Largo Inc. (LGO) on Q3 2021 Results - Earnings Call Transcript
Operator: Good day, and thank you for standing by. Welcome to Largo's Third Quarter 2021 Earnings Webcast and Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Alex Guthrie, Senior Manager of External Relations. Please go ahead.
Alex Guthrie: Good morning, everyone. Thanks for joining our third quarter 2021 earnings conference call. On the call today is Ian Robertson, our Co-Chair of the Board; Paulo Misk, our President and CEO; and Ernest Cleave, our CFO. Our VP of Commercial, Paul Vollant will also be available during the Q&A session of the call. To accompany the call today, we have uploaded a supplemental webcast presentation, which will be available on our website at largoinc.com. Our Q3 2021 financial statements and MD&A are also available on the website as well as on SEDAR and 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, cash operating costs excluding royalties and revenues per pound will also be discussed during today's conference call. Actual results discussed during today's call could differ materially from those anticipated and risk factors that could affect results are detailed in the Company’s AIS and other public filings, which are available on SEDAR and on EDGAR. Further information regarding Largo's use of non-IFRS measures are also available in our Q3 results press release and in the Company's latest MD&A which are available on the website. Additionally, 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 during 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 projections of future trends are based. The agenda for our call this morning is as follows; Ian will provide an update to the Company's name change and rebrand initiative with further highlights provided on our strategic transformation. He will then close the call with an update on our clean energy division progress. Paulo will follow Ian and will provide an update on the Company's operational and sales results as well as an update on the vanadium market. Ernest will follow Paulo with the Q3 financial results. Finally, we'll open the line up for questions. We kindly ask that you restrict your questions to two, and then re-queue, if you have any additional questions to allow others the opportunity to participate. And with that, I'll turn the call over to Ian.
Ian Robertson: Thanks, Alex, and very good morning to all of you who have taken the time to join us both on the call and online. The objectives for my prepared remarks over the next few minutes are twofold. Firstly, to ensure that the strategy behind the exciting repositioning of Largo is clear and understandable. And in this regard, I hope to put into context that public announcements you've recently seen, including our exciting announcement regarding the implications that our pre-feasibility study has on driving forward-looking profitability, enhancing and access to vanadium. And the second objective is I am hoping to share some additional insights into why we are enthused about the integration of our vanadium production business with our energy storage business. So let's start with our strategy. We see Largo as an organization, which provides investors with two separate, but closely related new economy focused business propositions. Firstly, investors will continue to enjoy the profitability and value of Largo's highly capable legacy business of producing vanadium, an element which is growing – has growing recognition as a renewable energy transition enabler. We believe that this business in the context of our recently disclosed technical report results and its plan for profitability enhancement provides material value upside. And secondly and additively, as our vanadium production begins to be directed for use in the vanadium-based storage systems we deliver, investors are expected to benefit from incremental and higher earnings from the manufacturer and sale of these systems. This is a business whose competitiveness has improved with the enhanced access to vanadium coming from the mineral production expansion. Our strategy leverages the unique vertical integration of these two businesses to create shareholder value. We are hopeful that providing transparency into each of these businesses will allow full value to be credited to the Largo story. As you know, Largo has had a long and successful history as a producer of vanadium, a mineral, as I mentioned, which is emerging as an important energy transition input factor needed to enable the planet's transition to renewable energy. The new use cases being developed for vanadium will be a source of growing demand, which should imply higher future prices. Largo recently announced its plan to significantly expand its vanadium production operations. Of strategic importance, vanadium production is expected to increase by approximately 20% commencing in 2023 and mine life has been extended to 20 years. And secondly, the company is expecting to generate enhanced profitability from the sale of titanium dioxide, a co-product derived from the currently being processed for our vanadium production. The cash flows from the sale of this co-product will lower the net