ELBM 2023Q3

Thank you for standing by. This is the conference operator. Welcome to the Electra Third Quarter 2023 Results Conference Call. The conference is being recorded. 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, Galine, and good morning, everyone. Thank you for joining us today for our Q3 call. We do have quite a bit of material to go through before I turn it over to Trent. I want to point out a couple of things. All of our disclosure material related to our Q3 results, including the MD&A, financial statements, and the press release were issued last night. They've been filed on SEDAR and are also available on our website. We will be making use of a presentation today. That presentation is on our website, and I encourage you to follow along. I do want to make note that we will be making some forward-looking statements under the meaning of safe harbor. As well, I want to point out that we will have a Q&A session today that will be open to the analysts who do follow us. For any shareholders that would have additional questions, please reach out to me at any time. And so with that, I do want to point out that in addition to Trent Mell as CEO, we do have Peter Park, our CFO, on the line with us, as well as Mark Trevisiol, who is our VP of Project Development. So with that, let me turn it over to Trent for his opening remarks.

Thank you, Joe. Good morning, everybody. So yes, I'll start. Peter will say a few words, then Mark, I will wrap up before we open the call up to questions from our analysts. So over the past quarter, since completing the re-baseline engineering report on our cobalt refinery, we've been particularly focused on our capital, our balance sheet, strengthening the balance sheet in two ways: one, despite some pretty tough markets and uncertainty, hopefully that peaked, at least concerning inflation, we received strong support, raising CAD 21.5 million in August to support our efforts and energy proceeds. In addition, over the quarter, I think we received encouraging news from sources for nondilutive financing that could get us to USD 60 million needed to complete our refinery, so some great progress there. I can't say much about the latter part, but we can come back to it if we like. On the other developments listed here, we're going to go through these, so I won't dwell on it too much. But Slide 4 here talks about the black mass trial, which Mark will go into detail about, Three Fires, and formalizing or advancing our joint venture. I'll come back to that at the end. And then this partnership, commercial relationship with LG, cornerstone partner, that is a really great partner for us as well. So before we elaborate on all that, let's go to Peter, and he will review our liquidity and talk about Q3 highlights.

Thank you, Trent. Good morning, everyone. I would like to begin my remarks with a review of our liquidity position found on Slide 6. At the end of Q3, we held $15.7 million in cash and marketable securities. This was up from $7.4 million held at the end of Q2. The increase was driven by our equity financing that generated gross proceeds of $21.5 million, but offset by capital costs related to the construction of the refinery project and costs related to the running of our black mass trial. I should point out that our cash balance at the end of Q3 did not include the remaining $5.1 million of government investments expected to be received. Cash management remains a key priority, and we have undertaken several steps to reduce costs and manage expenses since the start of the year. Among these include a reduction of the owner's team to 12 individuals from 30 we had at the end of 2022, reducing G&A costs at the head office, and limiting the use of consultants and advisers. There are a couple of other financial highlights of Q3 that I would like to bring to everyone's attention, as noted on Slide 7. Our net loss for the period was $9.2 million, of which $4.4 million was due to fair value adjustments relating to our convertible notes. The adjustments are financial in nature and noncash. I also want to point out that our financial statements for Q3 included a reclassification of our convertible notes from long-term to current liabilities due to the timing of the waiver received from our lenders regarding our registration statement, allowing for the resale of the underlying securities. The waiver has been received subsequent to quarter-end and as a result, the liabilities associated with the convertible notes are now classified as long term. The delay in the receipt of the waiver, unfortunately, had a bearing on our reporting timeline. That concludes my remarks. I will now turn the call over to Mark for an update on our refinery project.

Thanks, Peter. Let's skip up to Slide 9. Although our efforts at the refinery in Q3 were primarily spent on conducting our black mass trials, some gains were made on our cobalt sulfate project as well. Just recapping what our site looked like about two years ago, Slide 9 shows our site back in June of 2021. The subsequent slide, Slide 10, shows some of the construction that has happened during this period as of fall 2023. You can see there's an extensive amount of work that has been completed, especially around solvent extraction and crystallization. The most noteworthy is the white building, which is a solvent extraction plant. Once fully commissioned, this building will be where we will separate the majority of the impurities of our feed and make better than 99.99% pure battery-grade cobalt sulfate solution. That solution would then get crystallized into what we would call the final heptahydrate cobalt sulfate powder. From the slide, all of the shell of that big white building is completed. Things such as the footings, foundations, and roofing are not as visible as the inside of the building, obviously. But there are over 33 solvent extraction cells that have been placed in the building, as well as some accompanying holding vessels. Also noteworthy is the completed work on the crystallizer circuit, which we'll talk about next. Slide 11 shows a nice view of the crystallizer. In this circuit, we will essentially be taking installment from the cobalt solvent extraction circuits of the cobalt sulfate. It's getting vaporized in the falling film evaporator and then being crystallized within the crystallizer. I should point out that the crystallizer contains the falling film evaporator, and that was the vessel that we put out an announcement on several months back that was damaged during shipping. The top of that vessel is just protruding through the roof. In front is the main crystallizer vessel, which stretches about 50 feet long and about 8 feet in diameter. Recently, we've received several longer lead items, mostly related to the solvent extraction plant. A lot of these vessels were manufactured overseas. There were delays in getting them here and being fabricated. We finally got the final shipment in September, so we're happy that all that equipment is here. But there's still some electrical equipment that we're waiting on to arrive on site within the next six weeks or so. Finishing installation of the equipment delivered on-site will continue as we secure capital funding for the project. As for the updated project costs, they are in the range of USD 113 million to USD 122 million, with the current estimate to complete around USD 55 million to USD 62 million. We've done the re-baseline engineering. The cost estimate was reviewed by a third-party estimator. We see inflation driving costs in various areas. For industrial materials like steel and stainless steel, we've observed increases of up to 50%, which was not projected and is linked to the COVID-19 pandemic. However, the updated project economics have significantly derisked the refinery project. So our next steps are to work on project funding and aim for non-dilutive financing, continue receiving items on-site, and proceed with the black mass recycling trial. Regarding the black mass trial, we've extended it through Q4. Our goals are to test the hydromet process that we've developed in-house and target the recovery of high-value metals like nickel, cobalt, and lithium, as well as manganese and graphite. Critical success factors for the trial include safety and environmental compliance with regulations in Ontario. We're aiming to maximize our recovery rates. We've made great gains in recovery rates for some individual processing steps, particularly for manganese, nickel, and cobalt, where the quality of our product is exceeding what we achieved in the lab. We've treated about 40 tonnes of black mass and shipped about 20 tonnes of nickel and cobalt MHP to date. We're also recovering lithium carbonate, a significant element in battery production, and working to refine that to a higher-grade product. We've made significant improvements in manganese recoveries. Our next steps are to continue optimizing the hydromet process, improving product security levels and recoveries, and reducing moisture levels.

Thanks for that, Mark. Before I go to Page 20, I want to pause and congratulate Mark and the team, including George and Hayden, the folks at site, and the commercial support from Michael and Andre. What we are doing on-site with the recycling, coupled with a permitted facility, a world-class lab, the team and the existing refinery being recommissioned, positions us uniquely in North America. Many are talking about this, but this team is delivering. I'm really proud of our accomplishments, especially at the plant scale. I think our approach is being rewarded as we continue to improve the quality of the MHP and lithium carbonate production. The reason we're still at this after 11 months is that we keep learning and benefiting from the growing experience of the team, so hats off to them. Now on Slide 20, let's turn to a couple of the strategic initiatives we're working on, including one with LG. In September of '22, we signed a binding term sheet that effectively allocates 60% of our production to LG over three years. Despite delays due to industry-wide inflation, LG is keen to work with us to extend the contract because the demand for cobalt will significantly increase from '25 onward as supply chains develop further, and these battery plants are established. LG, the second-largest battery maker worldwide, is building six plants in North America, making this an important market for them. Our contract could amount to USD 620 million worth of cobalt over this period. That's a big deal for us. We've formed a strong relationship with them and appreciate their support. The essential goal of this arrangement is to help insulate the company and our shareholders from the volatile swings that typically characterize commodity markets. So while it's not completely insulated, the aim is to establish steady earnings that yield solid investment returns without significant downside risks. Now let's talk about Three Fires, which is an economic development agency for First Nations groups in Southern Ontario. They have a great track record in consultation and advising other First Nations. We're excited to work with them. Initially, we had planned a strategic investment, but for various reasons, we paused it. We've doubled down on the commercial side and formed a memorandum of understanding for a primary recycling business, essentially a shredding business. Within their traditional territory, several battery plants are coming online, and we aim to extend our supply chain and participate in shredding operations as well. Our work over the last quarter has focused on funding, with Three Fires taking the lead on that. They are responsible for sourcing capital while we manage the technical aspects. If you turn to Page 21, you’ll see the closed loop we are working to create. We've got the plant-scale refinery we want to commercialize and, ideally, build a shredding facility south of Toronto to capture battery scrap. This scrap can then be sent to our refinery north of Toronto for metal refining, creating a localized closed-loop system with a minimal carbon footprint due to transport. Importantly, we're not trying to buy black mass. Long-term battery makers have no intention of selling scrap only to buy it back the next day. This is about cultivating relationships and ensuring a margin-based partnership. This allows us to secure a steady supply of materials for our refinery, enhancing our business model. Additionally, integrating a black mass plant with our cobalt plant has more advantages, and as we commission the cobalt plant, we can produce battery-grade cobalt sulfate from MHP. It's a focused approach aimed at reducing risk as we gradually move towards commercial production of battery-grade products. Regarding near-term milestones, we anticipated 2023 would be challenging. However, I feel we managed our operations well compared to others in the commodity space, which is yielding positive results. Our long-lead equipment has largely arrived. To summarize, we have several milestones, including continued receipt of long-lead items and further insights from the black mass trial, along with additional government funding possibilities. For Iron Creek, we anticipate some field work and permitting plans as we look toward a 10-year plan for drilling to expedite operations in U.S. Forest Service properties.

Galine?

Our first question is from Matthew O'Keefe with Cantor Fitzgerald.

Just, I guess, my main focus here is really around liquidity. I mean, yes, you did add that financing, which has certainly helped, but your working capital position is still low given your burn. So a couple of questions on that. So one, you still have long lead items coming in, and the question around that is, are those all prepaid? Or are there still costs associated with these preordered items, these long-lead items? And two, with additional sources of financing you have—no, sorry, you have the government and you've got Three Fires group that are sort of promising some money, but we've been hearing about that for a while. So what's the holdup on, a, getting the provincial government funding; and b, the deal that we struck, I mean from what I can see, you satisfied your side of the deal, so where's Three Fires with their portion of equity financing?

Yes. With Three Fires, I think we jointly agreed to put that aside for now. I mean, I think what happened, Matt, and you'll recall, right, we were going to do 10-10 financing back in July, August. With the announcement of the LG contract extension, our book filled up quickly, and Three Fires wasn't in a position to move, so that really is in their court. Their feedback is they’d like to explore that, but the focus is on getting the commercial pieces together. The advantage I see in the short term with Three Fires is obtaining that upstream investment. If they take responsibility for sourcing the capital while we handle the technical side, it is beneficial for our shareholders. Regarding the government piece, yes, and we've talked about this before. There are several commitments from two government levels—we're close. I can look at it now as approximately $5 million aimed for us, with another potential $10 million that requires more negotiation for release. For the cobalt facility, that’s a USD 60 million situation we're working through. I feel better about our options than I have in a while regarding available funding. We've been exploring government programs, commercial partners, and trading houses. It may not materialize by the end of the year, but I am quite optimistic about what lies ahead as we approach summer.

So just to add on to that, Matt. Sorry, Matt, just to add on to that. I mean, one key thing to take into consideration from a timing perspective on the funding has to do with the completion of the re-baseline report that helped derisk the costs associated with the project. I think factoring that development has also impacted some of the timing of the release of the funding that's been committed to us. So that review process and ongoing developments have contributed to the timing issues we've experienced on the funding. So with the derisking behind us, as Trent pointed out, we hope that funding will come sooner rather than later.

