Electra Battery Materials Corporation (ELBM) Q1 2023 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Electra First Quarter 2023 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Joe Racanelli, Vice President, Investor Relations with Electra Battery Materials Corporation. Please go ahead.

Thank you, Jillian, and thank you everyone for joining us this morning. We released our results for the first quarter last night. The material is available both on SEDAR and our website. Today with me are Trent Mell, company's CEO; as well as Craig Cunningham our CFO. And joining us for the first time is Renata Cardoso, our VP of Sustainability. We will be using a presentation this morning, and I encourage you to follow along from our website. At the end of management's discussion, we will be opening up the call to questions from analysts who do cover us. I'd now like to turn the call over to Trent for his opening remarks.

Thank you, Joe, and good morning everybody. Lots to discuss today, and thank you for joining us. We will, as always open the call up to analysts for questions. But before doing that, I'd like to review some of the developments we've had in what remains a busy time for us and an active Q1. So first quarter, yeah, like I said remains busy as we were in 2022. Probably the most notable milestone for us was our battery recycling or black mass refining demonstration plant, huge accomplishments there that we will talk about later in the call. But that first of its kind, plant-scale recycling demo in North America to our knowledge, first MHP production, we produced a very high-quality lithium carbonate. We produced a graphite product and the demo plant has allowed us to continue to develop our IP and improve our process in a large-scale environment. I do have Mark Trevisiol online who can take some questions on that later on. We also closed a convertible debt, retiring our old debt, generating proceeds of US$14 million off of that. Other developments in the quarter included the sale of some non-core assets in the Canadian cobalt belt, particularly silver. We also released a new resource estimate for our Iron Creek, copper and cobalt asset, an asset that continues to show big prospectivity with validation of what we believe to be a sister to our Iron Creek, an area known as Ruby. And then, really pleased to have Renata, our VP of Sustainability and Low Carbon on the call with us. She is truly a global leader in sustainability and a great fit for us because one of our key differentiators is our low-carbon footprint. I don't think anybody on the planet can have as good or better of a footprint as our, and it's something that we brag about with good reasons. So, Renata is going to talk to you not just about that, but some of the developments we've made in our own sustainability journey which as she likes to remind me is a journey that has no end. And at the end of the call, we're going to talk a little bit about some of the more recent developments. The Board tech committee recently approved a rebase line review of our top capital cost estimates for the refinery project. We'll talk a little bit more about the desktop study on black mass, and I'll touch upon the strategic review, which we also announced in today's press release. So with that, I will turn it over to you Renata.

Thank you, Trent. Good morning everyone. Moving on to slide 6. As we said before, Electra has a deep commitment to sustainability and contributing to the global energy transition. This commitment is reflected in our core values and our mission, as you can see on screen. Our mission, which is focused on providing low-carbon ethical and traceable materials to the global battery supply chain is at the heart of everything we do and highlights some of the priority topics that we covered in our sustainability report. Moving on to slide 7. We present our approach to sustainability. Our framework, that was developed in partnership with our stakeholders and encompasses a number of critical aspects, such as climate change, human rights, health and safety and respect to indigenous peoples. This framework helped us to underpin our ESG activities in 2022, when we developed our ESG policies, implemented our whistleblower channel and became members of the responsible minerals initiative, RMI, which allows us to assess our suppliers' compliance to OECD guidelines. Moving on to slide 8. We can see a summary of our ESG scorecard that you can find in our sustainability report. Our results you see here, reflect our construction phase. So numbers will change to reflect the future developments of our plans. However, it's very important to highlight our safety record of zero high-consequence work-related injuries informing how well our sites are managing this major priority for us now and always. For those unaware, our sustainability report was released in January and is available from our website. That concludes my remarks. I will now turn it over to Craig, who will review our financial highlights.

