Neometals Considers Royalties Over Ownership Model in Changing Market Conditions

• Neometals has made a new lithium discovery from a historic dataset, adding upstream lithium assets to the portfolio
• The core focus is still on the battery recycling business and Mercedes plant
• Adapting strategy in weak market; tech licensing model to minimise risk
• Lithium chemicals and vanadium projects slowed but still have options with partners
• Targeting royalty revenue streams; sees superior returns for shareholders

About Neometals

Neometals specialises in the development and commercialisation of sustainable processing technologies for the extraction of critical materials. The company's focus is on servicing the lithium-ion battery and renewable energy storage markets. Through partnerships, Neometals demonstrates the economic and environmental benefits of producing battery materials such as lithium, nickel, cobalt and vanadium from recycling and recovery processes rather than traditional mining.

The proprietary technologies pioneered by Neometals enable the production of high-purity critical materials at low costs and with a minimal carbon footprint. This supports the creation of circular supply chains to service the global energy transition. The company commercialises its technologies via joint ventures and licensing models. Neometals' core business units concentrate on lithium-ion battery recycling, lithium chemicals production and vanadium recovery from steelmaking by-products

The Company has unveiled a shifting strategy to navigate difficult market conditions while positioning itself for an upswing. In an interview, Neometals CEO Chris Reed outlined the company's plans, including a new lithium discovery, an ongoing focus on its core battery recycling business, and an increased emphasis on a technology licensing model to minimise risk.

Interview with Managing Director, Chris Reed

Promising New Lithium Discovery

Reed announced that Neometals has uncovered significant lithium mineralization at one of its nickel exploration projects in Western Australia. He explained, "We were alerted by actions of our neighbours that a legacy nickel project indeed had some potential for lithium."

The company reviewed historical records and identified pegmatites - igneous rock formations often containing lithium minerals - had been intersected by past exploration drilling for nickel across the 55 sq km tenement. Neometals re-logged 11 of 29 historical drill cores stored on site and conducted analysis using portable X-ray fluorescence (XRF) technology. The results confirmed multiple intersections of spodumene, a lithium-bearing pyroxene mineral. While no lithium assays had previously been conducted, the discovery of spodumene in the cores suggests strong potential for significant lithium grades.

Reed noted the geology is analogous to the Mt Marion mine, one of the world's largest hard-rock lithium operations. The project's location on a major regional fault structure known to host lithium pegmatites adds to the prospectivity. With the initial discovery made simply by re-logging historical drill cores, Neometals sees strong potential for additional discoveries. The company has identified 13 surface pegmatite bodies along 8km of strike that have never been drilled, providing numerous walk-up targets to expand the find.

While early stage, Neometals sees the potential to quickly outline an economically viable lithium deposit at minimal cost. Reed highlighted the extremely low discovery cost as a huge advantage, with the company avoiding expenses on speculative grassroots exploration. With Neometals' core focus on battery recycling, Reed indicated the company can advance exploration at a prudent pace. However, the discovery provides significant upside potential without material financial commitments in the near term. Drill testing high-priority targets could rapidly delineate a substantial maiden lithium resource for minimal expenditure.

Battery Recycling Remains Core Focus

Despite the promising new lithium discovery, Reed emphasised the company's core focus remains commercialising its proprietary lithium-ion battery recycling technology. He highlighted, "Our core business is delivering the Mercedes-Benz plant," referring to a battery recycling facility Neometals is building for the German automaker.

The 10 tonnes per day plant, set to begin commissioning in 2024 in Germany, will provide a real-world demonstration of Neometals' recycling process at a commercial scale. The company will supply the plant to Mercedes-Benz under a fixed-price contract, enabling Neometals to showcase and de-risk its technology with a leading electric vehicle manufacturer.

Reed explained that being able to demonstrate its process with an established high-quality partner like Mercedes helps validate the technology and supports Neometals' efforts to sell additional battery recycling plants to other customers. Mercedes' continued involvement also provides confidence, as its team will be closely evaluating operational and economic performance. Importantly for Neometals, Reed noted the company will retain ownership of any operational improvements and recycling IP developed during its collaboration with Mercedes. This will allow Neometals to market future iterations of the technology without restrictions.

The initial 10-tonne per day plant will be a starting point, with Neometals holding ambitions to scale up capacity significantly. Reed outlined plans to eventually supply facilities with 200,000 tonnes per year of recycling capacity, targeting the 10-20 million tonnes per year of lithium-ion battery cells expected to be reaching end-of-life by that stage.

While Reed acknowledged that producing battery-grade chemicals has been the most challenging aspect of the recycling process, he reported that Neometals has now successfully generated battery-grade nickel and lithium hydroxide. The company is also confident it will soon finalise the process for battery-grade cobalt. Solving the chemical purity challenges paves the way for the planned Mercedes facility. With lithium prices down roughly 70% from their peak last year, the ability to recycle lithium at the bottom of the global cost curve will provide Neometals an important competitive edge with its recycling technology. The company anticipates its first recycling revenues by 2025.

