Euro Manganese Inc. (EMN.V) Earnings Call Transcript & Summary

Okay, Matt, I can see that a number of people are with us now. So if you'd like to get started, I will put myself on mute to pass it over to you.

Thank you, Louise. Good morning and good afternoon to everyone. Thank you for joining us to review developments during Euro Manganese's third fiscal quarter. Please note the slides for today's call can be downloaded from our website. Before we begin, I must remind you that this presentation involves forward-looking statements. Please refer to our cautionary statements here and the risk factors in our annual information form. Our news release filed on August 14 highlight our third fiscal quarter financial position. This should be made in conjunction with our management's discussion and analysis and financial segments, both of which are available on our website, SEDAR and the ASX. Joining me today on the call are Martina Blahova, Chief Financial Officer; and Louise Burgess, Senior Director, Investor Relations and Corporate Communications. I'll pass on to my team in a moment to go through financial highlights for the quarter and the company's financial position. Then I'll run through the key developments during the quarter and how we're progressing against key catalysts for 2023. We'll wrap up with a quick question-and-answer session. Over to you, Martina.

Thank you, Mr. Matt. Just a reminder that we report to a year-end of 30th of September. So our Q3 references the period of April through June. We also report in Canadian dollars. I will briefly comment on our cash position and the intended use of these funds in the coming quarters. We remain funded to deliver certain near-term project milestones and corporate G&A for the next 6 months. We started the quarter with $13.8 million in cash, $1.2 million was spent to advance the commissioning of the demonstration plant, which is now close to completion, and to make a milestone payment to the client equipment supplier, $1.6 million was spent on operating expenditures, which covered the advancement of the quality permitting, including preparation of documentation for land planning and construction permits, the scoping study and other due diligent costs for Bécancour site in Quebec and other corporate costs. We closed the quarter with $10.9 million in the bank. Our cash position will allow us to deliver on our near-term project milestones, which include commissioning of the demonstration plant and its initial operation on a batch basis. Advancing of permitting for construction of the qualities project, advancing certain land acquisitions for the commercial plant area, initial feed, front-end engineering design, and corporate G&A costs for the next 6 months. Additional funding will be required for the EPCM engineering procurement construction management services for the project. future payments for land acquisitions and future construction of infrastructure and facilities for the project. Funding will also be required to advance the company's North American strategy, including land payments and completion of the Bécancour feasibility setting. Financing is one of our top priorities, and we continue to work diligently on it with our financial advisers. I will now turn it back to Matt.