Thank you, Renata. Thanks everyone for joining us this morning. As Joe mentioned, we filed our Q1 statement at the end of yesterday and let's take everyone through some of our highlights. To begin, we'll start with liquidity. Liquidity position is on slide 10. At the end of Q1, we had approximately $12.9 million of cash and marketable securities. This was up from $8.4 million held at the end of the prior quarter. The increase was primarily driven by the $51 million convertible debt offering that we closed on in February. That offering provided us $50 million in net $50 million in gross cash proceeds. The increase was partially offset by refinery commissioning costs, expenses related to the black mass trial, and higher general and administrative costs for the period. I'd also like to point out that at the end of Q1 that cash balance did not include any amount of the $5.1 million that we are still yet to receive from government investments but should be received in the coming quarters. So, at the start of Q2, our cash and marketable securities position has declined, while we have continued to settle a number of our advancements on the refinery. Cash management is maintained -- cash measure is a key part of the company. We will be continuing to undertake measures to protect the cash and reduce some of our exposures. As mentioned, we completed our $51 million convertible debt financing. If we move to slide 11, we will be able to see a summary of some of these terms there. Although we did go over these in Q4 it will provide a quick update and some additional information there. Again when we completed the $51 million in financing in February, we retired the original $36 million of outstanding 2026 notes at par value, plus the accrued interest. The conversion price ratio used in the new 2028 notes is $2.48. In addition to the notes investors were entitled to 10.8 million of warrants. Those warrants are available for five years with the same strike price of $2.48. Additionally, these notes allowed us to have a lower minimum cash balance of $2 million. You will notice in our Q1 result the impact of settling the 2026 notes and creation of the 2028 notes resulted in a $19.9 million one-time loss recognition. This relates to the settlement and then initial recognition of the 2028 notes. That is a non-cash loss primarily driven from the fair valuation method used in the package of financing. I would now turn over the updates to Trent, who will take you through the refinery project economics.

Thanks Craig. All right back to the refinery. I do have Dave Marshall on the line for questions as well later on. Dave, our VP Engineering led the rebase line review with our EPCM contractor EXP. And so by way of reminder on slide 13, we did withdraw our guidance on February 14, became apparent that just with the ongoing supply chain issues that we're all well aware of compounded by the receipt of some damaged equipment inflation the likes I haven't seen since the -- I guess since the 1980s and all of the pressures that that put against us that we needed to pull that and review our capital cost estimate. So, we'll go through that a little bit now. The study was completed at eighth day with EXP. We then had a third-party estimator complete an independent review as well of that and following which it's gone through a tech committee. So, we had a pretty good scrubbing of the numbers. And with the amount of detailed engineering and procurement done and much of the long lead stuff now on site or in transit, we're feeling pretty good about where we are in terms of our estimation. So, as I say it was completed with a -- I do estimate now of $110 million to $121 million. We spent just under $50 million of that. We do have some additional funds as Craig outlined that are coming in, but it is apparent that we are going to need more money in order to complete that process. And if you look to slide 14, you can see how the variances stack up against different components of the project. And they take freight as an example never predicted 5x increase in the cost of freight, but these are the kinds of things that replicated higher labor costs higher steel, concrete, and so on. And so it's been some challenges, but we're making our way through it. And I think we've got a pretty good idea of what the way forward looks like. Another perspective looking at it again through slide 15, gives you the workup to both the low end of the range and the higher end of the range. What we've done here is we went right back to the original estimate just for transparency to show where we were with our study documents. Our control budget by way of reminder wasn't $62 million, but $80 million when we started construction. But this just shows you the workup of the study, it doesn't quite show the control but where we think we're coming in right now. And again Dave is here, if you wanted to work through that there's more details in the press release. So, as I said, we're going to need more capital. If you look on slide 16, in terms of our next step, it does now focus our attention with some of our partners on funding the gap. We've got commercial partners that we've been talking to for some time. Government agencies, federal, provincial, US as well that are in the mix and then some strategic partners as well. Until that time, things are going to be a little bit slower in terms of how we execute. We've got a small team on site that continue working that through. But it is really a question now just managing the capital managing our expenditures and getting ready to resume construction once we've lined up the remaining portions of the capital. So we can come back to that in the questions. Let's maybe turn it back to Craig now if I may on the black mass study starting on slide 17 and 18.

