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

Good morning, and thank you for joining the Euro Manganese Investor Webinar. My name is Jane Morgan, and today I am joined by the President and CEO, Dr. Matthew James. Today, we'll be providing a company update with the recently lodged investor presentation and engaging in a Q&A. Please note this webcast is being recorded, and a replay will be available on our website in due course. The slides that we use today can be downloaded from our website. And after the presentation there will be a question and answer session. [Operator Instructions] Before we begin, note that this presentation involves forward-looking statements, so please refer to our cautionary statement here. Matthew, I'll pass it over to you.

Thank you, Jane. Good morning and good afternoon to everyone. Thank you for joining us for a Euro Manganese company update. I'll start with an overview of the market for high-purity manganese. We will then move on to discuss the company's projects. 22 million tonnes of manganese is mined annually with almost all going into the ferroalloy industry. This segment of the market is growing in line with the steel market, around 2% to 3% per annum. However, high-purity manganese is a completely separate material serving specialty alloys. And importantly, manganese is an essential material in the majority of the cathodes in the batteries of electric vehicles. NMC is nickel-manganese-cobalt. Note, however, that manganese is the most affordable of these battery metals. A typical NMC-622 cathode contains 17% manganese by weight, but represents approximately 1% of the cathode cost. LFP batteries are making headlines with their growth. However, the majority of the LFPs are forecast to move to LMFP, as manganese additions increase the energy density and have a one -- and have one of the best dollars per kilowatt cost ratio. An LMFP cathode can contain between 30% to 50% manganese. As the EV market moves into the mass market mainstream, lower battery costs are becoming more important as the battery can account for 1/3 to 1/2 of an entry level vehicle. The OEMs have to reduce the cost of their battery to enable the production of a lower-priced EV. Manganese-rich cathode chemistries are one of the key enablers here, and it does not matter which emerging technology is developed. All require high-purity manganese and substantially more per battery than is used today. Overall demand growth has 3 industry tailwinds. The first is the underlying growth of the EV market. There are reports that the growth rate may have slowed. However, the switch to electric is happening, and the market is still growing at 20% to 30% per annum. The second is the move to manganese-rich chemistries. Umicore, for example, are commercializing their high-lithiated manganese chemistry, which has 60% manganese. BASF are developing a 70% manganese chemistry. Many other manufacturers are also pursuing manganese-rich chemistries. Tesla has recently announced and is validating CATL's LMFP or as they call it, M3P battery for the Tesla 3. The third tailwind is the regulatory environment, which is driving the creation of local supply chains. The Critical Raw Materials Act has just been passed by the EU Council, finalizing this legislation, which will come into effect in May this year. High-purity battery-grade manganese is on the strategic raw material list for which the parameters are 10% mined, 40% processed and 25% recycled in the EU and no more than 65% from any single country. In addition, the battery regulations have been passed in the EU, which will, in time, define the required CO2 footprint of batteries sold in the EU. In the US, the Inflation Reduction Act, a bipartisan bill, clarified in December 2023 that from 2025 any vehicle with battery raw materials extracted, processed or recycled in a foreign entity of concern is ineligible for the tax credit, which moves us nicely to the supply side of the market. As you could see, over 90% of high-purity manganese sulfate monohydrate or HPMSM, which is the material required by the cathode active material makers, is processed in China, a foreign entity of concern. The non-China landscape has very few producers. There is no current HPMSM processing capacity in North America and only a very small plant in Europe. And only a handful of development projects, of which only 3 are at feasibility study stage or later. With the full potential supply of known projects versus independent market demand forecasts for HPMSM, a supply deficit begins to appear in 2026 and it steadily grows. The gap appears earlier and is larger on a base case, which excludes projects on paper. On a regional basis, the regulatory environment pushing for localization of supply chains, North America, Europe and rest of Asia have sustained imbalances. Even China has to increase production approximately fivefold by 2030 from today's production level just for their own requirements. As we have seen in nickel, lithium and cobalt, when any raw material moves into a market tightness, there is a price [ fly-out ] reaction. This will stimulate extra projects when development time lines are long even for our processing plants. In addition, when prices do revert, they do not go back down to their historical level, but rather down to the marginal cost of production, which sets a new higher price benchmark. Again, we have seen this in lithium and raw materials such as rare earths. With that context in mind, we can now turn to the update of the company's projects. Euro Manganese is a battery materials company with our flagship project in the Czech Republic, the only sizable manganese resource in the EU. With Germany to the north and west, we are strategically located in the heart of Europe. This project is unique and is local. It has a very low carbon footprint, and it's a circular project. The company has the European Bank for Reconstruction and Development as our second largest shareholder who invested in December 2021 at CAD 0.48 per share. The European Investment Bank has recently completed its initial due diligence, and the project is now listed on their website as under appraisal with the EIB. We see our Czech project as the first step in building a multi-asset manganese platform, starting with our project in Quebec, which I'll talk about later. Our project in the Czech Republic is a tailings project. 