E3 Lithium Limited (ETL.V) Earnings Call Transcript & Summary

Good morning again, everybody. We are -- have the pleasure of joining with us Raymond Chow, who's CFO of E3 Metals Corp., a junior lithium exploration company operating a DLE project in Alberta, Canada. E3, we've been following for some time now. They have been on our radar following a brief agreement with Livent that came across our -- came to our attention a few years ago, and they've steadily been kind of ticking the boxes and moving closer towards commercialization and product verification. And so I'm very happy that we have Ray with us today, and he's going to lead off with a number of slides, kind of go over the asset and the technology. So we'll start there. Ray, I'll kick it off to you.

Thank you so much, Matt. I really appreciate the opportunity to be here. For those of you new to the E3 story, it's been a banner year for E3 Metals. I'm hoping and I'm going to go through a lot of those milestones we've achieved later on in this presentation. So E3, as Matthew was saying, is an Alberta-based lithium resource and technology company, whose goal is to extract lithium from underground brine water. So standard forward-looking statements and then into E3's growth strategy. So what makes E3 Metals unique? It has 2 things that sticks out in my mind that makes us different from our peers. First, our proprietary technology. E3 has its patented DLE technology that can extract lithium out of brine water. Second, our resource. We own 100% of our resource, which our PEA has outlined 7 million tonnes of lithium resource, which is just the tip of the iceberg for us. For us, our goal is to go from brine to battery-grade lithium hydroxide to deliver 99% purity lithium hydroxide for direct sale to foundry manufacturers and OEMs throughout the world. Currently, we're very well funded. We have about USD 13.5 million in our bank today, which is sufficient to carry us through our major milestones this year. Our operation's located in Calgary, Alberta, Canada, home to the Alberta petroleum industry, has given us a huge advantage in terms of having a very well-understood process, permitting process, a mature regulatory body, a stable workforce and a social license to drill here in Canada. Our goal is to have a small environmental footprint, which we'll talk about later on in this presentation. And we have quite the amazing team that we've put together here. So Chris Doornbos unfortunately wasn't able to join us today, our CEO, founded the company back in 2016, took it public in 2017 and has been leading it ever since. A little bit about myself. I've been with the company almost a full year now. I've been in oil and gas after -- for the majority of my career, expert in a little bit of project finance, high-growth entrepreneurial companies. And a recent addition that we've had is Jonathan Nielsen. We've been able to grab him from actually the U.S. down in Salt Lake City, who's a specialist in hydrometallurgical engineering, specializing in lithium development for taking projects all the way from PEA all the way up to full commercial development. So at the end of 2020, we released our preliminary economic assessment. It outlines a project value of $1.1 billion NPV8% with a pretax IRR of 32%. It was based on a project producing around 20,000 tonnes of lithium hydroxide. Pricing was around USD 14,000 per tonne. So with today's pricing, I think it's trading over about 30,000 per tonne. This would almost double the value of our PEA. Coming from the upstream oil and gas sector, the low-cost producer always survives in a low-cost commodity environment. There's that cyclicality in the commodity stocks. And so for us, I always like outlining the cash operating costs of about $3,656 per tonne. And so in that low cost environment, our project would still be economical, and we would be able to weather the storm. It would require $600 million of initial CapEx to get this project off the ground, with the current payback period of about 3.4 years. With current pricing again, this would slash the payback period in about half. Of the USD 600 million of initial CapEx, about 1/3 of that is dedicated to drilling, 1/3 of that to the DLE technology, and about 1/3 of that to the polishing and crystallizer to get us up to lithium hydroxide. So our PEA outlines what our project would look like. It looks very to the conventional salars and hard rock mines. It looks very much so like an oil and gas project. This is what the part that makes me very excited to talk about. We drilled 42 directional wells from 4 pads to produce the lithium-rich brine and pipe it to our central processing facility about 15 kilometers away to extract the lithium using our DLE technology. We basically take the lithium concentrate and refine it into battery-grade lithium hydroxide. We then reinject the brine, 100% of the brine back into the aquifer, which makes this a closed-loop system. It's the best of the oil and gas world, best of the mining world. It doesn't require any additional drilling, where we -- an oil and gas company would be finding declines. There's no fracking, high water flow rates, and there's no onerous burden of a growing abandonment and reclamation liability. In terms of conventional lines, our project requires about 3% of the land footprint, has no evaporation ponds and doesn't have the land footprint, with the land impact of hard rock mining. So let's talk about the technology. The technology itself is actually quite simple. It uses something called ion exchange. It's very commonly used in water softeners, water purification and water decontamination. If you had this water softener in your house, it takes your hard water into your house, runs over your water softener. There are some beads in there. It extracts the calcium and basically sends soft water back into your house. For us, we took a small iteration of this technology where the brine comes into our system, runs over our proprietary sorbent and then extract the lithium. And then we basically send 100% of the brine back into the aquifer. So our technology is unique. From my understanding, compared to our peers is that we -- our peers purchase off-the-shelf sorbents and their IP lies around the IX process and the design itself. Whereas our IP lies in the sorbent, which we produce in-house, and we're looking to use an off-the-shelf system, IX system, which is very widely used and very widely available. So our resource. Our resource itself has a lot of history behind it. The Leduc Reservoir has had a lot of historical significance in Alberta. It was one of the most prolific oil and gas reserves, first drilled by Exxon Imperial back in 1947, which spurred a huge oil and gas boom here in Alberta. You ask most people in Alberta now, the produce is basically 99% water