Electra Battery Materials; POSITIVE EBITDA next year, attractive valuation now…

Despite crazy volatility in metals & mining juniors, underlying Cobalt (Co) & Lithium (Li) prices remain quite strong. Co is not that far from its 1Q 2018 all-time high, and Li is more than twice its twin peaks of early 2016 & late 2017.

This is great news for Electra Battery Materials (TSX-V: ELBM) / (NASDAQ: ELBM) as it will be producing Co sulfate from early-2023 and recycling Li-ion battery black mass from mid-2023. Recoveries & sales of Co, Nickel (Ni), Li, Graphite & Copper (Cu) are planned.

By the end of 2024 management hopes to be producing refined battery-quality Ni sulfate from locally sourced Ni hydroxide feedstock. All of these activities; refining cobalt & nickel + Li-ion battery (black mass) recycling will be housed on the same footprint, centered around an existing refinery that’s being upgraded & expanded.

Finally, Electra’s products/services will be combined with one or more third-party battery or cathode materials plants to form a valuable & strategic Battery Materials Park (BMP).

I’ve been writing about Electra for a few years now. CEO Trent Mell & his growing team have executed very well and continue to articulate a bold vision for one of the very first independent BMPs in Canada.

Paradigm shifts in EVs, logistics, security of supply & ESG benefiting Electra

I invite readers to think about what’s happened around the world over the past few years...

Electric vehicle demand has been stronger than almost anyone could have imagined, especially given two+ years of COVID-19. Not only that, but Ontario & Quebec have become rising stars among upcoming N. American EV/battery manufacturing hubs.

Onshoring manufacturing to address logistical bottlenecks caused by COVID-19 began to gain traction in early 2021, only to be kicked up a notch by soaring freight rates (accompanied by costly shipping delays) and then substantial energy price hikes that remain in place to this day. Broader inflation is at a 42-yr high in the U.S. and a 31-yr high in Canada.

As if inflation, energy prices, logistical challenges, shipping delays, etc. was not enough to convince the world of the critical importance of onshoring, the war on Ukraine reinforced all of the above. But wait, there’s more…

China’s reluctance to condemn Russia’s brutal imperialism, and its weak compliance with economic sanctions, could mark the start of a cold war with the West.

China & Russia will be difficult-to-impossible to do business with for years to come. Therefore, OEMs & battery makers, are all-in on security of supply & onshoring initiatives. Yet, many planned BMPs in Canada & the U.S. will come online years after Electra.

Global inflation is partly to blame for this year’s stock market swoon. Previously high-flying tech stocks have been hit especially hard. For example, (Netflix, Amazon, Facebook, Tesla & Zoom) are down an average of ~45% over the past six months!

Investors transiting to strong growth, hard-asset & positive free cash flow companies

Tangible assets & commodities are both inflation hedges, a natural destination for risk-off capital flows. Electra’s share price is down ~20% from six months ago, but it pulled off a share consolidation, enabling it to list on NASDAQ.

In the chart below I show seven producing EV/battery/recycling + commodity companies. Electra is valued at ~4.6x its forecasted 2024e EBITDA (with modest upside to its EBITDA estimate). By contrast, peers are trading at an average of 11.3x 2024e EBITDA. Electra should enjoy higher growth through 2024, and possibly a few years beyond that.

Readers should note that several peers have suffered substantial declines in valuation this year. The avg. could easily return to 14-15x 2024e EBITDA in the next 6-12 months.

On May 31st, management introduced comprehensive “policies & frameworks” in support of Electra’s ESG initiatives. The policies will cover human rights, supply chains, the environment & sustainability. I typically don’t comment on ESG matters, but given the pressure on OEMs & battery makers to prove that they’re clean & green — ESG is especially important.

Onshoring will be expensive & logistically difficult for some companies/industries, but every step that Electra is taking is exactly what its customers & investors want to see. Even better, management expects margins to improve upon the adoption of onshoring & co-locating facilities at its BMP.