Adapting to Market Conditions with a Licensing Model

With lithium prices down approximately 70% from last October amidst industry-wide weakness, Reed outlined an increased emphasis on minimizing risk by licensing Neometals' proprietary technologies rather than developing projects on its own balance sheet.

"In this current market, the low capex, low-risk method is just to license the technology, don't put in capital," he stated. The approach allows Neometals to commercialize its technologies while avoiding major capital outlays. Reed highlighted this strategy has helped advance projects like the Mercedes recycling plant and a lithium chemicals pilot plant without large upfront investment.

Slowing, But Not Halting, Other Projects

While Reed indicated Neometals is pivoting to a more conservative stance in the current market conditions, he clarified the company has not abandoned its other mining and extraction projects, even if it has slowed development timelines.

He highlighted the Barrambie titanium project in Australia as an example. Neometals has completed extensive pilot testing and feasibility studies on a proprietary process to produce high-grade titanium and iron powders from this resource. However, after potential off-take partners refused proposed equity investments, Neometals has halted spending on a bankable feasibility study. But Reed emphasised that Barrambie remains a strategically significant asset. With titanium demand projected to grow and few large-scale undeveloped resources, he believes the project can still create value for shareholders. Neometals is maintaining the project on minimal budgets until market conditions improve or new partners emerge.

Similarly, Reed noted the company's proprietary lithium chemical production process being piloted in Portugal with partner Bondalti remains active, despite cautious spending. With the first half of piloting complete and demonstrating positive results, Neometals has slowed matching Bondalti's capital contributions as originally planned. However, Reed stated the company can fund its limited portion of remaining pilot expenditures from existing cash reserves. He highlighted that if the next phase succeeds as expected, Bondalti will fund the majority of costs to complete the piloting. This preserves the project's upside potential with minimal near-term risk.

While Reed acknowledged the challenges of balancing various projects amid volatile markets, he asserted Neometals retains optionality across its portfolio. The company has focused spending on core initiatives like the Mercedes recycling plant while keeping secondary projects ready to advance once conditions improve.

Targeting High-Return Royalty Revenue

A key element of Neometals' strategy is building a portfolio of royalty revenue streams from licensing its proprietary battery recycling and extraction technologies.

Reed explained this approach aims to generate strong returns for shareholders by creating recurring cash flow tied to production, rather than relying solely on commodity price appreciation. He believes the royalty model avoids the risks of capital intensity and instead translates into higher valuation multiples. As an example, Reed highlighted Lithium Royalty Corp, a company focused purely on royalties from lithium projects. Despite being pre-revenue, it trades at a price-to-earnings ratio of 69x, underpinning the value ascribed to lithium royalty exposure.

Reed expects Neometals to realise higher multiples than typical mining projects as its recycling and extraction plants ramp up. With lithium prices projected to rise over the long term due to surging battery demand, Neometals' percentage-based royalties should capture a significant upside. With multiple royalty streams across several commodity plants, Neometals aims to mitigate downside risks. Reed noted the diversity across lithium, nickel, cobalt, and other battery materials prevents overexposure to a single commodity.

The royalty model aligns with Neometals' capital-light technology licensing strategy. By maintaining ownership of its IP while outsourcing plant capital costs, the company avoids dilution from large capex requirements. This positions Neometals to potentially realise substantial gains as partners commercialise its technologies. While Neometals' shift toward a royalty focus means delayed cash flows compared to mine development, Reed maintains it can ultimately deliver higher risk-adjusted returns for shareholders. With potential plants carrying 5-10% gross royalty rates, small increases in production could drive significant royalty revenue upside.

The Investment Thesis for Neometals

For investors evaluating lithium exposure, Neometals offers a unique approach compared to traditional lithium mining stocks:

• New Lithium Discovery Provides Optionality: The early-stage spodumene discovery creates a potential upside without the need for near-term material spending. Successful exploration could add low-cost resource upside.
• Core Recycling Business Advancing: The Mercedes recycling plant provides a showcase for Neometals' proven process, with revenue generation on track by 2025. Additional plants should drive royalty income.
• Capital-Light Model: Adopting a licensing model for its technologies limits dilution risk while allowing commercialisation with partners' capital.
• Focus on High-Return Royalties: Building a portfolio of royalty revenue streams should translate into higher valuation multiples than capital-intensive mining projects.

Neometals aims to navigate challenging lithium market conditions by advancing its core recycling business while limiting spending. If lithium prices recover, its capital-light licensing model provides torque for significant royalty revenues from proprietary technologies. For investors open to an alternative approach, Neometals offers leveraged upside to an electric vehicle battery boom.

With lithium prices under pressure, Neometals has pivoted to a licensing model for its recycling and extraction technologies while making a promising new Australian lithium discovery. CEO Chris Reed believes adopting a capital-light strategy focused on recurring royalty revenue can reward shareholders without excessive risk. If Neometals can execute its plans, it may emerge strongly positioned to capitalise on a rebound in the lithium market.