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Edited Transcript of LGO.TO earnings conference call or presentation 14-Nov-19 3:00pm GMT

Q3 2019 Largo Resources Ltd Earnings Call

TORONTO Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Largo Resources Ltd earnings conference call or presentation Thursday, November 14, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex Guthrie

Largo Resources Ltd. - Manager of IR & Communications

* Ernest M. Cleave

Largo Resources Ltd. - CFO

* Paul Vollant

Largo Resources Ltd. - Director of Sales & Trading

* Paulo Guimarães Misk

Largo Resources Ltd. - President, CEO & Director

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Conference Call Participants

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* Andrew D. Wong

RBC Capital Markets, Research Division - Associate Analyst

* Curtis Rogers Woodworth

Crédit Suisse AG, Research Division - Director & Senior Analyst

* Leon G. Cooperman

Omega Advisors, Inc. - President, CEO & Chairman

* Marcus Walter Giannini

H.C. Wainwright & Co, LLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Largo Resources Third Quarter Financial and Operational Results Conference Call. (Operator Instructions)

Thank you. Mr. Guthrie, you may begin your conference.

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Alex Guthrie, Largo Resources Ltd. - Manager of IR & Communications [2]

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Thank you, operator. And welcome, everyone, to the Largo Resources third quarter 2019 results conference call. Today's call is being recorded, and the replay will be available starting tomorrow in the Investors section of our website at largoresources.com. Our third quarter 2019 results press release, MD&A and financial statements are also all available on the company's website and on SEDAR.

Some of the information you 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, revenue adjustment payable, revenues per pound sold, vanadium sales per pound sold, revenue adjustment per pound and estimated revenue, forecast cash and revenue adjustment payable at April 30, 2020, will be discussed during this conference call.

Actual results could differ materially from those anticipated, and risk factors that could affect results are detailed in the company's Annual Information Form and other public filings, which are all available on SEDAR and on the company's website. Further information regarding Largo's use of non-IFRS measures is also available on our third quarter 2019 results press release and in the company's MD&A for the 3 and 9 months ended September 30, 2019.

Financial amounts presented today will be in Canadian dollars, except as otherwise noted. Market and industry data contained and incorporated by reference during this call concerning economic and industry trends is based upon good faith estimates of our management or derived from information provided by industry sources. Largo believes that such market and industry data is accurate, and the sources from which it has been obtained are reliable. However, we cannot guarantee the accuracy of such information, and we have not independently verified the assumptions upon which projections of future trends are based.

Speaking first today will be Largo's President and Chief Executive Officer, Paulo Misk. Speaking second will be Largo's CFO, Ernest Cleave, who will provide additional detail on Largo's Q3 2019 financial performance. Following Ernest, Largo's director of sales and trading, Mr. Paul Vollant, will then provide an update on the sales and trading business and vanadium market. Finally, we'll open the call to questions.

I will now turn the call over to Paulo for opening remarks.

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [3]

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Thanks, Alex, and welcome, everyone, to our quarterly update conference call. Maracás Menchen Mine performed well in the third quarter 2019, highlighted by 2,952 tonnes of vanadium pentoxide produced at cash operating costs, excluding royalties, of USD 2.81 per pound of V2O5. Although the company achieved lower operating units cost during the quarter, profitability continue to be impacted by a result of lower vanadium price combined with the company's management of trade receivables and payables as a result of its current offtake agreement. And consequently, the company recorded net loss of $8.1 million in Q3 2019. The company believes that vanadium price are unstably low and expect sentiment in price to improve as evidenced by the recent price increase of vanadium in Europe. Despite the huge increase of vanadium consumption in China over the last 2 years, the current price environment is largely attributable to a dramatic increase of Chinese lead production in 2019 from the VTM deposits to a high iron ore prices. The increase of Chinese vanadium supply, combined with the niobium substitution, put vanadium price under pressure through 2019. Going forward, we expect vanadium price sentiment to improve following decrease of production from high-cost stone cold producers, a decline in the slag production and a decline in niobium substitution on the back of lower vanadium prices.

