High-tech, green Electra Battery Materials, the nerve… EBITDA+ next year!?!

Goldman Sachs has an index of 10 U.S. stocks named the, “Non-Profitable Technology Index”. It contains high-flying stocks that are down between ~40%-81% from their 52-wk highs, compared to a 13.5% decline in the NASDAQ & an 18.2% selloff in the Russell 2000.

I created a list of 10 companies including; Nio, Rivian, Plug Power, Li-Cycle & QuantumScape — names from the EV / [battery tech / materials] / charging / recycling sectors. The names in my bucket are down an average of ~55%.

Emerging high-tech companies need to grow into their valuations or risk further stock market pain. However, without acquisitions many will continue to burn cash for years to come.

Electra Battery Materials (TSX-V: ELBM) / (OTCQX: ELBMF) is SEXY enough to be on any (battery metals / green energy / ESG-friendly) list, but has the audacity of planning to be EBITDA positive from 2023 on. Not barely positive, C$10’s of millions in EBITDA/yr. vs. its pro forma enterprise value {market cap + debt – cash) of ~C$220m.

Every auto EV player & Li-ion battery maker will want Battery Material Parks

Electra could become an attractive takeover target. Given the high-tech troubles of unprofitable names, Electra’s soon-to-be positive EBITDA profile will be even more compelling.

Assuming earnings estimates on Market Screener, a quick review of the landscape quickly revealed four companies (ESS Tech, Solid Power, FREYR Battery & Workhorse Group) that would swing from negative to positive EBITDA in 2023 by acquiring Electra.

I found another three (Li-Cycle, Liontown Resources & Plug Power) that would enjoy significant improvements in valuations with 2023e EV/EBITDA multiples slashed (on average) from ~53.5x to ~31.0x.

Importantly, I do not assume a takeout would occur anywhere near today’s enterprise value — I crunched the #s with a hypothetical acquirer paying C$500M.

It’s not just adding Electra’s EBITDA & strong growth profile that matters, the seven companies mentioned would benefit from diversification into a world-class asset in a world-class jurisdiction, thereby hedging the risks of delays (or worse) in their own projects. Depending on those companies’ ESG credentials, they could gain on that front as well.

Not that I want to see a transaction for Electra anytime soon. Management has a lot more cards to play before possibly selling out to an auto OEM or battery / cathode / precursor maker, mining company, commodity trader or Li-ion battery recycler.

As a reminder, a few years ago Electra was an aspiring cobalt “Co” refiner with plans to revitalize a refining facility in northern Ontario. It also has exploration properties in Idaho (USA).

Overvalued, hype-driven EV / high-tech stories could benefit from acquiring an EBITDA+ segment

However, in the past 15 months — with Co, lithium (“Li”), copper (“Cu”) & nickel (“Ni”) prices soaring — management has been approached by investors, prospective partners & customers about refining and/or recycling additional products.

Adding recycling was a no-brainer since Electra’s refinery is well suited to host BOTH Co sulfate refining & black mass recycling circuits. By building a second large facility on the existing site, CEO Trent Mell and team are contemplating Ni sulfate refining after the recycling operation is commissioned.

Management is transforming the company from just a Co play to a more exciting Ni + Li + Cu + graphite + recycling + a fully-integrated Battery Materials Plant (“BMP”) story.

Much of the heavy lifting has been done on Phase 1 of the transformation, funding the upgrades & enhancements to the existing refinery to [concurrently] start running Co sulfate & (a modest) recycling segment in 2023.

While recycling cash flow is next year’s business, proof of concept is expected this Summer. Unlike larger recycling-focused companies, Electra is not desperate to hit the ground running with a large recycling business. It plans to prudently scale up & optimize recycling operations over time.

Li-ion battery recycling enhances Electra’s value proposition & its ESG game!

Even C$5M in EBITDA in its first year would be a great start, after which I would not be surprised to see recycling EBITDA double or triple in 2024, 2025 & 2026. Note: {no mgmt. guidance has been providedhowever, Co sulfate production can be increased up to 30% in 2024}.

That suggests combined Co refining + recycling EBITDA of C$40-C$45M next year and perhaps ~C$55-60M in 2024 {my view, not necessarily that of mgmt.}.

Li-ion battery recycler Li-Cycle is forecast to have ~C$325M of EBITDA in 2024 vs. C$65-C$70M in 2023. Therefore, Li-Cycle might be 12-18 months ahead of Electra, yet that company has an enterprise value of nearly ~C$1.1 billion.

Management is looking to invite one or more third-party to co-locate a precursor plant, forming an integrated BMP by 2025 or 2026. Creating a BMP in Ontario is a plan the government will like. Last year the province pledged C$5M, a free-money grant to Electra.

Electra to deliver first independent BMP in Canada, a scarce & valuable strategic asset

Connecting plants to form BMPs is well established in China, Japan, Korea & Finland. Electra believes it can potentially capture 10% in incremental margin by cutting its op-ex, while lowering the op-ex of co-locating companies as well.

Perhaps equally important, by co-locating with third parties, plus producing copper & cobalt in Idaho, ESG mandates will be more easily achieved. Lower GHG emissions from far less global movement of raw materials & finished goods is a big part of the Company’s future.

Electra will also benefit from using Ontario’s green, low-cost hydro-electric power. A closed loop from cradle-to-grave centered on a BMP that hosts recycling is exactly what the EV world is demanding.

High-flying EV / battery companies will be anxious to acquire BMPs across N. America to enhance initially weak margins & bolster ESG credentials. Multi-billion dollar OEMs & tech companies may have cash & debt funding prowess, but they lack time.

The race to secure EV market share over the next five years is on, no time can be wasted, no expense will be spared.

Electra could have a fully-integrated BMP in place as soon as 2025 or 2026. By contrast, greenfield BMPs will take years longer to plan, permit, fund, construct & commission. Longer still if feedstock procurement, infrastructure availability, environmental approvals or First Nation consultations present headwinds.

EV OEMs & battery makers will spend $10s of billions on plants in N. America

On January 25th, GM announced a new US$7+ billion investment in Michigan, incl. a partnership with battery giant LG Energy Solutions. Global OEMs, some of whom will have difficulty breaking into a very crowded & competitive Chinese market, will redouble their efforts in N. America.

Circling back to the multi-billion dollar, EV-related, high-tech companies around the world — acquiring a profitable business like Electra’s, on its way to becoming a BMP, makes tremendous sense.

Acquiring what should be one of the first independent BMPs in Canada and pulling forward positive cash flow by a year or two is a recipe for success. The market is questioning business models facing years of negative EBITDA, it’s time for a change. M&A is the only way to make it happen faster.

There are not many EBITDA+ battery materials stocks in N. America to choose from! Electra Battery Materials (TSX-V: ELBM) / (OTCQX: ELBMF) is in the right place at the right time with the right team and the right assets… 2022 should be a big year, only to be topped by 2023.

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

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