5E Advanced Materials, Inc. (FEAM) Earnings Call Transcript & Summary

Hello, and welcome, everyone, to Water Tower Research fireside chat. I'm your host, Dmitry Silversteyn, Managing Director, Chemicals and Materials Technology at Water Tower Research. Today, I'm being joined by Paul Weibel, Chief Executive Officer of 5E Advanced Materials, which is developing the Fort Cady project in California into a vertically integrated producer of boric acid and advanced boron materials for industrial, energy, defense and advanced manufacturing markets. Over the past few months, the company has announced multiple customer agreements, advanced its commercialization strategy and demonstrated additional upside through lithium carbonate by-product opportunity, positioning Fort Cady as potentially the cornerstone of a U.S. critical minerals and metals supply chain. Welcome, Paul, and thank you for joining us today.

Good morning. Great to be here today. How are you?

Great. Thank you. Before we begin, I want to remind the audience that 5E Advanced Materials safe harbor statements are available and can be found on the company website at www.5eadvancedmaterials.com. Also, this fireside chat may not be reproduced or written transcript distributed without the expressed written consent of Water Tower Research. With that out of the way, let's get going. Paul, the boron market is historically flown under the radar, if you will, for many investors, but that seems to be changing. What are the biggest changes taking place in the boron industry today? And why do you think boron is becoming an increasingly strategic material?

Yes, great question. I think it's flown under the radar because it's been this historic global oligopoly where 85% of global supply is dominated by two groups. And one is a private nationalized mining company out of Turkey. It's about 60% to 65% of global supply. There are some financial statements out there, but they're in Turkish. So it's not really very hard to kind of understand what their production capacity is. Two is Rio Tinto's U.S. Borax, which financials are disclosed, but they're really buried in Rio segment information. So just from -- it's a relatively opaque market with very little reporting. And as you look into that, I think the U.S. government got it right and in November flagged Boron as a critical mineral. Rio has a depleting mine life. There was a reserve downgrade in 2018. The business is for sale right now that has been publicly announced by Rio. And I think the main driver of why it's becoming so important is supply and demand. Project Blue, which is a really great market research platform, they're formerly out of the Roskill, Wood Mackenzie team. They have the Boron market in a deficit today. And when you look at what happens when a commodity or chemical is in a deficit and there's excess demand oversupply, ultimately, that drives higher pricing. It -- it's very similar to what we've seen in the lithium market or the tungsten market or as supply gets short and utilization is overused, in turn, prices drive higher. And then why it's becoming so important on a go-forward basis is that, one, what China is to rare earths, Turkey is to boron, so that you have different tariff regimes. But then ultimately, you have the specialty applications where the neodyominium sic [ neodymium ] permanent magnets, ferroboron comes predominantly from China. Boron carbide production, again, China. And you have a depleting asset in the U.S. that while we had reliable long-term supply, for the long term, that position isn't as secure as I think everyone has previously assumed. So the punchline being, it's -- we're in a deficit. And two, this market is growing, and it goes into so many different applications of which many are critical to make life as we know it exists today.

Thank you, Paul. That does provide a good overview of why Boron is becoming strategically important. That brings -- let's bring the discussion back to 5E specifically. Very few advanced boron development projects you mentioned, whether it's in North America or globally. What differentiates Fort Cady from other boron assets around the world that may be in the development stage? And where do you believe it fits within the global competitive landscape?