On the cost front, the company's Q3 2019 cash operating costs, excluding royalties, were $2.81 per pound of V2O5 in Q3 2019, representing a decrease of 8% over Q3 2018. The company has also lowered its 2019 annual average gas operating guidance excluding (inaudible) from the range of $3.45 to $3.65 to a range of $3.30 to $3.40 per pound, reflecting cash operating cost performance up to now and expected positive impact on foreign exchange for the balance of the year.

Total sales of V2O5 in Q3 2019 were 2,720 tonnes, which includes 360 tonnes of high purity V2O5. The company's total sales of high purity V2O5 in 9 months ended September 30, 2019, are 1,160 tonnes. As of September 30, 2019, the company has produced 7,566 tonnes of V2O5, and we continue to maintain its annual production guidance range of 10,000 to 11,000 tonnes of V2O5 in 2019.

On August 20, the company announced that it had formally given notice to Glencore after nonrenewal of its offtake agreement dated May 14, 2008. In accordance of this notice, the company's offtake agreement will expire effectively May 30, 2020. We expect -- we recently announced the appointment of Mr. Francesco D'Alessio as Largo's Head of Sales, Americas, who will support the company's vanadium sales and trading business, with a particular focus on North and South America markets. Mr. D'Alessio brings many years of industry experience, most notably as the global sales manager for our vanadium for EVRAZ, and will pay a key -- or play a key role as Largo continues to develop -- development of its sales and trading strategies.

The company has attended multiple conferences while we continue to build the back office team to support sales and ensure highest quality of service from May 2020 onwards.

We are also proud to report that the Board has approved the construction of a ferrovanadium conversion plant at Maracás Menchen Mine. Ferrovanadium is essential in the production of the steel products, which make up approximately 91% of the global vanadium market consumption. The construction of the company on ferrovanadium conversion plant creates downstream advantage and creates flexibility as it eliminates the dependency of the convert V2O5, Largo's production using third-party converters. The company has began the best engineering studies associated with the construction of the plant and looks forward to provide an update to the market in the near future.

The company is also in advancing basic engineering studies to further evaluate the economics associated with the upgrading of the Maracás Menchen Mine's non-magnetic tailing using a chemical plant and a concentration flotation to produce TiO2 oxide. The company's non-magnetic tailings are composed of ilmenites, which also contains high purity TiO2. The company starts a pilot plant in October to study flotation performance and anticipate results of the ongoing study in Q4 2019.

We are also proud to announce a strategic partnership with Boston Metal to further advance its Molten Oxide Electrolysis testing using Largo's V2O5 to produce ferrovanadium. Boston Metal's patented metals production process is more efficient, less costly and greener with the Molten Oxide Electrolysis.

In summary, operation at the Maracás Menchen Mine continue to perform well in the third quarter of 2019. The Board realized that the share price does not currently reflect the value of the company and is considering instituting a share purchase program by a way of a normal-course issuer bid. Management remains very confident that this very strategy is well aligned, and we'll remain very focused on maximizing value for all of our shareholders.

With that, let me turn the call over to Ernest, who will provide details on our third quarter 2019 financial performance.

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Ernest M. Cleave, Largo Resources Ltd. - CFO [4]

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Thanks, Paulo, and thanks to everyone for joining the call today. As Paulo previously mentioned, the company recorded a net loss of $8.6 million in Q3 2019 compared to net income of $71.4 million in Q3 2018. This movement was primarily due to a decrease in revenues and was partially offset by a decrease in operating and finance costs during the quarter.

Following the $20.4 million reduction in revenues as a result of the remeasurement of trade receivables payables under the Glencore contract, the company recognized revenues of $32.1 million in Q3 2019 compared with revenues of $149.5 million in Q3 2018. Revenues per pound sold in Q3 2019 was $5.36 or USD 4.06, which compares to $27.12 or USD 20.73 per pound in Q3 2018.

Vanadium sales from a contract with the customer was $32.5 million in Q3 2019 compared with $120.5 million in Q3 2018. This decrease is primarily attributable to a decrease on the V2O5 price with the average price per pound of V2O5 of approximately USD 7.16 for Q3 2019 compared with approximately USD 19.66 Q3 2018.

