Electra Battery Materials - Q4 2023

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the Electra Year-End 2023 Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press Star, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then zero. I would now like to turn the conference over to Heather Smiles, Vice President, Investor Relations and Corporate Development with Electra Battery Materials Corporation. Please go ahead.

Heather Smiles (VP of Investor Relations and Corporate Development)

Thank you, operator. Good morning, everyone, and thank you for joining us. Firstly, a few housekeeping matters. This presentation includes forward-looking information and forward-looking statements. Please see slide two for clarification on what that entails. All of our fourth quarter disclosure materials are available on our website and SEDAR+, and today's presentation is also available on our website. For those who don't know me, my name is Heather Smiles, and I oversee the Investor Relations and Corporate Development programs for Electra. I rejoined the Electra team in January of this year, and I previously worked for Electra from 2017 to 2019, and spent the last several years with Baffinland Iron Mines here in Canada, leading their stakeholder relations program.

Our presenters today are two familiar faces, our CEO, Trent Mell, and our Vice President, Project Development, Mark Trevisiol, as well as another new member of the team, our CFO, David Allen. Dave joined Electra at the new year as well, and has more than 30 years of finance experience spanning manufacturing, natural resources, shipping, real estate, and financial services industries. He's held CFO and senior finance roles with companies such as Algoma and Canada Goose. Now, I'll turn it over to Trent.

Trent Mell (CEO)

Thank you, Heather, and good morning, everybody, and I should say, I guess, Heather, welcome back to the team, and Dave, welcome to the team. It's been really enjoyable working with the two of you over the last few months. So, I'll start with some highlights on what we've been doing through 2024 before handing the baton over to Dave and then Mark. Summary of some of our activities. 2023, towards the beginning of the year, you'll recall, we focused on the rebaseline exercise, so that was basically to do a reassessment, the post-inflation, of what the completion schedule and capital costs would look like to complete the refinery.

You know, brownfield expansion plus construction, so depending on the metric, we're quite advanced with permits in place, civil works done, buildings, equipment there. Did that exercise, and then in tandem with that, we started what we believe is the continent's first plant-scale demonstration plant for the refining of black mass. Mark will talk a lot about that. And that took up a good part of the year and allowed us to take advantage of the gap in construction by recommissioning the front end of the brownfield site that we've got. In tandem with that, spent a lot of time, especially myself, working on the funding gap. I'll come back to that a little bit later. Making great progress there, as I indicated in Q3. And then strengthening the balance sheet.

Myself, Dave, and others, we extended the maturity of our debt. We, in Q1, I guess, announced a CAD 5 million grant from the federal government as kind of a bridge to a bigger solution. Made amendments to our debt facility to minimize the potential dilutive impact of the notes. You know, all said and done, I think we're getting closer and closer to our goal here, which is, of course, to complete construction and make our way into production, and spent a lot of 2023 just laying the groundwork for that environment to occur and come out of the gates stronger when we do get back to work. As you can see in slide four, a number of commercial pieces as well were announced through the year.

Quite recently, we announced a feedstock agreement with Eurasian Resources Group. Incidentally, that's where our VP Commercial worked prior to joining Electra, and that's one of the biggest cobalt miners in the world, and delighted to have them as a supplier for our refinery. Also, earlier in the year, strengthened the relationship with ERG, sorry, with LG, rather, LG Energy Solution, on the offtake by extending the term and the quantum of the material they're gonna be buying for us upon production. And then we've advanced and continued to advance the strategy with the Three Fires Group. I'll come back to that as well, but basically, it's an Indigenous economic development group in southern Ontario, with some shared values around closing the loop on the battery supply chain through recycling.

Plant scale, again, I'll defer to Mark on that, but, but bottom line, you know, our journey here to produce IRA-compliant, onshore, North American battery materials continues unabated. Some good progress, more to come, but before we get into that any further, let's go to Dave first, and he'll review the financial highlights for Q4. Dave?

David Allen (CFO)

Thanks, Trent. Good morning, everyone. I'll ask everyone to turn to slide six. At the end of Q4, we held $8.2 million in cash and marketable securities. This is down from $15.7 million held at the end of the previous quarter. This is driven by capital cost related to construction of the refinery and costs related to running our black mass trial. I should mention that our cash balance at the end of the year does not include $5 million of new government commitments announced in February, nor the $5.1 million of previous government commitments not yet received. Cash management remains a key priority, and we continue to take steps to minimize costs and manage expenses.