production cost for vanadium going forward. And we are hopeful that both of these factors are seen as contributing significant accretion to the value of our legacy mineral production business. The second separate, but related value proposition comprising the Largo investment thesis is our emerging energy storage business. I'm sure it doesn't surprise you that market demand for long-duration electrical energy storage is growing exponentially as the transition to renewable energy progresses. Vanadium is being recognized as a high value new economy mineral given its role and enabling the long-term duration energy storage required for greater integration of renewable energy into the supply mix. The long-duration energy storage council, which was announced last week at the COP26 to provide guidance to governments and grid operators and we will publish a strategic report on long-duration energy storage technologies with the aim of enabling the global deployment of up to 140,000 gigawatt hours of long-duration energy storage by 2040. As a result of these secular factors, over the coming five years, the long-duration energy storage market is forecast to grow at a compounded average growth rate of around 30%, reaching 50 gigawatt hours annually. And to put our energy storage business aspirations into context, capturing just 3% of this market would represent full utilization of our current production capacity of vanadium in battery systems. We have begun marketing our VCHARGE, as we call it, energy storage battery system to utility and industrial energy storage customers, and have created a sales pipeline representing some 6,000 megawatt hours of storage. A typical VCHARGE system for these larger size opportunities might consist of a 10 megawatt hour battery with a capacity to operate for 10 hours of duration. The sale of each such VCHARGE battery system would potentially brings three benefits to Largo. Firstly, we would earn margin from the production of the approximately 2 million pounds of vanadium contained in the electrolyte needed for such a battery. Secondly, an additive to the value of our vanadium production, we'd earn operating margins on the manufacture of our proprietary hardware comprising the battery system. And lastly, and importantly, under the Largo energy storage business model, we would invest in, retain TiO2 and ultimately monetize the vanadium employed in this battery. So let's contrast the two business models present within our organization. Consistent with the conventional mining business model, Largo generates operating margins, which are equal to our revenues less operating costs from producing, selling and delivering vanadium to its current customers. In contrast for the energy storage business, the model is slightly different in three ways. Firstly, the operating margins generated by the sale of a VCHARGE system are expected to be materially higher than the model of simply producing and selling the associated vanadium, and to help contextualize based on the current vanadium market and assuming our VCHARGE systems are priced competitively against battery storage alternatives, these operating margins would be approximately 80% higher. Secondly, we plan to invest in and retain TiO2 each pound of vanadium used for energy storage. And this vanadium would remain on the Largo balance sheet and will be monetized when it makes sense. And thirdly and lastly, we are proud of and believe that the market will recognize the ESG implications of committing vanadium for use in a battery system, which enables the planet to capture more renewable energy rather than the conventional use cases of vanadium. Our energy storage business employees and gathers a sustainable competitive advantage from its unique access to vanadium and this is something which is denied to all other producers of vanadium-based batteries today. Before I close out, I'd like to ensure that our two prong shareholder value creation strategy is both crisp and clear. Firstly, we will deliver shareholder value from our legacy vanadium production business, value which is expected to be enhanced some higher profitability on our expansionary plans. And secondly, we are committed to augmenting shareholder value through higher operating margins forecast to be earned in connection with the use of our growing access to vanadium in the energy storage business. Overall, we are hopeful that this strategic repositioning of the company will deliver a capital markets re-rating of Largo as it becomes recognized as a new economy participant. In some respects, Largo represents to perfect some of the parts investment opportunity. The sustainability alignment of of our business really forms the foundation of our vision. We are truly focused on utilizing our strengths and competitive advantages to enable the planet's transition to a 100% renewable energy. Let's say this is something that inspires me personally and we've remained confident that this shift is paving our path to long-term shareholder value at Largo. With that, I'll turn things over to Paulo for an update on the company's expansion, execution plans and operations in sales progress for the past quarter. Paulo?