The company generated positive cash from operating activities on Q3 2019 with net cash provided by operating activities of $11.7 million compared with $113.4 million in Q3 2018. This decrease was primarily due to revenues exceeding direct mine and mill cost and royalties by $8.1 million compared with $120.2 million in Q3 2018. This contributed the cash used before non-cash working capital items of $1.7 million compared with cash provided before non-cash working capital items of $120.4 million in Q3 2018.

Cash used in financing activities in Q3 2019 was $28.1 million compared with $64.2 million in Q3 2018. This movement is primarily due to the decrease in the repayment of long-term debt from Q3 2018 of $219.2 million; a decrease in debt issue costs, interest, guarantee fees and other associated fees paid; a decrease in the change on the restricted cash; and an increase in net interest income.

Cash used in investing activities was $15.7 million, representing an increase of $11.7 million from the $4 million seen in Q3 2018. This increase is primarily due to the expansion project being undertaken by the company. The net change in cash in Q3 2019 was a decrease of $35.5 million compared with an increase of $43.9 million in Q3 2018.

The company's trade payables balance at September 30, 2019, was $82.2 million, and the revenue adjustment payable was $92.3 million. Assuming V2O5 prices remain the same as of September 30, 2019, the company's total estimated revenue adjustment payable to September 30, 2019, is $89.8 million. As of November 13, the company's estimated revenue adjustment payable for V2O5 sold up to October 31, 2019, is approximately $95.7 million.

Given the overall decline in the market price of V2O5 since December 31, 2018, the company anticipates that it will continue to realize lower revenues, including significant negative remeasurements of trade receivables/payables in future periods, until such time as the decline levels of prices increase.

The company has forecast its expected cash balance and the estimated revenue adjustment payable as of April 30, 2020, under 3 different vanadium price scenarios. Each scenario assumes that vanadium price presented applies from October 31, 2019, to April 30, 2020, and assumes that the company sells 100% of its production during this period, constant foreign exchange rates and cash operating cost per pound produced consistent with the results to date. At a vanadium price of $4, the company's forecasted cash and the estimated revenue adjustment payable at April 30, 2020, will be $131.3 million and $103.7 million, respectively. That is a net of $27.5 million. The vanadium price of $4.73, which is where the market currently is, the company's forecasted cash and estimated revenue adjustment payable at April 30, 2020, are $138.1 million and $95.5 million, respectively, or a net of $32.6 million. At the vanadium price of $5.50, the company's forecasted cash and estimated revenue adjustment payable at April 30, 2020, will be $144.7 million and $86.6 million, respectively, for a net of $58.1 million.

On the cost front, operating cost for Q3 2019 were $31.5 million compared to $36.7 million in Q3 2018 and include direct mine and mill costs of $22.2 million, depreciation and amortization of $7.5 million and royalties of $1.8 million. Lower operating costs in Q3 2019 compared to Q3 2018 are primarily due to a decrease in royalties as a result of a decrease in V2O5 prices during the quarter. Cash operating costs, excluding royalties in Q3 2019, were $3.71, that's USD 2.81 per pound compared to $3.99 or USD 3.05 in Q3 2018, representing a decrease of 8%. The decrease seen in Q3 2019 compared with Q3 2018 is largely due to higher production during the quarter as well as an improvement in the global recovery level from Q3 2018.

With that, I will now turn the call over to Paul Vollant, who will provide an update on the company's sales and trading business and the vanadium market. Following Paul's update, we will then open up the call for questions.

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Paul Vollant, Largo Resources Ltd. - Director of Sales & Trading [5]

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Thank you, Ernest, and thanks, everyone for joining this call today. I will jump right onto the recent vanadium price decline and what we believe many people on this call are concerned about.

First of all, on the supply side, increased production from China in the first half of 2019 is now reversing due to the recent price decline. Lower vanadium and iron ore prices are already leading to supply decrease and shut down in China.

On the demand side, steel mills that were long on vanadium following the market tightness in 2018 probably overcommitted in 2019, and current contracts are being carried forward into 2020. We expect the situation to normalize early next year. Also, high prices in 2018 led to substitution with niobium. The impact in Europe might have been as high as 15% for some steel mills. However, we're already seeing steel mills reverting to vanadium and strongly believe that the current price levels should lead to healthy increase in vanadium utilization rates next year.

