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Good day. My name is Joanna, and I will be your conference operator today. I would like to welcome everyone to the Largo Resources Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] Let me now turn the call over to Mr. Alex Guthrie, who will begin your conference. Please go ahead.
Thank you, operator, and welcome, everyone to Largo Resources Q2 2020 Financial Results Conference Call. Today's call is being recorded, and a replay will be available starting tomorrow within the Investor Relations section of our website at largoresources.com. Our Q2 2020 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 and cash operating costs excluding royalties, total cash costs and revenues per pound sold will also be discussed during this call. Actual results could differ materially from those anticipated and risk factors that could affect results are detailed in the company's AIF and other public filings, which are available on SEDAR and on the company's website. Further information regarding Largo's use of non-IFRS measures is also available in our Q2 2020 results press release and in the company's latest MD&A, which are available on the company's website. Financial amounts presented today will be in U.S. dollars, except as noted otherwise. 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 will be Largo's President and CEO, Paulo Misk, who will provide highlights from the company's second quarter 2020 results, followed by Largo's CFO, Ernest Cleave, who will then provide some additional detail on the company's Q2 2020 financial performance. Following Ernest, Largo's Director of Sales & Trading, Mr. Paul Vollant will provide an update on our sales and trading progress as well as the vanadium market. Finally, we'll open the call to questions. I will now turn the call over to Paulo for opening remarks.
Thank you, Alex, and welcome, everyone, to our quarterly update conference call. I'd like to begin the call today by thanking all the frontline workers that help keep us all healthy and safe during the global COVID pandemic. We would also like to thank our entire workforce, and all of our contractors whose commitment and tenacity helped to continue our operations in a safe and responsible manner during this uncertainty time. Our thoughts continue to go out to all those affected by this virus. At Largo, we continue to prioritize the health and safety to our workers, understand our support to our local communities. In addition to our ongoing preventive measures, such as additional safety protocols, travel restrictions, health screening and increased hygiene measures. Largo has also assisted local business in producing over 230,000 masks to aid the fight against the spread of the COVID-19 in Maracás region. Going forward, we will continue to do our part to help stop the spread of COVID-19 and help ease the effects caused by the virus. Operation at Maracás Menchen Mine continued during Q2 2020, and the company produced 2,562 tonnes of V2O5, representing an increase of 2% over Q2 2019. Operations performed exceptionally well in May and June with 1,062 tonnes and 1,032 tonnes of V2O5 produced, respectively. I am very encouraged by the support and dedication shown by our entire team during these challenging times, while, at the same time, achieving above nameplate capacity operation targets. The Q2 2020 global recovery of 20.8% was higher than both Q2 2019 of 79.1% and the budget, with a strong recovery level seen in both the kiln and leaching areas of the plant. This represents the second consecutive quarter of strong global recovery in 2020. In Q2 2020, we also announced the company's planned upgrades to the kiln and improvement in the cooler will occur in Q4 2020 due to the precautionary measures which are limiting mine site personnel and contractors in light of the COVID-19 pandemic. This work is intended to increase the nameplate capacity to 1,100 tonnes of V2O5 per month, and it's not expected to have a significant impact in our company's Q4 2020 production. In Q2 2020, the company continued to perform very well on a unit cost basis and achieved a new record low cash operating costs, excluding royalties of $1.89 per pound. This represents an increase -- a decrease of 44% over Q2 2019, and incorporates tax credit benefits of USD 2.2 million. Largo has demonstrated substantially lower unit costs in Q2 2020 versus Q2 2019, despite of the fact that such costs now include sales and distribution costs. While under the previous offtake agreement, the company's sales and marketing commission were netted off against revenue. The company's balance sheet and financial position remains solid exiting Q2 2020 with a cash balance of USD 78.2 million. Although profitability was impacted by the lower recognized sales during the quarter, the company's working capital investment was necessary to fuel our sales pipeline and build strategically global V2O5 stockpiles in order to fulfill customer demand going forward. I'm pleasant to report that despite minor delays caused by the COVID-19, our sales and trading efforts continue to progress as planned. And we have maintained our sales guidance for 2020 of 9,500 to 10,000 tonnes of V2O5. The company also continues the necessary work required for the construction of V2O3 processing plant, which is expected to commence in Q1 2021. The company's V2O3 processing plant at the Maracás Menchen Mine is expected to increase sales in the high purity aerospace market. Chemical industry and vanadium electrolyte used for vanadium redox flow batteries. The company expects the ramp-up in commissioning of the plant to conclude in Q3 2021. The company's 2022 drill program recommenced in late June following delays caused by the COVID-19. All drilling personnel have followed the prescribed quarantine procedures before beginning work on site, and we do not anticipate any further disruption to the overall plan going forward. We currently have planned for 22,500 meters of drilling on the near mine targets in the 2020, primarily to upgrade and expand known resources to determine initial mining opportunities. We also continue to work on advancing studies to further evaluate the economics associated