Thank you, Trent. In addition to the update on the refinery which we released yesterday and Trent just walked through we'd like to provide a overview of our black mass scoping study. As a reminder, we started this scoping study based off of the very positive results we had seen from our demonstration plant, which we commissioned in December and have been running throughout the quarter. We have received a lot of interest related to that capability from various stakeholders within the supply chain for EVs. The recovery and production of lithium-carbonate products as shown on slide 18 was also something that has generated considerable interest. So the success of our black mass trial project is a significant underpinning to as joining at an MOU with the Three Fires Group which we also recently announced. If we move to slide 19. There's a summary of the highlights of the scoping study and what some of the indications could be for a potential black mass recycling plant located in our Temiskaming facility. As you can see on slide 19 the scoping study is based on processing 2,500 tonnes of recycled material per year indicating on some compelling economics. Most notably we'd be building or permit black mass operation using our existing footprints at our refinery. They would cost in the range of approximately US$6 million to complete and construct and will deliver attractive rate of return and a payback period of less than two years. Some of the -- to focus the economic highlights of that potential opportunity we would be predicting an EBITDA in year one approximately $12.6 million and in year two of $9.9 million and carrying forward in a similar fashion that way. Some of the key assumptions that are built into the model are using analyst consensus for estimates on commodity prices over the coming years as well as consensus prices on reagents for the same period. Moving to slide 20 the next steps with our like mass trial. The results we've achieved today in black mass trial are rather encouraging. We -- rather encouraging and supportive of the market outlook. Looking ahead we anticipate the first commercial deliveries of products produced through the demonstration plant to happen in Q2. And we also expect to continue to refine our hydrometallurgical process through our batch analysis and improve our processes. Pending completion of our trial we will evaluate the results and demonstrate a path towards commercialization of this technology and potential opportunity. This concludes my comments. And I would like to turn the call back to Trent for his closing remarks.

Thank you, Craig. Now to round this slide 22 now. And before I do the concluding remarks I just want to say a word or two about black mass as well. The benefit of this picture shows you the significant advantage we have and why we were first to produce for the refined black mass on a plant scale because we've got this legacy refinery that you see before you that has been commissioned by Mark and our skilled team at site. And it really is a huge accomplishment. There's a lot of black met -- a lot of battery shredding happening in the industry but thus far nobody is doing this. Nobody is taking that black mass and refining the six critical materials -- minerals in their into their constituent elements. And so our approach has been fairly straightforward, but also different. It really is about proving out our IP. And that's what we've been doing. And once you proved your IP you can then partner. And we've had lots of visitors coming to your site receiving our product looking at what we're doing. And it's once you've done your proof and your partnerships that then you can start building out the plant. And we look to build this out on a modular basis growing with the market incrementally so that we don't get too far ahead of ourselves or where the market is. So a big, big congratulations to the team, our metallurgical team, our operating team and the leadership for pulling off what is a huge accomplishment that I would say is probably not getting enough recognition. But with that I'll move on to just some closing remarks. And the first bullet there as we said in our announcement today, we have disclosed that we've launched a strategic review to evaluate potential alternatives that could help us address our funding shortfall to complete our refinery project. The black mass does give us an alternative, but there is a bigger capital lift required on the refinery and capital requirements on the black mass as well. So I won't talk today about the process and we will report back when we do have something to say but at this point it would just be speculation and rumors. So we're going to leave it as disclosed in the press release. And now maybe some shareholders may be surprised by the development. I think it's good to take into account that the context in which we sit today when we started this project in late 2019 and into 2020 coming out of COVID real interest rates were negative. Access to capital was much different than it is today. The equity markets were favorable and we were moving into a period where chemical refineries like ours were receiving pretty generous multiples. And over the past to the 1.5 years it's been a different tone. Equity markets for small caps are getting tougher. Liquidity is harder; interest rates are harder or higher I'm sorry. And as a result access to capital has become considerably more challenging. And as I look to 2023, looming recession seems to be the growing consensus. What this company needs and the only thing we need is a stronger balance sheet. And however we want to achieve that. Everything else I think is in our favor, the macro tailwinds. We've got a process; we've got a location with permits; we've got people; and we've proven out a lot of what we have set out to do; and we're well into construction with long-lead equipment on site. But of course you need that balance sheet and that partnership to help you get that across the line. So we have anticipated for some time 2023 was going to be challenging and that's why we did start taking steps frankly some time ago to make sure we would complete our vision and succeed with what we have laid out over the last couple of years. As you know the outlook for the EV battery market is extremely bullish. We keep seeing announcements here in the continent. I think it's taken the industry by surprise that the speed at which things have picked up no doubt bolstered by the US inflation Reduction Act, and other incentives that are there across the sector in North America. So, against this more favorable outlook, we're very committed to completing the refinery project capitalizing on our first-mover advantage, moving forward with our black mass and our Bécancour plans. And with that, I'll thank you and open it up to questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Matthew O'Keefe with Cantor Fitzgerald. Please go ahead.