On the positive side, unlike in 2015, stock levels at steel mills are low, and restocking should happen in the coming months. Overall, we are strong believers that the price levels that we see today will ultimately, without high cost producers, as evidenced in the previous downturn.

Regarding the sales and trading division, as Paulo mentioned earlier, we are very pleased with Francesco D'Alessio's recent appointment. Francesco brings more than -- brings very long experience in the sales and trading of vanadium and ferroalloy. Francesco spent more than 4 years as a global sales manager for vanadium at EVRAZ, where he led the commercial strategy and sales to end-users, Francesco supervised the sales team as well as agents on a global basis while looking after all aspects of pre- and after-sales functions, including logistics and a strong focus on cost management. With Francesco, myself and the rest of the Largo team in Brazil and Canada, we now have a very strong group to manage direct sales in Europe and Americas. Our focus is now on building the back office team to support sales and ensure highest quality of service from May 2020 onwards.

Alex, I leave it up to you now.

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Alex Guthrie, Largo Resources Ltd. - Manager of IR & Communications [6]

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Great. Thanks, Paul. I think we'll now open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Heiko Ihle of H.C. Wainwright.

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Marcus Walter Giannini, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [2]

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This is Marcus Giannini calling in for Heiko. Heiko is tied up on another earnings call.

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [3]

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Thank you.

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Marcus Walter Giannini, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [4]

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Yes, so my first question is in regards to Board approval for the construction of the ferrovanadium conversion plant at Maracás. I understand we are only in the engineering study part of this, but can you provide some preliminary color on timing, cost savings and capital requirements?

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [5]

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Thank you for your question. The ferrovanadium plant is a very important asset that's going to create conditions to support our commercial strategy and to give us flexibility. And we -- based on our engineering study, we expect to expand in the range of USD 8 million to USD 10 million. We will start the implementation next year, and we expect that the ramp-up -- the start-up will be ready by January 2021.

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Marcus Walter Giannini, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [6]

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Okay. Great. And then regarding the Glencore agreement, at this point, we are 6 months out to the day when it expires. Besides the hiring of Francesco, what other preparations are being made behind the scenes for the eventual ending of the contract?

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [7]

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Paul and Francesco, and including myself, we are so focused to being tight with the market, talking with the customers, having attending the conference and the conferences that all of the customers have been attending as well. So we are very confident that everything we have done, we will have -- we'll meet all the strategy that we have planned. So we are very happy with what everything has been doing. And we are sure that we are going to have a very good commercial results, creating opportunities for Largo.

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Marcus Walter Giannini, H.C. Wainwright & Co, LLC, Research Division - Research Analyst [8]

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Okay. Cool. And then my last question is what's your best guess for vanadium price that would yield breakeven EPS?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [9]

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I'll take it.

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [10]

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Yes. Ernest will answer that.

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Ernest M. Cleave, Largo Resources Ltd. - CFO [11]

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Yes. Okay. So I'm going to deflect the cost of breakeven EPS and rather, focus on, let's call it a cash breakeven. And I think something in the range for next year because it's a transition year for Largo. On a cash breakeven basis, we are seeing something between $5 and $5.50. Something in that range would be required for cash breakeven to pay for ourselves in trading activities on normal operating activities, and obviously, our CapEx, et cetera. So I hope that answers it partially. But -- and I'll deflect on EPS per share.

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Operator [12]

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Your next question comes from Andrew Wong with RBC Capital Markets.

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Andrew D. Wong, RBC Capital Markets, Research Division - Associate Analyst [13]

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Just going back to the post Glencore transition. Do you expect any sort of disruption or a transition period in sales when that contract expires? Or can we expect kind of like a seamless transition on the selling and the sales volume? And maybe just maybe elaborate like are there contracts or arrangements that are already in place to take on 100% of the production?

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [14]

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Thank you, Andrew. It's too early to have a numbers from the contract that we are just setting and confirming with the customers. But we don't expect to have any problem, any disruptive commercial issues. Of course, in -- from May, we'll start converting material V2O5 to supply the customers, so we may have lower sales on May and beginning of June. However, all the high purities will be ready to be delivered to our customers from the 1st of May 2020.