with the producing TiO2 concentrate for the pigment industry from our non-magnetic tailings. The ilmenite chemical pilot plant was complete in October 2019 and was proven successful with ilmenite product being produced shortly after. We constructed an additional chemical pilot plan to further upgrade these ilmenite products into TiO2 pigment in April 2020. Test work to further understand and evaluate the company's TiO2 chemical pilot plant product is ongoing, and we look forward to providing these results to the market shortly. The company also announced the release of its 2019 sustainability report in July, highlighted by the improved performance metrics and new reporting standards. Our sustainability report is now guided in the part by SASB, the Sustainability Accounting Standards board. Our new approach to sustainability report sets a new standard for open and transparent communication, and we expect to continually improve our sustainability disclosure in the years to come. The report can be viewed within the Responsibility section of the company's website. In summary, the company's financial position remains strong in Q2 2020, and we believe the transition away from our previous offtake agreement will prove beneficial both strategically and economically for Largo, and we continue to sell -- to sell off our vanadium products internationally. We have made the necessary working capital investments in Q2 2020, and look forward to repeat the benefits going forward. We also remain extremely optimistic about expected addition of vanadium demand growth as a result of recent announced global stimulus programs, particularly with new anticipated source of long-term demand, such as the vanadium redox flow battery. Largo remains very well positioned to supply additional future vanadium demand growth as Maracás Menchen Mine has a proven track record of premium product quality and operational stability. It is our goal to remain investor preferred, trusted and reliable source of vanadium for the global steel and premium yield high purity markets. With that, let me turn the call over to Ernest, who will provide highlights from our Q2 2020 financial performance.
Thanks, Paulo, and thanks to everyone for joining the call today. As Paulo previously mentioned, the company exited Q2 2020 with a strong financial position and softer balance sheet. The company's cash balance at June 30, 2020, was $78.2 million and its total debt was $24.8 million. As expected, due to lower recognized sales during the quarter, the company generated revenues of $8.4 million from sales of 1,018 tonnes of V2O5 equivalent. This compares to revenues of $22 million in Q2 2019 from V2O5 sales of 2,480 tonnes. The expected low volume of sales in May and June was due to the company's sales not typically being recognized at the time of delivery, which can take a few months from the time of shipment from Brazil. The company recorded a net loss of $7 million in Q2 2020, following the recognition of a deferred income tax expense of $1.5 million. This compares to a net loss of $15.3 million in Q2 2019, and is primarily due to a decrease in operating and finance costs, but was partially offset by a decrease in revenues and interest income, and an increase in foreign exchange loss. The company's trade payables balance with its former offtake partner at June 30, 2020, was $2.4 million. The decrease is primarily attributable to the payment made of approximately $57.4 million during Q2 2020, and the balance at June 30, 2020 is attributable to the remeasurement of trade receivables or payables for V2O5 sold in the period to April 30, 2020. The company anticipates that the final remeasurement of trade receivables/payables resulting from its recently terminated offtake agreement will negatively impact future periods by an aggregate of approximately $0.3 million. On the cost front, operating costs for Q2 2020 were $9.6 million, which compares to $24.8 million in Q2 2019. This includes direct mine and mill costs of $2.2 million, which compares to $16.8 million in Q2 2019, royalties of $1.3 million, product acquisition cost of $2.4 million, distribution costs of $0.3 million, inventory write-down of $1.3 million, and depreciation and amortization of $2 million. The decrease in direct mine and mill cost is primarily attributable to the decrease in the V2O5 equivalents sold in Q2 2020. As Paulo mentioned, the company's cash operating costs, excluding royalties in Q2 2020 were $1.89 per pound, following tax credit benefits of $2.2 million. This compares with costs of $3.3 per pound in Q2 2019 and represents a decrease of approximately 44%. Without tax credits, the company's cash operating costs, excluding royalties per pound which -- would be $3.04, which represents a 9% decrease over Q2 2019. This decrease was largely due to the decreased sales as noted previously. Additionally, total costs in Q2 2020 were $3.68, which also includes the benefit of tax credits of $2.2 million. Without the mentioned tax credits, the total cash cost would be $4.66 per pound. We are very pleased with our cost performance today and look forward to maintaining this momentum during the remainder of the year. In Q2 2020, cash used in operating activities was $63.6 million, which compares to cash provided by operating activities of $22.23 million in Q2 2019. This is primarily due to the change in accounts payable of $51.4 million in Q2 2020, following the payment to reduce the company's trade payables balance with its former offtake partner. A further factor is the change in inventory of $15.9 million in Q2 2020 as a consequence of the increased time for the company to deliver its products and recognize sales as well as the building of strategic stock levels. Looking ahead, the company remains very well positioned for the remainder of the year as we continue to deliver on our production and sales commitments, while realizing the direct economic and strategic benefits associated with our commercial independence. With that, I will now turn the call over to Paul Vollant, who will provide an update on the company's sales and trading progress as well as the vanadium market. Following Paul's update, we will open the call to questions.
