in 2023. The improved logistical situation post COVID should also help to increase sales throughout the gradual reduction of our stock levels. Moving on to exciting developments in the Vanadium market. We are pleased with the recent strengthening of vanadium prices. And as of today, the benchmark price for V205 in Europe is trading just below $11 per pound. This compares to about $9.50 at the end of the previous year, and a 44% increase from the lows of 2022. This increase is due to healthy consumption from all key markets and especially in the high-purity sectors. Aerospace demand came back faster and stronger than anyone expected after the lows of 2020 to 2021 and are now back to pre-COVID levels. We're in an advantageous position as a key supplier of both high-grade V205 and V203 and are able to place more units in this sector, so as to benefit from the associated price premiums. We intend to capitalize on this demand growth for many years to come. However, the most significant change in consumption and future expectations is coming from the energy storage industry, especially in China, where new BRP deployments could total around two-gigawatt hour or approximately 10% of global vanadium output in 2023. Additionally, recent announcements from China also indicate the potential for new VRFB manufacturing capacity of around 20-gigawatt hour over the coming years. As Daniel mentioned, Largo itself is at an inflection point, but I have to add that the vanadium industry is also at one as well. To supply this energy storage capacity and maintain the current level of consumption in our traditional markets, the vanadium industry would have to grow by over 100% over that period. Already, according to vanadium, a global vanadium organization, the VRFB sector was the second largest source of vanadium demand just after still in Q3 2022. Government support is also growing as long-duration energy storage is becoming a key priority towards decarbonization. Let's pose here and put this into perspective in terms of market overview. As most of you are aware, the VRFB technology was invented in the 70s by a professor in Australia. From that point until the end of 2021, there have been approximately 400-megawatt hours of VRFB installed across the globe. In 2022 alone, there was another 400-megawatt hours of ERP deployment, essentially doubling deployments in one year than all other deployments over the last 40 to 50 years. This is quite remarkable. But more importantly, it is estimated that another 2-gigawatt hours of VRFB will be installed in 2023, representing another 2.5 times increase from the previous installation month. Historically, VRFB has accounted for approximately 1% to 2% of global vanadium consumption. In 2022, that number is estimated to be around 6%. And in 2023, it could represent more than 10% of global consumption. I think it's safe to say that this is the definition of exponential growth. At Largo, we're extremely excited about it, and it gives strong credence to the VRFB commercialization story, but also support our Vanadium supplier pillar with additional sources of demand. Historically, supply has been slow to respond to geometric dimensions. And its important to position ourselves with structural changes. Let move on to another potential source of increased demand for vanadium sector. Largo Physical Vanadium, or LPV. As an entity, we are very proud of having created. As we see, it's a truly innovative tool for investors seeking exposures to a key metal and will be a cornerstone to assist Largo in advancing its clean energy strategy. LPV's net assets are now over 90% adding physical vanadium products and near-term delivery commitments. The launch of LPV in September 2022 coincided with lower vanadium price, which allowed us to purchase vanadium units at favorable market prices. As of March 8th, LPV's NAV is now CAD2.56 per share a 35% above the closing share price of CAD1.9 on the same day. Keeping the LPV app on, we believe our extreme not to share price discount offers current and new investors an attractive investment case and closing this disconnect is now LPVs key focus. We are now working on a broad marketing and communication campaign to raise awareness and its investment proposal going forward. I'll stop there and turn it back to Daniel.

Thank you, Paul. Before moving into Q&A, I want to highlight Slide 14 that summarizes our key priorities for 2023. As I mentioned at the beginning of this call, the return of a normalized production level, cost control in advancing our clean energy divisions remains front and center in the ensuing year. This comes on the back of increased demand in the vanadium sector and a very healthy demand outlook for the future for both the commodity and the new global BR FB deployments. By successfully achieving all these priorities we hope to reach the end of 2023 with a solid foundation to maximize shareholder value of the company. With that, let's go ahead and open it up for questions.

[Operator Instructions] Our first question comes from the line of Andrew Wong with RBC Capital Markets.

So, I just wanted to ask about Ansaldo and the potential partnership there a little bit more, to the degree that you can talk about it before an actual agreement is concluded. Can you -- maybe just provide a little bit more detail on how potential partnership might work, what does Ansaldo bring? What does Largo bring? And like what's your plan for kind of growing that business in Europe?