Electra enhances mgmt. team with several critical additions

Electra’s team was recently enhanced by hiring Renata Cardoso, VP of Sustainability & Low Carbon. An economist by training with an MBA, Renata began her career in Vale’s corporate strategy group. In 2008, she helped formulate Vale’s approach on sustainability & climate change, strategy & transparency and social & environmental indicators performance management.

In 2019, she joined Vale Canada, working on low-carbon initiatives, leading cross-functional teams to develop & implement a low-carbon roadmap for operations in Canada, Indonesia, the UK & Brazil.

Another key hire was a new VP of investor relations — Joe Racanelli — a 20-yr. IR & capital markets professional. Joe has extensive buy & sell-side contacts which will help Electra attract new institutional funds and (hopefully) more sell-side research. He will expand Ms. Cardoso’s & Mr. Trent’s capacity to convey corporate highlights to a wider audience.

The most recent senior exec to join the team (as CFO) is Craig Cunningham, a finance expert with 17 years’ accounting, finance, operational & capital markets experience. Prior to Electra, Mr. Cunningham was VP & Regional Financial Officer at Kinross Gold overseeing finance, information technology, supply chain & logistics in Russia. 

Craig was responsible for accounting, budgeting & procurement for key development projects, and the integration of significant acquisitions. Mr. Cunningham served in the controller, risk management & audit roles at Kik Custom Products, Loblaw Companies & PricewaterhouseCoopers.

Electra remains on time and largely on budget. Admittedly, a 5%-10% increase in cap-ex was announced, that’s what globally significant inflation rates do. Some investors complained, but all projects are experiencing cost creep, most haven’t announced it yet.

Moreover, readers are reminded that a 5%-10% rise in cap-ex is well more than offset by the ongoing strength in the commodities that Electra will be refining & recycling from 2023 on.

In recent articles, I pointed to Electra’s listing on NASDAQ as an investment highlight and a possible catalyst to drive the valuation higher. However, in the time that ELBM has been listed, the overall market for speculative stocks has been weak.

I believe that trading volume should pick up later this year as new institutional buyers discover this story and risk appetites improve.

Electra Battery Materials (TSX-V: ELBM) / (NASDAQ: ELBM) enjoys the best of multiple worlds; high-tech, high-growth, green, ESG-friendly, with robust positive EBITDA starting in 2023, and an attractive valuation. A company offering security of supply & just-in-time delivery in a time of ever-growing geopolitical headwinds.

Many previously high-flying, sexy tech names are still years from + EBITDA operations and face more execution risk than Electra. The stars are truly aligned for this battery materials Company as it continues to execute and de-risk its business plan.

Disclosures: The content of this article is for information only. Readers understand & agree that nothing contained herein, written by Peter Epstein of Epstein Research [ER], (together, [ER]) about Electra Battery Materials, incl. but not limited to, commentary, opinions, views, assumptions, reported facts, calculations, etc. is to be considered implicit or explicit investment advice. Nothing contained herein is a recommendation or solicitation to buy or sell any security. [ER] is not responsible under any circumstances for investment actions taken by the reader. [ER] has never been, and is not currently, a registered or licensed financial advisor or broker/dealer, investment advisor, stockbroker, trader, money manager, compliance or legal officer, and does not perform market-making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of Electra Battery Materials are highly speculative, not suitable for all investors. Readers understand and agree that investments in small-cap stocks can result in a 100% loss of invested funds. It is assumed and agreed upon by readers that they will consult with their own licensed or registered financial advisors before making investment decisions.

At the time this article was originally posted, Peter Epstein owned shares of Electra Battery Materials and the Company was an advertiser on [ER]. 

Readers should consider me biased in my view of the Company. Readers understand and agree that they must conduct their own due diligence above and beyond reading this article. While the author believes he’s diligent in screening out companies that, for any reason, are unattractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for any perceived, or actual, errors including, but not limited to, commentary, opinions, views, assumptions, reported facts & financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to subsequently follow or cover events & news, or write about any particular company or topic. [ER] is not an expert in any company, industry sector or investment topic.