Electra Battery Materials Focused on Near-Term Cobalt Refining Amid Tough Markets

• Electra is a North American focused cobalt refiner, currently building a refinery and advancing battery recycling trials
• Inflation and market conditions forced Electra to slow construction and focus on non-dilutive funding
• Electra has an off-take agreement with LG for 60-80% of refined cobalt production
• The company aims to resume construction in Q2 2024 once new funding is secured
• Future plans include expanding into nickel refining and battery precursor production

“Ready to Execute” on Near-Term Production Once New Funding Secured

Electra Battery Materials, a North American focused cobalt refiner, has faced significant headwinds this year that forced the company to adjust its strategy. However, with its permitted facility already halfway complete, an off-take deal with LG Energy, and potential new government funding possibilities, Electra aims to resume construction in 2024.

The cobalt refining startup has struggled amid a “terrible year for the industry,” said CEO Trent Mell, with commodity prices falling even as inflation has driven up Electra’s construction costs. “It was build build build off an existing permitted refinery...[but] since March it has been okay let's slow down the Cobalt build, let's run our recycling demonstration plant because that's lower dollars and and let's focus on a non-dilutive funding Solution to get the balance the capital in place,” Mell explained.

Interview with Chief Executive Officer, Trent Mell

Pausing Mid-Build

Electra broke ground on its cobalt refinery in late 2021. Located north of Toronto, the facility will leverage an existing site and infrastructure valued at nearly $200 million. An additional $160 million is budgeted to complete the project.

Initially, the company was fully focused on fast-tracking construction. But then “inflation hit levels that I haven’t seen since I was 10,” said the CEO. Key inputs saw extreme price hikes over a short period, with piping up 50%, labor and steel costs rising significantly, and overseas shipping rates increasing six-fold. Facing unsustainable cost increases, Electra made the tough decision in March 2023 to pause construction efforts. The company has used this time to shift focus, advancing work on its battery recycling plant and attracting new potential funding partners.

Government Backing Could Unlock Funding

While commodity price weakness has slowed industry investment, government policy support for domestic battery supply chains is heating up. “27 government investments” have been made in the US battery space just this year, Mell noted.

With its Canadian cobalt facility already permitted and halfway complete, Electra may be positioned to benefit. Discussions are underway that could provide “largely non-dilutive” funding solutions to restart and complete construction.

The recent Inflation Reduction Act in the US also brings incentives for domestic EV supply chains. As Mell stated, “Our main asset is in Canada and initially you had that sort of sucking sound of capital interest and investments into the US and that's starting to rebalance.”

Well-Structured LG Off-take Agreement

Though market conditions have been difficult, Electra has maintained an off-take agreement with LG Energy Solution for up to 80% of its future refined cobalt production.

The agreement provides both volume commitment and price protection. As Mell explained, “The reference price on cobalt is stated at the same point in time so it’s an efficient operation...There’s a floor and there’s a bit of upside participation.”

Once ramped up, he projects $40-43 million in annual revenues from cobalt refining alone. At standard chemical industry multiples, 5-10x earnings, that suggests the potential for a $200-400 million market capitalization for Electra.

Near Term Plans

The company aims to resume construction at its cobalt refinery in Q2 2024. Key prerequisites include finalizing additional funding streams and completing some remaining procurement. Mell stressed that with detailed engineering complete, the main work ahead is just “piping, instrumentation, electrical work” along with hiring and training additional staff. He expressed confidence that “once you have the money, you’re executing.”

When asked what the big to-do for next year is, Mell emphasized securing funding. “We feel pretty good on timeline and capex,” he said. “Money comes in, then you got to negotiate the contract and terms around that and the releases, and then it’s just remobilizing the team.”

In the long term, the company is also advancing battery recycling capabilities and sees possible expansion into nickel refining. “The nearer-term growth opportunity is going to be a black mass,” Mell noted, referring to recycling battery materials. Ultimately, Mell aims for Electra to be “a refiner,” not just a cobalt company. The large 600-acre site already has room for expansion. In addition, the Quebec government “has invited us to build a second [refinery] with some pretty hefty subsidies,” though concrete plans remain years away.

The Investment Thesis for Electra Battery Materials

• Permitted Canadian facility already halfway built, lowering the risk
• Inflation forced a pause, but construction ready to resume with funding
• Attractive margins locked in through LG off-take agreement
• Possible government support and strategic partners could provide non-dilutive funding
• Plan to start battery recycling operations in the near future while the cobalt facility completes
• Proven management team that has stayed nimble through volatile market conditions

After inflation derailed original construction plans, Electra Battery Materials has worked diligently over the past year to cut costs, advance new projects, and attract potential funding partners. With cobalt markets projected to tighten in coming years, the company appears poised to benefit from rising prices once its refinery comes online. Attractive off-take agreements and possible non-dilutive funding also set Electra apart from struggling peers. If additional financing can be secured as planned in early 2024, the company looks ready to rapidly advance the commissioning of its permitted Canadian cobalt refining facility.