The Future Outlook for Battery Metals Looks Good for Investors

• Battery metal focused CEO's Eric Zaunscherb (Critical Elements Lithium), Terry Lynch (Power Nickel), and Brandon Yurik (Electric Royalties) discuss the challenges and opportunities in the lithium, nickel, copper, PGM and royalty sectors.
• Despite recent lithium price volatility, the long-term demand outlook remains strong, driven by EV adoption and energy storage needs. Nickel and copper also face constrained supply and growing demand.
• While funding has been difficult in a risk-off market, the companies are staying frugal, pivoting strategies as needed, and believe a turnaround is imminent as battery metal fundamentals reassert.
• Power Nickel made a significant new copper-PGM-gold discovery at its Nisk project in Quebec which could be a "category killer." Critical Elements Lithium aims to make a construction decision on its Rose lithium project in Quebec this year.
• Electric Royalties provides diversified exposure to clean energy metals through 71 royalties across 9 metals, with several royalties potentially starting to pay in 2024. The company believes it is significantly undervalued.

Introduction

The global transition towards electrification and decarbonization has put a spotlight on the critical metals required to manufacture batteries for electric vehicles (EVs) and stationary energy storage. Lithium, nickel, copper, cobalt, manganese, graphite and other battery metals have seen dramatic price volatility in recent years as the market attempts to calibrate explosive demand growth forecasts with limitations and bottlenecks on the supply side.

While spot prices for some key metals like lithium have retreated from record highs over the past year, the consensus view is that structurally higher prices will be required to incentivize the massive supply response needed to keep pace with demand. However, this has not yet translated into improved sentiment for battery metal explorers and developers, many of which are trading at deep discounts to their underlying asset values.

Panel with Eric Zaunscherb, Chairman of Critical Elements Lithium, Terry Lynch, CEO of Power Nickel & Brendan Yurik, CEO of Electric Royalties

Lithium: At an Inflection Point?

Lithium prices soared by over 500% from early 2021 to late 2022 on the back of explosive EV demand, propelled by the post-pandemic reopening in China, generous subsidies in Europe, and the rollout of EV manufacturing capacity in North America. However, the rally reversed abruptly in late 2022 as COVID-19 lockdowns in China undermined demand and recession fears grew.

However, Chairman Eric Zaunscherb believes the lithium market is bottoming and poised for renewed strength: "We're already seeing a bottoming of the market in terms of the spot [prices] that everyone follows, even though that spot lithium pricing is not representative what goes on in the market - that's better represented by the realized prices of the producers and recently some auction prices that have seen a huge differential from the $8-900 per ton that in that the spot market is quoted at, versus the auctions coming in at $12-1300 per ton."

He noted that despite some sluggishness in the US and Europe, global EV sales were up 21% year-on-year in Q1, driven by 31% growth in China. Canaccord Genuity estimates that 236,000 tonnes of lithium carbonate equivalent (LCE) supply has been removed from the 2024-27 period due to project delays or cancellations in response to the lower price environment.

Critical Elements believes its Rose Project in Quebec is well-positioned to help fill the lithium supply gap, with a definitive feasibility study outlining a 17-year mine life producing an annual average of 158kt of 5.56% chemical grade spodumene concentrate for the battery industry, and 46kt of 6.16% technical grade spodumene for the glass and ceramics industry. The company is finalizing project financing and aims to make a construction decision this summer.

The high purity of Rose's spodumene concentrate could command a premium price from buyers, as Zaunscherb explained:

"We've got one of the highest purity, low iron oxide and low mica projects globally, which makes it amenable for use in the glass and ceramics industry, and why that is important is because it's a premium product and you attract about 100% premium for that product, which has a huge impact on your margin."

Nickel: Significant New Discovery for Power Nickel

While the LME nickel price is down over 40% from its March 2022 peak near $50,000/t, CEO Terry Lynch argues that the market is differentiated between Class 1 nickel used for batteries trading at a premium in Europe and North America vs. lower-grade material prevailing in the seaborne market that's dominated by Indonesia.

He believes that nickel miners in Canada are relatively insulated from the price volatility, especially after the passage of the Inflation Reduction Act (IRA) in the United States that includes strict sourcing requirements for battery metals to qualify for EV tax credits.

Power Nickel may have made a timely discovery of a new high-grade nickel-copper-PGM-gold zone called Lion Zone at its Nisk project in Quebec:

"We've had this amazing discovery which will soon learn about and that's going to give us a totally different valuation approach that will be a different game changer for us [...] this discovery as it unfolds as the assays come out is a category killer, it's really going to be impressive, this is one of a kind."

