Electra Battery Materials: Definitive Cobalt And Nickel Play (NASDAQ:ELBM)

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The Forest Gump of Cobalt

Remember the movie “Forest Gump” and the scene where Bubba is listing off all the various ways to cook shrimp? That is how I feel about Electra Battery Materials (NASDAQ:ELBM). They have: a cobalt mine, a cobalt processing facility, cobalt supply agreements, and even cobalt recycling (via black mass electronic waste). Frankly, they bring home all that tasty cobalt that you and the high end electric car market crave.

Cobalt Global Prospective

Currently, China controls 80% of the cobalt sulfate production. From a strategic standpoint this is non-kosher. Outside of Asia, Finland is the only location that sports any significant cobalt sulfate refining. (See the 2023 estimate below.) Do note the figures on the bottom right concerning est. market share once Electra enters the cobalt fray.

Electra Battery Materials, cobalt in canada, china cobalt, cobalt sulfate

Est. Cobalt Sulfate Market Share 2023 (March IR deck – Electra Battery Materials)

Show Me The Money

Let’s put the amount of cobalt that Electra is going to process in context.

ELECTRA BATTERY MATERIALS CORPORATION

MANAGEMENT’S DISCUSSION AND ANALYSIS

FOR THE THREE MONTHS ENDED MARCH 31, 2022

In 2020, the Company announced the results of an engineering study on the expansion of the Refinery that demonstrated that the facility could become a significant, globally competitive producer of cobalt sulfate for the electric vehicle market. The engineering study determined the Refinery could produce 25,000 tonnes of battery grade cobalt sulfate annually (equating to 5,000 tonnes of contained cobalt), which would represent 5% of the total refined cobalt market and 100% of North American cobalt sulfate supply. The study indicated strong operating margins at the asset level.”

It is interesting to note that the company plans on expanding this production.

In response to strong customer demand, the Company has invested in increased capacity for its cobalt crystallizer, which can result in installed capacity of 6,500 tonnes of annual contained cobalt production, a 30% increase from the engineering study design of 5,000 tonnes.”

Cobalt Revenue Estimates

From the below picture, we can see production and revenue estimations using cobalt prices from March 2022.

Tonnes Low est per tonne High est per tonne Low Side Total Revenue High Side Total Revenue
2023 4,375 $27,000 $31,000 $118,125,000 $135,625,000
2024 5,750 $39,000 $44,000 $224,250,000 $1716,000,000
2025 6,500 $45,000 $51,000 $292,500,000 $2295,000,000

(Source: Author using company figures below, note the below yellow highlights are the authors)

cobalt prices, cobalt, cobalt metal, cobalt sulfate, Electra battery materials, First Cobalt

Revenue Estimations (Electra Battery Materials)

Looking at the March 2022 IR deck presentation we see the following estimates:

electra battery materials, cobalt profitability, cobalt metal price, cobalt sulfate price

Production & EBITDA – EBM (March 2022 IR Deck from EBM)

The above estimates give us a hint at potential EBITDA over time ($24.1 million USD in 2023E, $34.4 million in 2024E, and $40.1 million in 2025E due to cobalt processing plant expansion).

Then we see EBM is suggesting they are undervalued relative to peers on an EV to forward EBITDA basis. I take these figures as best guess work, but it does give us a notion of what might be. Consider it a hint for a large jigsaw puzzle.

Given the market cap of a mere $147 million USD (As of 6/21/22), this strikes us as quite the value play once you compare it to potential revenues though it will take time for everything to pan out.

Broad Viewpoint

One week the market is up; the next week the market is down. The yo-yo cycle continues. The market is too hot, too cold, too tepid, and sleepy at times. Rarely is the market in a perfect state of being.

As the world continues to shift to a much more unstable standing, the markets reflect this via extreme fluctuations. Interest rates are rising due to knee-jerk printing up of money over the last few years. Could we enter a deep recession? Sure, why not, and guess what, life will continue: The market will fluctuate. Yet, if we gear our investments towards big picture demand, we can be set up to profit during good times. During stormy times, we will have solid investments that can endure the rough seas to emerge and recover.

Taking a side bar, one must realize that an entire generation of investors have yet to experience a bad market. Sure, the short lived Covid slump was novel but it didn’t last as the Fed opened the flood gates. Yet, once you experience a 1999 tech implosion or a 2007 leading into a 2008 decimation, it gives you a different prospective. Frankly, things can get much worse. Yet, even if things pull a 2008 ... one thing is certain: America will come back. The business cycle will continue. Peaks and valleys are supposed to happen.