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Andrew D. Wong, RBC Capital Markets, Research Division - Associate Analyst [15]

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Okay. And then on the share buybacks you mentioned in the prepared remarks, maybe could you just provide some longer-term plans around that? It looks like we have kind of better line of sight on the balance sheet and the impact of remeasurements. Given where the share price start today and it looks like they're undervalued, what's the timing around the buybacks? And is there any interest to take on some extra debt to do some buybacks in the near term?

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [16]

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We are still evaluating all the opportunities regarding this. We believe that our low share price creates a good momentum for doing this. However, we need to take into consideration all the interest of the shareholders. Ernest, you have anything else to provide, please?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [17]

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So somewhat similar to our CapEx projects, something like an NCIB would also be subject to obviously, sufficient liquidity on organizations, so we are busy making those evaluations. But certainly, from a fundamental perspective, just looking at the share price, it does seem like an opportune time. But we don't have ranges or magnitudes to share at this time. Hopefully, that's something we can share with the market in the near future. But certainly conceptually, we're certainly behind this idea. So we need a little bit of passage of time to see how vanadium prices react and get a good sense of our liquidity. But subject to those constraints, I think it's well liquid.

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Andrew D. Wong, RBC Capital Markets, Research Division - Associate Analyst [18]

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Okay. And then maybe just 1 for Paul. Can you talk about on the demand side in China? I mean it looks like, if you look at the initial data, it looks like demand's up 15%, 20% this year. How much of that is driven by higher steel production versus increased use of vanadium in steel? And then just secondly, what's the outlook for 2020 given that maybe outlook for steel production is a little bit lower going into next year?

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Paul Vollant, Largo Resources Ltd. - Director of Sales & Trading [19]

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Yes. Thank you. It's a very good question, actually. And as we mentioned, we've seen consumption in China increase rapidly over the past 2 years. Vanadium consumption has been up 24% in 2018 and 2019 combined. We expect that trend to continue very strong next year, especially on the utilization rate. And as the new rebar standard is being implemented, we are going to see it more and more, new transition rate in China. On the steel demand itself, it's more difficult to comment, but I think that kind of add up to the consumption as well.

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [20]

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I just would like to complement that idea. Just one very good news regarding China is the consumption has increased as Paul said. In the supply side, we could see in 2019, a huge increase of production from this lag is due to the high price of iron ore. So what we expect in respect of the traders, expert in iron ore, is the iron ore price will decrease even more in the range of $70 to $75 per pound -- per tonne. So it's going to reduce the vanadium supply from the (inaudible) lags. If you look at the DMO report, one of the reasons -- the second most important in China, they have a cost of production of iron ore in the range of $80. So it will create a situation to not have the enough V2O5 being produced in China, considering the iron ore and considering the substitution of niobium, which it was in the range of 15%, 18%, in 2019. And based on the consultants that we have talked, they expect to be just 5% in 2020. It's a huge difference. Another factor is the strong coproducers, which have a very high cost of production. When you look at the DMO report, it's in the range of $8 per pound of V2O5. So I don't expect that they're going to keep producing V2O5 in 2020, considering that -- the current price. So it's a completely different perspective of the market in China for next year. And we can see that market is much stronger for next year.

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Operator [21]

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The next question comes from Curtis Woodworth from Crédit Suisse.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [22]

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Ernest, you talked about sort of cash breakeven at $5, $5.50 for next year. How do you think about that number sort of pro forma moving beyond Glencore and high purity? I know that in the past under -- granted a much higher price environment, Mark kind of used to talk about potentially, up to $3 per pound kind of accretion from more optimization post-Glencore and high purity. Can you kind of update us on your thinking around that?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [23]

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Yes. So I guess the first point to make, is given that it is a transition year next year, as you can appreciate, we are actually being -- there's a bump in our working capital that happens at the transition point next year. So the point that we actually take over from Glencore's sellable material and undertaking it ourselves to the point that they -- our working capital cycle goes from a very short period of time to something in the region of about 100 days. So over the course of that year, 2020, from a cash perspective, you're not going to effectively have the benefit of those -- the full year sales of all the production. So that's why we are guiding in that $5 to $5.50 range but on a normalized year from 2021 onwards, that would come down fairly significantly.