Paulo Misk: Thanks, Ian. Good morning, and thanks to everybody for joining us today. Today, I am very excited about the growth prospects of Largo and our update brand and positioning to be more than a just mining company. We have identified our multiple growth avenues, and I believe the value of our company will continue to grow as we execute on our strategy. Before we dive into our Q3 operational and sales results, I'd like to spend a moment to outline and contextualize the key highlights of our technical report results released last week. As we have discussed earlier in this year, Largo undertook a comprehensive optimization study for the Maracás Menchen Mine with the objectives of increasing reserves, increasing production capabilities, extending mine life and improving our vanadium production forecast. We were pleased to report the falling drilling and engineering work performance at the Campbell Pit and the NAN and GAN deposits, in addition to the inclusion of TiO2 has resulted in a significant increase in reserves and resources. Compared to the information in the conference we stated 2020 annual information form, the technical report results show a 305% tonnage increase in Proven and Probable reserves and a 128% tonnage increase in Measured and Indicated resource for Maracás Menchen Mine, increasing our mine life to 20 years from 12. To contextualize this further for everyone, over the next two years, we plan to invest approximately $120 million to begin our execution on the phased operational approach outlined in our technical report results press release. The Phase I investment is scheduled to produce 140,000 tons of ilmenite, which is the titanium concentrate from 2023 to 2025, from which 30,000 tons of TiO2 pigment per year in 2024 and 2025 from non-magnetic concentrate already mined from our existing vanadium operation. Largo has a long history of successful execution at its Brazilian operation to become the world's largest primary vanadium producer. Our focus and determination is executing it successfully with this endeavor is no different. As Ian mentioned, these plan has vast implications in furthering our commitments to Largo’s overall evaluation, including develop our energy storage business integration. TiO2 production presents the opportunity to substantially increase profitability and the results of the technical report anticipates free cash flow generation of more than $4 billion over the life of mine with an after-tax NPV of $2 billion on a mining standalone basis with no location of production to the battery…
Operator: And we have experienced a brief interruption in the conference. Please remain on the line while we reconnect the speaker. Thank you.
Ian Robertson: Operator, why don't we turn things over to Ernest to pick up on our financial highlights for the year? Ernest?
Ernest Cleave: Thanks, Ian. Absolutely. Thank you, and thanks to everyone for joining the call today. The following are some key highlights of our third quarter financial results. Strong vanadium prices in the third quarter resulted in the company achieving revenue of $53.9 million…
Operator: Please continue, sir.
Paulo Misk: Ernest, I am back. Sorry for that.
Ernest Cleave: Go ahead.
Paulo Misk: Yes. Sorry guys. I was talking about this – the Phase 1 also estimates an average of V2O5 unit cost of $2.31 per pound, which is significantly lower than our cash operating costs excluding royalties in Q3. Looking ahead to the future, we have outlined additional phase, which are expected to increase our throughput capacity for our TiO2 pigment production, but more importantly, have presented an opportunity to significantly increase our vanadium production. As pointed out earlier, we expect to increase our nameplate capacity of vanadium from 13,200 tons per year to an estimate average of 15,900 tons in 2033 onwards. With that being said, I think we have outlined a very clear and profitable path forward for Largo. One that we believe we create significant value for our shareholders. Our existing mining business has significant growth potential as outlined by the results of this technical report and alternatively can be directly towards our growing energy storage business, which has the opportunity to grow our company's value even further. Moving to our operational and sales progress in Q3. I am pleased to report that production from Maracás Menchen Mine was 3,260 tons of V2O5 in Q3 2021, representing a 5% increase over Q3 2020 and the second-best quarter of production since commencement of operations in 2015. The strong production performance during the quarter was largely driven by increased throughput and improved recoveries following the completion of the company's expansion project in Q2 2021. On the sales front, increased delays and global logistical challenges have impacted all aspects in our supply chain, increased our inventory in-transit and resulted in lower V2O5 equivalent sales in Q3 2021 of 2,685 tons. However, it will note that as a result of diligent planning performance on our sales and trading team, we have been able to deliver on all our commercial commitment up to this point. We do not expect the global logistic situation to improve until mid-2022, following increased port equipment availability at which point we expect to reduce our in-transit inventory. It is important to note that these units of vanadium will be sold going forward. Demand in all our key vanadium markets remain strong in Q3 2021 highlighted by a quarterly increase of 76% in European FMB V205 price. Today's price in Europe have average price of $8. Aerospace industry demand continues to recover slowly, and we expect a gradual recovery in demand from this market over the next two to four years. We continue to maintain a strong focus on developing new markets for our high purity vanadium products supported by the addition of V2O3 in our product range. We expect to conclude the commissioning of this plant in Q4 of this year. To close out, our focus in delivering profitable growth in 2021 and in the future, we now have a clear and profitable path outlined in our technical report results that when combined with the continued development in our energy storage business, really present an exciting opportunity to drive shareholders values at Largo now and in the future. I will now turn the call over to Ernest who will discuss our financial highlights for the quarter.