Coma Stocks – The Sleeper Must Awaken

I last wrote on Electra Battery Materials in May 2021. Since then, I’ve just held the shares and, frankly, the stock went into a coma. In my three decades of investing, I’ve seen this happen time and time again. Take a good company and for whatever reason the sizzle behind the fizzle goes into dormancy; The stock goes catatonic. Investor interest goes elsewhere and the mentality of “I’ll get around to buying it” comes into play.

The problem is the investor never gets around to buying the stock, because frankly no pressure or compelling reason exists in the short term to do so. Why deploy capital in something that is going nowhere when a speculator can put it in something hot? The problem with this approach is one day that sleepy stock wakes up and goes off to the races, leaving behind those that lacked patience or foresight to invest in the company.

A perfect example of this would be Nano One (OTCPK:NNOMF). The stock had been in a languorous slide for what seems like forever. Long term considerations aside, the average speculator saw no reason to deploy capital that could be used elsewhere — till one day a series of unexpected catalysts flared up at the company. While hints were present Nano One might acquire a cathode facility in Quebec, this arrived out of the blue for most people. Then the BASF deal was signed and a partnership with powerhouse Rio Tinto (RIO) shook the stock from its slumber. Yet, these are only the tremors before the massive catalyst earthquake that is to come for Nano One (but I digress).

Electra Battery Materials might experience a wakeup call this winter when the cobalt facility comes online. I sense deep stirrings within the company and these germinations have gone all but unnoticed by the market (at least for now).

Russian Cobalt Import Tariffs Increase 45%

While lithium prices have been in the headlines, cobalt prices are also experiencing quite a rise in price and it might go even higher in the United States per Russian tariffs.

It appears the U.S. Senate has passed a bill that will see Russian cobalt import tariffs rise by 45%. Russia, per 2021, accounts for a mere 4% of global market share, yet it will be interesting to see if this cobalt simply diverts to China or India. This could only make lithium harder to get in the U.S. (thus a price increase) and could be an interesting wild card to watch.

Increased cobalt prices could obviously benefit cobalt related stocks. Factor in that cobalt is used in some of the higher end electric car markets and thus the question is “What cobalt stock should we buy?”

cobalt, cobalt prices, Trent Mell, First Cobalt, Cobalt in America

10 year Cobalt chart (tradingeconomics)

Strategy of Electra – A Chemical Park

The strategy of Electra is simple. They will have one chemical park to carry out their 4-phase strategy. Per the CEO from April 11th 2022.

So now in our discussion through 2021 with battery supply chains, OEMs, and their battery makers, we are seeing they want an integrated site. They want to see cobalt nickel recycling all in one location so that you can take all that material, and put it into the precursor, that first set of the battery process, all in one chemical park – save capex and save your opex.”

And from the Investor Relations slide deck, we can see the phases of how the company is going to grow over time.

Electra Battery Materials Park will host cobalt and nickel sulfate production plants, a large-scale lithium-ion battery recycling facility, and battery precursor materials production, which will serve both North American and global customers. Electra also owns the advanced exploration-stage Iron Creek cobalt-copper project in Idaho.

Electra Battery Materials, Electra, Trent Mell, ELBMD, Cobalt

Electra Battery Materials Plan (Electra Battery Materials)

Note the location of the battery park where cobalt refining, lithium-ion, and black mass recycling will take place. This is a very strategic base of operations given the proximity of various industrial users.

Electra Battery Materials, Austin Craig, Cobalt refining, Tesla and cobalt

Electra Battery Facility (Electra Battery Materials)

2022 – Cobalt Refining

Electra will commission its 600-acre Cobalt refinery this December. Feedstock to be provided by Glencore (OTCPK:GLNCY) with Electra ramping to 6,500 tonnes of battery grade cobalt per year as output. It is interesting to note that per the CEO they have “about $100 million dollars of infrastructure there, roads and power, tailings and equipment” and “You got the permits in place, which is huge”. In another interesting PR concerning the budget for the refinery we see:

Electra has commitments in place for 52% of the US$67 million capital budget, inclusive of amounts spent to date. The Company expects to approach a 70% commitment level within the next month, with the overall project currently on budget.”