Hi, good morning. So, a lot in there just a couple of questions on. Let's start with the refinery. So it sounds like you're current stalled construction here. When you do just figure out your cash issue and you reengage in construction, how long would it take to complete the build and get it commissioned?

Yes, that we -- thank you Matt, and good morning. We haven't disclosed that in part, because it really is capital dependent. So we continue to receive equipment. I think comfortably conservative number, realistic number once we've got funding in place ready to go might be 14 months. You could do it faster; you could do it slower. But where we are right now with detailed engineering is at 98%, 99% procurement. Largely the big stuff is done. So we've got some piping and cables and whatnot that we need but a lot of that custom fab SX tanks and all that have been received or coming. And so really it's execution now. And so we're talking about a couple hundred people on site doing piping and electrical work. And what that schedule looks like is going to be a function of how your funding aligns and how quickly you can crew up.

Okay. And on the financing side. You said you're -- you spoke a lot about partnerships and aren't going mention too much about who or what. But are we looking at across the gamut here from traditional lenders to automakers to either strategic -- like other mining companies or processors, or is it more narrow than that?

It's pretty broad. We talked about in the presentation the $5.1 million that we expect to receive from government. There are a couple of other streams two or three other streams including application with the U.S. Department of Defense. They're hard to predict what those look like,. but certainly a lot higher than $5 million each of the other streams, I'm looking at The downstream partners, yes, I think that's going well. The reality is with a rebase line underway, we needed to get this out in order to complete those conversations. So I can think of one downstream partner in particular that's not in the public domain that wants to have the conversation now that we've got this back out so they can understand how they are part of a bigger solution. And then of course the strategic process and what that may yield.

Okay. And then if I could ask one more question just on the black mass. For you -- you said $6 million CapEx actually two things there. One maybe explain how -- that doesn't sound like a lot to generate $10 million of EBITDA. Maybe you can explain what goes into that. And does that require the completion of the refinery in order for you to engage in the black mass processes?

Yes, I'll let Mark talk to that high level what we're doing -- because the refinery and I know you've been you've been through there the refinery is running today, right? We're running -- we can run up to a tonne of material per day through that plant. And so it's basically taking what we've got for the demo plant, adding some tanks, building out a bigger lithium circuit, and scaling that up using what we have. So unlike a new build the feed handling system is there the warehouse the lab the maintenance crews. And Mark, maybe I'll let you add some narrative to that.

