Ideanomics (IDEX) – How to Insert Company into Chinese Battery Market

Ideanomics.
  • NASDAQ: IDEX
  • Shares Outstanding: 237.3M
  • Share price C$0.84 (23.09.2020)
  • Market Cap: C$216.824M

Interview with Alf Poor, CEO of Ideanomics (NASDAQ: IDEX)

READ ARTICLE FOR THIS INTERVIEW HERE

This is a global ESG story with multiple divisions and a focus on driving commercial electric vehicle adoption. Ideanomics is headquartered in New York with offices in Qingdao and Beijing, China. Ideanomics is an international company with a firm focus on driving commercial momentum into electric vehicle consumption whilst developing innovative, futuristic financial services and Fintech products. Our main topic of discussion was the company’s electric vehicle division, Mobile Energy Global (MEG).

The company currently specialises in replacing conventional catalytic conversion engines with battery motors. Moreover, the company also enables group purchasing discounts for fleet managers to be able to carry out these operations and also provides financing and charging solutions. Ideanomics Capital, the company’s corporate division, includes DBOT ATS and Intelligenta, providing unique financial services via AI and blockchain solutions. In totality, Ideanomics provides its global customers and partners with enhanced efficiencies, cutting-edge technologies and leverage to capital from global markets.

As a US company operating in China, we were also keen to dig into how Ideanomics’ dealings have been affected by COVID-19 and can they operate without hindrance in China as a US company. And in fact, can they grab the attention of investors in the US whilst consorting with the enemy? In terms of the end game, Ideanomics wants to be providing energy to EV consumers and gas stations by taking a fee on the energy provided.

We Discuss:

  1. 2:36 – Company Overview
  2. 3:22 – History & Development of Ideanomics
  3. 5:27 – Fitting into the EV Thematic: Main Problem to Solve
  4. 16:13 – Breaking into the Chinese Market: Implications for Success
  5. 20:04 – The Business Plan: Relationships and Monetization
  6. 31:22 – Assurance for Success and Competition
  7. 33:18 – Geopolitics: “Anti-China” Rhetoric’s Impact on Business
  8. 41:48 – COVID-19’s Impact: An Outlook for 2020
  9. 44:38 – The Big Prize: Is the Story too Complex for the Market?
  10. 51:27 – Expectations & Excitement for the Rest of 2020

CLICK HERE to watch the full interview.

Matthew Gordon: Why don’t you kick off and maybe give us a one-minute overview of what the business is and then we can get stuck into business plans and what the future looks like.

Alf Poor: Ideanomics started out as a company that was really looking to get involved in industries that are transformative. A couple of years ago we really started to shape the business around two key areas. One of them is Fintech, specifically the use of blockchain for trading systems. Also the second one is EV – the electric vehicle industry is a catalyst for change in what has traditionally been internal combustion engine driven automotive industry, and more recently we’ve been putting a lot of our energy into the EV side because that’s really a growth engine at this.

Matthew Gordon: We notice your share price had various incarnations along the way.  What do you put that down to?

Alf Poor: This has been a business in transformation, and I think whenever you transform any business you need to convince the market as to what you are doing. Then you need to prove it out through fundamentals. Starting with the last quarter, we started to produce revenue from our EV Division and that’s really the fundamentals the market has been looking for. Now we can show them execution I think we’ll see stability and shareholder value growth in the future.

Matthew Gordon: How long have you been working with Ideanomics?

Alf Poor: I’ve been with Ideanomics for exactly two years, but involved a few months longer than that before I officially came on board,

Matthew Gordon: What were you brought on board to do?

Alf Poor: I originally came in more of an operational role, but slowly progressed through as they help them get the U.S. operation stood up and where we wanted it to be, I migrated into the CEO role.

Matthew Gordon: Have been brought on board to kind of clean house, as it were, get focused?

Alf Poor: To some extent, but that would be unfair on the previous management. Obviously, the management team had a fail fast strategy. Whenever you’re looking at transformative industries, you look at new ideas, and new ideas are obviously slightly more risky than other endeavours, but I came in with a history of being in start-ups. I worked 8 start-ups previously, all in the B2B space and all of them have been a success to a greater or lesser degree. We’ve never turned the lights out. I came in with a focus around making sure that execution is important, delivery is important and growing the business profitably is important. 

Matthew Gordon: How are you positioning it?

Alf Poor: It’s a very interesting industry, if you look at automotive, that’s really not the play here. The automotive is the means to the end. When we say we look for transformative opportunities, it’s really happening with the electrification vehicle. There is a transition of energy demand away from petroleum products: gasoline and diesel, known as petrol in your world, to electricity. Now, if you think about it, you look at the automotive industry; the GM’s, the Fords, the Fiat Chrysler etcetera. They go through typical economic cycles; good years, bad years, look at the people supplying the energy that’s driven the vehicles for the last 100 years – ExxonMobil, BP, Shell -they don’t have a good year, they make a few billion. If they have a good economic cycle, they make tens of billions, right? This is really about the energy demand, that’s where our focus is. Although we’re involved in the industry, we do own an automotive EV manufacturer in Malaysia called Treeletrik, and we are planning to bring our own branded vehicles into North America and Europe under our Medici Motor Works brand. The objective here really, which is what Tesla understands and not a lot of other people do; the end game is about transitioning energy demand. Billions, trillions of dollars are spent every year on petroleum products. That will now be moving into electricity demand.

Matthew Gordon: Where do you fit in the mix?

Alf Poor: Yes, I’ll explain what we’re doing in China because that’s the first market we chose to go into. We chose to go into China first, not because it’s easy, but because it’s regulatory driven, which means you can be relatively confident that you can derive revenues when there are regulatory deadlines in place, particularly some of them are quite near term like all the city buses have to be changed by 2022. When we go into a country like China, it currently has 90% of the world’s EV manufacturers. So there’s no point Ideanomics going in as another manufacturer or another brand because it’s already a saturated market. What we chose to do was we chose to go into EV enablement to help commercial fleet customers understand how to transition their vehicles, how to get through the sales procurement process, the rebates process, the lease financing process, and then move them into being a customer of ours so we can market them wholesale, prepaid electricity or discounted access to our preferred partner charging units so that we can get that strong, rich, recurring revenue from the electricity demand. 