2023 – Black Mass Recycling

A demo plant is planned for 2022 with commissioning estimated for 2023 to recover black mass (nickel, cobalt, lithium, copper, and graphite) from electronic waste via an acid leach process. Per the CEO they have “about 30 providers of battery black mass that we could draw on”. Also, per an April 6th, 2022 video with the CEO:

We have an announcement to sell a big part of the production coming out of battery recycling, the nickel, and the cobalt, in a stream called NHP. Glencore is going to buy up to 100% of that for the first 18 months. So, it really derisks the business plan as we seek to continue to expand this battery materials park into an integrated site. Having them as a partner is huge. We still have copper, we have graphite, lithium contracts to negotiate as well.”

Looking back at the slide deck, we see some of the potential sources of black mass recycling below.

Electra Black Mass Recycling, Idaho Cobalt

Black Mass Recycling (Electra Battery Materials)

One such supplier of black mass is Japanese Marubeni Corporation who signed an agreement with the company.

2024 – Nickel Sulfate Refining & Battery Precursor Manufacturing

Looking a bit further out, Glencore and Talon Metals are working with Electra for a government sponsored nickel sulfate refinery study and this leads us into 2025 where the company lists “Battery Precursor Manufacturing” in the slides above. Let us explore some company highlights next to see what interesting data might be lurking within.

Company Q1 2022 Highlights

Sometimes a simple copy and paste can convey all you need as an investor. Per Electra’s Investor Relations page:

  • Held cash of $51.9 million as of March 31, 2022, a total that does not include the remaining $6.5 million of government investments expected to be received.
  • Total incurred costs for the refinery construction project at quarter end were $25 million.
  • Net income for the period was $2.3 million or $0.08 per basic share.
  • Received Industrial Sewage Works Permit and approval for the Refinery Closure Plan.
  • Commenced construction of foundation works for a new solvent extraction plant expected to be commissioned in December 2022.
  • Drill results to the west of the Iron Creek cobalt-copper project successfully extended mineralization by 130 meters along strike and by 110 meters at depth. Drill results subsequent to quarter end successfully extended mineralization by an additional 180 meters to the east of the deposit as well as down dip from the eastern edge of the resource zone.
  • Announced the launch of a battery materials park study in partnership with the Government of Canada, the Government of Ontario, Glencore Plc and Talon Metals. The group is collaborating on engineering, permitting, socio-economic and cost studies associated with the construction of a nickel sulfate plant as well as co-location by a global battery precursor cathode active materials (PCAM) manufacturer adjacent to Electra’s cobalt refinery and recycling plant.
  • Signed a battery recycling and cobalt sulphate supply agreement with Japanese conglomerate Marubeni Corporation.
  • Launched a new at-the-market equity program for the issuance of up to $20 million in common shares from treasury. As of May 26, 2022 the Company has issued a total of 448,517 common shares at an average price of $5.65 per share for gross proceeds of $2.5 million.

Highlights Subsequent to Quarter End

  • Signed a two-year offtake agreement for nickel and cobalt produced from recycled battery material. Electra expects to commission its recycling plant in 2023. A demonstration plant is expected to begin operation in 2022 at a cost of $3 million using existing equipment.

Notice from the above bullet points the powerful sentence “colocation by a global battery precursor cathode active materials (PCAM) manufacturer adjacent to Electra’s cobalt refinery and recycling plant.” This shows future intent and potential catalysts.

While unnamed, it does make you wonder what cathode manufacture is going to locate in EBM’s battery park? Perhaps a South Korean venture?

Conclusion

While the short term pain looks likely to continue, long term we assess that the automotive companies will continue to embrace EV adoption as well as the masses. United States and Canadian government backing via grants and loans is simply too enticing for some companies to pass on. Political pressure continues to be pro EV.

While a bit early to estimate profits, given the prospects of Electra Battery Materials (Cobalt and nickel refining, a cobalt mine, and black mass recycling) we view the company to be an incredible value especially when one factors in the strong balance sheet ($51.9 million as of March 31, 2022, a total that does not include the remaining $6.5 million of Canadian government support or the $2.5 million from selling stock).

Simply put, great management combined with a strong balance sheet and diverse potential revenues (cobalt refining, black mass refining, a cobalt mine along with a potential battery park) have captured my attention. Maybe they should garner some of your attention as well for a long term play.

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