now. It's had over 1,800 wells drilled in the area, or 158 of those wells have crossed into or through the Leduc. And so we've been able to leverage all of this existing data to help derisk our resource and help contribute to our geological model. For us, the blue sky for us is that we have everything -- sorry, we have the permits to everything outlined in the whites, which cover the entire Leduc Aquifer. Our PEA focuses only on the Clearwater project, which is outlined in the dark blue in the center, the $1.1 billion project value. Blue sky for us is that if the entire area was fully developed, we would have enough brine to produce the equivalent of about 150,000 tonnes of lithium that could be produced from our existing permits. Starting the Clearwater project as a fully sustainable and environmentally friendly extraction has been a huge focus for this company. There's a wind farm just east of our project area, and we've had other renewable sources of energy where we would look to sign a power purchase agreement upon commercial construction. The beauty of working in oil and gas-centric Alberta is that in order to get carbon neutral, you would need to access carbon sequestration and carbon capture, which is very widely used in the province, and it is available to us. As I had mentioned earlier, our project has no evaporation ponds, no fresh water use and uses a very small land footprint. So I believe the next generation of lithium extraction is going to include DLE. Conventional sources of lithium today are from like hard rock mining in Australia and the salars down in South America. The advantages that come with DLE are hard to dismiss with a strong ESG component. And I would bet that DLE would become the preferred method of lithium extraction in the future. So what's the advantage? What is the intangible advantage of working here in Alberta, Canada. We have a stable mature oil and gas regulatory regime. Drilling and production into a reservoir is already very well-known and well accepted in the Alberta oil and gas industry. The regulatory framework for the oil and gas is very well paid for E3. And recently, Bill 82 was announced by the Alberta government, which I'll talk about later on in this presentation. As represented by our team, we have leveraged many of the specialists from the oil and gas industry and have been working with companies to explore repurposing infrastructure for our project. All levels of our government, all the way from municipal, all the way up to federal have been supportive of the energy transition and the diversification of our economy. E3's project would probably bring up to about 400 additional jobs during the construction phase of this project. So reflecting on the milestones that we've achieved in the past year is a big thing for us. We've had a banner year as I said at the beginning of this presentation. Since delivering or PE at the end of 2020, we progressed our proprietary technology at a rapid pace. We've commissioned our own lab facility at the beginning of the year. We moved from a bench-scale testing to a fully automated 2-train lab pilot prototype capable of handling up to about 31 gallons of brine per hour or about the equivalent of about 18 barrels a day of brine. Our initial series of tests have already reinforced the assumptions used in our PEA with recoveries as high as 97%. This has marked a significant move towards the path of commercialization and proving out our DLE technology. In the coming days and weeks, we're hoping to update the market with some more results from our lab pilot prototype. In terms of the regulatory front, since starting E3 in 2016, Chris, our CEO, has been active in working with the Alberta government to place lithium and rare earth metal extraction under the well-established body of the Alberta Energy Regulator, the AER. At the end of this year, the provincial government passed Bill 82, which basically puts the lithium extraction under the AER. So for us, that provides regulatory certainty and well-established framework for us to go to commercialization. On the corporate front, we've moved from a market cap of about USD 25 million, all the way up to about USD 120 million with shareholder returns of about 270%, a really good year for shareholders. We graduated to the Tier 1 of the TSX Venture Exchange, graduated to the OTCQX, and we've grown our team members and the management team, who have delivered impressive results in 2021. And we've had significant experience and names to our Board. So for us, what's the next steps in terms of getting us to commercial production. 2022 is going to be a huge year for us. We're going to be looking to deliver our first field-based pilot plants, where we no longer need to scale up but to scale out. This means we don't need to build the larger plants for commercialization. We just need to add additional LEGO blocks. For second for us, we're looking to drill 2 to 3 wells this year to upgrade our resource from inferred to measured and indicated and to also determine the optimal location for our commercial operations. We're looking to kick off our pre-feasibility after all these activities. And then during 2023 and 2024, we're looking to complete the PFS, do some project financing before commercial permitting and then have commercial production of about 20,000 tonnes of LCE per year by the end of 2025, early 2026. Our shares trade on the OTCQX under the ticker symbol of EEMMF or the Toronto Stock Exchange Venture Exchange, ETMC. In U.S. dollars on OTCQX, we traded around $2.10 and cash balance, as I said, about USD 13.5 million with a market capital of about $120 million. We have about 10.5 million options and warrants outstanding all in the money, which would deliver approximately about another USD 8 million to our balance sheet. So why invest? It's an upcoming year of significant milestones that we look to deliver on this year. We're a very undervalued company when compared to our peers in the DLE space. We have a very clear plan on how to derisk our resource and scale our technology to realize the $1.1 billion value from our Clearwater project, 32% pretax IRR and $14,000 per tonne with best-in-class OpEx of $3,600 per tonne. The Clearwater project is just the tip of the iceberg and the Leduc aquifer is not limited to our PEA of 20,000 tonnes per year and has enough brine to produce up to 150,000 tonnes of lithium per year. Our project is probably one of the few projects targeting carbon neutral or net 0 project. It's one of E3's top priorities to provide North America a source of sustainably produced lithium. And looking at forecasted global demand and supply constraints from the EV market, E3 is very well positioned to help alleviate the lithium supply crunch in the coming years. So that is the E3 story in a nutshell, everybody.