I'm not going to commit to a number right now, but as you can imagine, you could have up to potentially a quarter of your production if you don't have a cash input in 2020. Whereas in an established year, you won't have that impacting you. So we're going to have a onetime impact of that working capital. Obviously, that can change over time, subject to vanadium prices. But effectively, once it's embedded in the system, then the company's working capital becomes less of an issue and you are essentially consistently selling when there's demand. So definitely lower, but don't try and peg me to a number just yet. And we can probably, at a future date, talk about what's the sustaining post Glencore number, but we don't have that to share at this stage.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [24]

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Okay. And what's working capital assumption that underpins the side effects if they breakeven?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [25]

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Yes. So there's shipping assumptions upwards of 45 days and payment cycles in the region of 55 days. Obviously, on things such as V2O5, because it's a much quicker turnaround time, you get paid much earlier and [if you view] conversion, you're at the far end of scale. So we've taken some very conservative assumptions. We'll see how it goes. But at this stage, given that we're at the infancy of starting up the sales and marketing proper, we thought that doing those 2 to be as conservative as possible on working capital side. So there are always options on trade finance, et cetera, which effectively could reduce that period of time, but we're not taking any of that into account. And from a planning perspective, we're just going to stick with a fairly conservative number.

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Curtis Rogers Woodworth, Crédit Suisse AG, Research Division - Director & Senior Analyst [26]

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What's the rough dollar value of working capital usage you're thinking for next year?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [27]

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It's come down a bit because obviously, we were thinking of the range of $40 million before the price [varied] of different vanadium prices. So right now, probably in the region of $20 million to $25 million. But that's very rough.

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Operator [28]

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Your next question comes from Lee Cooperman from Omega Advisors.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [29]

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Couple of questions and observations. It wasn't clear, was the $5 to $5.50 cash breakeven level, is that U.S. dollars or Canadian dollars?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [30]

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It's U.S. dollars, sir.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [31]

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Okay. And then what are you currently selling the product for?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [32]

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What are we currently selling the product for? Well...

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [33]

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Yes, you need $5 to $5.50 to breakeven cash. Where are we currently realizing in our sales?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [34]

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Yes. So this is the challenge. If you look at the third quarter for instance, if you take into account the revenue adjustment, the effective price due to Largo was just over USD 4. USD 4.06.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [35]

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Okay. So we're losing money on an operating basis. And it wasn't clear from the comments made. I may have missed it. You may have answered it, and I apologize for asking the same question again. But what do you expect your low cash position to be between now and the cessation of the contract with Glencore?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [36]

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Yes. So we provided -- in the MD&A, we provided 4 scenarios. So we took a very punitive view at $4, assuming that $4 continues between now and the end of April. And suffice to say, we do not see that happening. And then we took the current price as one of the scenarios and then sort of a normalized price at $5.50. So in Canadian dollars, the forecasted cash under those 3 scenarios starting at the first is, I'll just use round numbers here, but $131 million, $138 million and $145 million. That's all Canadian.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [37]

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And that's in April, but the contract ends -- so that's at the end of the contract? So in any scenario, you expect to have -- after paying for the remeasurement, you expect to have over CAD 130 million of cash? Is that -- do I understand that correctly?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [38]

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Correct. And then the asset point in time, at April 30, we will owe Glencore estimated -- and I'll give you the 3 numbers in sequence again. These are all Canadian again. $103 million, $95 million and $86 million. So the net numbers, just netting those off, starting with a $4 scenario, about CAD 27.5 million. That would be our most punitive view. $42.6 million is the current price scenario. And then under $5.50, $58.1 million.

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [39]

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Let me give you a recommendation. I find it very bush league when companies talk about, we're thinking about buying back stock. We are not looking to support the stock. We're looking to take advantage of Mr. Marcus' mistakes. Now if I was you, I wouldn't buy any stock back because you guys have been very wrong in assessing the outlook for your business, and I would wait for things to stabilize before you do anything. Even though I'm a fan of stock repurchase, I also believe one has to be very prudent about what they're doing. And so a low cash position of under CAD 30 million in an uncertain environment, would not suggest you're a candidate to do stock repurchase unless you know something I don't know. That's a recommendation and suggestion.

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Ernest M. Cleave, Largo Resources Ltd. - CFO [40]

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But we agree with you. At the end of the day...