Ernest Cleave: Thank you, Paulo. Thanks, again to everybody for joining the call. So let's get back to the key highlights for the third quarter. So strong vanadium prices in the third quarter resulted in the company achieving the revenue of $53.9 million and revenues per pound sold of $9.10 from the sale of 2,826 tons of V2O5 equivalent. This represents a 96% increase in revenues and a 69% increase in revenues per pound sold when compared with Q3 2020. We reported net income of $9.2 million or $14 per share for the quarter, representing a 261% increase in net income over Q3 2020. We also reported cash provided before working capital items of $20.3 million for Q3 2021 and $49.3 million for the nine months ended September 30, 2021. The increase resulted largely from higher revenue during the quarter resulting from higher realized vanadium prices. In terms of our financial position, we ended the quarter with a cash balance of $87.6 million. Cash operating costs excluding royalties were $3.53 per pound in Q3 and that compares with $3.14 for the same period last year. The quarter-over-quarter increase is largely due to the impact of cost increases for critical consumables and a slight decrease in global recoveries with 83.7% achieved in Q3 2021 compared with 84.2% achieved in Q3 2020. As Paulo mentioned, we expect to have a solid exit to the year and anticipate ending the year with a cash position of approximately $100 million inclusive of the $15 million working capital facility we obtained earlier this year. With that, I will now pass over the call to Ian to conclude.
Ian Robertson: Ernest, thanks very much. And maybe before we move to the Q&A session, I'd like to kind of follow-up on the insights that Paulo has provided on the execution of our expansion plan by giving you an update on our path to execution on the energy storage business plan. On the VCHARGE battery commercialization front, the build-out of our product development and stack manufacturing facility is proceeding on schedule with a completion expected in Q1 of next year. We are confident that the manufacturing capacity of our Boston plant will be sufficient to satisfy our production requirements through 2024. Secondly, we are on track for delivery of our first commercial battery contract with the Italian utility called Enel in mid Q2 of next year. In this regard, we recently received Underwriters Labs approval of our battery system, which was an important milestone under the Enel contract. We are pleased that that's behind us. In late September this year, the United States Department of Energy announced that we were selected to receive $4.2 million in funding for research and development towards the scale up of manufacturing of our long-duration flow battery systems. And lastly and perhaps most importantly, we are continuing to move forward on the development of the commercial side of our energy storage business. And perhaps consistent with the approach taken by some of the other long-duration energy storage companies such as ESS, EOS and Energy Vault, we are in the process of finalizing commercial supply framework agreements with a number of energy storage developers, including a company called Concentric Power, who are an important developer of energy management systems on the West Coast and specifically focusing on California. And these agreements represent more than 2,500 megawatts of storage capacity over the coming four years. We are currently negotiating the first deliveries under such frameworks and are confident that additional system deliveries will be announced shortly. And with that, I'll turn the call back over to the operator to field any questions that we might have. Operator?
Operator: Thank you. And our first question will come from Carlos De Alba with Morgan Stanley.
Carlos De Alba: Yes. Thank you very much, everyone. So a lot of big announcements. But I wanted to start asking Ian, maybe if you can give us a little bit more specific as to when you expect to announce the second contract on the energy business. It has been several months now since you guys came out with the business – the energy business, and then you had your investor Battery Day but we haven't really seen a lot of pickup in the sales. So can you give us a little bit more color on that very interesting and promising business? Ian?
Ian Robertson: Sure, Carlos. Look, appreciate the comment. I think it is important though to kind of keep in mind – candidly, there is a difference between the production and sale of an energy storage system and the sale of a – I'll say of a commodity product like vanadium. And then – obviously, energy storage systems are integrated, there's significant capital investments. And they're integrated into projects, which are many, many months, maybe even years in the making. And so the gestation period for these projects is long because they are multi-decade investments by our customers in the energy storage systems going forward. And so I guess I'm not surprised and not disappointed. Obviously, I remained enthused being a guy who's been in the wind development business for a long time. These things are, I'll say, overnight successes, which are five years in the making. So I think we're very pleased, where we stand from our pipeline perspective, the engagement we have with some very specific customers. And obviously, it feels a little uncomfortable disclosing those specific contracts until they're signed. But I think it feels like they are progressing in accordance with my expectations, understand what it takes to move forward. I think it's fair to mention that the evolution of Largo's long-duration energy storage technology, I'll say, well, it's been a long time in the making. I think we're pleased that our first commercial battery system, that is up and operational in a place called Shirley, Massachusetts, and it's doing exactly what we expected it to do. And so it's giving us confidence certainly in the delivery of the next system to Enel. And I know this was a long answer, Carlos, to a very specific question. I think we're confident that you're going to see us meet the expectations or at least move forward toward the expectations we set at Battery Day this summer in terms of what we're looking forward in 2022. So I guess, in short, and I don't want to say, standby because I agree with you that this is an incredibly exciting part of the business. I will say that – and maybe I go back to the shareholder value creation strategy that obviously, shareholders are enjoying the profitability and value that's being created on the mineral production side of our business. And so we obviously – are anxious for us to be additive to that value, but in some respects here, I don't want to say getting paid to wait that this is a great company and that – these developments will come in the normal time. I don't know, Carlos, if that answers your question, I know you were looking for some very specific commentary, but hopefully, I've kind of communicated the process we're in right now.
Carlos De Alba: Yes. Thank you very much, Ian. I understand the challenges of giving more details at this stage, just looking forward to getting some incremental good news. And then if I may, just coming back to the more traditional Largo business, I noted that the implied sales spec to feed you for the fourth quarter is a little bit – it's close to 2,800, maybe a little bit – just a little bit above that level. So it's still below the 3,000 run rate and certainly below the production – the implied production for the fourth quarter. So your inventory will continue to increase. Can you comment a little bit more as to specifically, what could you do in order to alleviate the logistic issues that you're facing? Or why do you have hope that in early 2022 that should start to ease?
Ian Robertson: Yes. Well, let's turn that over to Paul Vollant. Paul?
Paul Vollant: Yes. Thanks, Ian. And thanks Carlos for the question. It's a very good question. We have been trying to manage our inventory and sales as best as we can in the current logistics situation. What we can do is deliver material to customers closer to the production. That is the easiest thing we can do to reduce transit time and get material to our customers quicker. We've been very active in that. We have sold less material than budget into Asia and more material into Europe, which is much closer to Brazil. Obviously, there's a limit to what we can do because we have long-term contracts that we need to meet and deliver, but we are doing the best we can to accelerate sales. We are trying to be reasonable and cautious in the expectation for Q4 again, because of the logistics situation, but we had a good month of sales in October, and we'll continue to try and perform as much as possible for the remaining of the year.
Carlos De Alba: Thank you, Paul. I appreciate that. And then my last question, if I may, it has to do with costs or expenses at least. What should we expect in terms of the run rate – the normalized run rate for professional consulting and management fees? I mean, obviously there wasn't a spike in this quarter. It was expected because you're ramping up the energy business. But now that you are also working on the titanium development, and maybe there is more to come on the energy business. What should we look for in terms of those expenses on a quarterly basis?
Ian Robertson: Well, Carlos, normally, we limit guys to two questions, but we're going to make a special exception for you to give you the third. Paulo?
Carlos De Alba: Thank you, Ian.
Paulo Misk: Ian, I think Ernest is more of the…
Ian Robertson: Sure. Ernest, go ahead.
Ernest Cleave: Yes, Carlos. Candidly, I think the numbers that you've seen in Q3 are going to be reasonably represented of what we will do going forward. They are just some fundamental increases that are associated with being listed as a NASDAQ company. We obviously have the LTE division that adds to our overall G&A. So in and around that number that you see for Q3, I think is I don't expect substantial reductions from that number.
Carlos De Alba: Thank you, Ernest.
Ian Robertson: And Carlos, I'm just kidding. You can ask the fourth. Go ahead.
Carlos De Alba: I'm fine.
Ian Robertson: Okay. All right. Thanks. Appreciate your questions.
Operator: Thank you. Our next question will come from Lee Cooperman with Omega Family Office.