I appreciate the walk-through. You mentioned -- so you've been progressing the lab scale work, and you mentioned processing 18 barrels per day of brine. What have been the major findings of the work so far? I think you mentioned a pretty impressive recovery rate. How does that stack up versus some of the peers you're seeing in the DLE realm? And what has -- I guess, we'll start there and we can keep going on that, I guess. But...

Absolutely. So compared to our peers, I believe that our results have been proving higher on the lab scale basis. For us, it's consistent with what we used in the criteria on our PEA. And so we actually just have another set of results that we're hoping to release here, like I said, in the coming weeks, which also probably will reinforce the thesis outlined in our PEA.

And so what's the -- I mean, you mentioned most of the industry works through this process of creating a proprietary ion exchange, and you went the other way by creating a proprietary sorbent. I mean what were the merits that you found of going that route?

Yes. So when you look at lithium concentration in the Leduc, we found that in order to make a DLE project economical, you need kind of 3 key things; and everyone always just focuses on the 1, which is lithium concentration. Our lithium concentration is around 75 PPM. And then so the 3 things that you need to make it work is high recoveries, which we have around 97% recoveries; and up to 99% recoveries, you need to have a lithium concentration that works and then high water flow. And then for us, we have kind of all 3 things. If we were to use other people's technology or sorbent, the recoveries aren't as high. And for us, their concentration might be higher, but the recoveries are lower versus our concentration is lower, but our recoveries are higher, if that makes sense.

Understood. And so as we think about as you move up from lab scale, like what are the limitations of the lab scale work that you're doing? What do you hope that pilot will be able to solve for you? My assumption as well, a lot of that has to do with trying to figure out the flow rates because you're going from a stationary lab process to something maybe under a bit more pressure? Ray, I think you're on mute probably. [Technical Difficulty]

I'm not muted. What was the question again? Sorry about that.

No, no worries. So as you move from lab scale, you talked about kind of doing the pilot work. That's kind of the next step. What -- as you look at the resource and your process here, what are the limitations of working in the lab that you hope to overcome with the pilot work?

I think just to scale up, I think, is the biggest risk for things that you get bigger. Like for our scale right now, it's good for lab scale. It's fully automated right now. We have 2 trains running. For us, the next step will be basically the final step for us in terms of scaling up. And then from there, it's just a matter of scaling out, like I said, into kind of LEGO blocks or very modular pieces. So for every incremental, let's say, 1,000 tonnes we get on, we would just add another module. And that's just an example in terms of scaling if that makes sense.

So is this something where you're going to basically be fabricating something like a shipping container and you'll have a 1,000 metric tonne...

It'll totally be around that size.

Okay. So you have a 1,000 metric tonne shipping container and within that will be the sorbent process and the ion exchange. And as you scale the process, you'd have 20 of these at full 20,000 -- I mean, give or take, is that kind of the...

Yes, that would be how we would envision it, yes.

Okay. Is there any benefit to scaling bigger than that and having one larger operation? Or do you find this technology works better on a modular basis?