Matthew Gordon: You’re solving for these fleet managers, they are sitting there with these huge, big diesel fleets and you’re saying to them there’s a better way?

Alf Poor: Yes, we say there’s a better way in a number of areas. It’s not just about switching to electricity to be clean and meet the regulations, EV vehicles have a lot fewer moving parts in them than internal combustion engines – about 10% moving parts. That means less maintenance costs, less repairs and the vehicle lifecycle is much longer.

The second issue is you save money when you fuel your vehicles with electricity versus gasoline and diesel. If you look at the whole life cycle cost of owning a vehicle. It’s going to come down dramatically.

Matthew Gordon: If you’ve got this mandate from the government coming down the line saying hey, you’ve got to by X date. What’s that discussion look like?

Alf Poor: The discussions are interesting. First of all, they don’t know where to go. Because we’re focused on the commercial space not the passenger space. If you’re in the passenger car space and you’re looking for a new family car and you want it to be electric, but you got two choices: Tesla or everything else, right? Most people are picking Teslas. But in the commercial vehicle space, it’s a very different landscape; if you think about walking down the street in any country, okay? A VW Passat goes by, a 5 Series BMW goes by, a Ford Focus goes by. Because of the amount of advertising done by those brands commercially: TV, internet, newspapers Etc. You are ambiently aware of what that vehicle is. You don’t know you know why it’s a VW Passat or Ford Focus, but you know it is. You see a city bus go by, a garbage truck, fire truck – you have no idea who they’re made by. Heavy goods vehicles – you may know Scania and one or two other names in the business, but you don’t really know who makes those commercial vehicles. There’s a lot less brand awareness in commercial vehicles.

If you take that dynamic already, from a commercial fleet perspective and you add in almost everybody as a new entrant int he markets, how do you pick who you work with? If you are a commercial fleet customer sitting there right now, how do you know which companies are making reliable EV trucks when almost every player in the market is less than five years old? That’s where people like Ideanomics come in. We work through everybody from local and national governments on the rebate programs, through all of the best battery makers. We have Partners like see ATL – world’s leading battery maker. Major manufacturers. We know the entire landscape. We’ve got a McKenzie-style IP knowledge of this industry at this point, and we’re making our mistakes at scale in China, which is our first market we’re in, so when we come to copy paste that model as we go to other countries, we will have a refined model that will be a really important point of purchase commercial fleet customers.

Matthew Gordon: How are you solving their problem? 

Alf Poor: The ultimate problem right now is around financing. I’ll tell you how we solve the problem: there are rebate programs available. I own an EV. I bought an EV passenger car in the US. People don’t understand the amount of money the government will give you to move to a clean energy car. I don’t think all the governments internationally really understand why they’re promoting the programs other than ambiently they want to be doing something for the environment. You can save a lot of money doing that – you get USD$7,500 off the car in the US. So that already brings the cost down. The big challenge is EV is very different to an internal combustion engine when you break down what you are actually trying to do for the commercial fleet customers because half the vehicle’s value is in the battery, the battery pack and the energy management. Most of that can be taken out and put in another vehicle. That’s like being able to take 3 or 4 screws out of a car, lift the engine out, put it in another one. So the lease financing companies are like, whoa – how do we deal with this problem? Because you can’t predict the future residual value if you’re going to be swapping batteries, because the battery in a truck or a bus is 55% of the value. In a car like a Tesla it is 35%. If that thing can be taken out and changed and it doesn’t have a VIN number on it like an engine does, then you have a real problem from a lease financing perspective. So that’s where you’ve seen commercial sales be a lot less vigorous than you’ve seen with maybe Tesla’s sales.

Tesla is looking at an upper middle market, right? So they are cash buyers for the most part, but they can afford to buy that vehicle. It’s a higher-end vehicle. Commercially that doesn’t exist. They have a balance sheet built over many years, it says they rotate the fleet within a certain amount of time and they are used to pay 10-15% deposit. The EV world kind of blew that; the lease financing companies can’t jump in with the way they borrow the money from the capital markets because their capital at risk is structured a different way if you do an EV deal.

What we’ve done, and we need to solve this problem regionally as we move through different countries, in China we created a consortium and we went to the typical people who back lease financing funds, typical corporate debt buyers, people like insurance companies with cash on the balance sheet. We also did a bit of a masterstroke; we rounded up all of the electrical utilities as well. Okay, because who’s the downstream beneficiary of the change in energy demand? The electrical companies. So we went to Southern Grid, State Grid, Three Gorges, GCL, and we came up with a program where they participate and they will take the risk on the difference with the battery. They can afford to play the long game because they’re the people who are getting the demand for electricity. Even if I market the electricity in China and I get a certain percentage for selling at wholesale by giving access to the charging partner network, the underlying electricity is coming from one of these major grid suppliers. So they’re the ultimate beneficiary in that, and that’s what we did to solve that problem in China.

We were responsible for that. Our chairman and some of his team put that Consortia together so we could get these lease financing funds up and running, get these commercial vehicle owners, fleet operators into EV within the regulatory timelines they need, which has been a big headache for them.

Matthew Gordon:  You have solved that problem for them. But you said, we’ve made a lot of mistakes in China.