Thank you, Andrew. I think I can start by saying that we believe that any potential deal with Ansaldo would be a very significant milestone and catalyst for the organization? Ansaldo brings a number of things to the table, but not least of which is their industrial capacity, they're technical now, the know-how in the energy industry. So, we look forward to hopefully completing a successful joint venture arrangement with them. It would be a traditional JV type structure, basically 50-50, where Ansaldo would fund some of the early development costs and start-up costs to some degree and after that point share equally in the operations of the business and its outcome. So, we think that the ability of Ansaldo to engender and enable our European business is very significant. So, we are extremely excited about it. The deal is not done yet. There are certainly no guarantees, but our negotiations have been very strong. We have a great relationship with Ansaldo. So, we look forward to hopefully having a very positive outcome there.

That's great. And then maybe just for Paul here. You talked a little bit about Vanadium prices and strength. Maybe just discuss a little bit more about what -- how much of that -- the recent strength is attributed to things like China reopening or the battery project that's being built there. And how sustainable are current prices right now?

Sure. Thanks, Andrew. It's always very hard to predict where prices are going. But being in the Vanadium market every day, I'm very confident looking at the number. Demand in our traditional market essentially steel and chemicals is strong. And there is a lot of reasons to be happy about these numbers. But the outliers there are two. One is the aerospace industry. We have to think back about two, three quarters ago. The aerospace industry was still suffering from the effect of COVID. And it was the general industry expectation that there will be a gradual recovery to pre-COVID level and will be there by 2025 to 2026. Six months later, I think everyone in the industry is convinced that we'll be back to pre-COVID level this year. right? So, we really accelerated that recovery by two to three years, which is an extremely good news for us, a challenge to adapt, but definitely a great opportunity in front of us. The other outlier, as I mentioned during my part of the call is the growth in deployment of vanadium redox flow battery and the growth in capacity to build this battery has just been nothing short of the mailing. They are planning over 2 gigawatt hours to be deployed in 2023. 2 gigawatts now, we represented roughly 20,000 tonnes of V205 equivalent. That's about 10% of the world production. That's truly amazing. We're coming from 1% to 2% of the vanadium industry just a few years ago to about 10%. So, it's truly amazing growth. The amount of the capacity that is being built is also mind blowing. There's about 20-gigawatt hour of new capacity announced just in the month of February. So yes, we I think the current price level are justified that there is nothing in the market that is telling us that things will be slowing down. And as I said, it's hard to predict where it's going to go, but we feel very comfortable with the state of demand at this stage.

Okay. And then maybe just one quick follow-up on the China BRB. Do we know if they have the vanadium already secured? Or is that something that they might be purchasing in the market? Like how does that today.

Yes, it's a very good question. Just as a background, China produces and consume about 55% of the vanadium units globally, right? So, it's really by far the largest market globally. So, they are the unit, right? They have enough units to cater to the BRB. But unless there's a significant change in supply structure, which no one thing can happen in the short term. There's going to be extra demand that will have to be met by extra supply. And if China becomes a net importer in the quarters to come, it's a possibility. China over the past few years has been either marginal exporter or marginal importer, they very balanced market. It could be that the China becomes and as important, but we will see what happens in the coming quarters. There are some good official statistics about that, that we follow very closely. But yes, China has a lot of vanadium resources, but if they need an extra more than 10% units, the structure of the market will have to change.

We'll go next to Heiko Ihle with H.C. Wainright.

Hi. Thanks for taking my question. Can you hear me already?

Yes. Great. Thank you.

Thanks, very much. In 2022, the company's net loss included about $15 million of nonrecurring stuff. Q4 was $6.3 million of that. We're 2 weeks away from the end of Q1. I mean, given the fairly large and consistent numbers. Is there any nonrecurring but cash expenses that we should expect to see in Q1?

Well, Heiko, at every reporting period, end of period, we would do NRV analysis on inventories, et cetera. But there's nothing that we were anticipating at this stage. So that's certainly something that we should plan for.

Got it. Okay. And since I got you, anyway, I mean you gave a little bit of color on the ilmenite project earlier on this call, then everything is on track, everything is fine. And I know you'll be giving guidance after commissioning of a plan, but can you just maybe give a bit of color on what's been spent year-to-date? And then also maybe just go through the requirements of cash spend by quarter, if you could?