Probably not the technical guy to be able to answer [ if ] it was better if it was more.

Fair enough. And you talked about the project as it relates to your goals. You have 1/3 of your CapEx is going to the drilling. 1/3 is going to the DLE, and 1/3 is going to the hydroxide conversion part of the equation. I guess if I were to think back and sit, maybe this is an unfair generalization, but your expertise seems very much on the DLE side of the equation. How do you plan on cracking on the downstream conversion side?

So the conversion is actually a very well understood process. We're actually working with the [indiscernible] out of Vancouver in terms of the polishing and crystallization for lithium hydroxide. And so it's a very well-understood process. It's not a new technology where we're trying to reinvent the wheel. It's something that you could probably buy a system off the shelf again to convert a lithium concentrate into a lithium hydroxide. So it's another piece that we're not too, too fast about it. We're very focused on proofing out the DLE, and the drilling side is actually very well understood just being in oil and gas, Alberta. So...

And I have to think about the fact that there's probably a lot of existing wells in Alberta, right? So how is your data and understanding of your brine resource just given the massive footprint of drilling that already kind of exists in the area?

It's been phenomenal, like I said, being able to leverage preexisting data, not having to drill thousands of wells and being able to pull samples and data from wells throughout Alberta to help delineate the size of the resource for us and the concentration that's available. And so for us, drilling the 2 or 3 wells this year is just a matter of ticking another box to upgrade our resource and to plan for the best optimal location for our commercial operations.

Understood. And so I have an inbound question that I kind of want to pass along. So the more -- sorry, the sorbent manufacturing process, right, as it happens right now, this is something happening on a pretty small scale. But as you kind of scale things up and it starts to become a larger and larger amount, like how do you, one, focus on that scaling? How do you -- where do you manufacture it? Is this stuff you're going to be doing yourself? And then how would you, I should say, gain confidence in the durability of the sorbent over time?

That's the whole point of the lab scale prototype is to test the durability and the longevity of our sorbent. And so we're hoping to publish some results on that as the testing continues. And what was the first part of that question again, sorry?

How do you put -- so how are you going to go about manufacturing the sorbent and scaling it as you need more products at the project?

Right. So we've already looked at engaging third-party vendors to look for commercial production for our sorbent manufacturing. So it's something that we know that we can do easily on a small-scale basis, but as we start moving towards the field pilots and towards commercialization, we do realize that we will need to find someone with the manufacturing capabilities for us.

Understood. And Steve had a question, I believe, on the chemical process for the conversion side and perhaps some of the technology that you end up looking at doing, although Steve just went yellow. I'll ask it I guess. So do you -- it sounds like you plan on using crystallized process. In the past, in Canada, there had been talk about using electrolysis for conversion to hydroxide, talking as well about the green merits of using hydro in the area. Have you thought about the footprint downstream and what that will do? Or is this still kind of mostly DLE?

No, we've looked -- we've started working with [ Enviro ] in terms of doing a life cycle analysis of the carbon footprint of the like entire life cycle of lithium being developed here in Alberta. And so we are evaluating our carbon footprint and how we can best address it. And as I said earlier in the presentation, it's, for us, having the ability to look towards BC for BC hydro or wind power, which is just actually east of our project area, is actually quite ideal for us. We have cheap natural gas, which is available, but we still want to lower our carbon footprint. And with the help of carbon sequestration and carbon capture here in Alberta, we believe that it's actually a very doable thing.

Understood. And another question then on the processing side. I'll size if this is -- but how high is the purity of the brine as it relates to lithium? Do you need to further refine the brine stream for other elements? I mean how many processing steps do you envision that's having? Or is it pretty consistent with the one?

I would prefer you to our PEA, where we have the flow sheet in terms of what all of our processing steps are. There is a pretreatment to the brine before it comes to the system. But everything after that, I'm going to leave to our PEA flow sheet to answer that question.

Understood, Ray. And so maybe it's early days, but I would imagine you've thought a fair amount about this. At some point, it's going to come time for you to partner to take on either offtake or funding, probably maybe both in some respects. But ideally, what are you looking for, for a partner? What asset or what capabilities do you feel you could most benefit from when you're starting to engage in these conversations?

I would say that we've already started to look into these types of conversations. Like these types of conversations start very early on and that relationship grows and builds throughout the stages of up to commercialization. In terms of this, for myself, I come from with a project finance background, and so the dream is to be bookended with credit support and operational support at the beginning and a strong offtake partner with a fixed price that you can take to the bank to finance. And so for us, we would want to find someone as a -- for a strategic partner to find someone with strong operational knowledge whether it be on the DLE side or on the chemical processing side or even on the drilling side to help support us operationally and with that credit support. And on the back end, as you said, you would want that strong offtake with an OEM or a battery manufacturer to basically bookend your project finance. So yes, those -- that would be something that the Board has tasked Chris and myself to get in the coming years.