Alf Poor: Yes, we’re making our mistakes in China. I wouldn’t say we made a lot of mistakes, but whenever you launch into a new industry, you’re sailing in uncharted waters. You sail down cul-de-sacs, so you have to turn around again, but we’re making a market. When you have to put together a consortium of lease financing funds, you’re building that market. As soon as we start to deploy those funds, which we are doing this quarter going forward, I think we’ll see other copycat funds come to market because there’s a lot of capital in China that needs to be deployed like there is in most countries. When they see what we’re doing and that we’re making money from it, I think that’ll happen. We embrace that because China has a big problem; it has a lot of very large polluted cities, but it has a very short regulatory window. Up until now, passenger vehicle sales have been very strong in EV, but commercial vehicle sales have not.

Matthew Gordon: What makes you think that you can succeed? Surely there is a lot of competition?

Alf Poor: It comes down to a couple of things: we developed our model, which we call, ‘S2F2C’, which is sales to financing to the charger. It’s really the charging like I said, that’s really what we want to get access to because that’s the rich, recurring revenue stream in the future. How can we play out in the charging? Own the customer, which is the fleet operation. How do you own the customer? You do the sales and the financing aspects for it because it’s tricky in EV because it’s a new way of doing things. Whenever there’s a new way of doing things people need a guiding rail.

Think of it as a fishing analogy – the sales procurement that we do, helping them find the right vehicle with the right spec for the right price – that’s the hook. The bait is the lease financing; giving them terms that they’re used to that they currently can’t get in. Then we’ve acquired a valuable customer. He may own a fleet of 20, 200, 2000, 10,000 vehicles. Once we have him as a customer and he trusts us as a service provider, we then market his energy needs: we can sell you, with our utility partners, wholesale, prepaid electricity. We can also sell you access to our preferred partner charging networks. GCL and others are building their own charging network systems at this time. They are our partners; we have agreements with them. If we give one of our fleet customers access you will get a discount for in-network charging and we’ll get a small percentage of that.

Matthew Gordon: What was that? S2F2C?

Alf Poor: Yes: Sales to financing to charging.

Matthew Gordon: How has this business has been set up? It comes back to why you’ve been drafted in here. What are you trying to build?

Alf Poor: Chairman Wu – he’s a gift to any company. What he has is an incredible network and a capability to shrink a sales cycle for you.

Matthew Gordon: What do you mean by that? 

Alf Poor: Say you want to work with a utility provider who provides cheap, clean electricity like Three Gorges. The world’s largest hydroelectric dam. A huge electricity company in China, one of its main power companies. It’s very difficult for me as somebody without any influence in China, to pick up the phone and get that deal done.  I can call Dr. Wu, our chairman, and say, I need you to get us a relationship with Three Gorges. He can get on the phone and make it happen. Instead of there being an 18-month sale cycle in which there has to be a lot of learning about each other, getting to know you, corporate lawyers taking 6 months to turn the agreements around, Dr Wu can use his influence within China. He can crush that cycle down to a 2-3 month program.  So that’s really the value of him. Underneath him we have operators that are responsible for running the business. In China one of the most important things we did last year is Bruno and I went out and looked for somebody to run our MEG group, and the gentleman that we brought in from GCL, which is a clean energy provider and has a lot of plans to be influential in providing both clean energy and charging networks for EV, and prior to that, he was a sales executive at Gili which is an international automotive company that owns some high-profile brands like Volvo. So we put somebody at the head of the ship there who knows the industry both from the electrical demand perspective and from the automotive.

Similarly, in Asia we hired a gentleman called Shane McMahon to go in and head up the electrics. He set up the operations for LDV DAF, which is an old British Leyland truck event you may remember from years ago. That was bought by a Chinese company. They set up operations in China. He did everything from setting up the assembly plants to the supply chain for parts and everything else. We’re putting the people in place who are experienced operators. So we use Bruno Wu to get the door open, we use him to get the deal done. Then we bring top-class professionals in to help do the job.

Matthew Gordon: Why guarantee manufacturing? That’s fraught with danger, isn’t it?

Alf Poor: One very simple reason: when we went to speak to the manufacturers in China so we could help get top-tier relationships to make the sales procurement side of the business, they said to us: we love your story. We love what you’re doing. You’re bringing the whole industry together. It’s great that you guys are evangelists. But you’re just a source of orders for us. Until you have an order we have nothing interesting to talk about. We said: that’s never the case, what’s your real pain? They turned around they said: the real pain point is this -we’ve been told, as a bus manufacturer, that we have to do something like 25 years of bus manufacturing in a 4.5-year window to meet the government regulatory guidelines. And we’re in China. This is not like the UK, the US where we set a deadline of 2022 and it’s 2032 and you’re on Panorama or 60 Minutes talking about budget overruns and things like that- it doesn’t happen in China. They say the bad thing about China is it is authoritarian, but when you want to get something good done, being authoritarians is a pro not a con.

When they say 2022 they mean 2022. They will use different fines and things they have for their carbon credits against those particular companies or provinces or city municipalities if they don’t meet those deadlines. So the manufacturers said, if we’re going to create 25 years’ worth of buses in 4.5 years, we are going to create tremendous overcapacity.

Now China, at either the national level or at the Province level, they’re subsidising it. So that’s great. But I’ve still got to buy a factory, build factories and hire workers. What happens January 1, 2023, when the last bus has been delivered? I’m waiting for a vehicle accident in order to sustain my business, why? Because China is not a growing population. It’s not like India.  So once all the buses have been replaced they have a 17-year shelf life, it’s going to be a long time before another bus is sold and this one breaks down. So they have an overcapacity issue.

Southeast Asia is a very friendly belt and low trading partner for China, so owning an electrical vehicle brand in Malaysia, the only country that has an automotive manufacturing history because of the proton, also has a highly-skilled workforce. It has factories for Intel and others there, is a very attractive proposition. So by making that move to acquire Treletrik, we suddenly became very interesting to a lot of major automotive manufacturers in China.

When you’re in the commercial space, you don’t mind being an OEM and building those buses, building those garbage trucks, building those police cars, those fire trucks, vans, lorries and trucks, and having the Treeletrik brand on them. What you need to do is, you need your business to be sustainable after the regulatory deadline has gone. So that was the key strategic reason why we purchased Treeletrik.