Thanks, Martina. Here's an overview of achievements during the quarter and to date -- and we advanced on both technical and commercial fronts, including our North American strategy, and I'll speak to these in more detail in the coming slides. Specifically, we remain focused on 4 key work streams to deliver our Chvaletice project. These include advancing engineering, permitting, offtakes and as Martina just mentioned, financing. We made excellent progress on our engineering work stream this quarter. In June, we awarded the engineering, procurement and construction management contract or EPCM -- to wood. The contract covers all phases of work through to commissioning and handover of the commercial Chvaletice plant. Awarding the contract on a rigorous selection process I'm very pleased to be partnering with such a high-caliber Tier 1 company. In addition to Wood's technical and engineering capabilities, it was important to us to work with the team and had experience in the European Union and a proven track record of delivering large-scale chemical plants. The contract is cost reimbursable and structured in 2 phases. Phase 1 includes a GAAP analysis which is an in-depth review of the Chvaletice plant feasibility study deliverables, including evaluating test work and the flagship developed by team. Following this initial piece of work, front-end engineering design or FEED for short, will commence, which include value engineering, identification of long legal items vendor engagement and a project implementation strategy, which will inform a baseline schedule for the EPCM phase. Deliverables of Phase 1 also include preparation of the construction permit documentation and an updated capital cost estimate for the plant to a plus or minus 10% accuracy. As a reminder, our feasibility study for the Chvaletice project outlined an initial CapEx of approximately USD 750 million, which included over $100 million of contingencies. The feasibility study was completed in mid-2022, when prices for materials were higher than we're seeing today. My point here is our initial CapEx figure is robust, and we may potentially see some benefits from costs returning to more normal levels. On completion of Phase 1, expects to be in mid 2024, we expect to make a final investment decision prior to entering Phase 2. Phase 2 is the full engineering, procurement and construction management stage where Wood will provide overall project management services, including detailed design, procurement, construction and commissioning of the main Chvaletice plant. Over to the permitting work stream and work there is progressing well. On a positive note, 13 of the 14 relevant authorities approve their sections of the study in the environmental and social impact assessment, indicating an overall positive perception of the project. However, we received comments from one authority related to noise abatement during the quarter, and we have now addressed and resubmitted this section to that relevant authority. For background, our projects anticipated noise level for well within legislative limits for an industrial project. However, the cumulative effect of noise with other industry in the region, marginally exceeded permitted noise levels at a measurement points, located have the closest residential areas. We expect to resubmit a full EAA in the coming weeks and anticipating a positive decision on this ESIA before the end of 2023. In parallel to the work, our team has completed the revised ESIA. They have also substantially completed the documentation required for the land planning permit. This permit can be submitted on approval of ESIA. The approval time line is typically 3 to 4 months for the land planning permit. Thereafter, the next key permit stage is the construction permit. Which is a deliverable of the feed phase, the documentation, the approved time line for that is also 3 to 4 months. Over to the demonstration plant where we produced 99.9% pure high-purity electrolytic manganese metal HPEMM during the quarter, external lab tests confirmed the HPEMM net demonstration plant specifications. And this derisks our process free sheet. Production of on spent high-purity manganese sulphate monohydrate or HPMSM has been delayed, and this is due to a manufacturing fault with the crystallizer. An incorrect welding material used by the manufacturer cause corrosion inside the vessel. Our team identified this issue, had has addressed the issue and production of HPMSM has recommenced. Samples need to be tested and assayed by external labs. I want to remind everyone that HPMSM is an almost pharmaceutical-grade product in terms of purity and therefore, specifications of impurity [indiscernible]. The demonstration plant is a crucial step in our development. Lessons learned can mitigate risk on the commercial plant, and it also provides experience with our production processes for our operators as well as enabling production of large-scale samples for potential customers. Note these samples are not expected to be required for completion of offtake contracts. That's a good segue to our offtake work stream. Our offtake funnel remains full with tonnages under discussion increasing over the quarter and now exceed our plant capacity by more than 30%. In addition, new offtakers have entered the funnel. We now have 22 parties at the top with more than 50,000 tonnes of HPMSM per annum collectively under discussion in that session. A number of parties have advanced to the middle of the funnel with a total of 11 parties now interested in more than 30,000 tonnes of HPMSM product. Obviously, we remain focused on advancing the 6 parties at the sharp end of the funnel to Term Sheet stage. Verkor is the seventh party here with whom we already have a term sheet and are moving forward with full documentation. These 7 parties at the sharp end of the funnel now account more than 120,000 tonne of HPMSM per annum, which amounts to 80% of our production capacity. That is a number we are targeting on offtake to underpin on debt financing. I would mention that these initial tonnages, these are initial tonnages from off-takers, off-takers have indicated a potential need for higher tonnages as the market grows and as Manganese rich chemistry enrollment. We are seeing increased news flow of commercialization of Manganese rich chemistries, including Nickel Manganese Cobalt, which are increasing the amount of Manganese decreasing the amount of Nickel and Cobalt. We're seeing LMFP and with Manganese being added