See, you can count the prospective sizable economic boron deposits that aren't in production today on kind of one hand. There's about four of them globally. So there's high barriers to entry in the Boron market, specifically tied to geology. While Boron is kind of common trace mineral in large economic quantities is incredibly rare. You really -- and this is why you see it kind of dominated deposits dominated in Turkey, California, kind of Nevada as well as Serbia, right? That's where you find the deposits. There's a couple of smaller South American producers as well, but you predominantly need faults in geology. And so large economic deposits, they're just inherently rare. Fort Cady, we have a large colemanite deposit. The benefit of colemanite, it's a calcium-based boron mineral. It's very easy to leach. There's four types of minerals where boron is commonly found. That is Colemanite, it is Tincal, Kernite, which coincidentally Rio is located in Kern County, California. So that's where the Kernite comes from and Ulexite. Those are kind of -- if you have mineralization of those four, you can extract the borates' relatively easy. So I think we have a colemanite deposit. Our method of mining is in sitsu sic [ in-situ ] leaching. We have all of our major permits. We'll inject a very dilute hydrochloric acid underground, that leaches up the minerals, we'll pull that to surface. And listen, I think the benefit is we're dealing with aqueous chemistry. So as you think about processing, it's not like we have to move dirt and then crush and float and ultimately refine that. We're always -- when we pull up to top surface and we process that, we have an aqueous solution that's easy to crystallize and remove out the borates. Additionally, with our process, we can now produce different levels of borate grades. We have our metaboric acid, which is an 80% B2O3 as well as our traditional boric acid. So I think from there, then that's our base business. We'll also have value-added byproducts such as the gypsum the calcium sulfate as well as the lithium carbonate. So I think from a differentiating perspective, we have kind of this portfolio of critical minerals. And then you have the ability to further refine and kind of go into some of those specialties. The metaboric acid is definitely a specialty. Additionally, we've -- we're almost on our first round of bench testing for ferroboron. So that's an iron oxide produced in a furnace with high B2O3 products. So I think you have the ability to vertically integrate and then solve some of those downstream derivatives, which the Chinese dominate today.

Well, that certainly helps put the Fort Cady's competitive positioning into perspective. Of course, a great asset can create value or can only create value if customers want the product. Now you've made some meaningful progress on that front over the past few months. One of the more noticeable developments this year has been the series of customer agreements that you have announced. How do these agreements validate the project? And what should investors understand about the commercialization strategy behind them?

Sure. I think we've really focused probably since March. We've been talking to various customers for the better part of 1.5 to 2 years. I think we've qualified, we've demonstrated that the product we can produce out of our deposit through our small-scale facility meets customer specifications across almost every industry. We're at a point in the business where it's to move this forward, you need heads of agreements that kind of form the basis for those binding offtake agreements. And so in March, we did a customer roadshow. We visited probably 9 or 10 various customers of different shapes and sizes, all domestic predominantly. And that was intentional because there's a small -- much smaller producer that had exited the boric acid market. So customer concerns were elevated. And listen, we're 2.5, 3 years out. We have to -- we're going to go to FEED engineering and then ultimately, you want to build this project and you got a commission. And ultimately, for -- if you're going to go into FEED engineering, which is an 8-month process, and it's about $8 million. You need to know that on the other side of that, you can achieve FID. And what you need is pull side demand and customers saying they're going to -- if you build this project, there's going to be buyers that are going to buy your product, very rational, keep it simple. So we put together -- we proposed different structures. And I was on a kind of a previous webinar earlier in the year. And I said, listen, we're going to have a diversified basket of customers across multiple industries with various contract structures, of which they all need to be bankable. Obviously, you can get debt lending on those contracts. And today, we have five initial HOA contracts. One is a letter of intent. But basically, the important part is that the commercial terms are flushed out, right? And that is something we can look to take to lenders and say, "Hey, I have a revenue leach even in our financial model." That ultimately underpins the bankability of this project. Our contracts today, a handful of them are fixed pricing with annual escalation. The most recent two we put in place are indexed to Fastmarkets forecasted FOB price on the West Coast and they're collars. There's a floor and there's a ceiling. And the floor that ceiling, they ultimately escalate over the life of the contract. So that's something where a lender can come in, they can look at our contracts, they can then say, okay, I can model in a worst case, a mid-case and a best case scenario. And listen, they're not going to lend on the worst case. They're not going to lend on the best case. They're going to kind of find the midpoint. And I think that's what we're doing. I think there's probably one more domestic U.S. customer we're looking to kind of close out here. And then we -- our team was over in Asia maybe 2 months ago, 6 to 8 weeks. And we're looking on kind of doing this next round of contracting in HOAs with the Asian customers to kind of get our export access here, and that takes us to a point where we can ultimately have a nice portfolio, probably as we think about any loan on 10 to 12 customers, which I think when we're at full-scale production, we'll have closer to 25.

Understand. Okay. So those commercial milestones certainly suggest the market is responding to what you're building, given how quickly the agreements came together after your March trip or your marketing and commercial exercise. So beyond the core boric acid business though, you've highlighted several additional opportunities that could enhance project economics. You've outlined opportunities in lithium recovery, calcium chloride, you mentioned, gypsum and longer term, getting into the specialty boron products. How important are these additional revenue streams to the long-term economics of Fort Cady?