And I didn't answer the first part of your question, Matt, I apologize, on the equipment deliveries. We're now at the receipt date, so no new liabilities are being incurred. The items here are all reflected in our financials as commitments, so it is really a matter of delivery. Peter and the team have focused on cash conservation, and we've had G&A reductions. That continues to be a focus into next year.

Our next question is from David Talbot with Red Cloud Securities.

You guys are continuing this black mass trial through Q4, tweaking the process in the flow sheet. When should we expect that black mass report? And then assuming it's positive, how quickly might that lead into a planned 2,500 ton per year ramp-up, assuming that's right-sized for viability?

Yes. The report is currently being worked on. I'd like to say we'll have it by the end of the year, but our immediate priorities around funding are consuming the technical team's time. So I might—Mark, correct me if I'm wrong, maybe end of January sounds reasonable for the black mass summary report?

Yes, I think that's reasonable. As Trent mentioned, some engineers working on the report are occupied with government funding initiatives. Parts of the report will be redacted due to associated IP. However, the gains we made have exceeded my expectations in terms of product quality and recovery rates. We have clearly identified further areas for optimization, which will require more capital for the 2,500 tonne per annum plant.

I'd add that the desktop study still stands, and we have several assumptions there to validate. Once the report is ready, the immediate next step will be doing a METSIM model to tend to equipment sizing. After validating the assumptions in our desktop study, we can begin detailed engineering and look at the lead times for any long-lead equipment. As you know, we won’t start construction or order equipment until we have the capital secured. We've been around this industry for a long time. When we paused construction in March, it’s difficult to solve a procurement machine when you have items being ordered and fabricated globally. We want to be cautious before we press start. The timeline shouldn’t be long, but it’s vital not to get ahead of ourselves.

Yes. Would that CapEx be included in the $62 million of the cobalt sulfate plant, or is that a bit of additional CapEx?

Yes, we treat them as discrete projects. The USD 60 million gets the cobalt plant into production, while black mass has a separate capital estimated around CAD 8 million, approximately USD 6 million. That's what we're aiming to validate with the next level of study. I don't know if we've landed on feasibility yet, but METSIM modeling and feasibility will help clarify that.

Okay. Do you have an idea of what that capital is?

Well, that is around CAD 8 million, so about USD 6 million. That is what we want to validate with the next study, whether feasibility or pre-feasibility will depend on our discussions.

And the 20 tons of MHP you sold, can you say anything about the sales price on that? I’m assuming you’re not booking revenue but applying that to capital. And more importantly, any feedback on the quality of the material you’re delivering?

Do you want to address that, Pete?

Yes, the sales price was about USD 82,000, recorded as part of the other income number.

And then the feedback from customers. Mark, maybe you can address that?

The contract with our customer indicates we exceeded the metal content, and we are well below impurity levels. We continue to work toward both goals, which has been very positive.

Additionally, we’ve received positive feedback from buyers for our MHP product, particularly since it represents a first-mover opportunity in North America. Initial conversations focused on the unique challenges our MHP faces versus traditional primary sources. As we continue to refine our process, I believe we’ll unlock more buyer interest as we expand our reach.

This concludes the question-and-answer session. I'd like to turn the conference back over to Joe Racanelli for any closing remarks.

Yes, I just want to—before we go to Joe, thank everyone for tuning in. These have been tough markets in 2023, but I like our prospects for 2024. Hopefully, we've hit peak inflation. We made some early decisions to insulate ourselves, and I think we're in a good position with most of the long-lead equipment now on-site. Remember, as illustrated in Mark's aerial site picture, the replacement value is USD 200 million with just $60 million left to complete. From a cost perspective, it’s a minor endeavor compared to building a mine, which can take a decade and billions of dollars. This is a permitted site, operational with low capital intensity, and we're poised with the commercial contracts. LG is buying 80%, and the remaining 20% is effectively sold on paper. I'm very much looking forward to our continuing efforts.

Thank you, everyone, for joining us today. If you have any follow-up questions, please feel free to reach out. We will continue to provide updates on our progress, and we'll disclose announcements as they unfold. Our next slated call for an update will likely be towards the end of February or early March as we report our year-end results. Until we speak again, good luck to everyone. For those in the U.S., Happy Thanksgiving and later, season's greetings and tidings.

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