Thanks, Ernest, and thanks, everyone, for joining the call today. As Paulo previously mentioned, we are very pleased to report that the company's progress against its sales and trading strategy is in line with the company's expectations. We continue to maintain our sales guidance of 9,500 to 10,000 tonnes of V2O5 for 2020. The company has committed a majority of its production between July and December 2020. The balance is targeted towards the spot market, which we expect to be particularly active in the remainder of the year. We remain confident that our sales and trading division will continue to add significant long-term value for the company going forward. We completed our first independent vanadium shipment from Brazil on May 14, 2020, to a customer in the U.S. And since then, the company has delivered VPURE, VPURE+ as well as ferrovanadium powered by VPURE to customers in Brazil, North America, Europe and Asia.Our logistics operation have experienced some delays related to COVID-19, both inside and outside of Brazil. However, we've been able to fulfill all our commercial commitments, thanks to careful planning, swift responsiveness and close relationship with our customers.Although we have seen impact from COVID-19 on the demand for vanadium from aerospace industry, the market has also been supported by strong demand from the Chinese steel sector, which currently accounts for approximately 50% of the global vanadium demand. During Q2 2020, the domestic Chinese V2O5 price increased by approximately 15% to an average of $6.95 per pound. On the demand side, Chinese crude steel production was up 3% year-over-year in the first half of 2020. And Chinese V2O5 consumption was up 4.5% over the same period. Chinese V2O5 imports were more than 2,000 tonnes in the first half of 2020, with export dropping off significantly in June. The new flexibility associated with our commercial independence enable Largo to take advantage of such opportunities. In Europe, the average price decreased by 5%, ending Q2 2020 at $5.3 per pound of V2O5 compared with approximately $5.58 at the end of Q1 2020. More recently, the European ferrovanadium price climbed to an average of $24.25 per kilo V. It's highest price since June. We also anticipate that increased export to China have left vanadium inventory in Europe at very low levels and will support price appreciation.Looking ahead, our view in the medium and long-term regarding vanadium demand and price remained positive as infrastructure spending in China and other emerging market increase. We continue to prioritize increasing our customer portfolio, particularly following the completion of our vanadium trioxide plant next year.As the preferred producer and supplier of high purity vanadium, our focus remains on capturing high-value sales when demand returns to a normalized level.With that, we will now open the call for questions.
[Operator Instructions] Your first question comes from Heiko Ihle from H.C. Wainwright.
It's nice to see the company performing without the overhang that we've had for a couple of years. Given all the issues that you see in regards to Brazil with COVID on the news, can you just clarify for us how many people are actually physically at site right now? And building on that, I assume getting PPE hasn't been an issue. But I mean, when you do your planned kiln upgrades and cooler maintenance in Q4, how many people do you think you'll need at site at that given point in time? And do you think there might be any issues with that?