So it's really important because I think it gives us the opportunity to sell at higher prices, which thus in turn make us that much more bankable. For the -- obviously, in our pre-feasibility study, the lithium economics were not included. We've always had a lithium chloride stream. And we equate out what we've seen over millions of gallons injected in recovery at our demonstration plant, it's that you probably produce -- we'll produce 500 tons a year of a lithium carbonate for about every 130,000 tons of boric acid. And we were very intentional when we were going into FEED engineering that the lithium stream could be viewed as a bolt-on. It's relatively small in the grand scheme relative to the boric acid production as well as the gypsum. So we had -- when we first kind of got capital numbers from Fluor, there was a significant amount of CapEx tied to sodium removal. We also produce some salt as well. Salt maybe sells for $30 or $40 a ton. It's not a value-added byproduct. And there was the $45 million of CapEx. And so we kind of -- well, we just said we can't spend that much money on a product that we're not going to make that much money. Is there an alternative way to extract? And you can. You can use good old-fashioned solar evaporation ponds to kind of get the salt water out of the back end of the process. So we incorporated five ponds into design. They're all in our real property. We have 200-plus acres on our land. San Bernardino County is really friendly. So we -- easy to get them included. And this winter, we kind of -- is it winter in California and not really. But in January, February, we said, okay, lithium prices seem to have found a floor here. They're on the upswing. Let's take a look at the lithium stream. And it was really a sixth solar evap pond, very small for 500 tons. And it's the same technology package that ultimately they use in the Atacama desert every day. We're in the high desert of California. So it's very similar climate to Northern Atacama. And it's a place where solar evap ponds work. And so that got included in the design. And I think at 500 tons, anyone who's operating a solar or lithium, they can -- it just takes time to let the sun do what the sun needs to do. So you ultimately will be a very low-cost producer of lithium when you are using solar evap ponds. And so I think nominal cost to that and the CapEx is incredibly low. We did the trade-off. We looked at DLE and for 500 tons, it didn't make sense. And that can be an additional $50 per ton credit to boric acid at kind of $18 a kg lithium price. So it's very accretive and will help us be that much more bankable. On the metaboric acid, listen, there's stoichiometric value there. No question about it, like we've tested that with various customers. And customer feedback is like, hey, if I use your metaboric acid in my textile fiberglass process, I can use less product of your 80% than the 56%. So I'm happy to pay a higher price in turn for that. And I've kind of outlined how that pricing could work. And I think it gives us some boundaries to negotiate. We are working on some of those meta contracts today. And I think that will be included in the design as well. On the -- obviously, colemanite being a calcium-based deposit, you have optionality where you could either produce a calcium sulfate, which is the gypsum or a calcium chloride, which is ultimately another industrial mineral. The interesting thing is that -- and we did this because it gives us optionality on our variable cost profile. So most recently, because of what's going on in Iran and the Strait of Hormuz, the sulfur market has gotten very expensive. And is that specifically tied to Iran kind of like China exports a lot of sulfuric acid. And because of the strait, they kind of have -- any of their production has -- they've decided not to export, and that has made the sulfuric acid very expensive. Sulfuric acid and hydrochloric acid, which are two reagents, we mine with HCL, but we can actually aqueous -- we can take sulfuric acid, which has been historically the cheaper of the two reagents and through aqueous chemistries actually precipitate gypsum and regenerate hydrochloric acid, which becomes our feedstock to mine. We don't have to buy sulfuric acid. We could just buy hydrochloric acid. And over the last couple of months, sulfuric acid has gotten more expensive than hydrochloric acid. So if you wanted to just use hydrochloric acid, you could. And as a result, the byproduct you would produce in that situation is calcium chloride. And so you would actually be relatively mitigated to some of these crazy up prices we've seen in sulfuric. Yes, you're going to pay more for your reagents, but because you have optionality, you can actually buy the -- you could procure the lesser of the two expensive reagents given what we're seeing on the geopolitical front. And there's ample demand for both of these in Southern California. You have -- the majority of calcium chloride production in the United States does come out of Michigan. It's an occidental asset. There is some production in the Southwest, but there's demand. And on the gypsum side, you do have two very large cement manufacturing companies that have qualified our product as well that are very local to 5E. So I think having those two byproducts in our design. One, it actually ends up being a risk mitigation from a variable cost perspective. But two, it gives us optionality to kind of pipe one off of the other and kind of get the highest netback at commercial production.