Yes, sure. Good morning everyone, and thank you Matthew for your question. If you toured the plants the plant has about 64 vessels that over lifetime that has evolved to a hydrometallurgical facility that has several streams or had several streams in its history. Right now, under this current footprint we're using about a dozen or so of those vessels. So when we go to 2,500 tonne per annum plant we'll be using a lot more of the dormant vessels that are just lying there right now and not really doing any work for us. So that's the leverage that we have here. It's a lucky thing to have, because it really allows you to limit the capital spend and get into production quicker. So that's the asset -- leveraging the asset that we have to maximize the rate at which we can run. And you can see the profitability on these numbers is quite significant. So that's …

Okay.

…a bird's eye view of that.

Okay. So just so I'm clear, so you could run this, like you could dupe $26 million right now and have some cash flow before you complete the refinery for the cobalt?

Well, what this plan does? What this scoping study did? Was the, spend that would need to be done would occur over 12 months from getting the financing on that spend. Some of these vessels would be dual purpose and some would have to be replaced if the hydroxide project gets full financing. But in the near term this gets you operating and generating cash much quicker. If we have full funding on the project cobalt hydroxide the cobalt sulphate project, then some of these vessels would have to be replaced. …

Yeah.

…And that would be part of additional capital for keeping the rate going so to speak for black mass.

Got it.

And that if I may, just to be totally clear $6 million becomes $6 million-plus if you want to run these two concurrently that is to say the cobalt plant and the 2,500 tonne. Then yeah the idea of the $6 million this is a very quick and profitable way for us to get the cash flow with a quick return but you are borrowing some of the equipment that otherwise go to the cobalt plant so there would be a higher number associated with the 2,500-tonne standalone.

Okay. Do we have a number for standalone?

Truthfully, no. No.

Okay.

We'd be guessing we're working on a 25 -- we're working on a what would a 5,000 tonne look like that will come in time but that would be an order of magnitude larger because now you're building out structures and whatnot. But compared to a greenfield, you're not, -- obviously, we got our permits which is massive but you've got your infrastructure and power and water there's so much already there that, when I say orders of magnitude we're not talking a hundred million maybe you're talking half of that to get a 5,000-tonne plant. But again this is just orders of magnitude. We need to do the work. Because of everything that's there now we're building on to existing structures and facilities and equipment.

The next question is from Jake Sekelsky with Alliance Global Partners. Please go ahead.

Hey guys. Thanks for taking my questions.

Hi Jake.

So, just following up a bit on the black mass operation, do you expect to announce a full economic study before moving to commercialization there? Are you comfortable moving forward with the work that's been done so far on the 2,500-tonne a day scenario?

Yeah. Back to my point I made about proving out your process your IP and then partnering, we're at the partnering stage now leveraging somebody else's balance sheet whether it be through a commercial relationship or otherwise. So yeah, there'll be more work required. This is a desktop. So this is that -- Mark's team got this up and running for $3 million re-commission the plant and get, the plant going on a demonstration basis. So it's that same crew of operators and metallurgists that came up with this work. We're still doing our mets and modeling among other things that there will be more work required. I think we'll be able to share some of this publicly as well as the results of the study slightly redacted but we'll have a report available on our website to give you a sense of the amount of work that was done.

Got it. Okay. And then, just switching gears to the Three Fires agreement that you guys announced about a week ago. Could you provide any color on the pricing mechanisms that you guys are considering under that agreement or is it still too early stage to talk about that?