Okay. Thank you very much, Heiko, for your questions, and thank you for your support over these years. The COVID situation in Brazil, when you look at number of cases or death, it's really impressive. And it's -- all the media showed those numbers with very big notes and everything. But in fact, when we look at the number per million of that population, Brazil is in the 11th position, much lower than U.S. or United Kingdom or Spain or Italy. So our situation in Brazil, it's not solved yet. We are in a different stage of the curve. And -- but I could tell you that the situation in Brazil is not -- now tends to decrease -- the situation tends to improve, and the number of cases tend to decrease. And Brazil is taking seriously all the protocols of safe and healthy. When I look at the situation in Bahia, it's -- Bahia is one of the lowest deaths per million in Brazil. We have 27 states. It's ranking is 22nd. So it's not a critical issue. And we -- all the measures and actions that we -- that Largo has done in Maracás helped a lot to the community to behave with this. I mentioned that this 230,000 masks that we helped them to produce, we donate all the materials, and the ladies have stitched and get revenue for their production. So we just donate those masks to population to Maracás and its region. Just have in mind, Maracás has 22,000 people. We produce more than 10x the number of the population so we could distribute in the region as well.But beyond that, we also have distributed basket -- food basket. We provide the municipality hospital, ventilators. We donate the test for COVID more than 5 -- 16,500 tests for COVID. So we are supporting them as much as possible. When you look at our company, we have already 27 cases of COVID, just 5 is active. All other 22 was cured. And none of them have a severe situation, just a light symptoms, and we are taking all the -- taking care of them, give all the systems necessary. So I'm very confident that situation is under control. We are doing everything that's possible to do. And just one last notice, only one case, the contamination occurred inside our site. Of course, with someone else that -- not our employee that came contaminated already. But we are really taking care of our people because that's our priority, Heiko. You talked about the kiln. The kiln will be necessary because we're going to do some other maintenance at the same time. It will be about 200 people going to the sites. So...
200?
200. 200, among contractors and all the people that's going to work. Of course, not for the kiln and cooler, but we use that time for doing some other maintenance. And it was not convenient to bring that such high number of people into the site and get the risk or increase the contamination in our site in Maracás. So we are postponing for Q4 that we expect to have all the situation much more easy and under control.
Okay. Moving on to something completely different. Looking at your recovery rates, you came in just below 81%, which was meaningfully above our model. What have you seen in Q3 thus far? And how much do you think we can model out these higher recovery rates in the longer term?
Heiko, it's -- this 80%, 8.1 -- 80.8%, it's a very sustainable rate. We are improving.
It's very sustainable, you said?
Yes. Yes. We -- it's a main -- you see, we didn't stop the kiln, and we are keep producing more than 1,000 tonnes. If you look at May, July -- June and July, July, we did a disclosure, but was the best of the 3 months, and we are producing more than 1,000. And the main reason is because we improved the recovery mainly in the kiln and leaching. So we are doing everything internally to get a better performance. And if you can model this number, at 80.8%, it's really feasible, and I believe that we can do even more.
The next question is from Andrew Wong from RBC Capital Markets.
Just -- I wanted to start off with a couple of questions regarding the COVID situation. So in the quarter, mined ore was down partly because of reduced contractors. Can you quantify that impact on production versus what happened from -- like the impact from the rainy season? And then have those numbers returned to normal on the contractors? And if they will stay at reduced levels, what does that do for your production going forward? And just -- in relation to logistics, in the press release, you say there's not much impact or at least you don't think there should be -- I mean you maintain guidance for now, but there are some risk. Can you quantify that, like what the impact could be? Is it likely, very unlikely? And what would happen? Would you have to enter the market to meet delivery commitments if there were logistical issues.
Thank you, Andrew. Regarding the mining operation and mainly the contractor that do mining in Maracás, we need to adjust the shifts and the way we work. So in about 2 weeks, we had a reduction of this capacity of mining. But we have not just reestablished this capacity, but we have already increased. We have more excavators and more people into the mining area and we increased the capacity of mining. It's exactly because we are prepared already to reach 1,100 tonnes per month of V2O5.Regarding logistics, we have very few cases, not with raw material coming in, but some difficulty to ship -- to deliver the V2O5, but it was very few cases. And I prefer that Paul Vollant to give more details regarding this. Paul, please.
Yes. Thanks, Paulo. Andrew, regarding logistics, we, as discussed before, experienced some delays inside and outside of Brazil. All these delays were managed by the company, and we were -- thanks to our careful planning and responsiveness, we've been able to deliver all of the products according to plan to customers. And the good news is that over the past 2 weeks, we've had not a single delay. So it seems that so far, the situation has slightly improved, and we do not expect that we should revise our guidance on sales due to logistics issues. So it is -- it was an effect, but it seems that the situation is improving.
Okay. And for those few cases that there were some issues, did you have to go to the market to buy product? And how does that work? And how does that show up on the cost side?
No, we did not have to go to the market and buy product. In all these instances, we've been able to closely communicate with our customers who have understood and accepted small delays.
Okay. That's great. And then just on the upgrade and nameplate capacity. I'm just kind of curious, after the Q4 upgrade, nameplate is supposed to be around 1,100 tonnes per month or about 13,000 tonnes annually, if I was on nameplate. But obviously, there's been some months where you're above nameplates. There are some months where you have extended maintenance downtime. The recoveries have been really good. So there have been pluses and minuses. So I'm kind of curious like what's the normalized kind of annual production that we should expect?
Andrew, we -- the production in 2020, according to our guidance is 12,000 tonnes, that's our target. I'm very confident that we're going to achieve that number. And of course, for next year, we expect to produce 1,100 per month, which is 13,200 a year. And as usual, we have been producing more than nameplate capacity, but we're not going to compromise with those numbers. So 13.2 (sic) [13,200] is a good number for 2021 now.
But that's nameplate, right? And there are some months where you might have downtime, sometimes you have to do maintenance on the kiln, that kind of stuff, like is that -- is it reasonable to assume that everything operates on or above nameplate every month?
Towards December, we don't expect to have any reduction in production because we have material in the pipeline as a pregnant solution enough to keep producing V2O5 flakes. When you talk 2021, we do not expect to have any refractory replacement because we are going to do in 2020. And we can consider one shutdown for 15 days each 2 years. So for 2022, you can deduct 15 days in that forecast.
The next question comes from Lee Cooperman from Omega Family Office.
First, let me congratulate you on your performance in a difficult environment and very nice to see. And I wish that as many of the employees as possible stay healthy and safe, and for everybody and management as well. I have 2 questions basically. If you take the guidance you provide for production, sales and costs, would you expect to generate cash over the balance of the year, in the next 6 months, or would the $78.2 million go up in cash? Question number one.
Paulo, let me take that.
Yes, please, Ernest. And thank you, Lee, for your questions.
Lee, thanks for the sentiment. I appreciate it. In terms of generating cash, let me split it into 2 components. So on the margin or operating side, just extrapolating out at $5.50, which we're sort of using fairly conservatively for the second half of the year, we would generate a margin of about $20 million. However, the remaining CapEx to go between sustaining CapEx to the V2O3 plant, carryover CapEx and the capitalized stripping is negative $20 million. So we're looking to, essentially, from a cash perspective, be flat for the second half of the year.
But you have more capacity at the end of the year than you have now after the CapEx carryover?
Yes. Yes.
Okay. Second -- this is a difficult question, but most cyclical businesses have peak earnings, trough earnings and average earnings over a cycle. Do you fellows have a view of your normalized earnings as an enterprise? And the reason I asked that, I go back, I think the current market cap is USD 489 million, minus the USD 53 million of net cash. We have an enterprise value of USD 436 million. I believe you guys have repeatedly said in the past that the Glencore contract cost you USD 200 million. So that should be added back over time to normalized earnings minus what, of course, you have off-taking the contract internally. So it would seem that -- well, let me ask, you guys answer the question as you have normalized in a typical year, what do you think you guys would earn in a typical year?
Right. So from an EBITDA or from a margin perspective, looking at, let's call it, 13,200 tonnes sold, and using a historic price of $6.5 for vanadium, you're going to be in the range of about $75 million and depending on how well we do in the high purity market, a little bit higher than that. So between USD 75 million and USD 85 million.
Got you. And hopefully, one day, we'll get back to that $30 a pound price.
The next question comes from James Young from West Family Investments.
A couple of questions here for you. Number one is that, Paul, you mentioned that your sales were into like Brazil, North America, Europe and Asia. Can you give us a breakdown like on a percentage basis in the June quarter? And how you expect that to change over the next couple of quarters into those end markets in those geographic areas?
Paul, go ahead.
Yes, Jim, thanks for your questions. Over Q2, our sales were pretty much spread, 40% in Asia, 30% -- 40% in Europe and about 20% in the U.S. and Brazil together. We believe that there will be a rebalancing of the sales towards North America in the long run. But I think the current setup that we have and being independent in ourselves also enables us to profit from pockets of opportunities from time to time. So we want to remain flexible and nimble to enjoy these opportunities. So long run, we expect roughly 1/3, 1/3, 1/3 of the 3 big region of vanadium consumption. But we will adapt our strategy depending on market dynamics.
Okay. Secondly, then, if you're at 20% into North America, 40% Europe, 40% Asia in the quarter, are the prices that you're receiving for your sales, are they based the European sales that you did at 40%, or is that based primarily off of the metal posted price in Rotterdam per Metal Bolton? And as the Asian sales, are they effectively reflective of the spot market in China? Or how -- what's the pricing that you're receiving? What's that based upon?