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [41]

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Then stop talking about, you're thinking about it. Any company can think about it. Just don't talk about it. It just comes across as very promotional.

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Ernest M. Cleave, Largo Resources Ltd. - CFO [42]

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Yes. No, no, we take that on board. We -- as I think I tried to say in my opening comments, all of these things, including even the capital projects, are all subject to sufficient liquidity and runway that you're absolutely...

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Leon G. Cooperman, Omega Advisors, Inc. - President, CEO & Chairman [43]

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I think all your comments were very appropriate, very on point. I mean if I look at this company, a year and a quarter ago, you're earning over $300 million, it's a business. And that's before the Glencore contract, and you guys were on record, saying that Glencore contract probably cost you $100 million of EBITDA. So this is a company with a market cap today of, I don't know, $500 million, whatever it is on the equity, there's no debt, that earned almost that a year ago. And everything is cyclical. So I can understand why you're thinking about it, but I would just say, either do it because you have enough of a handle on your numbers or don't talk about it until you do have a handle on your numbers. That's all. Just a suggestion.

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Ernest M. Cleave, Largo Resources Ltd. - CFO [44]

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That's fair. Thank you.

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [45]

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Thank you, Lee.

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Operator [46]

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Your next question comes from Robert [Neil] of (inaudible) Capital.

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Unidentified Analyst, [47]

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I had a couple of questions here, just kind of follow-up, not tapering up old Glencore. But I just want to clarify, confirm 1 aspect of the agreement. Is it a correct statement that there will be absolutely no negative effect of the remeasurement post calendar Q2 2020? Meaning -- what I'm basically trying to figure out, is there some sort of tail on this agreement, which as you know is highly redacted in the filed document? Is there any sort of tail on that? Or does is it literally -- there's no negative effect after May 15, 2020?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [48]

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Well, we can't talk about it. But I think what we're sort of saying in an inadvertent way is we provided the numbers both on cash and payable. Other than those numbers we provided, we are not forecasting any other deleterious impact or something that we need to inform at this stage. So that's it.

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [49]

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Just giving a better overview about this remeasurement. We see the market of vanadium, stronger from now. We see already that this week, vanadium -- ferrovanadium in Europe increasing its price by 8%. So it seems that the vanadium price had hit the bottom and going up from now, and we know that the remeasurement is going to be positive instead of negative. So we can see that the price goes lower than what we are doing today and that it's going better in the future. It should not impact our results anymore.

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Ernest M. Cleave, Largo Resources Ltd. - CFO [50]

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Yes. Just going back to your question again, all these forecasts that we provided here assumes a sort of a steady state vanadium price. And over time, being whatever adjustments are in the system really, are averaging out to all but the previous system. If we saw, hypothetically, some major reduction in price in a couple of months leading up to April 30, then yes, you could have an additional price adjustment that would go beyond April. But that's not what we are foreseeing, but that's ultimately totally dependent on vanadium price.

So just to make sure we got the record straight here, that ultimately, it's just going to depend on vanadium price. So if things may change, and improve as Paulo and Paul think they will, than they know, no further impact. But if there are some unforeseen or unforecasted correction in the market or change -- I shouldn't say correction, that, that could hurt us beyond April.

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Unidentified Analyst, [51]

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That's fair, and I appreciate the insight. But just -- I think everyone on the call will likely agree that this is a lowish Canadian V2O5 pricing. Anyway -- but in the event -- I don't know, I'm making up a number here, in the event it was $2, V2O5, and it's August of 2020, could the price -- what I think I hear you're saying is that there could continue to be follow-on negative effects. I mean at some point, when does this all roll off? Is there a hard date when all of that sort of stuff rolls off despite the price? Or does it just kind of depend?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [52]

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I can't give you the time period after the cessation. But suffice to say, that the price -- if the price suddenly reduced in the run up to the end of April, that would have a cash impact that extended beyond the end of April. That's far as I can say.

