ELBM - Electra Battery Materials: Onshoring The EV Supply Chain

Summary

• Electra Battery Materials is a battery materials pureplay geared at securing North American battery capacity.
• The Company is presently developing its Canadian battery processing complex.
• But 10 years of zero revenues, sizable capital destruction, a name change and rebranding do little to quell investor fears.

General Overview

For those of you who have been asleep for the past couple of years – sustainability is big. Perhaps only bettered by money managers’ ESG rebranding of investment products in a brazen cash grab under the auspices of making the world better.

Call me a cynic. But following Swedish activist, Greta Thunberg’s public slamming of world leaders on lax environmental policy, it appears feel-good finance has squarely jumped on the bandwagon.

Annual reports are now smitten with buzz words like sustainability, equality, and environment. Investment bots scour corporate presentations and investment pitches looking for ethical capital allocation opportunities that meet standards implemented by some of the biggest money managers in the world.

It’s made for an interesting investment universe. One where buzz words build the business rather than the business builds the buzz. And while I am a hardened believer of the importance of energy diversity – some companies appear to be free-riding on investor naivety around allocating cash to save the environment.

Could this be the case for Electra Battery Materials ( ELBM )? The North American battery minerals pureplay looking to onshore the EV supply chain?

The task remains a noble one but the financials and price action paint perhaps a much bleaker image. I am bullish diversified global energy but bearish on Electra Battery Materials – both on the firm and the prospects of recovering the -80% in capital destruction inflicted to date.

Let us discover more.

Cobalt prices have seen a previous boom in 2018, peaking out at $90,000 per ton.

Company Introduction

Electra Battery Materials is a processor of low-carbon, ethically sourced battery materials. Currently commissioning North America’s only cobalt sulphate refinery, Electra is executing a multi-pronged strategy focused on onshoring the electrical vehicle supply chain.

Previously known as First Cobalt Corporation, the firm has rebranded itself in efforts to diversify risk associated with being a cobalt only battery mineral play. Since then, the firm has expanded its name and its sphere of activity to cover all battery minerals.

Electra Battery Materials Corporation has given up -80.41% of its value over the past 5 years.

The $81M North American battery minerals recycling venture is listed across multiple exchanges, namely Canada’s TSX, the UK’s London Stock Exchange and Germany’s Deutsche Boerse. The industrial sustainability play trades at 68x forward earnings over the next 12 months.

BEV sales are expected to be North of 16M toward the end of the decade.

The crux of the business is to deliver a solution for North American batteries mineral processing. Dominated by China, US original equipment manufacturers are scrambling to find alternatives to Asian industrial players for battery mineral processing, specifically following the Inflation Reduction Act.

This $430B piece of legislation is likely to reshape the EV ecosphere with a restructuring of EV tax credits barring components manufactured or assembled by a foreign entity of concern (China.) That is bullish for Electra Battery Materials Corporation, at least until you take a closer look at where all the activity is concentrated.

Electra is progressing with the development of a cobalt sulphate refinery complex.

The company has been assisted by Francois Philippe Champagne’s recent Asian roadshow aimed at shoring up investor interest in Canada as a battery minerals investment destination.

Thus far he has managed to coax Korean industrial giant Posco into investment in Becancour with a sizable capital outlay in Quebec as part of the EV supply chain. He has perhaps also managed to attract a major competitor to Electra’s fledgling industrial complex.

In addition to this, a long-term nickel sulphate deal between GM and Vale provides affirmation for Electra Battery Minerals who may plan for a second cobalt refinery based in the Becancour industrial park.

Electra Battery Minerals is actively developing its Canadian battery minerals processing facility.

The company has also managed to secure a 3-year agreement to supply battery grade cobalt to LG Energy Solution, a leading global manufacturer of lithium-ion batteries for electric vehicles. The deal recently stitched together will see Electra supplying 7,000 tons of battery grade cobalt over a 3-year period from 2023 to 2025.