Leon Cooperman: Yes. Hi. A couple of questions in observation. One, you guys created an expectation level regarding battery sales when you had your Battery Day. And as an observer of the company, I think things have been extremely disappointing. And the question I guess was, Carlos asked, you really were unresponsive. What is your timetable for announcing significant new battery orders? Because we've only had one and that order was like pulling teeth to get it done. Secondly, what was the statement that company is looking to make when you made, which seems to me to be a superficial name change from Largo Resources to Largo. What was behind that decision? I can understand Largo Clean Energy. I understand the significance of Largo Resources to Largo. And third, this is to Ernest, you obviously have a budget because you talked about year end cash, earnings estimates are all over the place. Can you help us and give us some guidance as to what you anticipate earnings in 2021 and 2022 given current conditions? Those three questions.
Ian Robertson: All right. Well, Lee, let me start with the – I'll start with the first two and I would let Ernest pickup on the second one. And actually, I'm going to start with your second one first that talks about our brand change. And I think – here is the short answer, is that this organization from our perspective is more than just a resource company. And so do I actually think a name change is meaningful? No, I actually don't, but I think having the wrong name can imply to shareholders and to customers and to employees things that aren't consistent with the business we're in. And so I think dropping resources from our names is a recognition of the fact that we haven't – we have a broader perspective than simply producing vanadium. Having said that, I guess this leads me into your second question. Obviously, this organization has a long and rich history of producing vanadium and we'll continue to do that and create value. And I guess, I'm sorry if it wasn't the intention to leave the expectation that building and selling battery systems was the same – had the same production and sales cycle as selling a commodity. As I've – I'd mentioned to Carlos, and I'll say – I'll reiterate the answer, and I'm sorry, you didn't find it responsive is that we're in active discussions and negotiations with organizations who are investing in multi decade projects. And the investment in that sales cycle is not something that happens sort of in weeks. These relationships take months to develop. And so I will say that, it's not – if somebody kin to building and selling wind turbines. If you know anything about that business, it's a long sales cycle. Having said that, we're pleased that we've got a pipeline of interesting and opportunities that are growing in significance and size and I think that this business has great implications going forward. But again, as I mentioned to Carlos, I think that the short answer is in some respects, you're getting paid to wait that there's value upside from the energy storage business. This isn't not just a startup where we have no revenues and you're sure hope we come up with something, we're producing significant earnings and revenues today, and we're pleased that we have the prospect of being additive to that. So I'm sorry that you didn't find the answer to Carlos responsive. But as I said, I think it's inappropriate to be telling you, oh, I think we're going to announce this sale and this sale and this sale before we're going to announce them. And if you're saying, well, it's taking a long time, that's just the nature of this sales cycle. That is what it is.
Leon Cooperman: happened because you guys created a level of expectation on Battery Day. And I also would take it – you said, we're getting paid to wait. You're getting paid to wait when it’s a dividend in your pocket. We're not getting paid to wait for anything. I think the company is being very promotional in its presentation.
Ian Robertson: Well, Lee, we're going to have to disagree whether earning returns and accumulating cash on the balance sheet or paying out a dividend are not the same thing. I think what – I just going to have to respectfully disagree with you on that point. And if you say we were being very promotional. I'm sorry that wasn't the intent. We're obviously enthused about the prospects of – as I said, building and taking an organization and converting an organization, which was largely an old world economy producer, and bringing it into the new economy in two areas, the ability to produce an element which has strong uses in the new economy and one that's actually producing systems that are facilitating. So I actually do feel that this organization feels fundamentally different than it might have a year ago. I'm sorry if you disagree, but it does feel fundamentally different. I think the prospects of this organization are materially different. And I'm hoping that for a guy who's been following this organization for a long time, that you look into the announcement that was made in terms of the resource that we now have and the prospects that we now have and go, oh my gosh, there's a lot more here than I thought there was even a year ago. So anyway, I obviously see it as being quite different and I'm hoping that I'm communicating that without being promotional. That's not the intent. But let's answer the rest of your question. Ernest, Lee obviously has some very specific topics.
