First Cobalt [Electra Battery Materials Corp.], SIX ways to win!

All $ figures US$ unless indicated otherwise. Co = cobalt, Ni = nickel, Cu = copper, Li = lithium. Note: {First Cobalt Corp. is changing its name to Electra Battery Materials Corp. Going forward I will use “Electra” to refer to the Company.}

First Cobalt Corp. [Electra] (TSX-V: FCC) / (OTCQX: FTSSF) has a number of compelling investment catalysts coming in the next 15 months. Most important is the ongoing de-risking of its fully-funded Phase 1 expansion of an emerging 100%-owned Battery Materials Park (“BMP”) in northern Ontario.

The analysis of recycling opportunities to recover / refine cobalt, nickel, lithium, copper (and possibly 1 or 2 other materials) is moving forward as well. In recognition of this notable progress in other areas, FCC is changing its name to Electra Battery Materials Corp.

Name change to Electra Battery Materials Corp. to reflect multiple metal cash flow streams

In Sunday’s press release management commented,

“The Company has been assessing black mass feed from recycled Li-ion batteries and will be announcing results from test work & engineering studies in coming weeks.

By month end, investors should have enough information to begin making rough estimates for Electra’s recycling segment. Li-Cycle, a C$2.8 billion company, stated that it expects EBITDA of ~C$136M in 2023, a margin of 41%, and a 56% EBITDA margin in 2025. Li-Cycle’s Enterprise Value ~20 times its forecast 2023 EBITDA — its [EV/2023e EBITDA = ~20x]

If Electra could achieve an EBITDA margin of 40% or more by 2023-24, it wouldn’t take that much throughput to generate meaningful EBITDA relative to its pro forma Enterprise Value {market cap + debt – cash} of ~C$286M. Note: {The Company will have ~C$62M in net debt after completion of Phase 1}.

Compared to Li-Cycle’s EV/2023e EBITDA estimate of ~20x, Electra’s EV/2023e EBITDA multiple is much lower at ~5.0x, assuming C$10M of EBITDA from recycling in 2023.

CEO Trent Mell reports strong interest from automotive companies and cell makers in the Company’s four-phased growth plan encompassing battery recycling, cobalt, and then nickel refining, followed by Li-ion battery precursor material manufacturing (co-locating with third parties).

In addition to a potential company-making recycling business, developing a BMP around it could take Electra’s valuation to another level. BMPs are popping up all over Asia & Europe as the preferred way for OEMs & battery / cathode / precursor makers to operate in the most efficient & green manner possible.

Phase 1 plans include transforming clean, ethically-sourced cobalt hydroxide into battery-quality cobalt sulfate at Electra’s 100%-owned refinery that’s being expanded to run at 55 tonnes per day.

Many Lithium juniors have soared since their lows in July

In following > 120 lithium juniors listed in Canada, the U.S. & Australia, the top quartile (30 names) are up an average of 195% from their respective lows of the past four months. The top-10, +264%. By contrast, Electra is up far less, +65%.

Readers might be wondering what Li juniors have to do with a cobalt / recycling company. It turns out, there’s a lot in common. Most notably, investors in Li juniors are demonstrating high conviction in the idea that Li-ion battery demand will be stronger for longer.

In the chart below, Li carbonate spot prices in China are at 194,500 yuan, +397% above the low in August 2020, making it one of the best performing commodities in the world.

Strong lithium demand can only be good for cobalt. The title of this article says there are SIX ways to win#1 is by supplying battery-quality cobalt sulfate starting in a little over a year, potentially reaching an annual run-rate of C$45 – $50M in 2023.

There are dozens of high-flying battery materials, recycling, EV & EV charging companies that are several years from reaching positive EBITDA (if ever!).

Way to win #2? As Co sulfate production ramps up in 2023, management plans to concurrently be recycling black mass (crushed end-of-life batteries stripped of plastics & casings) + battery scrap (scrap material / rejects from newly manufactured EVs).

While it’s too soon to know how much EBITDA a recycling segment might deliver, recycling is very important for a number of reasons. It diversifies risk by branching out from just Co to generating cash flow from recovered / refined lithium, cobalt, nickel & copper, and possibly manganese + graphite.