Concretely, the company will supply 1,000 tons in 2023 and subsequently 3,000 tons for the following 2 years. According to the company, it is enough to power approximately 1.5M battery electric vehicles. That is in fact the full annual capacity of Electra’s facility. Additionally, the company is presently evaluating options for a second refinery in the province of Quebec by 2025-2026.

The cobalt crystallizer will be the centrepiece of this battery minerals processing facility.

According to research by CRU, a leading provider of business intelligence on global metals, China is responsible for 71% of refined cobalt, 76% off refined nickel and 93% or refined manganese used in EV batteries.

Favorable public policy and growing adoption rates are accelerating the development of a North American refining and battery recycling ecosystem. But there is a problem here – strategic resource nationalization implies that Electra Battery Materials will have a natural cap to its potential market with the US currently being the smallest.

China’s 3 million units of battery electric vehicles sold places it in top spot for global revenues.

China is the world’s largest EV market with sales tripling over a 3-year period from 2019 to 2021. It will continue to be the hub for battery electric vehicle sales with Europe not far behind. In fact, Europe is firing on all cylinders – growth has been impressive with sales progressing from ~567K units in 2019 to upwards of 2.2M in 2021.

European electric vehicle sales continue to show meaningful growth.

North American battery electric car sales have been much more muted. From 2018 to 2020, revenue numbers declined and appear to have been propped up by a fiscal boost engineered by the current Biden government.

While that is good for sustainability and US manufacturing, spending somebody else’s money is a great way to stimulate growth until you run out. That shows potential headwinds for a North American battery materials processor with all chips on a single geography.

Additionally, Asian competition is lining up to build industrial hubs and battery manufacturing centers to curry favor with the US government – nobody wants to be on the foreign entity naughty boy list enacted under the recent Inflation Reduction Act.

Electric Car Sales in USA have shown solid growth, but volumes remain comparably tame to both Europe and China.

Financials

Electra’s financials are barren to say the least. Zero sales for almost a decade and regular losses patched over perhaps by regular stock issuances and reliance on credit markets. Since 2017, the company has had to finance itself with stock issuances (~$70M) and debt ($60M).

With zero sources of funding from revenue generation, recourse to secondary offerings of stock or credit will have to do. The biggest problem with that strategy is that both interest rates and equity risk premiums have increased substantially – making future cash calls perhaps a possibility.

The company has consistently lost money since inception.

The cash flow statement is not much prettier – the venture has continued to bleed cash with negative free cash flow per share almost tripling from -$0.20/ share (FY 2020) to -$0.78/ share over the last 12 months. That is understandable to some extent, insofar as the firm is in the process of building a battery industrial complex. But 10 years? That seems excessive given the size and scope of the project.

Major sources of financing – Electra Battery Materials.

All in, there are no big positives to highlight save perchance the $14M in cash held currently on its books along with a current ratio of 3x and a quick ratio of 2.7x, providing some financial breathing rooms while its industrial project progresses.

Risk

There are bag loads of risk here for the capital markets junkies. With a beta of 1.83 and volatility to boot, this stock has been known for price action tumult. The company is heavily invested in a concentrated part of the North American electric battery market at a time when demand is declining, Tesla is slashing prices and margins are being compressed.

Foreign direct investment may perhaps crowd out Electra Battery Materials and market volatility has pushed both equity risk premiums and yields on credit to the upside. None of this is good.

The company has a track record of capital destruction, and zero revenue generation. Given today’s current market, that should be enough for most money managers to steer clear.

Key Takeaways

Electra Battery Materials has a noble mission – strengthen domestic battery materials processing and secure the EV supply chain. That is great when during boom times, but the EV market is increasingly appearing as one supported by government during a time when consumer discretionary spending is peaking, and the US is moving into a recession.

Elon Musk could not put a band-aid over Tesla’s compressed gross margins during last week’s earnings call. More competition, drained demand, and a constrained North America-only market are likely to present challenges for Electra in the future.

For further details see: