Neometals (ASX: NMT) - Mercedes Opportunity Growing and Advancing Quickly

Neometals Limited is a mineral and advanced material company involved in the recycling, and production of high-grade lithium and vanadium. The company was founded in 2001 and is headquartered in Australia. Alphamet Management Pty. Ltd, Mount Finnerty Pty. Ltd., Reed Advanced Material Pty. Ltd., Mt. Edwards Lithium Pty. Ltd., Barrambie Gas Pty Ltd., and Inneovation Pty. Ltd (formerly Australian Vanadium Exploration Pty. Ltd.), are the companies' subsidiaries.

Matt Gordon caught up with Christopher Reed, CEO and Managing Director, Neometals. Chris started his career in the mining industry in 1990 and co-founded Reed Resources in 2001. He is a member of the AusIMM (Australasian Institute of Mining and Metallurgy) and former Vice President of the Association of Mining & Exploration Companies. His educational background includes a Bachelor of Commerce degree from the University of Notre Dame, WA School of Mines.

Company Overview

Neometals is an innovative mineral and advanced materials company focused on a sustainable future. The company seeks to de-risk and develop long-life projects with strong integrated partnerships throughout the value chain. The company was founded in 2001 and is headquartered in Australia. It is listed on the Australian Stock Exchange (ASX: NMT) and the London Stock Exchange’s Alternative Investment Market (AIM: NMT).

Neometals has observed certain delays in operations that were reflected in the share prices from September onwards. The company anticipates that this is largely due to a number of 2023 investment decisions and a lack of a steady cash flow, which leads the investors to anticipate that a capital raise is around the corner. The company did see new shareholders come into the market. It currently has 20M shares short at the moment, which is about 4% of the total shares. The change in share prices is also due to the general market malaise that has affected the industry at large. The company is looking to deliver tangible catalysts in 2023 through a set timeline.

Looking at the volume of sales and the volume of EVs (Electric Vehicles), it is apparent that the penetration rates in Europe are on the rise. There is a marked increase in domestic production capacity. In terms of volume, Europe is the second largest market for electric vehicles after China, while North America is in third place.

Neometals has 3 core businesses that are focused on green processing technologies that are used in producing battery materials. The company is commercializing these technologies with a partner. Primobius is a joint venture that is dedicated to providing recycling solutions for cell makers and car makers. Currently, recycling is a highly attractive venture to develop closed-loop, secure supply chains that reduce carbon footprint. The overarching thematic here is that recycling is compulsory. It’s now an obligation for car makers and cell makers to recycle their own products. The company has developed a flow sheet that will be used to recycle the batteries. It will produce high-purity, green battery materials that have a low carbon footprint and the lowest point on the cost curves for the products.

The company has developed a flexible business model as the recycled material is sent back to the manufacturers. It has a process in place and has SMS as a partner that is responsible for building the actual plants. It is the partner’s decision to implement a build strategy as the volume of materials that is coming back is increasing. At the moment, Neometals is providing a fully licensed waste disposal company that can handle lithium batteries in Germany, setting the highest bar from a safety, sustainability, and efficiency perspective.

In Europe, different environment ministries that comprise the EU (European Union) have agreed on setting recycling targets. Through the pilot plant, the company has successfully demonstrated its recycling capabilities. The new EU battery regulations dictate that companies need to hit 90% overall recoveries in nickel and cobalt by 2026. Furthermore, companies are expected to hit a 95% recovery for nickel and cobalt by 2030. For lithium, the recovery rates have been revised from 35% to 75%. According to the flow sheet, Neometals is yet to reach those recovery numbers. The company is transparent with regard to the progress. The company aims to be the first to be fully compliant with EU battery rigs. This would also help deliver a better product for the customers.

The company is looking to make its plant capable of achieving these recovery metrics. The plant can then be either operated by the company or it can be provided as a service or through a joint venture. Here, licensing and supply would need to comply with EU regulations.

Ongoing Operations

Internally, Neometals is working on product readiness which is when the product is ready to contract and supply the plants. This process is coming in fairly quickly. The company is looking to reach a 10t/day product readiness for Mercedes Benz in this quarter, following which it will offer Mercedes a contract and execute it. In the early next quarter, the company will be focusing on a 10t hydro-met plant for Mercedes Benz as part of the cooperation agreement. Once the engineering cost study is completed by the June quarter, the company will be offering a 50t spoke and hub arrangement for Stelco. Following this, the company will have a 30 days option to buy into the joint venture with Stelco for a cap of $1.5M.

By 2026, the company is looking to hit the new recovery targets set by the EU. The current TRL (Technology Readiness Level) for Copper is at 87%, while for nickel, cobalt, and lithium, the TRL is at 84%, 82%, and 83% respectively. The lithium requirement is the lowest because it is the most difficult element to extract among the battery metals. The company has 2 flow sheets, one is to recover lithium from the wash water at the front of the plant, and the other one is to recover lithium out of the hydro-met section. This strategy has enabled the company to future-proof the element that is the hardest to extract. By 2026, the company would need to increase the TRL of copper, nickel, and cobalt by 6%-7%. It is currently running trials in order to achieve the target recoveries as quickly as possible.

According to the company, it is theoretically possible to get the desired recoveries for the back end. This way, most of the innovation would need to be carried out on the front end. When the material is shredded at the front end, bits of the cathode are stuck to the plastic, copper foils, and aluminum foils. The company is adding friction washing to the process in order to rub off the cathode so that it can go into the leach solution. If the material isn’t picked up in the front end, it cannot be processed on the back end. This is why the company is actively tweaking the front end so that the back-end recoveries work as intended.

The company’s Mercedes Benz contract provides substantial validation from third parties. It is looking to scale up the recycling at manageable levels, going from 1t to 10t and then 50t capacity, eventually aiming at a 500t plant. The economies of scale will help further bring down the processing costs.

Mercedes Benz has requested a few changes to the process. One of them is in the front part of the plant where the discharging and disassembly of cells is carried out. It needs to account for more modules coming back. The cells that go into cars are generally smaller in size. As Mercedes Benz makes the cells, the production is modeled at about 10%. However, historical figures show that it is higher than 10%. The company anticipated that it would take some time to get onto the modules, but Mercedes Benz asked it to develop discharging and disassembly for whole modules into the scope of the plant. This is great news for the company as 70% of the fee that is charged at the Hilchenbach plant comes from modules. At the same time, this is expected to increase the number of processes, resulting in higher costs.

Inflationary Pressures

Global inflation has caused an increase in costs. The need for higher lithium recoveries has coincided with the increase in lithium market prices. Meanwhile, the nickel prices have stayed largely the same, while the cobalt price has been softer. Looking at the Neometals’ delta in terms of previous revenue growth, the company is assuming it at a certain top cathode. The company is taking these changes into consideration and multiplying them with the recoveries and the market prices. Essentially, the increase in costs is offset by the increase in recoveries, which leads to a net gain. Scaling up the operations will further improve the cost metrics for the operations.

Neometals has partnered with SMS to build the plants. It will begin operations with a 10t plant, and increase the capacity to 50t and eventually 500t. SMS is looking forward to building more plants that are bigger in size. The company has a flexible business model which is targeted toward increased volumes.

As part of the process, Neometals is in active discussions with the car makers and cell makers to work out the increase in volumes over time, taking into consideration both the high and low cases. Following this, the company mapped out the size plans, modeling the centralized hub and multiple spokes. The makers are then provided a CapEx (Capital Expenditure) and the NPV (Net Present Value) to devise a strategy going forward.

In the earlier stages, the car and cell markers are buying cells and making their own modules that go into the electric cars. During this process, a limited amount of scrap is generated. Here, Neometals is mainly getting back the modules in smaller volumes. These modules can then be processed for a fee, adding revenue to the cash flow.

All car markers are eventually looking to produce cells on their own. A lot of European car makers have announced plans on installing dedicated plants next to the cell-making facilities, generating a constant fee-based revenue, especially for higher grades. The company is prepared to share the economics.

Once it reaches its highest volume, recycling becomes a new impost on the carmakers, bringing in a new cost. As a result, the company needs to provide car makers with a pathway to the lowest total cost of recycling. Ultimately, the company isn’t looking to tie up billions of dollars in working capital for the really large-sized plants. It is looking to supply the plants and license the technology instead.

The company has modeled the sizing of the plant off a 35 Giga Watt factory at a 10% scrap rate that needs about 50t material on a daily basis, despite having a 20,000t capacity. Interestingly at the original Tesla Giga factory, it took Panasonic 5 years to get the scrap rate below 20%. It is important to note that cell makers have never made batteries at such high volumes before. Achieving this isn’t an easy job and not everyone can do it. Since there are different classes of batteries, manufacturing becomes increasingly challenging. The company is happy to invest and share the economics.

Neometals has built commercial capacity into the demonstration plant as it was conscious that the plant would be built. By 2030, the amount value of recoverable materials in batteries is projected to reach €600Bn. In gold equivalent terms, it is around 300Moz gold lying around plus a grade of 4oz-5oz to the ton. The €600Bn value is expected to grow by €100Bn each year.

The company has very high conviction about the fundamentals of the three core processing technologies. In the near future, there will be more EVs and cells, which would lead to more generated scrap, requiring addition to the end-of-life solutions. The company isn’t worried about the market, instead, it is focused on having a solution and a partner that could bring it and use exclusive access to Neometals’ technology to build as many plants as possible.

The company did not anticipate that the market needs for recycling would grow so quickly. It has both a public and a private pipeline. Once the company starts delivering into Mercedes and Stelco, it plans on taking a cookie-cutter approach. SMS Engineering, Neometals’ partner can build the plants as needed, while Primobius and the other joint venture partners will supply the plants to customers.

The Vanadium Business

For the Vanadium business, Neometals is producing the largest amount of high-purity material into a market supply for the top end. This includes the lithium vanadium cathode chemistry and the vanadium redox flow battery electrolyte. The company believes that putting the titanium master alloys into steel would be a waste. It has the liquidity to invest in the projects and generate strong revenues. The company will turn the waste product into battery materials, sequestering carbon so that it can be supplied to Scandinavia at the bottom end of the cost curve. The company hasn’t carried out any modeling for the by-product. This is because the product will have synthetic limestone going into it.