Reductions in operating activities include significant reductions on exploration activity at the Iron Creek site, seeing general and administrative costs at the head office, and reducing activities at the refinery to focus on the lower cost black mass trial. This was partially offset by higher professional and consulting fees incurred during financing activities associated with the capital raise in Q3 and the restructuring of the debt, the convertible notes, December. Turning to slide for more detail on the restructuring of. In February 2023, Electra closed a private placement of $51 million of the 8.99% senior secured convertible notes that are due in February of 2028, canceling the $37 million in previously held debt in 2026, and ending with net proceeds of $13.7 million, again, in U.S..

In December 2023, we announced proposed amendments to the agreement with noteholders to more closely align with market conditions. Those were completed in the first quarter of 2024. Conversion price of the warrants was adjusted and an acceleration clause added, and in partial consideration, the holders agreed not to exercise certain adjustment provisions. These amendments, which were finalized in early 2024, have the overall benefit of reducing the potential dilution should the notes be converted to capital. We are grateful for the support and partnership shown by the noteholders as we continue to advance the project finance. Concludes my remarks. I will hand the call over to Mark for an update on our project.

Mark Trevisiol (VP of Project Development)

Okay, thanks, Dave. If everyone can turn to slide nine. You know, we talk health and safety every day in the plant, and it is our top priority. We like to believe that we walk the talk when it comes to the results of our plant with regards to health and safety. Over the last two years, Electra employees have worked over 80,000 hours, and we've had zero lost time incidents. Our target was zero lost time, so it's something that we're fairly proud of and something that we again review on a daily basis at site. With regard to the project, you can see the pictures here that you know what the site looked like in 2022 and what it looks like now.

We've added about 60,000 sq ft of plant to our existing 45,000 sq ft of existing plant. We have over 600 acres of land, and the asset life is good for decades going forward. There's been a lot of work. We believe, you know, the site's roughly about 40% constructed. Most of the buildings that we need for the cobalt sulfate project are all in place, and the majority of the infrastructure is there, and we've got the power, all the power lines updated and to the rates that we need. We've got all the pipelines installed. So now it's mainly working, you know, the internals of the plant, putting piping, putting electrics, putting instrumentation and controls in place.

Next slide, slide 11, just shows you a view of our crystallizer plant, on the left foreground. And in the background is our new 40,000 sq ft solvent extraction plant, and to the immediate right is our sulfate warehouse. That's where our final product is gonna be stored before it's shipped offsite. I mean, the highlight of this plant is that, you know, we've built it and licensed it for 5,000 tons per annum, with a small incremental cost of capital at the beginning of about $600,000-$700,000. We can bump this plant up to 6,500 tons per annum of cobalt and cobalt sulfate.

That would include a permitting process with the Ministries of Mines and Ministry of Environment. But that is well within reach. So that's a significant upside for us, you know, both on servicing our customers and on the margins that it brings to our company. Black mass update. Did a lot of work on black mass over the last number of months, as Trent has alluded to. The recovery rates, so I'm on slide 13.

The recovery rates for metals of lithium, nickel and cobalt graphite have greatly improved since the start, and some recoveries are actually higher than what we had in the bench scale test when we got this whole process laid out at SGS Labs in Peterborough. We put about 40 tons of black mass through the plant, and we produced about 28 tons of nickel cobalt MHP, which we shipped to our customer. It's mainly all going to Glencore right now. And over the next couple of months, we'll probably ship another 20 or so tons of MHP product. Our lithium carbonate product is now approaching a technical grade.

If this wasn't as much of a focal point when we started the project, but as we all see, the price of lithium and lithium carbonate extremely escalated since we started doing bench tests, and now we're up to, you know, 97%-96% lithium carbonate, which is a significant achievement for us. Right now, we're not putting through any new black mass into the plant, but we're working on the recycled wash aids that were part of the process of making the MHP product and a lithium carbonate product, and concentrating those wash aids up to then produce finished products again, of lithium and MHP, nickel cobalt. We're very proud of what we've achieved here with what we started with.

