Electra Battery Materials: All Aboard (OTCMKTS:ELBMF)

In my last article on Electra Battery Materials (OTCQX:ELBMF), I outlined how the company was making steady progress towards commercial operations beginning at the end of 2022. Many readers asked me how come the company was so cheap, or at least why was it seemingly shunned by institutional investors?

Back in February, with less than 12 months before the hydrometallurgical refinery would start producing 5,000 tons of cobalt sulfate commercially, there were scant institutional investors: the CEO held more of the float than all institutional investors combined. That has changed and will change ever more. But first, let’s look at the progress the company has been making.

Electra steadily progressing

Regulatory requirements and permitting

Electra has been making steady progress since the publication of my last article. A critical plan for the refinery’s end of life was approved by the government, giving one of the last regulatory green lights and enabling the company to continue and accelerate construction. This latest approval keeps Electra on track for commercial production of Phase I to begin at the end of 2022.

Construction of the cobalt refinery has begun with foundations being poured for the solvent extraction building. The building is expected to be complete by the end of this month. Once cobalt is dissolved, it needs to be crystalized into a solid. Equipment for this is expected to arrive on site before the summer. Milestones are steadily being passed and this increases confidence that Electra will meet its Phase I goals in a timely manner and on budget.

Partnerships

Electra was exploring a partnership with mining giants Glencore (OTCPK:GLCNF, OTCPK:GLNCY) and Talon Metals (OTCPK:TLOFF), and the Government of Ontario. The partnership is to study the construction of a nickel sulfate refining plant, as well as a factory for precursor cathode active materials (PCAM), which is one link downstream from the refining operations in the EV battery supply chain. This agreement for joint studies makes steady progress in Phase III and Phase IV of Electra’s strategy. Initially, the partnership was to raise $700,000, with $250,000 each from the Ontario government and Electra, and $100,000 each from Talon and Glencore.

A few days later, the Government of Canada announced it would also contribute $250,000 to the study, not only deepening the scope of the studies but also marking the commitment by a higher level of government. As we will later see, the Government of Canada, along with the Government of the United States, is accelerating its efforts to rejig the supply chains for EVs and is investing accordingly. This supports companies like Electra by lowering their development costs.

Having the full weight and support from Canada for our ambitions is a clear message to the market that Electra will play a significant role in the evolution of the North American automotive supply chain as the transition to electric vehicles continues. Partnering with Canada, Ontario, Glencore and Talon on this study provides a clear path towards subsequent implementation of the Battery Materials Park project. It is essential for a low-carbon future that we process materials to battery grade specification here in North America.

Michael Insulan, Vice President, Electra Battery Materials

Vertical Integration

The partnership announcement to advance Phase III and Phase IV of Electra’s strategy is a welcome development that shows the wide support to re-shore the supply chain in North America.

Moving up one link in the supply chain from Electra’s refining operations to its mine in Idaho, the company has also been making steady progress. Drill results were recently published which showed that the Iron Creek property most likely has a substantial amount of high-grade cobalt. The drill results uncovered the high likelihood that cobalt deposits are greater than estimated from previous explorations of the property. As Electra keeps drilling, it keeps finding high-grade cobalt mixed with copper. The latest drilling intercepted areas with 0.51% cobalt present on a 1.5m width. More technical details may be found here. The drilling results support hope that more cobalt will be found within Electra’s property.

NASDAQ Listing

The company’s shareholders approved of a reverse-stock split at a meeting in December 2021. The 18:1 reverse-split, which the company calls a “consolidation,” will occur on April 11, 2022. Stock splits and reverse stock splits do not change the fundamental value of the company, since all that changes is how large a slice of the equity value of the company is represented by each share. So why is this important? Because the reverse stock split will increase the price of each share, vaulting the company out of the penny stock category. This, in turn, will allow the company to satisfy one of the several requirements for listing on the NASDAQ, in particular the minimum initial share price of US$4.

By listing on the NASDAQ, shares of the company would cease to trade over-the-counter on the OTCQX. (What is the OTCQX?) Institutional investors are often barred from staking positions in stocks trading over-the-counter by their investment mandates. Those that are not are often shy to do so because of a relative dearth of liquidity and less stringent reporting requirements than on major exchanges. Although the listing is not yet complete, the company’s reverse-stock split advances towards this goal which it hopes to meet by the end of April. Listing on the NASDAQ would enable the company to tap into a much larger pool of capital than the ones available in the TSX Venture and OTCQX markets. The mark-to-market value of the company’s shares depend on the last price paid for them. Given that many investors are unable to participate in the market for the shares, demand for the shares is suppressed and it is very likely that the shares do not reflect all the information available, such as the start of commercial operations in the next eight months. By listing on the NASDAQ, the constraints on demand for the company’s shares would be loosened and I expect the effective demand for them to increase following a listing. This translates to an expected increase in share price, all things being equal.

De-risking

Critical Minerals For National Security

Both the Canadian and American governments are increasing their commitment to securing supply chains of critical minerals. Both governments have been publishing critical mineral lists for years. However, the issue of critical minerals has taken a greater importance as a confluence of forces from ESG considerations to national security reinforce each other in policymakers’ preoccupations. The Canadian 2022 budget contains an explicit mineral strategy (p.65-70) that aims to support green critical mineral projects, exactly where Electra stands. The Biden Administration conducted a review of supply chains last year and found that they posed a national security threat.

[The] supply-chain assessment found our over-reliance on foreign sources and adversarial nations for critical minerals and materials posed national and economic security threats.

The White House in a February 22, 2022 press release

The US Government is also now leaning on the Korean-war era Defense Production Act to “secure a reliable and sustainable supply of such strategic and critical materials. The United States shall, to the extent consistent with the promotion of the national defense, secure the supply of such materials through environmentally responsible domestic mining and processing; recycling and reuse; and recovery from unconventional and secondary sources, such as mine waste.”

The cooperation between the two close allies is set to deepen on their joint-interest in a secure supply chain for the energy transition. The Joint Action Plan on Critical Mineral Collaboration has been in place since early 2020, and the two countries had been meeting regularly to advance the issue before; the embargoes on Russia have raised its urgency. These developments are positive, longer-term tailwinds to Electra’s stock as well as cementing government interest in its success, thus lowering the risk.

Customer lock-in

Electra has also secured a customer for its entire Phase II nickel and cobalt output. The agreement signed with Glencore provides a destination for Electra’s Phase II products for the first year of operation, 2023-2024. Combined with the prior agreement with Marubeni to obtain the so-called black mass feedstock for Phase II production, this substantially lowers the risk to the company as both a source of inputs and a destination for outputs have been secured.

Phase I has similar agreements for inputs and outputs: Glencore signed a five-year agreement to sell cobalt hydroxide – the feedstock for Phase I cobalt sulfate production – has signed an option for tolling on 1,000 tons of the output.

The new agreement not only further reduces the commercial risk of the company for its latter growth phases, it also deepens the relationship with a mining giant, generating goodwill with a global player capable of sourcing inputs and marketing outputs for Electra’s operations at scale – and eventually capable of acquiring the company.

Conclusion

Risk has been lowered on Electra with new agreements, partnerships, and government commitments. Meanwhile, Electra is steadily advancing towards commercial operations at the end of the year. Subdued price action on these encouraging developments should be understood by considering the exchange on which the shares of the company trade. I expect a short-term pop when the company lists on the NASDAQ as demand for shares dramatically increases with the added transparency and liquidity that will result from graduating from the pink sheets to an exchange with global reach. I expect strong longer-term growth as the company cements its place in the re-arranged North American supply chains.

I’m accumulating.