Recycling Li-ion Batteries + OEM/Battery makers’ scrap material could be game-changer

Recycling contributes to a closed-loop supply chain which is critically important for OEMs & battery material companies. ESG mandates from industry players & institutional investors alike all but demand supply chains cover these key areas, (minimizing emissions & waste, avoiding excess use of water & chemicals, co-locating facilities, conserving energy, recycling & reclamation).

Electra has a lot of ESG bases covered, 100% hydro-electric power in Ontraio, plans to attract one or more battery materials companies to co-locate next to the Company’s BMP, and (eventually) sourcing some cobalt feedstock from its own operations in Idaho.

The icing on the ESG cake will be selling its products locally in Canada and regionally into the U.S.

In the chart above, ING Research estimates annual demand growth over the next 20 years. I’ve been watching estimates like these for years, ING’s latest work is neither overly conservative nor too aggressive.

It captures the heart of the situation readers need to understand — demand growth for the key EV metals that Electra will be recycling / refining. Anything north of 10% over a 20-yr period is insanely bullish, for example a 15% CAGR is a 16.4-fold increase over 20 years.

NOTE: {this chart is only demand growth tied to EVs, not for all metal uses}.

Way to win #3? In addition to Co sulfate production, and end-of-life Li-ion battery + OEM/battery scrap recycling, the Company plans to source regional nickel feedstock for refining into Ni sulfate. I’ve already touched upon the bright prospects for Ni as one of the primary materials coming from recycling circuits.

Way to win #4? Electra has promising copper & cobalt mineralization in Idaho. The current in-situ value of the Indicated & Inferred resource there is not that large, but management believes it can double the # of pounds from known areas, and possibly make new discoveries in untested or newly acquired zones.

A tripling or more of the resource size (subject to more drilling and new discoveries), plus increased Cu & Co prices, would make Idaho’s mineral endowment quite meaningful compared to the Company’s Enterprise Value. Readers can look to cobalt/copper peer Jervois Global Ltd. for an idea of what Idaho potentially brings to the table.

Assuming that Jervois’ Idaho assets are worth 1/3 of the company’s total Enterprise Value, that’s ~C$226M for that company’s Idaho assets alone. Electra’s pro forma enterprise value is ~C$286M, with the vast majority of it tied to its BMP. Investors are ascribing very minimal (if any) value to Electra’s Idaho assets.

Way to win #5? A takeout of Electra by a metals commodity trader like Glencore, a diversified miner like Teck Resources, a cobalt player like Umicore, a lithium producer like Livent / Albemarle or by a number of large battery / cathode / precursor makers.

Earlier I mentioned there are dozens of companies with multi-billion dollar valuations, yet negative EBITDA for years and years to come. Jumpstarting positive cash flow by a year or two with C$45 – 50M of Electra EBITDA, would be worth a lot.

Acquiring cash flow, not just revenue — especially long-term, high quality cash flow — should be very compelling.

Way to win #6? Electra is in the process of rebranding its mission statement to add recycling & Ni sulphate production in the next 2-3 years and enticing third parties to co-locate battery / cathode / precursor plants next to their BMP. The proposed name change is one part of this effort.

I’m especially excited about next year’s listing of Electra on the NYSE American or NASDAQ stock exchange.

Having a full U.S. listing has proven to be incredibly valuable for lithium companies like Lithium Americas & Standard Lithium, uranium company Energy Fuels, copper/coking coal producer Teck Resources, and gold companies Barrick Gold & Pretium Resources.

For readers who believe that metals / mining sectors will be strong for most of the 2020s, First Cobalt Corp. [Electra Battery Materials Corp.] (TSX-V: FCC) / (OTCQX: FTSSF) warrants attention. No longer just a cobalt & copper play, now a company with exposure to lithium & nickel (and perhaps graphite & manganese).

Not an exploration play that will live or die based on drill results, a company with tangible wholly-owned hard assets that will be in production and meaningfully EBITDA+ in 2023.

Management is moving rapidly, yet prudently, to maximize its role in the paradigm shift to the electrification of transportation, while strictly adhering to increasingly important ESG mandates.

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 First Cobalt Corp. / Electra, 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 First Cobalt Corp. / Electra 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 First Cobalt Corp. / Electra 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 reasons, 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.