Matthew Gordon: Why is that your problem?

Alf Poor:  I wanted preferential terms with the manufacturers: he BYDs, the SECs, the JIACs, like DonFeng – the big boys. Until I had orders for them, I wasn’t interesting. ‘You guys sell some buses then come and tell us and we will sell you the buses to sell to your customers.’ Then we introduced the notion of giving them an export and international expansion then we became much more strategically important to them. Then we got more preferential terms, which means when we sell a bus, we can create a greater spread for ourselves because they’re giving them to us at a discount which nobody else can achieve because I have another strategic reason why they want to be involved.

Matthew Gordon:   Can you make money?

Alf Poor: Absolutely.

Matthew Gordon: It’s not just about the relationship. You can make money. That’s a commercial decision?

Alf Poor: Yes. I’ll give you a quick rundown on how we make money on the S to F to C: on the sales we make money on spreads. We buy the vehicle at one price, we sell it on for another. Again, because we’re strategically important to them and we have volume of sales, we get a much better deal than any fleet customer would by going direct. In terms of the lease financing, although we put the Consortium together, we’re not actively part of the lease financing. We sit on the board. So they pay us a commission, a finder’s fee whenever we place the deals. The deals are large because it’s commercial vehicles, big ticket items, we get a commission out of that. We get a spread and a commission but those are just nice income streams in order to acquire that fleet custom. What we really want to do is we want to make 3% recurring revenue off the energy sale. We’re getting commissions and spreads from the lease financings in sales today in order to help us acquire the customer and pay the bills, but really what we’re after is that recurring revenue stream. You get 3c on the dollar or 3p on the pound for every gallon that’s filled up, you’re a very wealthy company. That’s where Ideanomics is heading and that’s the endgame.

Matthew Gordon: How long is that pilot running?

Alf Poor: When you’re involved in EV enablement, as I said earlier, you speak to everybody from government bodies through to customers, battery suppliers – everything. We got into some discussions with the government, and the government said: look, we love EV/ We’re promoting EV. Our cities are polluted, but we need a game plan for three of the biggest producers of money in the treasury, which is Petrochina Sinopec and Sinoc, three big petroleum pants. They give us the majority of our treasury revenue. If you look at the total state-owned entities in the PRC, they give me a huge amount of money. We do not want to be out of business tomorrow. EV has suddenly hit a tipping point and everybody’s driving EV. So they came to us and said: we want to do something: we want to convert all those fuels stations so that we don’t have a hard stop for a treasury revenues but we have a gradual curve and then our petroleum companies get to meet energy demands. They’ve all made grid edge technology investments, like BP, Shell and others have in recent years, acquiring charging station technology.

The idea here is going to a petrol forecourt, gas station forecourt – there are 10 pumps. We’re going to take out the last two. We’re going to make those EV fast charge. We’re going to leave the other 8 as diesel and petrol. In some areas, depending on how fast the growth is, it will be as quickly as 5 years. We’ll just keep taking two pumps off until the last two pumps are petrol and diesel. In others, you’ll be able to replace the whole one. It really depends on the city; whether it’s a suburban or rural area. The rural areas we anticipate will take longer but the idea is to replenish those.

That’s interesting for China -why? Because they own more than 100,000 pieces of real estate in prime locations called gas station. They don’t want to shut all those and put a for sale sign up, those will be hard to sell. They also don’t want to lose their revenues into the treasury. They need to stay in the energy business. They just need to transform. They’ve done a study that tells them if they can get the DC fast charging time down to around 10 minutes, so it’s only a couple of minutes more than filling up your car with petrol, consumer habits won’t change that quickly. If consumers are ambiently aware there’s a network out there they can refuel at, they don’t care if it’s electricity or petrol.

Matthew Gordon: How do you assure me that you know how to do that and you’re going to be able to do that?

Alf Poor: That’s the most important part, and that’s where the S2f2c is important. As I said, we’re providing a value-added service right now, helping these people get the right vehicle, the right spec, for the right price on the right lease financing terms, then they trust us. Only through that process can we then market the electricity product.  We have a deal with China Union Pay, which is the equivalent of  MasterCard wrapped in one to create a 4-in-1 energy card. So they’re going to have a card, or actually an app in China because no one uses plastic anymore, all payments are electronic and phones. So the app will allow them, if they have this app, to get discounts at those partner networks. That’s our app. We’re guaranteed to get the revenue stream from them.

Matthew Gordon: You talked about China, it’s very authoritarian, very good at getting things done, but does it stop competition coming in? 

Alf Poor: It doesn’t. BP is working with Didi, the China equivalent of Uber, to put charging networks in. China does actually allow foreign investment and foreign companies to come in. China is opaque by nature. It’s not a difficult trading environment that many people think it is. On the ground, we find them to be very buttoned-up, very business-focused and open to foreign investment, but it has to be done in the right way because China just works a little bit differently than the West.

Matthew Gordon:  Do you think your share price has been affected by the whole Trump trade War? The kind of rhetoric that’s going around, the anti- China type statements?

Alf Poor: Yes, we do. A lot of people don’t understand. Bruno Wu, our chairman, obviously, he’s a very important person in China. He’s married to one of the favourite daughters of China. He’s a high-profile media personality, but he’s a US citizen and this is an American company. All of our operations in China are foreign-owned entities. This is how China sees us. We have to do a lot of work, a lot of advocacy to be a basically US company because the obvious thing,  everyone says to us – you are Chinese. We’re not Chinese. When we’re in China, they’re saying to us: we need specific assurances from you guys because you’re enriching NASDAQ-based investors because you’re a public company. You’re a US public company. So we get it on both sides. That’s probably one of the toughest challenges in the job; China is cautious because we’re a US public company and the U.S. sees us with heavy operations in China and some meaningful Chinese individuals within the company, so they are trying to see like that. We are just saying: hey, let the politics be the politics, We know what we’re good at. Let’s keep focused on the business. China has a problem that needs to be solved. We’re adding value. Let’s make some money.