You know, we've had some batches of nickel, cobalt, MHP approaching 50%, nickel plus cobalt, so it's quite a high-value intermediate product. Slide 14, some next steps for black mass. There are some optimization areas that we've seen when we've run the pilot plant or the demonstration plant in our existing refinery. And we're addressing those going forward. And we're also... You know, the cobalt business is a little bit unlike copper and nickel and zinc, where an intermediate product, you could get a significant part of the London Metal Exchange price for your product, but not in the cobalt business, just because the processing plants worldwide aren't really tuned to take those products and recover high-value cobalt.

So the way we can maximize more profit to the company is to produce a cobalt product that is LME grade, and that's what our target is, to get up to, you know, a 99.9%-99.5% cobalt product. And this, what you see there on the right is a separation of nickel and cobalt, with cobalt being on the top, blue-colored in that bench scale test that you see there. And we've been managing to get almost four nines separation and extraction, so that's, you know, 99.99%. So, you know, a critical step for us moving forward.

And as well, you know, we are also in discussions with a few funding agencies on helping us to develop this further. As Trent had mentioned, you know, we'd like to be and stay in the recycling business and feed supply is so critical, and that's where the Three Fires Group Memorandum of Understanding comes in. You know, Three Fires has got territorial rights in Southwestern Ontario on the lands, and we look forward to, you know, building that relationship and securing a supply of recycled lithium-ion batteries to our process. I think I will now turn this back over to Trent for some closing remarks. Trent?

Operator (participant)

I mean, we seem to have lost Trent, Trent's line. One moment. Let me see if I can locate him.

Mark Trevisiol (VP of Project Development)

If you want, I can kind of finish things off if we can't get him back on.

Operator (participant)

I'm gonna try to... Oh, he's just joined the private sub conference. Hang on one-. Okay, I have Trent back on the line.

Mark Trevisiol (VP of Project Development)

Hi, Trent, it's Mark. Yeah.

Trent Mell (CEO)

Yeah.

Mark Trevisiol (VP of Project Development)

I just finished the-

Trent Mell (CEO)

Thank you.

Mark Trevisiol (VP of Project Development)

the black mass, and over to you for the final slides here.

Trent Mell (CEO)

Yeah. Sorry, everybody. I tried to unmute and pressed the little red button as I did so, so, apologize for the gap. Look, I think, as we put a highlight on slide, we're on my 16 here, some of our partnerships. Before I go there, just want to highlight one of the things Mark said. Maybe some of you caught it, but when he talks about LME-grade cobalt, I mean, one of the new opportunities we're looking at through black mass is, it's not just cobalt sulfate, but can the separation of MHP also allow us to produce a cobalt metal? That would be exciting, you know, to have that optionality.

I mean, it's a trader's dream to be able to trade cobalt sulfate or cobalt metal, depending on which way the winds are blowing and how commodities are trading. You know, stay tuned on that. We have the option to bleed cobalt from black mass into our cobalt sulfate plant, but to have a separate circuit that could produce a standard-grade metal product, could be very, very interesting. So we'll have more on that. Yeah, slide 16. Just wanted to highlight some of our partnerships. I touched on this a little bit earlier, but you know, the journey we're on, as our long-term shareholders would know, is to produce IRA compliant, so that's Inflation Reduction Act, U.S. compliant, cobalt sulfate for the battery supply chain. Why?

Because more than 80% of battery-grade cobalt today comes out of China. And if you look at the 30D credits in the U.S., so that's the $7,500 vehicle credit. Starting next year, you can't have any material coming out of China or you lose that credit. So it's a small market for anybody looking to sell IRA-compliant materials into the U.S.. And, and moreover, we saw the tariffs this week, and the Biden administration said a further signaling the, the policy intentions here, 25% tariff on batteries, 100% on vehicles. And, you know, Electra, I like to think we're the, you know, we're the poster child of what, of what onshoring should look like, right? Our entire focus is on the North American market. And so these partnerships you see here underscore that.