Okay. So, yeah, maybe just Three Fires just by way of background, I think the best way to describe it in economic development a group that represents a number of indigenous First Nations communities around the Great Lakes area. And of course, we've got two very large cell plants that are coming into their territory. And I think from their perspective circularity and recycling aligns with their values. And they've got access, I suppose to capital and access to government officials eager to help build capacity. And so the -- where we are right now on the MOU, we haven't outlined the economic split, but the high-level concept with Three Fires and this was them reaching out to us with the idea. You've got the refinery; you don't need four of those. What you do need shredding capability and a dedicated feed. And so why don't we work together to build out the shredding capability in Ontario and have a good size collection and shredding facility for whatever the sources might be. And the broad parameters would be that they would help with the siting the location the property and the initial capital. We would bring our expertise both in refining and also on the shredding side to help make that a reality operatorship the profit share as we would see. But what that really does Jake is it provide us now with a captive feed source, which I think is really the future. I think this idea of buying black mass in the open market is going to come and go, because as battery plants start to pop up nobody is going to sell you their feed only to buy it back again. And so this sets us up for what I would say, the second generation of the black mass market as we see it evolving.

Makes sense. Okay. That's all for me. Thanks again.

Thank you.

The next question is from Gordon Lawson with Paradigm Capital. Please go ahead.

Hey, good morning, everyone and congratulations you got into this stage. My questions are in line with what's already been asked. But the forecasted decrease in EBITDA is that largely based on consensus commodity price forecast or are there other factors at play?

Before I hand it over to Craig, the EBITDA that we presented there Gordon relates just to the black mass, right? Other EBITDA that we had previously presented was for the cobalt sulphate production activities. But as we've indicated we withdrew those guidance numbers earlier this year. So numbers today are presented just for the scoping study on black mass.

Correct. But the products coming out of that -- the black mass recycling are you generating EBITDA based on commodity prices, correct?

That's correct, yeah.

Okay. So as for the mill, is there an opportunity for debottlenecking or additional fine tuning? The mill is now being used for different product than originally designed. So I'd assume there's room for improvement there unless you prefer to keep it as is for the future cobalt production correct?

Do you want to take that Mark?

I mean, as far as black mass processing yeah we've been -- since we started this back in December we have been tweaking the process as we go. In fact, that's one of the things that is nice about this whole demonstration is that it gives us that ability to increase recoveries, increase throughput by getting feedback on what's working well and what isn't working so well and then moving forward. As far as the hydroxide project, we've done a pilot plant a complete pilot plant on that right through to processing and manufacturing cobalt sulphate. So, we're pretty confident in our flow sheet and the people that we've -- the vendors that we had involved, with supplying equipment have supplied equipment to other cobalt sulphate plants around the world. So, there's a level of confidence that we have in that process. But overall, the opportunity that we have right now for the black mass circuit is, really adding value to our steps moving forward and expanding out to 2,500 tonnes. Yes, there is ongoing tweaking that we're doing almost every week here and finding little ways to improve recoveries as I mentioned, at full production rates.

And Gordon, I'd say -- as Mark said, this plants had a couple of iterations ready to produce nickel and cobalt, copper products in the past silver even. What it hasn't produced, is lithium. So if I were to think of a bottleneck today, it's building out that circuit, right? This is a circuit that we introduced as part of a demo plant. So, to go continuous, we'd want to continue adding that capacity. But did – yes, to the bigger cobalt hydroxide plant, we looked at that early And so our decision to buy a larger crystallizer, which is now having some knock-on effects on our CapEx, but to go from a 5,000-tonne crystallizer to a 6,500 tonnes cobalt-contained crystallizer, that would have been a bottleneck. And you got to size that right out of the gate. And that's a -- tankage is certainly, not an issue. It may be when we go from 5,000 to 6,500, but I think we successfully address that, potential bottlenecks two years ago. And when I looked at the cobalt projections of any one of the big three or any one of the big automakers, this plant's total capacity for cobalt is going to exceed any one, auto manufacturer's requirements by about 2027. So, I think it was the right decision there.

Okay, great. Thanks very much, for the color.

Thanks, Gordon.

That is all the time, we have for questions today. I'd like to turn the conference back over to Joe Racanelli, for any closing comments.

Thank you, everyone, for joining us. We will be available for any follow-up questions. Please, do reach out to us. We're happy to answer any of your questions. And again, thank you for participating today.

That concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.