Matthew Gordon: Is Trump a problem for a business like yours?

Alf Poor: He hasn’t been so far. I don’t know how much of it is just rhetoric in the media, for soundbite sake, and how much of it is actually true. I can tell you that, other than questions about us being a NASDAQ-listed company, no-one’s ever mentioned Trump to us in China. He never comes up in conversation. We’re all focused on doing the job, which is getting the pollution levels down and getting him to move on to clean energy vehicles. And politics doesn’t really get spoken too much in China anyway, it’s not one of their pastimes. Their Pastime food and drink, doing business so it’s a slightly different culture than the West. We’re obsessed with politics and things like that. They don’t have elections, right? So for them, there’s not so much focus on day-to-day politics.

Matthew Gordon: What are the things that you have to do carefully?

Alf Poor: It’s a very, very regulated and documentation-heavy process to work in China. People think it’s not. People think it’s the Wild West, fly-by-night. It’s not  There’s a lot of things in China that occur. I’ll give you one very specific example, you raise an invoice, a VAT invoice in the UK, a tax invoice in the U.S. You pay that at the end of the month or end of the quarter in the Western World. You pay that at the point of billing in China. You send out an invoice, you need to log onto a government website, get a serial number to attach to the invoice so they can trace that you charged somebody and you have to remit it immediately. That’s one of the challenging things; the administration side of it more than culture side. China is very interesting. People think it’s a communist country, it’s a fully-westernised capital market in a communist country. There is no difference to here: there is McDonald’s, Kentucky Fried Chicken, Gucci, Gap. Cars ranging from Ford’s and Buicks through to Lamborghinis on the street. This is this is not the China of 50 years ago. This is a very modern country with all the normal modern entrepreneurial dynamics that you would expect to see in place.

Matthew Gordon: Do you see any kind of conversations? You said they don’t talk about politics, but is there an anti-West approach to this?

Alf Poor: There’s a lot of questions why, they basically say to us, why do you hate us? We manufacture everything you want us to manufacture very cheaply because we’ve got a billion people. We have low labour costs, right? We make everything you want. We do everything you want to do. Apple is one of the richest companies in the world, and the reason that they’re so rich is because we can make the iPhone so cheap, they keep most of the margin, so why are we the bad guys? We are a non-religious society by and large. We’re not bringing any religious overtones into it. We love the West, we love Hollywood. We love all of your brands; all of our shopping malls are packed with all of your people buying all of your brands, and yet it’s a very simple statistic that no one likes to talk about.

Very few Chinese cars are sold in the US. China is one of the USA’s largest car markets. Just have a look at the recent earnings coming out from the GM, comments from the Ford CEO. China is one of the most important markets,  then you look at other companies out there: Stanley Black & Decker, right? Covid-19 supply chain issues – why? Because the majority of their parts are all manufactured in China. So I don’t know how you can have this love-hate relationship with your engine room, which is basically what China is for the world, it does all of its manufacturing rights. It feels to me a little like being in a tough marriage, where you have an argument and then the next morning the wife wakes up and it’s like, oh hi, honey. What’s for breakfast? And she is confused. I think that’s the role China’s playing right now. It’s getting bashed but it’s doing all the work for Western consumption.

To me, it’s a very strange dynamic. All they ask us is, why do you hate us? In many ways, it’s heartbreaking to hear because you have a country that is ready and willing to work to give you the goods at the price that the West wants to pay for them, but also expects them to be the scapegoat.

Matthew Gordon: Do you think that’s going to get resolved with the elections at the end of the year if Democrats come in or is it just part of the new world economy that we are looking at?

Alf Poor: There are a few issues here:  I think it’s easy to take shots at China. communist countries – immediately when you put that label on it has a negative connotation. I think the bigger issue is China is very fast becoming capitalist and westernised, as I mentioned all those brands, all the restaurants are packed, the shopping malls are packed, but when you’ve got 1.4 billion people you’ve got 4 times the population of the US. It’s just a matter of time before that economy becomes the largest. I think you’re probably looking at the real geopolitical issue – the US and the west, countries like Germany, these massive economies, are they happy not being number 1?

Matthew Gordon: How does this year look for you?

Alf Poor: Q3 and Q4 will be very good quarters for us. We can expect quarter-over-quarter growth here on in. We’re making deliveries. We’re only halfway through the Q. This Q is already better than Q2, considerably better. The most important thing to understand here, in terms of commercial EV, it’s been nascent until this year – the whole industry.  You see people on fire now out there through these reverse mergers they’ve done into SPACS?, the world the FiSCA Etc. These guys are just taking orders. We started making sales. Although we will be to some extent in the US, we’re also not driven by a single brand, we’re able to work with multiple manufacturers. So if the commercial fleet operators needs are not met by another brand like a FiSCA they’ll go elsewhere. With us, they don’t necessarily need to do that.

We can work with any manufacturer because we offer a full end-to-end service provider. You’re not just the manufacturer where you make a go or no-go decision. We’re ahead of the curve in terms of getting the EV commercially out the door. We’re making those sales now. I think you’ll see some very interesting numbers in Q3 and Q4 from us as the big-ticket items, the buses and trucks orders start to get fulfilled. I think that’ll be much more meaningful and I think investors can look forward to profitable quarters ahead.

Last quarter, we got several million dollars in revenue, which is great to prove our model, to prove that we are over COVID. We also brought forward a lot of non-cash items, because the quarter wasn’t stellar, we deliberately brought forward a lot of accounting treatment which made it look more loss-heavy than it was, but it’s all non-cash. At the same time, we brought in a lot of money from the market. We filled our coffers so we have a war chest because I think in the second half of the year, there’s a lot of interesting companies that are not doing very well but have excellent long-term prospects.