The Nisk project is being advanced in partnership with mining technology group CVMR, which is completing a feasibility study on a potential refinery that could allow Power Nickel to produce finished nickel and cobalt products for the battery market. This could allow the company to capture more margin and potentially accelerate development compared to a conventional mine-first approach.

Electric Royalties: Diversified Exposure to Clean Energy Metals

For investors looking for torque to a rising battery metals tide without the concentrated risks of an individual developer, royalty and streaming companies offer an attractive value proposition. CEO Brendan Yurik explained how Electric Royalties has quickly assembled a portfolio of 71 royalties across 9 clean energy metals and 31 projects operated by third parties:

"First, let me say I think for me at the very beginning of starting this company, the first 10 years of my career in the mining space basically taught me that mining is a very risky game. And so I don't know if I'd play it any other way than being a royalty company where we're now going to be diversified across 71 assets, 9 different clean energy metals, and we're not on the hook for development costs, capital costs, any of that stuff."

Looking ahead, Yurik sees potential for several portfolio assets to start generating cash flow in 2024: "We have some royalties in our portfolio like Battery Hill [manganese] where we expect that's going to payout over C$7 million a year for 50 years. Here our valuation is less than C$30 million, so I definitely think we're an undervalued company right now. We've got a lot of good news that should be coming out this year - there's four different royalties in our portfolio which could come back into production this year."

The Investment Thesis for Battery Metals

• The market is at a positive fundamental inflection point for battery metals - demand is recovering but supply is constrained, supporting higher prices.
• Look for developers with high-quality projects in stable jurisdictions with access to renewable power and transparent permitting processes.
• Focus on companies that are well-funded and have experienced management teams with track records of creating shareholder value.
• Consider royalty companies for diversified exposure to the battery metals theme without the high capex and operating risks of mine development.
• Don't try to time the market perfectly - valuations are attractive but battery metal equities could fall further in a recession. Take a staged approach and add on weakness.

Company Profiles

Critical Elements Lithium (CRE.V)

Critical Elements' flagship Rose Lithium-Tantalum Project in Quebec is one of the most advanced large hard rock lithium projects globally. A feasibility study outlined a 17-year mine life producing 173,000 tonnes of spodumene concentrate annually. The high purity of the concentrate could command a premium price. The company is finalizing project financing and aims to start construction this year.

Power Nickel (PNPN.V)

Power Nickel is advancing the Nisk nickel sulfide project in Quebec in partnership with mining technology group CVMR. The company recently announced a high-grade discovery in the new Lion Zone which returned 0.60 m of 24.3 g gold, 5.7 g silver, 5.29% copper, 3.26 g palladium, 0.29g platinum, and 3.31% nickel. Upcoming assays could be a major catalyst. In addition, CVMR is completing a feasibility study for a stand-alone refinery which could allow Power Nickel to produce finished nickel and cobalt products, potentially accelerating the timeline to production.

Electric Royalties (ELEC.V)

Electric Royalties provides diversified exposure to clean energy metals through a portfolio of 71 royalties across 9 metals. Several portfolio assets have potential to begin paying royalties in 2024, including the Battery Hill manganese project in New Brunswick (C$7 million per year), the Penouta tin-tantalum mine in Spain, the Middle Tennessee zinc mine, and the Authier lithium project in Quebec. Despite the quality of the portfolio, the company trades at a deep discount to the NPV of its royalties, suggesting significant potential upside as the battery metals market recovers.

Conclusion

The roundtable discussion with the CEOs of Critical Elements Lithium, Power Nickel and Electric Royalties underscored that battery metal fundamentals are at a positive inflection point, with demand recovering just as supply is tightening. While equity valuations are depressed, the disconnect with the underlying value of battery metal projects is unsustainable and creates a compelling opportunity for investors.

The challenge is to separate the quality projects and management teams from the marginal ones. Critical Elements and Power Nickel are advancing high-grade, large-scale lithium and nickel projects in Quebec with the potential to be developed in an accelerated timeframe. Meanwhile, Electric Royalties offers diversified exposure to the battery metals theme through a portfolio of advanced-stage royalties.

While risks remain, including recession or renewed COVID lockdowns in China, the panelists were unanimous in their view that battery metal prices and equities are bottoming and poised for recovery as the unstoppable force of electrification collides with the immovable object of supply constraints.