Yes. So, I'm not going to be able to do cash spend by quarter. But last year on the ilmenite side, we spent just shy of $19 million. And our guidance is $19 to -- guidance was $19 million to $21 million. And then remaining to be spent this year, we're looking at another $17.5 million to $18.5 million to be spent this year, relatively even, I guess, ultimately, between Q1 and Q2 because we're supposed to be up and running and selling ilmenite by Q3 of this year. So, I hope that gives some color.

We'll go next to Gordon Lawson with Paradigm Capital.

Good afternoon. Thanks for taking my call. Pretty simple question for you here the lower recoveries at the mill, was that simply reflection of processing with stockpile material?

I think it's a function of stockpile material and the actual progression through the pit at the time because we couldn't access higher-grade magnitude at the bottom of the pit due terrains, it had some impact. So, I wouldn't overstate it, but I'll hand it over to Daniel that may have some additional Color on this.

It's a matter of the combination between disseminated material that as you know has lower magnetics and massive material who has the highest magnetics. So, when you mix the blending between the disseminated and the massive material, that's when you have an effect in the recovery at -- So that is something that they were working right now in order to keep the right blending and you can keep the right blending when you have these stockpiles, from when you can reach that combination of different materials. But sometimes recoveries are being affected, when you don't have the right blending.

Okay. Thank you very much. And my second, if I may, are we at or around the current run rate for -- vanadium production? Or do you expect that to fluctuate with market?

We had lower production as everyone is aware, in Q1 from the leftover impacts of the rainfall, but we are back up and running. And so, we're not predicting any variation of deviance from our far vanadium production. We produced B2O5 and send that off for conversion at fair vanadium converters, but the amount of ferrovanadium, let's say, that we are anticipating selling for the year is still roughly the same, no change.

It's been not change at all. Basically, the affectation of the heavy rain with a lot of stress on the sequence of mining at the open pit. But right now, in the month of February, we are almost back to normal. And our intention with described during my presentation was that our intention is to try to normalize operation as we move along during the year.

Okay, great. Thank you, very much.

We'll go next to Carlos De Alba with Morgan Stanley.

Thank you, good afternoon everyone. I just had one question. Would you mind sharing with us how much of the electrolyte pure vanadium electrolyte that is going to go into the Enel Green Power Espana battery will be produced or has been produced by Largo Clean Energy. Is it 100% of that electrolyte?

It's 100% with one small caveat. When we acquired the assets of one back in the day, some of the assets we acquired with some inventories of electrolyte. And so, we've actually used some of it in this particular project, but largely it's coming from LCEs on production.

But so that's coming from the stop pass, if I understood correctly. Are you currently in a position to produce that electrolyte yourselves? Would you have to rely on third-party purchases?

Yes. So, we would purify electrolyte. So, the first stage of electrolyte production, we would send to third parties to produce the electrolyte from vanadium that we provide to them. And then we have patented purification processes to further refine that electrolyte. So again, it's a mixed bag answer.

And is there a reason why you are not able to produce the 100% of the process in-house or do 100% of the in-house?

No, we could certainly choose to do it. It's basically just a very simple chemical process, the first part of the process. So, we send it to toll-converters right now because it's very cheap to do that. And it's not consequential to the overall process. But if we wanted to spend a couple of million to buy some tanks and do some mixing ourselves, we could do so. But it's not key or critical to the process.

We'll go next to Steve Silver with Argus Research.

Thank you, taking my questions. And I appreciate all the details in the prepared remarks and between that and the Q&A so far, most of my questions have already been asked. But I was hoping if you could just ask broadly, if you could provide any color on quantifying the high demand in the aerospace market. just as it relates to the overall production capacity for the company, just trying to size up the potential to recognize the premium for the high-purity market in the total products sold.

Yes, sure. Thanks, Steve. As I say, the Aerospace industry is expected to get back to pre-Covid levels this year. We can expect around 5,000 to 6,000 MTV. So about -- I would say, 10,000 to 12,000 tons of B20 equivalent required by this industry this year. Largo's total capacity -- nameplate capacity is around 12,000 tonnes. And we have the largest capacity globally for high purity production. So essentially, I think with our entire production, we could cover the whole demand. Obviously, we won't be able to do that. We have a competition in the market, but I'm very confident that this year, Largo will be the largest supplier to the aerospace industry. So, it's our target we have the capacity in-house to supply close to the entire market, and we will do our best to perform in this market.