Companies like us right now, are looking at those type of opportunities as potentially accretive acquisitions to give us a boost even further. Push us even further out front.

Matthew Gordon: To control that you need to have something to be able to collect that money; through an app you’re talking about? That doesn’t sound too expensive or complicated, is it?

Alf Poor:  It’s not. For the most part, when we did the deal with China Union Pay, we’re using both of their backing like an infrastructure. We’re just producing a front-end app that facilitates, and there will be a connection into the different charging network providers. But again, it is all API handshakes, right? In terms of the technological lift, not terribly heavy to build some mobile apps and some connections to some partners. The challenge will be – China does everything at scale – so how to launch the app, how to make sure the equivalent of the Amazon web services that we’re using over there. We’re partnering with the right partner to make sure that it’s robust enough for the growth we anticipate. That’s the real challenge.

Matthew Gordon: EV thematic and Fintech. What is that?

Alf Poor: To some degree, yes, but we have a number of interesting investments in the BlockChain space. We have in Hong Kong that we have a minority position in called Liquefy. They are a real estate tokenisation platform. We believe that’s a big play in the future, getting those illiquid assets liquid, but the regulators are just not ready for that secondary market trading that creates the liquidity. We have investments in a platform called TN2 – blockchain-based without a token, which is interesting for the regulators. Commodity trading plan – that’s another interesting one. We own a company called DBot, which is a licensed broker-dealer. It’s an ATS, an off-market exchange. The idea is to link those technology platform providers with the Fintech regulated entity when the markets are ready for it so that we can start producing products for the trading markets as well.

Matthew Gordon: That’s got nothing to do with EV thematic. Why are they in this entity?

Alf Poor: Well, it has actually. In the beginning, the reason that we got into the EV space is that when China mandated all the city buses be changed, in 2018, by the end of 2020 to it underwrote all the ticket for the city bus companies. It did it at the high-interest rate then they told them you have the rolling stop when you have the bus inventory delivered, go out to the capital markets and ABS refinance, they pay us back and get yourself a lower interest rate. We went in and pitched for a portion of that business using blockchain. What we said is, we can use a blockchain-based system to streamline the underwriting process and help you get better rates in the markets.

If you remember in 2008, one of the reasons the mortgage crisis happened is because people put a thin layer of good quality real estate mortgage assets at the top and filled it up with a lot of bad stuff. If you give the underwriters and the investors access through blockchain, they can look at all the assets that are held within that ABS package and they can see that it’s all high-quality stuff and they can make a proper investment decision. You don’t have to push these synthetic products out layered with stuff that looks good but really isn’t. So we went in with a with an approach to do that from the marketing the transparency perspective, but also streamline it.

If somebody does ABS right now, whether it’s for buses, ships or for airplanes some poor junior analyst has got to go with their iPhone, take pictures of all the stock and the VIN numbers or equivalent. You don’t need to do that today. You get an API from the manufacturer or from the bus company or whoever it is, you connect them both to the blockchain. The manufacturer gives you all the digital images, the VIN numbers or the spec of the vehicles, and the bus company will also be able to tell you all the dynamics of it for the investor. This is the route. This is the number of passengers, the amount of revenue. You can do it in near real-time with the internet over vehicles. Here’s all the information. Here’s the package. Underwriters price it for the market. The market says we love it. We understand what it is. That’s how we got into the EV business using the blockchain. So that was an unintended consequence at that time, and we didn’t know how successful we would be when we went pitched that. We got a certain amount of business in China as a result.

Matthew Gordon: Can you see where that might be confusing to the market though?

Alf Poor: When we first came into the business, this was an old media company that was looking for a new business model. The media business had failed. What do you do when you’re creating your business? You take your underpinnings of something that can be transformative, in our case is technology. We always look to technology for the driver. The Chairman had some investments in AI, a blockchain, we said, okay, where can we apply this? The obvious place to go is financial services; come rain or shine these guys consume these types of services and these can be important transitional tools. Then we got into the EV side of it as a derivative of those investments in blockchain. What I’ve been trying to do in the last couple of years, as you know, is shut down a lot of the other components of the business that we’re currently not pursuing. Now we understand what the business model is. We have two business models: one is financial services, one is EV. There’s a large Financial Services component to EV because of the payments for the energy, the lease financing, the ABS refinancing needs to be done. So they do actually have a strong linkage. I’ve communicated obviously, publicly in our filings that we’re looking to divest, specifically for reason you mentioned. We were this thing that was coming together and forming, now we have this nucleus of a business that we want to focus on, we want to get rid of all the peripheral stuff and make some clear communication to the market.

Matthew Gordon: Are you excited for the rest of this year?

Alf Poor:  Excited for the rest of the year. Very disappointed not to be in China. I was going for a week to 10 days every month, pretty much since I joined the company. I spent a good amount of time there and although I can see the progress, I can’t see it, touch it, and taste it as if I was on the ground. Important things like launching our Amici Centre in Qingdao, I was there. I toured it, we signed the lease on it in November last year. We’re renovating some parts of it but a good chunk of it is online already. I want to be a part of that, and as the CEO I want to be there, I want to be involved in making sure the team on the ground is motivated. We’ve got the right culture in place, supporting them property from the business perspective. You can do all those things remotely, but you feel much more comfortable when you can be there and be a part of it.

Matthew Gordon: Alf, I appreciate that run through. Fast-moving is, I guess, an understatement and a pretty exciting space to be involved in as well. I appreciate your time today.

Alf Poor: Excellent. Thank you very much.

Company Website: https://ideanomics.com/

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Lithium Gaining Traction in the US

Interview with Howard Klein, Lithium market commentator and Founder & Partner of RK Equity Advisors, Writer of Lithium-ion Bull and Host of Lithium-ion Rocks!