Sure. So the main price benchmark on a global basis is Metal Bulletin in Europe. We -- this is our main benchmark for European sales, sales in Brazil and for about 50% of our sales in Asia. In the U.S., the main benchmark is CRU. And in Asia, quite a few of our contracts are also at a fixed price.
Okay. And then as you think about -- you mentioned that the sales, you got are contracted between now and through the December 20 -- I'm sorry, between December of 2020, and the remainder will be in spot. What percentage do you currently have under contract between now and the end of this year? And what percent will be into the spot market sales?
We have -- it's a moving target or so. In our long-term contracts, we have optionalities that might or might not get called off. But the vast majority of our volumes are already committed on the contract, and the remainder is in spot sales.
So are spot sales like 10%, 20%, 30%? Can you give us a sense as to the magnitude, please?
Between -- spot sales will be between 30% and -- yes, 20% and 30%.
Okay. And then as you think of -- as you look out into the next year, in 2021, it's my understanding that a lot of these -- your contracts are starting into discussions fairly soon to kind of get wrapped up by October, November-ish time frame. What -- how are you thinking about the contract versus spot sales in 2021?
I think we'll remain in line with what we have currently. The long-term contract discussion up and around the 2 main conferences in the U.S. and Europe in October and November. And -- yes, so we will start and conclude most of our negotiations in Q3 -- sorry, in Q4.
Okay. And have you seen any change at all -- I mean, the titanium end markets for the aerospace have been quite weak, of course. Have you seen any change at all at the margin with respect to these larger customers?
No significant change in the margin. There is some reduction in volumes, but our contracts have been negotiated and completed at different levels that are still being respected today. So the main impact was on the volume, but not on the price.
Okay. And then a couple of questions for Ernest. Ernest, could you just help us understand for your titanium dioxide plant that you're finalizing here, what is the total expected cost of the CapEx to get this up and running?
I'm going to have to defer to Paulo on that. The last number I've heard on it was $124 million to take it to the full purity level, but I stand to be corrected. Paulo?
Yes, that's the range. We didn't finalize all the status yet. But yes, it's a good guess.
Okay. So what kind of -- if you're going -- when is to say -- when are you expected to start this the titanium dioxide plant? And when is it expected to be completed? And what kind of an IRR or ROE are you expected to generate off of this $124 million investment?
Jim, it's -- we are concluding the chemical pilot plant test work . We are starting -- we have produced already the pigment at lab, but would like to confirm in a pilot plant, exactly to have enough material to send to the market because pigment is not a commodity product. Pigment is very specific. It's a special product, which we need to test in the customer and the market, how they accept our material. So we are doing that stuff. We have to do all these studies and characterization in our product to be sure exactly what we have in terms of revenue and everything. And we haven't done this yet.Another step of this project, which is -- we are still doing is evaluating the titanium in our reserve and resource. The numbers we have from Campo is really very, very encouraging. We have the same situation in other ore bodies, but we need to measure it. And we are doing all the exploration work, and we're doing all the mining plan considering the titanium. So it's a huge work. It's going to create a very strong and robust operation in Brazil, having 2 revenue streams. So I cannot give you the IIR (sic) [ IRR ] at this time, but I'm sure that you're going to be happy when you see the final numbers by Q1 next year.
Okay. And then a related question would be for V2O3 plant. Similarly, what's the expected total CapEx in here that you're expected to have to invest to develop this business?
The CapEx for V2O3 is $9 million. It's ongoing with all the implementations in progress. We're going to start in the first quarter of next year and fully production in Q3. So we -- but of course, we have already some material by the end of Q2 to deliver to our customers for the certification.
Okay. And then what -- and likewise here, what types of opportunities do you see from a sales perspective for the V2O3 plant?
Jim, it's all the aerospace industry. They -- in their production for the titanium alloy, they need V2O3 and V2O5 in a range of 1/3 of the V2O3 and 2/3 of V2O5. Today, we just supply them V2O5. And it's amazing how they requested us to produce V2O3 as well because they would like to build all production lines with our material. So just by producing the V2O3, we're going to increase our high purity V2O5 on aerospace market by 50%, just for the -- to have this available. So we are very -- it's a very encouraging and very robust project.
The next question comes from Serena Rocha from Morgan Stanley.
This is Serena here on for Carlos. I had a couple of questions, maybe starting with the purchase products that was included in V2O5 sold. Can you give us a little bit more detail in terms of what the strategies there going forward? How much can that add on an annual basis and whether that's included in your V2O5 -- in your vanadium sales guidance for the year?
Thank you very much for your questions. Paul, could you give more details about it, please?