to the LFP chemistries with a big announcement that Samsung are now launching an LMFP chemistry. And Sodium ion, a new battery chemistry also can contain up to 30% Manganese. Additionally, several larger potential customers are still yet to disclose our allocation of tonnage to the company. However, have expressed an expectation to do so in the near future. Euro Manganese remains very well positioned to meet the increasing need for high purity Manganese in lithium-ion batteries. We have the only manganese resource in Europe and stand the benefit from increasing demand for a local responsibly produced source of supply. Switching gears to Becancour, where we made good progress and this growth opportunity in Québec. Bécancour is fast becoming a battery materials hub, and we are well positioned to take advantage of being a heart of remaining North America EV supply chain. Our 15-acre site on which we have an option agreement to purchase in strategically located adjacent to a cluster of planned cathode active material manufacturing plants. These include investments by GM-Posco, BASF and just recently announced for Ford-EcoPro. After the quarter end, we released highlights of a scoping study that evaluated the development of a high purity metal distribution plant in Becancour capable of producing just over 48,000 tonnes per annum of HPMSM based on sufficient supply of HPEMM feedstock. Now just a reminder, a metal dissolution plant uses HPEMM as the feedstock. The scoping study serving delivers strong preliminary economics with a post-tax NPV, net present value of CAD 190 million using an 8% discount rate, a post-tax IRR internal rate of return of 26%, and a payback period of probably 4 years. The economic analysis was run on a constant dollar basis with no inflation. No government rights were included and was unlevered. Initial capital was estimated at CAD 110 million, including contingencies at CAD 15 million. A key aspect of the plant in the short build time. The scoping study estimated an approximate 2-year engineering and construction duration from the end of Becancour feasibility study. Minimum infrastructure is required with off-site infrastructure limited to just power line connection to potential development of a rail spur from the Becancour site railway line. On-site infrastructure includes road, client and administrative buildings, power distribution, storage buildings for metal feedstock solution and self-pay products. Parallel to this, we continue to engage with both the Quebec provincial and Canadian federal governments on the incentive support programs available for the plant. Residents in the region indicate the Bécancour plant may be eligible to receive support for up to 40% of CapEx. Additionally, we are investigating whether the recent announced claim technology, manufacturing tax credit, which would refund 30% of the cost in machinery and equipment used to process critical raw materials essential to the clean technology supply chains will be valuable for the plant. We've had -- we have appointed WSP Canada out of Montreal to complete a feasibility study for the Becancour plant. Which will further refine costs, economics and customer offtake opportunities. The feasibility study is expected to be completed in mid-2024, subject to financing. We aim to advance permitting in parallel with the feasibility study. In addition to the initial economics, what makes Bécancour an attractive opportunity is the feedstock optionality that the MOU with the manganese metal company offers. MMC as they are known, is the leading producer of selenium-free 99.9% HPEMM and they're based in South Africa. The MOU allows the Bécancour plant to be set with HPEMM from MMC and/or from our Chvaletice project. It allows for flexibility on the supply of HPEMM depending on market demand, MMC product availability and Chvaletice metal sales. The MOU is strategically significant as this metal feedstock enables a potential acceleration of Bécancour part to supply the North American market as early as mid-2026, this potentially enables us to be the first to market and also to bring cash flows forward for the company by at least a year. As a reminder, North American demand for high-purity manganese is expected to be over 200,000 tonnes by 2031. However, now no current processing facilities in North America. MMC has provided HPEMM samples for test work as part of the feasibility study, and we intend to work together to conclude a definitive agreement. I'm also very pleased with the cooperation agreement we signed last month with the Grand Council, Nation Waban-Aki a tribal council of the Abenaki communities on whose ancestral territory the Becancour plant will be situated. This agreement defines how we intend to communicate openly and regularly and to work together for the mutually acceptable development of Becancour plant, especially during the evaluation and planning phases. Perhaps a few words on the Becancour process flow sheet before wrapping up, the plant design allows for production of both high-purity manganese sulphate solution or HPMSS, which will be for local consumption. And high purity Manganese sulphate monohydrate powder, which provides customer offtake flexibility. Reducing HPMSS provides both cost and environmental benefits. As delivering our solution locally eliminates the need to crystallize, dry and package and HPMSM power product. The plant design leverages extensive process development and engineering work already [ placed ] for the Chvaletice project. Moving on to our 2023 key CapEx. I've given an update on most of these deliverables today. I want to note is the commencement of formal debt process by the commercial project finance banks. This is expected to commence in Q4 this year. The European Bank for reconstruction and development and the European Investment Bank have already commenced their due diligence processes. We remain focused on our flagship project in Europe, producing on-spec HPMSM from the demonstration plant and voting the remaining land access agreements, and you'll see that they have remained at 3 or 5, which has been the case for the last 2 quarters or so. But I would like to stress that significant progress has been made on these commercial agreements during these last few quarters obviously securing more offtake sheets and driving customers through that offtake funnel and to contracts is important. And finally, security finance. Thank you, everyone, for tuning in today. I'll now open it up to questions.