27 million tonnes of tailings created from a pyrite mine to produce sulfuric acid in the Communist Czechoslovakia between 1950 and 1975. This reserves gives a 25-year mine life, producing high-purity manganese products equivalent to just under 50,000 tonnes of manganese metal per annum. As this is tailings from a previous flotation plant process, there is no blasting, no crushing or grinding required. And we will be remediating what is a currently polluting site with currently nearly a tonne of sulfates leaching into the groundwater every day. And we are not creating a new hole in the ground. Our tailings will return to where they came from, but placed in a lined dry stack and capped facility. We're not using any new technology. It's all commercially proven. The ore is excavated and slurried to the processing plant just across the road. We use magnetic separation to create a concentrate, followed by leaching of the manganese carbonate ore. No high temperature roasting is required, unlike oxide ores. The resulting filtered solution is then purified, followed by electrowinning to form a 99.999% high-purity metal, another purification step in its own right. The high-purity metal step provides flexibility. High-purity metal can either be sold to companies who produce specialty alloys or to battery companies who wish to make their own high-purity manganese material. Or we can turn that metal into high-purity manganese sulfate through dissolution and crystallization at site or at another location. 1 tonne of high-purity metal produces 3 tonnes of high-purity manganese sulfate. The project has exceptional ESG characteristics. We have discussed the remediation of the site, which is being backed up by our independent life cycle analysis results. In addition, there is low CO2, no freshwater use and we also recycle some of our own emissions. Here, you can see the location of the processing plant adjacent to the tailings. Local support is not only generated by remediating a polluting site, but also in the Czech Republic 1/3 of the government royalties flow directly back down to the local municipalities. Through the use of 100% renewable power, we currently have -- and we currently have an MoU with Statkraft, one of Europe's largest renewable power providers. The CO2 footprint of our product will be 1/3 of the incumbent industry. This is a very important selling point for our target customers who have their own CO2 production targets, which will be backed up by EU battery regulations. We are the only high-purity development project that has advanced to the stage where we have an on-site Demonstration Plant. The plant has produced both on-spec metal and high-purity manganese sulfate, and there are 3 key main benefits from the Demonstration Plant. First, we can produce customer samples at the tonnes level. We are also gaining very valuable insights into the operation of this process that are being fed back to Wood, who have been appointed as the project's EPCM contractors and are currently undertaking field engineering. And third, our operating team are gaining valuable operations experience by running the plant. Moving over to the land, significant progress has been made on the various land-related issues. The company has made the final payment and is now the owner of the commercial plant site, seen on the map south of the road and the railway line, and you can see a power plant to the east of this land. All required land rezoning has been completed, a 3-year process in the Czech Republic. At the end of last year, we signed a land access agreement with CEZ, the largest company in the Czech Republic and 70% government owned, which provided access to 60% of the manganese reserves, bringing the total access up to 85%. The company is currently in negotiations with the landowner of the final 15%, and we remain confident of securing this land. The company issued the definitive feasibility study in July 2022. Quite a high-price environment in Europe at that time with COVID supply chain disruptions still having an impact and the Ukraine war also having an impact. We have seen steel prices and other material prices decrease since then, including sulfuric acid, our main reagent. Even with those higher prices, though, the project is robust with a NPV base case of USD 1.3 billion on a post-tax basis. CPM, who provided the price forecast, had prices increasing to over $5,000 per tonne of high-purity manganese sulfate. However, a more conservative price forecast was used for the base case with pricing increasing to $4,000 per tonne due to the supply-demand gap and rebasing at this level. The market is very opaque when it comes to pricing of high-purity manganese sulfate. There is only one index published, which is an ex works China index, which represents about 13% of the domestic China market, which is what is traded spot. Western high-purity manganese sulfate specifications are tighter than in China. And as such, the majority of the Chinese product does not meet these western specifications. These factors, together with the benefit of supply security, leads to a market premium for non-Chinese high-specification products. Our view, based on market research, is that the price in Europe today is between $2,500 and $3,000 per tonne and we remain at present in a balanced market. As we move forward, the ESG credentials of products are also going to play an increasing role in price verification. Offtake progress is being made. In our offtake funnel, we outline various stages of development for customers. The tonnages indicated at each level represent the tonnages allocated to Euro Manganese that are being discussed and negotiated. There is currently 290,000 tonnes on a high-purity manganese sulfate basis, nearly double our plant capacity with some parties at the top of the funnel yet to define their tonnages required. With cathode chemistries moving fairly rapidly, it does create some flux and delays, albeit said these are generally moving in our favor to more manganese-rich. The Verkor term sheet, a company backed by Renault, has been secured and is moving through the internal processes of Verkor towards an offtake contract. We are working hard to sign more term sheets in the first half of this year. Our updated time lines are laid out on this slide. We have discussed the demonstration plan, and this year, we'll be focused on providing customer samples to advance their qualification processes. Wood have now commenced FEED engineering delayed due to the elongation of the royalty financing process with Orion, but it is underway now. With ownership of the commercial plant site, we have planned to start on-site early works, such as geotechnical work, demolition of old buildings and getting the site ready for construction. The approval of the Environmental and Social Impact Assessment is imminent. I visited the Department of Environment in the Czech Republic a couple of weeks ago, and they confirmed their intention to release it in March. The ESIA is a key gating permit. Not until this is approved can other more procedural permits be applied for and issued. Documentation is nearing completion for the land planning permit, and the construction permit documentation will come from the FEED engineering work. The final investment decision or FID requires the debt financing package to be in place backed by 80% to 90% of offtake contracts, the FEED engineering to be complete to give a plus or minus 10% final installed cost and schedule, and the construction permit to be issued. Therefore, FID is targeted to be in the second half of 2025. The current construction schedule has commissioning and ramp-up in 2028. Now I'd like to lay out the company's project financing plans. Starting on the debt side, we have appointed Stifel out of London as our debt adviser, and we are currently modeling a debt gearing ratio of 