Ernest Cleave: Lee, thank you for your questions again and we appreciate your support. I think one of the things just to start off with, we have not traditionally given EBITDA guidance, but I think this is something that we will rectify in the near future. So I would like to say that late Q4 or Q1 of next year, we will put out some earnings guidance, we'll create a definition around it and try and break that down by quarter as well. So I just did some quick numbers, yes, just off the face of our financials. We are probably in the region of about $50 million EBITDA give or take just based on some rough calculation I just did. If you look at Q4, I'd anticipate something between $20 million to $25 million of additional EBITDA. So it maybe more, but we're going to end the year on about $75 million in EBITDA, Lee. But for next year and going forward, I think we'll get much more narrow and pointed in terms of the guidance that we provide. So we will continue with our guidance on cash costs. We will probably drop our guidance on total cash costs because I don't feel it's a very good measure. And then what we'll do to replace that as we'll start getting into the tradition of anticipating and forecasting earnings.
Operator: And our next question will come from Andrew Wong with RBC Capital Markets.
Andrew Wong: Hey, good morning. So in the prepared remarks, I think I heard the operating margin for VCHARGE sales will be 80% higher than your traditional vanadium business, which was very promising. Can you just kind of walk us through some of the assumptions in that calculation and how that's done?
Ian Robertson: Sure. Thanks for the question, Andrew. And so to be clear that – obviously, I don’t want to say it's a different business and it's priced against different indices. And so what we have attempted to do is kind of understand the alternative costs, the costs that would be incurred procuring an alternative energy storage system and candidly lithium ion is the most obvious one against which we are looking to price our battery storage systems. And it's the long haul cost. Just to be clear, Andrew, it's not just the upfront costs, there's a concept called the levelized cost of storage. So you look at it over the life of the storage system. And so assuming that we price our systems on a levelized cost of storage basis, which is at parody with our understanding of the lithium ion business, we back ourselves into kind of what we can charge for our systems. And it is on the basis of that that we kind of look forward and say, okay, the operating margins the revenue is less COGS for our system or as I said, materially higher than sort of the current margins we're earning off of producing and selling vanadium. And I think there are some more than just nuances that need to be discussed here because obviously as the price of vanadium goes up and down the margins, we earn from our mineral production business, obviously vary. And so it's kind of a multi-variant equation. And then the other and last and perhaps most important consideration of the energy storage business is that in our model we are retaining the vanadium that we are producing on our balance sheet. And so you might think, well, that's an interesting kind of value add. And we think it is, is that, we're going to invest in and put that vanadium on our balance sheet, and I'll say make it available to our customers, but it never leaves our possession over the life of that battery system. And so I think there's – you kind of have to look at it from a bunch of different ways. And I know this was a long answer, Andrew, to kind of giving you more insight into the value prop – the total value proposition associated with the energy business. But it really does involve those two elements, producing and selling the battery system and investing in the vanadium going forward. I'm sure I butchered the answer. So Andrew, rephrase it in another way, if I didn't get to where you were looking for.
Andrew Wong: No, that's good. That's helpful. That's good. And then just another question around LCE. We're seeing some other competing technologies that – like competing flow technologies like iron flow batteries, other flow battery producers. Can you talk about how those other battery chemistries and other vanadium batteries compare to what LCE offers like both – both on like the actual efficiency for the utility customer and then also just around the availability pricing and some of like the underwriter stuff, what's the difference? Thanks.