Thank you, Matt will pause for just a moment. Well, people wish to enter questions, please use the chat function with a Q&A, I apologize at the bottom of your screen to enter your questions. So we'll just take a moment now.

So 1 question that we had by e-mail before the call was on progress of the land access agreements. And as I mentioned earlier, we have made significant progress in those situations and we expect those to be completed in the near term.

Thank you, Matt. It is looking like we don't have any other questions at this time. So unless you'd like to enter the question now, we may well wrapped up. Alternatively, please do send us questions by e-mail if you have any. But -- sorry apologies, One has just popped in here. Matt, perhaps you can take this one. Can you talk about what you've learned about the high-care manganese industry in China and investments in capacity expansion there.

Yes. We have obviously been -- we monitor what's happening in China. I think all the forecast for global demand for HPMSM, indicating a deficit in supply globally through China. There have been announcements by a number of Chinese for, both incumbent producers and new producers announcing planned investments in capacity -- we haven't seen any groundbreaking activity as yet. There is a small amount of surplus as demand grows. We are not yet in that deficit situation. So I think we're probably right and seeing, I think, to see that deficit for you've seen new investments in China. I want to also say that the market is definitely splitting between in China and non-China from a demand perspective, and the demand for local source material, both in Europe and the U.S. is obviously where our focus is, and we're hearing from customers there needs to be a demand for locally sourced material. So whilst I do not underestimate the Chinese ability to grow production capacity quickly, we were able to supply all the requirements of a North American and European market from a legislative or incentive perspective? Second question, if all the remaining 6 terms assigned what will be the impact on the financial requirement for the European project. So if all of those are signed, then it means we will met the requirements of the project finance banks because they require 80% of our production to be under contract. Because in this market where you cannot hedge like a gold or nickel or copper production, they need to see offtake contracts secured got 80% of the product. So it will be a very significant impact on the positive impact on the financing for the European project.

Another one here, Matt, what level of premium do you envisage for an EU and U.S. price compared to current Chinese battery-grade manganese sulphate?

So it's a great question. Thank you. If you look at the only index, which is available for Manganese Sulphate. It's a Chinese Ex-Works index, so if we start with that as our baseline, when you look at that index is actually a mixture of different qualities including agricultural grade material, which is still considered in China high purity. Again if you look at the battery grade within that index, we see that at about $1,600 a ton Ex-Works China. You then add transport costs delivering into a European or a U.S. context, and you're adding about $250 per tonne. Now just to be clear, if you go into a freight or website, you'll probably see container costs are about $150, be it for inland transport and then inland costs and customs costs and processing cost, et cetera, it's about $100 dollars. So about $250, we're about $2,000 -- or close to $2,000. Once you add transport. We're seeing the local marketing in Europe today, current pricing at around $2,500 recent information we got from the market was Japanese material landing at around $3,000. So about $2,000 to $3,000 represents a premium to go effectively a Chinese project landing in Europe $2,000. So it's a 20% to 40% -- or 25% to 50% premium. [indiscernible] low end of that is what we are also seeing in markets like rare earth, for example, the non-Chinese supply of rare earth, is commanding about a 25% premium. We're also seeing in steel, interestingly in Europe, the green steel, low CO2 steel is commanding about a 20% premium to non-green stealing. So there are a number of analogies we can draw parallel to confirm that, that premium is a reasonable premium in the market context.

Thanks, Matt, perhaps maybe staying on pricing. Another question here. Can you remind us offtake pricing is not necessarily fixed. Can it be relative to a benchmark. Can you perhaps talk a little bit more about the pricing dynamic within offtakes?

Yes. So what we announced with our Verkor term sheet is a good example. We have agreed that Western price level -- and we will link it to the Chinese index in such a way that has a Chinese index rise and falls, the western products we have will rise and fall proportionately subject to a fuel price that we have -- and that fuel price is required again by the project finance banks. So it's not just 80% offtake, but they require a floor price in these offtake contracts, which meets their debt service covenant that's an important conversation that we're having with all of our customers. And they understand that this is effectively an incentive price for new production outside of China.

Martina, I'll perhaps pass this on your way. You mentioned the potential of Canadian government support for the back and core plants. Can you share any kind of more color around those discussions?