Just to clarify, the product we purchased in the market is a short-term strategy for Largo. It was really to fill gaps that we had in our commercial strategy, only being able to supply customers from the second half of 2020 following the end of our offtake agreement with Banco, when some of our customers requested 1-year contract or a contract that started before we could actually supply full quantities from our products. We also purchased some extra material in order to make sure that we have some safety stock to -- at the start of our independence -- commercial independence. So I think we should really view that as temporary to start our commercial independence.
Sounds good. And then could we talk a little bit about the distribution costs and what are the puts and takes to consider for that going forward? What are the drivers? And how much fixed versus variable costs on that bucket?
Ernest, do you want to take that or -- okay, so I have to take this.
No. Ernest?
Yes. Let me have a go. I don't have a breakdown between fixed and variable. But obviously, we're expensing this through our financials. The only things that are going through cost of sales are transformation costs and some warehousing cost. So everything else is going through our income statement. We're going to be lower than 2% of sales overall on the sales and distribution costs, and that's inclusive of all the personnel costs, storage, et cetera. So I don't have a breakdown on fixed and variable, but we can work with you guys separately to look into that, but definitely lower than 2% of sales.
Your next question comes from Gordon Lawson at Paradigm Capital.
Can you elaborate on the cost accounting this quarter? It looks like you're pro rating for pounds sold. So can we expect some of this quarter's expenses from production to be realized in Q3 and Q4? And do you expect this to reduce volatility in cash cost reporting?
Yes, please, Ernest.
Thanks, Paulo. Yes. So following on from what Paul was saying. The purchase product was very much a temporary strategy to help us fulfill sales contracts and enable us to fulfill contracts that required fulfillment over a 1-year period. So we're unlikely to do much, if any, by way of purchases on the open market. So you will see, over time, our unit costs become much more stable. So there's a little bit of contamination in this particular quarter, both because of the volume, the low volume of sales, and then the inclusion of some of these purchased products. But going forward, our costs are going to be in and around the guided level.
Okay. But I mean, you had 2,500 tonnes of production and costs were significantly lower-than-expected by probably most people out here. So where are those costs going -- where are we going to find those costs?
Yes. So there was a onetime reduction in the cost because we essentially sold ICMS tax credits in the open market to the tune of $2.2 million. So that really reduced it. If you took out those costs, the costs come back on an operating cost basis to just over $3 or $3.04. So the big impact that you're seeing in the quarter is we had 2,562 tonnes produced, we -- ignoring the purchased product, we essentially sold 860 tonnes of our produced product, which means that 1,702 tonnes went into our working capital load. So there's a little bit more to go on that basis, but not much because we're essentially guiding that working capital burden in 2020 to be 2,230 tonnes because we guided 12,000 tonnes of production as a midpoint level and sales of 9,750 tonnes.
The next question comes from Robert Neal from Skellig.
Just a couple of really working capital type questions. I was curious given the investment you made in the past couple of months just to build the internal sales machine, sales effort and the accompanying inventory that you have to carry, do you -- is it possible to characterize? Do you think that cash investment is largely complete at this point, I mean, given -- assuming sales stay roughly equal? Or do you think there's more cash that will be used for that in the coming quarter or 2? And then a related question. Well, if you could answer that, I have one follow-on question.
Paulo, let me have a go at it.
Yes. Yes.
So if you -- it's a good question, Neal, thank you. If you look at the whole, essentially in this particular quarter and just going back to the previous caller, we essentially built up working capital inventory of just over 1,700 tonnes. We were guiding 2,250. So we got 500 to 550 tonnes to go additionally over the second half of the year, but we are largely done because the bulk of that impact happens -- has happened in the Q2 period. As we send product overseas, just getting it across the Atlantic on a seaborne basis, excluding the trucking time, just that time alone is 33 days, plus, of course, then needs time to send to conversion, et cetera. So you're looking at a good 2 months, which is what we expected and what we've seen in practice. But most of it is baked in -- the bulk of it is baked in now.
Yes. I mean, my thought was it was mostly an upfront slug, which is largely behind you. So -- and just a related -- just one related question to that then. As you given the new world ex your offtake agreement, how are you looking at your cash balance on the balance sheet? Is there -- I assume there's some sort of minimum capital -- or excuse me, minimum cash requirement you're going to require just to run the business, which is probably a little bit higher than it was before. I mean is there -- can you give us any insights as to how you're looking at that?
Sure. That level for us is between -- and it has been for some time now, we would be uncomfortable going below between $20 million and $25 million in cash.