60% to 65%. The EU institutions are showing strong support with both the EBRD and the EIB in the debt process. The European project finance banks have also shown strong interest in financing the project. In November last year, the company closed a USD 100 million funding package with Orion, the private equity firm out of New York and London. The deal was structured as a royalty, which I'll discuss further on the next slide. The company is also in discussions with a number of parties on becoming a strategic investor in the project at project level. Ideally, this will be alongside an offtake commitment. It would provide those parties in the supply chain with a natural hedge, which otherwise is not available in the market. However, we are canvassing interest from other strategic players. Finally, the company is in discussion with multiple equity funds who are interested in contributing to the final equity investment at FID when the project will be derisked from a permitting, bank financing and market perspective. I think it is worth just delving into the Orion deal a little further. It is a very effective way of raising funds at this stage of project development without diluting current shareholders. Orion completed a significant amount of due diligence on the resource, the process flow sheet and engineering, the environmental aspects of the project, the high-purity manganese market outlook and the team. It was pleasing to pass through this and validated again our view that we have a very strong project. A USD 100 million facility is structured in 2 tranches of $50 million each. The first tranche is a loan with a 12% interest rate convertible to a royalty of 1.29% to 1.65%. The higher the price of sales, the lower the royalty between these 2 points. The company has drawn down USD 20 million to date and we'll draw down the $30 million of this tranche on completing some commercial milestones, which are in our plans. The second tranche is a straight royalty of 1.93% to 2.47% to be drawn down at the point of FID. Again, the higher the price of sales, the lower the royalty between these 2 points. Orion does have an offtake option of 20% to 22.5% of production, notably at the same price as the company sales. Canaccord, who writes research on Euro Manganese, published a note on this financing and valued the project on a look-through basis at USD 1.5 billion. As I mentioned previously, we are looking to create a multi-asset manganese company, so I'd like to touch briefly on our North American growth horizon. The company has secured an auction on a parcel of land in Becancour, Quebec. Becancour is rapidly becoming a battery materials hub with GM, POSCO and Ford EcoPro both under construction of battery plants within the industrial park. In addition, you have lithium, nickel, graphite, cobalt plants either planned or under construction. Now with Euro Manganese plants, it completes the battery cathode raw material requirements. It is the green, low-cost power from Hydro-Quebec, together with the excellent infrastructure and highly supportive government incentive programs, that is highly attractive for investment in this region. The plan is to undertake the final stage of processing at Becancour from metal to high-purity manganese sulfate, using some of the material from the Czech plant. Note, though, that the majority of Czech metal will be processed into high-purity manganese sulfate on-site in the Czech Republic. We have signed an MoU with MMC in South Africa who produced 28,000 tonnes of high-purity metal. A significant amount of that is going to the Japanese battery makers, but it provides the Becancour project with feedstock optionality. As well as the plants within the Becancour Industrial Park, there are European cathode active material makers and battery makers building plants in Quebec and Ontario. And our Becancour plant will also give direct access to the U.S. market. Note, a cooperation agreement has already been signed with the First Nations people in Becancour. An initial scoping study has been completed by Ausenco, showing good results. The next steps are to progress to a feasibility study and undertake permitting, both of which are subject to raising funding specific to the Becancour project. So looking forward, our key catalyst this year include producing products for customers from the Demonstration Plant, pushing forward with Wood on the FEED engineering, complete the land -- the final land access agreement and receive our Environmental and Social Impact Assessment and commence the formal debt process and conclude a project level strategic investment as well as to progress the Becancour opportunity. I would also like to mention that the EU Council approved the final stages of the Critical Raw Materials Act last week, and it is expected the legislation will come into force in May this year. With battery grade manganese on the critical raw materials list and being the only project in the EU, the company feels it will meet the criteria to be selected as a strategic project under the Critical Raw Materials Act, which is expected to have both funding and permitting benefits. A quick word about the executive team, an important component of any company. I'm a materials engineer by degree with a PhD from Cambridge. After which, I joined Deutsche Bank in London for 3 years, followed by McKinsey in London for 4 years. After which, I returned to Sydney and joined Lynas Corporation, the rare earth company, in its infancy in 2002. I was with the Lynas for 9 years and was right-hand man to the CEO as we developed the resource in Western Australia and the chemical processing plant on the East Coast of Malaysia. That journey has many similarities to the development of Euro Manganese, a market dominated by China and the development of resource and chemical processing plant to deliver a Western secure source of supply. Martina, our CFO, a Czech national who's living in Vancouver, has a strong financial background with PwC and E&Y with both automotive and mining company experience. James has recently joined as VP Commercial. An Oxford PhD in geology, and was at McKinsey the same time as myself before joining Rio for 11 years covering a number of roles, and luckily also with automotive experience. Andrea is our VP of Operations and a seasoned mining industry professional. Andrea led the development of the feasibility study and the regular selection process of the EPCM contractor, resulting in the appointment of Wood. Jan is our country manager and MD of the wholly owned project subsidiary in the Czech Republic. Jan is a chemical engineer and is also Czech and has a broad experience in leading organizations in the region. A very recent hire is Tim Kindred as Project Director, who will head up the [indiscernible] team working in an integrated fashion with Wood as they move through the EPCM contract. Tim has joined us from IGO and he's an experienced project director, having led multibillion dollar projects from feasibility through to commissioning with experience in the battery metal space. So thank you. I think now we will open the session to questions.