You can also catch Klein’s last interview with us about how lithium is mined in different parts of the world and who the key players are. Find it here.

Klein also penned an excellent article on our website covering hot topics like the lithium brine vs lithium hard rock debate. Check it out here.

This is a man who provides a really actionable analysis of the lithium market with technical detail. We were glad to get him back on the show to discuss the latest happenings in the space. The big focus today is on ‘market sentiment’; it can make or break a company, and in recent years, sentiment around lithium as a whole has been negative courtesy of oversupply and consequent depressed prices. COVID-19 was another short-term kick in the teeth to the lithium demand story, with EV consumption taking a hit whilst global economies attempt to recover. However, on the supply side of things, a lack of investment into new lithium projects, combined with impaired lithium production across the globe, is emphasising the supply-demand deficit and heating things up nicely.

The long-term picture for lithium demand also looks very rosy, with EV penetration set to be 25% by 2030. On the subject of the main lithium players, the Q2/20 financial results came out a few weeks ago, and Klein was eager to deconstruct them into meaningful information for lithium investors. As just mentioned, capital for new lithium projects comes at a substantial premium, so Klein helped us understand the terms of some of the few recent financings to take place in the lithium sphere. We also cover lithium clays and DLE: direct lithium extraction. Could these new technologies also apply to brine extraction? Is lithium production about to get a whole lot more economic? Are lithium mining companies going to grow their margins

We Discuss:

  1. 3:34 – General Sentiments on Lithium: Does Anyone Care?
  2. 10:33 – Lithium Hydroxide Companies: Ignore the Rest?
  3. 18:13 – Getting Financed: Options for Lithium Companies
  4. 27:05 – The Mysteries of Lithium Clay: Which Companies Can Solve it?
  5. 32:51 – DLE: What is That?
  6. 38:35 – Navigating the Market as an Investor: What to Look for?

CLICK HERE to watch the full interview.

Matthew Gordon: I want to have a run through of this from an investor’s perspective and help share some of the things which are happening out there. First of all, general sentiment: no one seems to care about Lithium still, do they?

Howard Klein: No, that’s not fully accurate. For some reason, a bunch of Robin Hood traders seem to have cottoned on to at least one stock – Lithium Americas, through the Tesla enthusiasm. In the United States, people are starting to pay attention, maybe not in the UK or in Australia, by Elon Musk, Tesla stock has gone ballistic and he’s been talking about Lithium and Nickel, both on Twitter and in his quarterly conference call. The fact that Tesla is doing so well demonstrates that his cars are selling well. Data points in China and Europe in terms of the sales have been pretty good in the last few months, July and August. The fact that he was profitable in Q2 compared to the rest of the auto sector, which was not the fact that he announced, the Austin Gigafactory, and I think Rodney may have mentioned he’s planning to build the Semi there and the Cyber Truck – those are very big batteries. The sentiment toward Lithium is improving in the United States selectively, it’s not reflected in most stocks yet.

The Q2 earnings came out of Albemarle live-in. Ganfeng’s were also out this week, actually. Ganfeng’s were more positive in their commentary than Albemarle and Livent talked about a relatively murky, no visibility, high inventories, et cetera. In fact, in Albemarle’s case, they announced an idling of their North Carolina hydroxide plant for 4 months, as well as their silver peak. In my mind that is largely a tactical move by them ahead of their year-end contract negotiations with their buyers, because they had to make some price concessions on their Lithium hydroxide contracts last year, and going into next year, they don’t want to have to do that.

The market’s going to be tightening fairly soon. Morgan Stanley’s China analyst is becoming, not yet in the market, but I’m watching this, Ganfeng I call the leading indicator. The people who are analysing Ganfeng at Morgan Stanley, and as I saw some notes from Diara overnight, Ganfeng was talking about Australia being an undersupply of Spodumene in 1 to 2 years. Ganfeng has 50,000 tons of hydroxide coming on stream later this year, their sales and market share are growing enormously in Korea and Japan. SQM is gaining market share in China, of a low-priced carbonate, a low-quality product, but Ganfeng is selling a higher-quality, higher-priced product to Western OEMs and Korea and Japan. If you’re focused on that, which I am, I’m focused mostly on companies that can sell to Tesla, to Volkswagen outside of China, and how that’s looking. Most of that is hydroxide, and the data points coming from Ganfeng are good. The note I think I just sent you, Morgan Stanley was talking about that inventories of Spodumene have been depleted from 5 months to 3.5 months just in July and August.

This message, hopefully in the ears of your listeners outside of China, will start to resonate. And this is corroborated by Rodneys’ research. He thinks hydroxide is going to turn a lot sooner. He’s talking about the second half of next year, but the data points that these things could be brought forward. Again, this is battery-grade hydroxide, I’m not speaking about any other product. And that product is only about 60,000 tons of the 300,000-ton Lithium market, but it’s the one that’s growing the fastest. If you just look at the demand from Tesla for hydroxide toward Q4, 2021, if you look at all of their plants and their plans, they’re going to consume as much hydroxide as is the current market alone.

Matthew Gordon: Hydroxide is the way forward. So, what happens to the rest of these Lithium companies?

Howard Klein: It’s a tough question to answer. There are lots of Lithium companies, in my mind, hydroxide-focused companies are the ones that you should be focused on. There are only 3 battery-quality hydroxide producers: Albemarle, Livent, and Ganfeng. They’re suppliers. I would throw Mineral Resources into that mix because Mineral Resources is a Spodumene supplier to Ganfeng and they’re also partnered with Albemarle. Although they don’t make hydroxide, they’re correlated to hydroxide, plus it’s a very well-managed company that has iron ore and mining services. So those four companies are well-positioned. They are at various valuations: Ganfeng is much more highly valued than Livent. I think Livent is actually well priced here for a hydroxide upturn, and the commentary that they had in their conference call was very positive. Outside of them, within the developing space, Lithium Americas has gone up a lot in value despite the fact that they’ve had relatively bad news.