And as you go through this process, obviously, the sorbent material is fairly proprietary. Have you been patent protecting that? How is your suite of patents kind of been built around? And we can kind of talk a little bit about licensing because I know that's something I talked about in the past, but maybe we can bridge that after the first question.

Yes. So we've filed, I think, a patent here at the end of December, and so I think we have 2 or 3 patents on our propriety sorbents that are out. And we continue to look to file strategic patents around our sorbents to ensure that we're very well positioned to license the technology here in the future. So going into a perfect segue for you, Matthew.

Yes. No. And so as you move from the lab scale to pilot scale, look, I got to think there's a lot of existing operators in the Alberta area who are drilling around the same aquifer and might be interested in testing their brine or even other DLE projects perhaps globally. I mean how do you think about leveraging your knowledge base this far as another source of funding as you kind of move forward?

Absolutely. In a perfect world, you would like to see E3 develop its resource and then also commercialize its technology. As I said at the beginning of the presentation, the one thing that makes E3 very unique is that we own 100% of our technology, and we own 100% of our resource. And so there's a lot of oil and gas producers in the area that are kind of looking over the fence into our backyard, looking at how we're doing and how we're progressing on our technology. And for an oil and gas producer that has a watered out well, like how phenomenal would it be to be able to take a liability on your balance sheet and all of a sudden produce lithium out of the water or the brine that's coming out of your watered out well? And so taking liabilities and turning them into assets, the dream of co-production of lithium oil and gas would be every oil and gas producer's dream. And so for us, we can also see there's so much potential in commercializing this technology. You look at a lot of our other peers in the space that are either a technology provider or a resource, and they have to partner together to say like, "Hey, in order to extract my resource, I need the technology," and they're partnering with these other companies. And so for us, we kind of have the best of both worlds again. So very exciting times for us as we prove out the technology.

Understood. And one thing that we've kind of come across, there's been cost inflation and product availability issues throughout much of the supply chain. So as you're kind of working out this fabrication process for the pilot plant, you're looking at securing the hardware necessary in the ion exchange technology. I mean is this fairly readily available. Are you finding long lead times? Or is this something where it shouldn't be a hindrance to hitting your goal?

I would say that you can't discount the supply chain issues that the world is experiencing naturally just with the global pandemic. But we tried to anticipate as early as possible any things that we need to order ahead of time. And so as of today, I don't expect too much delays. Ion exchange systems are very common and readily available here; and so hopefully, we don't run into any of those issues this year.

Understood, Ray. And so I did want to leave it open a little bit to kind of give you some points to kind of hit home at the end here because we have only a minute or 2 left. If there's additional points that you want investors to take home as it relates to the E3 opportunity and the value proposition, particularly, I know you talked about the 150,000 of potential resource. But what are the 1 or 2 points you want people to kind of lead with?

I would probably lead with probably permitting. I think the Alberta government approving Bill 82 and basically putting mineral extraction under the AER is a huge move. It gives so much permitting certainty to our company into basically rare earth mineral extractors here in Alberta. There's huge resources here in Alberta and to have that regulatory pathway in that well-established body, which is well understood, which makes a huge world of difference for other people that are struggling to obtain permits to extract the resource. And then second would be probably E3's ability to have a two-pronged approach, owning 100% of the technology and 100% of our resource. Having that runway room for both the resource and potentially the technology gives us incredible upside in the future. So I would say those would probably be the 2 points that I would want shareholders and investors to take away from today's call.

Okay. And so as we move through 2022, you had mentioned, ideally, we'll have some more updates on the lab processing around the durability of the process as you continue to kind of run the cycle times. But as we move through the year, what are other key milestones that we should be focusing on project-specific [ decisions yourself ]?

Absolutely. Just getting the field pilots, plants, permits in place, getting the field pilot kicked off, having it completed, having it operating this year, drilling those 2 or 3 wells, showing the consistent results throughout the geology and the lithium concentrations in the reservoir and then kicking off our PFS process, I think all of those things are huge catalysts and huge milestones for us to achieve this year. And so I would be looking forward to almost any news that would be coming out regarding those things.

Well, that's definitely what we're going to be doing, Ray. So I appreciate your time here today, and we'll be watching that. Thank you for freeing up and talking to us.

Awesome. I really appreciate the time, Matthew.

Of course. Have a good one. Take care.