The feedstock we have in place now, not just with Glencore, which goes back a few years to ERG. We've locked up the two largest non-Chinese cobalt miners in the world, both of whom have top-notch ESG practices, tracing IRA-compliant material. So the ethical mining practices are, you know, their operations are what you would see in the Western world and what you would expect. And with the two of them, we pretty much have all of our supply locked up for the foreseeable future. LG continues to be a great partner. They're gonna buy up to 80% of our production now, up from 60%. They're gonna buy 19,000 tons over five years, which is a big increase because we've added two years to when we're running at full capacity.

So, the remaining 20% has been bid, if you will, several times over. Our entire book, if you will, of expressed demand to our future production is about two times what we'd expect to produce, and so IRA is a big help. We're not in a rush to sign up that 20%. We've got some conversations ongoing, but I think time's on our side, and we'd be wise to use that leverage to our advantage. What else have I got? I guess the Three Fires piece then. Well, maybe just before I go away from LG, an important consideration when you look at where the markets are today, nickel's been under pressure and lithium and cobalt. And that's just the cycle.

It's just the nature of the market we're in and some of the geopolitical pressures perhaps magnifying that. You know, we structured our contract with LG to be, you could say a toll, but it, it's a, it's a toll-like, I guess. We've got basically, we just, we just don't lose money. It's a margin-based contract to remove some of that volatility. So you have the peaks and troughs are out of the way. We're true partners, and, and the whole point here is that if we run an efficient operation, then, yeah, we're gonna make money quarter over quarter and not risk our balance sheet. Three Fires, yeah, Mark touched on it. It's about the closed loop.

If we've got the refining operation up and running in Temiskaming Shores, then we need to get our hands on the material, and the most efficient way to do that, and again, to protect the margins, is to have our own supply, our own primary recycling facility, or a shredder, as it's better known. And Three Fires with some shredder plants in their traditional territories and other feed opportunities beyond, we think they're perfect partners to help us set that up, both from a funding perspective, from land and permitting, with us providing all the commercial and technical expertise. So with that, if I turn now to the next slide, slide 17, catalysts that are upcoming. 2023 was, you know, it was challenging, of course, as we all know. 2024, I think we're looking... I'm feeling very good.

Instead of my mood in Q3 and Q4 hasn't changed. If anything, it's gotten more buoyant. And, you know, I think one thing I'll give the team credit for is we were one of the first projects to pause, right? Post-inflation, and it seems like a distant memory, but we took an early decision to slow things down, and I'm hoping we'll be one of the earlier ones to come back as well. And it's not just the startups, OEMs as well, right? Cell plants, battery plants were delayed. But the trend is clear. I mean, we can't look at this quarter to quarter. We're building a global supply chain.

It's a multi-year process, so some of the alleged headwinds that we saw in Q1 reports. I don't think we can put too much, too much weight on that in terms of where the business is going. So 2023 also spent a lot of time, as we outlined, mitigating some of the uncertainty. We strengthened our balance sheet, we reduced our costs, and I think we're in a pretty good place now to come out of the stronger and to compete. So to recap from past quarters, we require roughly $60 million, and that's just the construction piece to get us to a point we can start commissioning.

And again, to reiterate, the focus here is on non-dilutive funding solutions, government, industry, strategic partners, and I feel that's starting to take shape. Near term, we're gonna keep working on the optimization for the black mass that Mark spoke to, and then we're awaiting some decisions from some of our partners that will allow us to come to the market with some funding ideas. And then once we've got construction of the cobalt plant at hand, we do have pipeline opportunities. There's the expansion of the plant itself. There's black mass, there's the Baie-Comeau LOI that we've got in Quebec to build a facility there or somewhere in the province.

We've also taken some early steps with some inbound interest on, on what a nickel sulfate refinery might look like somewhere in North America. That is a summary of the quarter. Thank you for dialing in, and I'll now open the call to any questions for analyst.

Operator (participant)

Thank you. We'll now begin the question-and-answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Once again, if you have a question, please press star then one. We will pause for a moment as callers join the queue. There appear to be no questions, so I'd like to turn the conference back over to Heather Smiles for any closing remarks.

Heather Smiles (VP of Investor Relations and Corporate Development)

Thank you, operator, and thank you everyone listening for your time today. We appreciate you taking the time to listen to our updates, and as a team, we're really looking forward to the next opportunity we have to bring you an update on our progress. Thank you so much and have a great day.

Operator (participant)

This brings to a close today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.