In order to prove the attributes of the technologies, the company needs to carry out qualitative and quantitative studies for the customers. This way, the company can deploy the technology either on its own, through partners, or by way of licensing. The company has developed the ELi technology with Mineral Resources for 10 years. This technology will shift the cost curve of lithium production on lithium producers that choose to adapt.

The company plans to carry out a class three engineering cost study, which is expected to be published in the June quarter. This study will highlight the CapEx and OpEx (Operation Expenditures) for an operation that utilizes ELi technology. The company is also looking to build a plant with Bondalti. It will consider buying the latter’s intermediate and processing the material on its own or through new producers by way of licensing. In Europe, the company would need to do this on an exclusive basis.

Neometals anticipates that there are going to be several catalysts this year. Over the next 6 months, people will get a better sense of economics from a valuation perspective. Essentially, the company is trying to conclude the SSAB supply and additional volumes, finding the shareholders agreement and tech licensing to take 50% of project ownership. The results of the Feasibility Study will be based on these metrics. On the capital front, the company is earning 50% through an incorporated joint venture. The asset can help procure its own finance. The company is currently running a debt financing process for the project and the project vehicle. The shareholders have the option to invest their own money, however, the company also has the option to bring in additional capital through third parties. Here, the company would need to show the potential funders that it would take about 12-18 months in order to qualify for the battery application. The vanadium market price that was put into the model is based on the fast market price. This pricing is for Europe and it is on a delivered basis.

The investment decision for ELi will be made by mid-2023, while the battery recycling with Stelco is a September quarter proposition. The company needs to find the shredding spoke and determine its own share in the shredding spoke. If the Board does not resolve, the company will be getting a 10% royalty off of Stelco. Following this, the company will invest its own share.

Later in the year, if the company goes to the market, it will be looking to scale up a profitable business that would invest in a spoke. The plant is expected to be twice the size of the Hilchenbach plant. The Hilchenbach plant is licensed to run at less than 10t a day capacity, and the company can run it at 1t an hour. Running a 50t Hilchenbach plant side by side comes with technical risks that are highly manageable. The company has an obligation in the shareholder's agreement with SMS to produce on a best endeavor basis at 50% project finance. The company does not plan of running the numbers around that. Essentially, each investment decision in Primobius will be towards building another plant.

The increase in processing capabilities will be incremental in nature. For Mercedes Benz, the company will be increasing the plant capacity from 10t to 50t. The company is providing Mercedes Benz a license for a 10t plant, which is small in size. While the licensing would be royalty-free, the company would still need to teach recycling to Mercedes’ team. At the same time, Mercedes Benz would share all the latest cells, formats, and chemistry with Neometals. Following this, the company will work on providing an industrial solution for one of the world’s leading car makers.

Neometals is currently processing some of Mercedes’ material at the Hilchenbach plant in Germany. Eventually, Mercedes is looking to develop in-house processing capability through its own plant, where it would take scrap from commerce. Mercedes is also looking to build its own cell plants.

It is important to note that Mercedes Benz is an investor in ICC, but at the same time, the company is also interested in building its own plants for recycling solutions. The company is going to need 50t plants. By 2023, Mercedes Benz is aiming to develop a 200 GWh (Giga Watt hour) cell-making capacity, which is 900,000t of batteries. In order to achieve this, the company would need a 500t a day plant at some stage in the next decade. The company would likely need five 500t plants.

Neometals’ ongoing studies will provide all the required tools to value the three core businesses. Furthermore, the company will also provide clarity on the strategy for its remaining business. Neometals has shown the propensity to de-merge and distribute a business back to the shareholders. This helps it maintain the company’s reputation of making money and sharing it with the stakeholders.

For the vanadium business, the company has the optionality to either spin it as a separate listed entity or operate it privately through the acquisition of new capital. The company is structuring its businesses in a way so that they will sit in special-purpose vehicles.

Widgie Nickel

Widgie Nickel (ASX: WIN) is a unique consolidation of a vast 240 square-kilometer package of highly prospective nickel and new economy metal prospects within the prolific Eastern Goldfields nickel sulphide belt.

Neometals believes that Widgie Nickel is unappreciated in the market. The asset is a nickel mine that will reach a production decision by the end of the year. The asset features fantastic lithium prospectivity. Neometals has given the asset back to the shareholders which continue to hold their shares. Recently, some oxidized material was discovered at the surface as well. The asset is on granite mining leases and it has a robust infrastructure comprising the national highway and rail that run through the asset, connecting it to a port.

For lithium exploration licenses, a company needs to prove that there’s sufficient material present, prove the project economics, put down a mining lease, and negotiate with the First Nations people. Neometals has extensive experience in carrying out these processes. Since the asset has a strong infrastructure, it helps in reducing the overall operating costs.

There are other lithium makers that are similar to Widgie Nickel. BHP Billiton has an under-utilized lithium concentrator. In case the equipment is sold, it will be the shortest part of commercialization.

To find out more, go to the Neometals website