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Unidentified Analyst, [53]

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No, I appreciate it. Fair enough. There's just one other-ish -- one other question, if I may, just on the kind of the issue of lower prices. Obviously, it's causing -- we've seen it in your results, but my understanding is -- I'd just like to confirm your all's internal view is relative to other major or even minor V2O5 and ferrovanadium producers around the globe. It doesn't seem like there's anyone who's close to your USD 2.81 production price. For example, if you look at your other publicly-traded peer that I'm aware of, Bushveld and their acquisition of Vanchem. I mean how -- I mean I've got my own view, but I'm curious what your view is of your cost advantage relative to Vanchem, both on the operating cost side as well as the fact that their balance sheet -- they're kind of where you all were 3 or 4 years ago. They're having to take on debt and CapEx to get to the point where you are. And I was just curious, your view internally on what sort of advantage that provides you, relative to the rest of the market.

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [54]

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One thing that we believe, that you must be very competitive. Largo is focused on having the lower production cost as possible. And I think we have succeed in a very good way until now, and we are going to keep focus on that in the future. We prefer to have a very conservative strategy on that -- on cost point of view. That's the way you -- we'll face any volatility of the price -- of the vanadium price in the market. And considering that, any acquisition that we may do or other opportunities that we see in the market will not contribute to reduce our production cost. So our strategy is to focus on Maracás' organic growth and to -- of improvement and to get this business as strong as possible. That way, we see the strategy actions in order to be more competitive. I don't have anything to say regarding other company because each one has their own strategy. But do you have anything to add, Ernest?

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Ernest M. Cleave, Largo Resources Ltd. - CFO [55]

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No. I agree with Paulo. I think the way the business is set up, we are in an extremely competitive position because of our low cost. And for all the producers and the lion's share of vanadium producers in the world, these are unsustainable price levels. So we'll just leave it at that, but we think we are competitive even in these low-price environments. But we don't, for that very reason, irrespective of which company you choose, we don't think this price is representative of what is sustainable price.

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Unidentified Analyst, [56]

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Fair enough. Last question, I promise, just to clarify. Did I hear earlier that on the ferrovanadium initiative, I heard start up by roughly January 2021? And the total cost of that point of start-up is USD 8 million to USD 10 million? Or was that just an engineering piece?

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [57]

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That's the total cost. Total cost, yes.

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Unidentified Analyst, [58]

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Okay. And how many kilos of ferrovanadium would that be forecast to produce? For $8 million to $10 million?

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Paulo Guimarães Misk, Largo Resources Ltd. - President, CEO & Director [59]

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It's capacity will be for feed, feeding up 8,000 tonnes of V2O5. That's the capacity of -- feeding okay. It's not, (inaudible) of course.

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Andrew D. Wong, RBC Capital Markets, Research Division - Associate Analyst [60]

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No, of import, I get it. I just wanted to get the metric down. Okay. 8,000 tonnes, V2O5, import. Okay, very good. I appreciate it.

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Operator [61]

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Your next question comes from [Nicholas Best] of [Grand] Capital.

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Unidentified Analyst, [62]

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This is [Shannon Best] on from [Grand] Capital. I just want to make a comment that earlier, someone was -- one of the callers mentioned, have you thought about issuing debt to buy back stock. And as someone who, in the past, was a lender to you guys and is now a stock owner, given everything that's going on in this call, I can't think of a more crazy thing to do than to issue debt to buy back stock. And I was a little -- you didn't -- you guys kind of just made it sound like something you'd think about. But I just -- from my -- from where I sit, looking at the variability of the business, the fact that we don't really understand what the hell we got going on with Glencore still, issuing debt to buy back stock would be madness, in my opinion. I just want to throw that out there.

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Ernest M. Cleave, Largo Resources Ltd. - CFO [63]

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No, but we fully appreciate. We -- don't take our silence as acquiescence. So we're not going to do anything to harm the shareholders. So any decision we'll make will be a prudent one. So we want to make sure that the company has sufficient liquidity. We'll say it again, we are not going to do anything that would be an inopportune decision at that time that the company is tight on cash. So we are not looking to do anything too esoteric.

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Operator [64]

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(Operator Instructions) All right. We have no further questions at this time. Please proceed.

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Alex Guthrie, Largo Resources Ltd. - Manager of IR & Communications [65]

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Thank you, operator, and thanks to everyone for joining us today. As we noted, Largo's third quarter 2019 results press release, financial statements and MD&A can be found within the Investor Relations section of our website at largoresources.com. That concludes our call. Have a great day, everyone.

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Operator [66]

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