Great. That's helpful. And one last one. Just trying to size up as you move forward with the clean energy business and getting close to servicing one deal potentially establishing the JV for other opportunities given the potential for long contracting for new opportunities in the space, just trying to get a sense of how you look at the progress in the clean energy business in terms of when you might expect recognition from the market as you continue to execute on that plan.

Sure. You're 100% correct. The negotiation and the commissioning and construction of these projects take a long time. So, we're very hopeful and anticipatory around our ability to enter into contracts at some point this year, but you would not see those contracts being delivered until earliest next year, and some of them maybe even two years out. But during that time, obviously, you would be constructing and involved in any number of those projects. So, we're working hard on that right now. we're very optimistic that could come from a number of sources. We have potential projects in the wing should the joint venture actually see fruition. And we're talking with other parties in the U.S. as well on potential projects as well, which are all ongoing. So, we have to bring some good news to the market in the future.

Okay, fantastic. Thanks, you for taking my question.

We'll go next to Jim Young with Midwest Investments.

Thanks for taking my question. And Daniel, likes to have you aboard Largo. Question really is can we talk about the high purity marketplace. What's your definition of high purity, please? And I'll secondly is what price premium are you realizing for the high-purity uranium? Thank you.

Thank you, Jim. Paul, can you take care of that?

Sure. Hi, Jim, there's no clear definition of high purity, but essentially, it's a grade that is above what is required by the steel industry. to have a broad range in the two or five equivalent if they are grade between 99% plus and 99.5% plus. To your -- what is also very important in the high-purity product is the low contaminant. So low impurities. To your question on premium, as you can imagine, it is extremely confidential, very key aspects of our negotiation with our customers. So, I won't be able to share that. What I can share, though, is that different customers have different specification in terms of V2O5 purity and also contaminant allowance. And the higher the requirement is the higher the premium. So, there is a fairly wide range depending on specific application in the aerospace chemical and Vanadium results flow battery applications.

Okay. Thank you. And the second question pertains is back to the electrolyte issue, because it seems that -- But the way you describe it is that, you are not really producing any electrolyte, but you are actually taking your vape, your V2O5 and you produce it, the Maracás facility in Brazil. You are sending that to a outside third party and they are making a left flight and you are kind of cleaning it up. So, could you just explain how this is going to work going forward?

It's correct, Jim. So, this the while, let's say, volumes are low, you wouldn't expand the capital cost to create your own mixing for the first stage, which is just producing the electrolyte. Again, it's a simple chemical process. So, you send that off to talk converters and thereafter, we put it through our patent purification process. And there are two steps to it. But if you have sufficient volumes and a number of different contracts then we would spend some additional CapEx to actually have the first part of the process in-house as well. So, I don't think you'd start with it, but eventually, you'd have it in ours as well.

Okay. So, is the -- where the -- Venn that you're delivering to get this converted to the electrolyte is happening in Europe or in Brazil or where burns taking place? And is this being clean it facility in Boston? Or what -- can you say that it's getting further defined in Boston? Is it happening in Boston?

So, we currently have a facility in Boston to do that, that's correct. But once you enter into contracts, logistics are very important. So, you would likely, in the absence of having your own first stage of the process probably use of toll converters in whichever region your project is in. And then we have the ability to actually put in place Institute on site or electrolyte purification. So, you would not send it back to Massachusetts and then back to the project, let's say, if it was in Europe, you would actually do the purification close to the project. So, logistics super important, but it would not go back and forth to our Wilmington facility -- that's just where we have it right now. You will save a lot of money, Jim, by doing the conversion close to the -- where the site of the project is otherwise you're moving liquid from Boston or from Brazil to the different places where you are building batteries in order to save cost, it's much better to have all this conversion of the electrolyte, what the project is. And that is in the is the intention that we're planning into the near future.

We'll go next to Brian Robson with breakout Investors.