Absolutely. And webinar attendees, please feel free to use the Q&A function, which can be found at the bottom of your screen. Matt, I'll jump into them now and you have actually answered this one already. But -- so how is the FID progressing?

Yes. So the FID has those 4 main components. To get to FID, we need to have the bank financing in place that requires the offtake contracts to 80%, 90%. We also need the FEED engineering complete to give us a plus or minus 10% final installed cost and that will also provide the materials for the construction permit documentation. So all four of those are moving forward well, and we believe that FID will be in the second half of 2025.

Wonderful. Just a question here on the offtake. So how is that progressing or advancing with Verkor?

So the term sheet has been signed with Verkor. We are moving forward -- they, I should say, are moving forward with their internal processes within Verkor towards the offtake contract. We do have a draft offtake contract and that's just working through the Verkor processes, alongside processes with other battery metals. And again, we expect that to be signed as an offtake contract this year.

Thanks, Matt. So another one here. So with FEED work and related time lines being delayed by about 6 months, do we have any comments on these shifting time frames?

I think the new time frames are laid out in the front end side that we talked through. So yes, the extension of the time required to get the Orion processing -- the Orion facility in place. Our gap analysis finished in October. It was the end of November until we got the first Orion funding in place. We then have Christmas and New Year and now we've remobilized the Wood team to move into that FEED engineering.

Thank you, Matt. Another one just on the Environmental and Social Impact Assessment. So is there an issue with gaining approval for this?