Ian Robertson: Sure. It's a great question. So I think you're making reference to one of the most notable stories in the capital markets is a company called ESS, which is producing an iron-based battery system, it's kind of a hybrid battery system. And let me start by saying is, ESS is being advanced by some very capable people. And I have – and I'm not intending to slag that story at all because, I think we have great respect for the individuals who have advanced it. And there are people who I'll say we know well. But maybe I should have started Andrew with the comment that this is not a winner take all market. As I hope you kind of came to the conclusion as we talked about the size of the market, there's lots of room for all of us in here. But obviously the things that you mentioned, capital cost, roundtrip efficiency, these are all things that will determine the competitiveness and that arguably maybe the margins that you get to choose. ESS, the iron batteries, I'll say they demonstrate certain characteristics, some of which are more challenging than some of the characteristics we have. And I think you're making the observation that iron is very cheap in comparison to vanadium. And so when you think about the – I'll say the act of electrolyte, there's no doubt about it, iron is cheaper than vanadium. Having said that, there are challenges with the voltage of an iron-based cell, the size of the stacks requires many, many, many more of them to get the same – to get to the same size and scale of our vanadium-based systems. And so we did a bit of – we tried to do an introspective analysis and I think we're comfortable that our vanadium-based system remains competitive even – not even, but against systems like ESS. What you are seeing, and you mentioned some of the other ones, you're seeing a bunch of mechanical energy storage systems, the thoughts of lifting big concrete weights up and dropping them down and expanding energy to make potential energy and turn it into through kinetics, into electrical energy. Those generally suffer from lower roundtrip efficiencies than I'll say chemical storage systems. So I think overall, and I will say that energy storage systems have different applications in different places, in different spots on the grid. And so I think there's going to be lots of room for everybody to be competitive. And we obviously know the lithium ion suffers some – obviously fire risks, et cetera. It's not great for really long-duration storage because of the coupling of energy and power. And so I think maybe the long way I'd answer your – or the short way to answer your question, Andrew, is that across the spectrum of energy storage technology, there isn't the killer app. And there certainly isn't the killer app, which is available today commercially or even forecast to be available. So I think, A, we're happy with our tech. B, we are super happy with our access to what is a pretty thinly traded hard to get access to element like vanadium. And I think it positions us well going forward. And so I'm happy to kind of take this offline and get into some of the specifics for you, but we're not seeing that killer app, which is causing us concern, Andrew. Again, apologize for the rambling answer, but you press the start button.
Andrew Wong: Thanks. And then just one last one on the vanadium markets. Obviously, we've seen prices turned a little bit lower here with steel production coming down. Can you guys – maybe Paul, provide a little bit on your outlook for vanadium prices going into 2022? What are inventory levels like globally, and are we seeing maybe some pullback in slag-based production because of the decrease in iron ore prices? Thanks.
Paul Vollant: Hi. Thanks for the question. Outlook for vanadium market, the way we see today is that prices are very well supported by strong demand in all of the industries. Our main industry, as we all know, is that it's still and still has been performing very well in 2021. We met with a lot of customers over the past few months, and they have very good visibility at least until the second half of next year. So that should be positive in the steel sector. In the aerospace industry, we're still quite far from the pre-COVID level, but there's been a definite recovery starting basically from April, May this year. And we think that it's going to continue to revert to the main over the next two to four years. Chemical industry has been a good business or so not that impacted by COVID and obviously there is a growing interest in the energy sector, and we believe we're going to assign a lot more of our units into the sector going forward. So I think demand should really support prices. The big unknown today is the logistics situation that could create a supply crunch if it gets worse. But today, we don't expect it to change dramatically. On the stock level, we are somewhat higher than budget on inventory not by a lot, but somewhat higher. And until the current logistics situation resolved itself, we probably see that it's not going to happen in the next two or three quarter. We believe we're going to keep the same type of inventory level as of today. I think your last question was pertaining to iron ore. Yet iron ore prices have dropped significantly. But as we all know they were starting from a very, very high base. I don't think we are today at the level where that is going to have an impact on supply reduction especially in China. But obviously if it continues in that direction, they will be impacting that in global vanadium supply, especially production of vanadium in the Bay Area in China.
Andrew Wong: Okay. Sorry, just on the inventory. I meant global inventory levels, especially given that steel production in China has come down. Is there a risk that we see instead of vanadium imports that we saw this year and last year in China that we see exports coming out of China, which then, despite the strong steel demand in Europe might impact vanadium prices elsewhere?
Paul Vollant: Yes. It’s a good question. Definitely China has become a net exporter compared to a net importer a couple of quarters ago. However, it's been very limited. The volumes going out of China, we monitoring very closely every month – tiny fraction of the whole production. We have not heard any high number of stocks anywhere, whether it's in China or elsewhere. If anything, I think the concern is more on the inventory sitting in transit on vessels, in trucks rather than in warehouses and readily available to be sold to customers. So that's where we’re seeing the main issue today is prompt availability of materials.
Andrew Wong: Okay. Perfect. Thank you.
Ian Robertson: Thanks, Andrew.
Operator: Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Guthrie for any additional remarks.
Alex Guthrie: Thank you, operator. This concludes the Q&A session and our quarterly investor call. Have a great day. Bye-bye.
Operator: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