Good afternoon. Your -- the first question is for Paul, and it's kind of a 2-part question. The market price for both Q3 ‘22 and Q4 '22 was relatively consistent. And your realized price was about $1 less quarter-over-quarter. And then as we look back a couple of quarters before that, your realized price was higher than you’re -- the market price for each of the last two quarters, and then it was lower this quarter. Can you first explain why you had the drop in realized price in Q4? And then how we should be looking at realized price versus market price as we enter into 2023?

Sure, Brian. I think there's two main points that I'd like to make on your question. Number one is the timing, right. And you're right in saying that sometimes our realized price is not perfectly aligned with the market price. And that's because the vast majority of our contracts are based on the quotation of payers that trade one to two months the actual market price. I'll give you a simple example. When we deliver material this month, let's say, in March, at the time of delivery, most of our contracts will be some sort of a formula based on the February price so that when we deliver the material, the price is known, right? So, at the end of the day, over a long period of time, we follow exactly the trend, but we're just training. So that's the first thing on time line. It is sometimes not perfectly adjusted. The second answer that I'd like to make, and you've said it some quarters, we make slightly lower and sometimes slightly higher than the published price. It's because I think what most people are looking at is the published vanadium pentoxide price, right? But a large portion of our sales are done on a ferrovanadium price, right? ferrovanadium is the product that goes into the steel industry. The indexes are very correlated. But depending on supply and demand situation from time to time, they vary. Currently, ferrovanadium on the end unit basis is trading at a discount to V2O5, right? So, for V2O5 sales, we're getting a better price on a unit basis compared to ferrovanadium sales. It was not always the case. Last year, ferrovanadium was trading at a premium to V2O5. But that probably explains the first part of your question. If you're only looking at one index, it's difficult to give the full picture. You need to look at the various indexes. And by the way, we sell products in Europe. We sell products in Asia, we sell product in the U.S. and all these regions have different pricing from time to time, very correlated over a long period of time. But at a specific point of time, there could be very significant premium or discount. So, if you're only looking at one index or one product in one region, you don't always get the full picture.

Okay. And this question is for Earnest. The product acquisition costs, it's something that you don't provide guidance on. It was $24 million in 2022, and that's $24 million that you're not getting margin on -- and I guess my question has two parts to it again is what is the amount of purchased inventory that you have on hand at 12/31. And at this point in time, I think you'd have a good feel as to how much purchased inventory you'd have in Q1. And I'm guessing that you perhaps have a bit more just because of the low production of late. So, if you can comment on that.

Yes. So, let me just quickly deal with the actual acquisition cost. It is not something to be concerned about because think of it as essentially a wash. So, there is a cost for it, but you're earning the revenue at the same time. The only time that we do that is -- for instance, when we've run into issues on logistics, where there are delivery time lines that are different from what -- was anticipated. And this was especially true in 2022 you're sometimes forced to go out into the market and purchase material to make sure that you fulfill your contractual obligations. But it's not a method for us to essentially trade in the market. It really just fulfills a practical necessity. So last year, we actually made money on purchase material, but that wasn't our plan. We made in the region and Paul can elucidate on it as well. But we probably made $4 million on that material last year. It wasn't our plan to trade -- it just -- it was pure happenstance at the time that we purchased the product and sold it later, we've gotten again. So, I would not focus on it, and we certainly don't plan for it or budget for it. At this stage, our objective is to sell what we produce. And if there is some unforeseen or untoward event that requires us to go and purchase in the market, we will do so. But it's not something that we forecast or even anticipate. In terms of what's at hand at year-end, it's about 400 -- just over 400 tonnes right now. We've already taken whatever write-down would have been required at the end of December. So, in theory, we look forward when we're preparing the year-end financial statements, we already know what we would have made on the material. So, you don't make additional gains or losses on the material there again a wash. So, it's not something that I would have investors focus on. It really does only serve a practical purpose. It's not there is trading mechanism or a way for us to make additional profits, even though we may have made some profits last year on that.

Also, we didn't have any purchases in the fourth quarter of last year. and none has happened during January and February of this year. What is happening is that right now, we are just selling and disposing of the inventory we have from last year, and most of that will disappear in the first quarter or first four months of 2023.

I would like to turn the presentation back over to Alex Guthrie.

Thanks, operator. And I just want to say thanks again for everyone who has joined the call today. That concludes our Q&A session and the quarterly investor call. Have a great day, everyone. Take care.

This does conclude today's call. You may now disconnect.