The next question comes from Andrew Wong from RBC Capital Markets.
What's the latest in the ferrovanadium project?
Ferrovanadium project -- thank you, Andrew, for your question. Ferrovanadium project, we postponed, supposed to be implemented based in the same time as the V2O3. But considering that the -- it's not as much strategic as V2O3, we give priority V2O3 and postponed it to conclude by the end of 2021. And it's in line with this reschedule.
Okay. That's great. And then just one other one on the marketing side. Now that you're out of the offtake contract previously, have there been any surprises that come up since taking over the process, the sales process completely? And -- or is there anything that you could say or do differently now that you're out of the contract?
We basically are doing according to our plans. To switch the way we do contract and sales is not the big surprise. Of course, COVID did some change in the market behavior. I look at the aerospace industry, it's not as excited as before. And Europe and U.S., it's lower than before as well. But when you look at the China, China is fantastic, how it's producing and consuming vanadium and producing steel. So it's just an adjustment necessary for all the COVID situation throughout in the world. But it's nothing that we could not adapt and keep following the plan. I would you like to complement some, Paul?
Thanks, Paulo. I'm fully in line with what Paulo just said. No major surprise, just continuous work to adapt to the market. And on your second part of the question, I think, what is really important for Largo and for Largo's investors is that we are now much more flexible and reactive in our commercial strategy. We are able, and we are today capturing value in opportunities that come from time to time that we were not able to capture before. So we are moving into high-priced region and high-priced markets much easier than before.
Okay. That's great. And then just one last one. On the mine plan, the last time there was a technical report releases back in 2017, and there's been a lot of changes and upgrades. Any thoughts on completing and updating mine plan? Or is that going to have happen after the TiO2 study?
The mining plan, we are following what has been planned before. It's not a big change. And we will be remodeling the resources and reserves, and we do a new mining plan with titanium included. So it's not a big change for a while. We're just following what we have planned. And we don't have any different news about this.
The next question comes from Lee Cooperman at Omega Family Office.
I wanted to go back to this titanium dioxide expansion of plan. The $120 million, that's almost 30% of the enterprise value of the company. My impression is that titanium oxide (sic) [ titanium dioxide ] is not nearly as an attractive commodity as vanadium. What next -- what was the reason to get into the titanium oxide (sic) [ titanium dioxide ] business? It's pain pigment, right? And what was our natural edge? Why do we decide to spend $120 million going to that business versus some other business or just feeding our own business? Can you discuss the decision of what the natural edge we have, if any?
Thanks, Lee Cooperman. It's -- we have titanium in our mind. When we mined the vanadium ore, which is, in fact, the magnetite, we have titanium attached. It comes together. So in our -- in the beneficiation plant to produce the magnetic concentrate to feed the kiln, the nonmagnetic has about 13% of TiO2. It's a huge amount. And all this titanium is there, minus crushing and milling. We just need to feed our flotation plants to produce the ilmenite concentrates, which have about 43% of TiO2.
So the bottom line is it's a byproduct of what we're producing in vanadium. We should be able to produce it at a very low-cost or lower the cost of producing vanadium, right? If we're getting another product out of it.
We can produce the very low-cost titanium concentrate. And just to produce pigment is a way to upgrade and incorporate value to this product. Because when you sell one of them for $100 per tonne, you'll sell another one for between $2,500 to $3,000 per tonne. So we're going to improve the value creation and we get the benefit of having titanium just for free in our plants.
I understand the answer is very clear. And so the way I would look at it, the revenues from the titanium sales will further reduce your cost of producing vanadium.
The revenue is for titanium -- selling titanium, and we're going to have a very high margin considering we have a very low cost because it's just a pigment expense.
Very good. You didn't offer a response, but you did say the $120 million will be a very profitable investment?
Yes, it will be. And titanium is more stable than vanadium. So I think -- in a simple way I talk to my team is, it's better to be stand with 2 legs instead of just 1.
The next question is from James Young of West Family Investments.
I just wanted to put to bed this whole Glencore situation. So just to clarify, in the quarter, you paid down $57.4 million payment to Glencore, of which you got $2.4 million balance. The remaining amount of money that due is $300,000. Now is there anything else out there that could lead to a remeasurement and a change to the amount of money you expect to owe to Glencore?
No.
A super bed, Ernest.
I just want to put that -- James said he wanted to put it to bed. So I figured that would do it.
There are no further questions. I will now turn it over for closing comments.
Thank you, operator, and thanks, everyone, for joining us today. As we noted earlier, Largo's Q2 2020 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.
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