Matthew Gordon: Are you saying we should, ignore all those other companies because there’s no money to be made, or are you saying they all have some value, but not as valuable as the hydroxide producers?

Howard Klein: I would not say that the other companies have no value, but if you’re an Argentine brine producer, and I know, I watch a lot of your videos and I raised money and advised a number of companies in Argentina, Chile. Lithium Power is a company that we still advise. They have the Maracunga asset in Chile, they’re waiting for a deal with Codelco, and it’s been taking a really long time. So, that’s a good asset. The world will need more brine assets. The world will need more carbonate as well as we’ll need more hydroxide. There’s no question about that.

Which project? There are a lot of projects; picking the winners within the Argentine Brines and the Chilean Brines is a more challenging dynamic, but Millennial Lithium, who you’ve had on the program, we’ve done work for them. They are well-capitalised. They still have the cash in the bank. They can wait. Right? So, balance sheet matters. If you’re an investor and you’re worried about dilution. Neo Lithium has a lot of cash on the balance sheet. Those three: Lithium Power. Millennial and Neo Lithium are our three companies, which are good companies, good management, good projects, but waiting for how long? I don’t know. The carbonate is going to take longer in my opinion. And while you are waiting for that, new things are happening: Direct Lithium Extraction is becoming interesting and people are thinking about, actually, those are the strategies of Millennial and with Lithium Power and Neo Lithium are still using conventional brine technology. There is a bit of a movement, like why are you still using that technology and not trying some of these other promising DLE technologies?

There’s a whole host of risks connected to Brines in South America that make them more challenging. VW did a tour of the Atacama to see from a sustainability perspective if it’s okay. They didn’t say it’s not okay, but they didn’t say it’s okay. They came out with a kind of muddled opinion like it is to be seen whether or not we’re going to invest in South America.

But on the other hand, VW and BMW have outwardly said, we’re partnering with Ganfeng and we understand getting Lithium from hard rock is sustainable and scalable. They’re voting with their wallets and their verbiage that hard rock is where these Western OEMs are going. I don’t see a quick turn. I could be wrong. Like I said at the end of last year in January: all the Argentina Lithium stocks soared. In January, February, it was kind of game on. If you’re a contrarian, you could say, everyone, hates Argentina. Everyone hates Chile. As a trade, it may work, but the likelihood that you’re going to see a strategic deal into those countries is lower than you’re going to see in other assets, in other countries. And if it does happen in South America, it’s most likely going to be Chinese. In my opinion,

Matthew Gordon: Brine is known for cheap. You’re saying companies are now voting with their feet, in terms of this whole ESG component. That is all going to be a big component of funding decisions for Brines going forward.

Howard Klein: I’m not saying exactly what you said because it’s to be seen whether or not anyone’s going to pay up for sustainability. I’m not saying that VW has said I’m willing to pay more for sustainability. What I’m saying is that hard rock to hydroxide is cheaper. And there is one hydroxide. Brine to hydroxide is not cheaper. If they only want hydroxide, they don’t want carbonate anymore, I’m talking about Western OEMs for their cars outside of China. Layer on sustainability factors like do they want to deal with geopolitical risks? Do they want to deal with indigenous people risks? Because it’s not clear, how you’re damaging or not damaging the Salar and the water. There’s a lot of question marks about that, but if it was definitively cheaper then they’d probably look at it more seriously, but it’s not cheaper. And the cheapness also ebbs and flows; there are currency considerations that are influencing, there are Royalty considerations. There are export tax considerations. Argentina is not in good financial shape. This is an export industry that they already put an export tax on, but because the peso has declined in value, they’re getting less hard currency taxes from that export tax. The probability of raising in export tax in the Fernandez administration in Argentina is high. The predictability of the cost where the medium to the long-term basis that a BMW or a Tesla would want is very variable and unpredictable. There’s a whole host of factors arguing against South American brine for Tesla, European, American cars that people are driving.

There’s a definitive appreciation for hard rock, but these new DLE has suddenly become interesting, intriguing. Hasn’t attracted a ton of capital yet, but it’s being looked at

Matthew Gordon: Are those projects getting financed

Howard Klein: There probably are 20 that are mothballed, but there are another 20 that are real, and of that five or six of them have raised meaningful capital in recent times.

Matthew Gordon: Like who?

Howard Klein: Sigma Lithium in Brazil just raised USD$45M from Société Générale at a 5% interest rate, this is traditional project finance alone, and that’s for a Spodumene-only project, not even making Lithium chemicals. Spodumene, everybody thinks is in massive oversupply and previous Spodumene debt funding that went to Altura and went to Pillsbury who were in the 12% to 15% interest rate category a few years ago. The Nordic bonds and American hedge funds financed with very expensive, mezzanine-like funding for Spodumene projects in a much hotter market. This is a much weaker market. And here you have Soc Gen, and this is very important as well: the Europeans are getting with the program that hard rock is sustainable. This was green financing. This money was investing in Lithium is green, right? And investing in Lithium hard rock is green. And so Soc Gen 5% interest rate is very low, very attractive. They required Sigma to put another USD$10M of equity underneath, which Sigma was able to raise at a premium to their last raise 2 years ago. They did it at USD$2.15 compared to USD$2 where they raised money a few years ago in a much hotter market.

Here’s a Brazilian Spodumene asset, Brazil is not the greatest country risk, but it’s a good project that’s partnered with Mitsui, so they got that done. They’ve raised USD$55M just in the past 2 months, they’re now kind of fully funded and ready to kind of go into construction. In an oversupplied market, a company getting funded, where Spodumene prices are like USD$400 and they’re talking about producing at USD$200. So that’s a good sign.

Pilbara, an already producing company, but they have significantly curtailed their production – very significantly. They had to raise equity because they were struggling to meet their interest payments. They were just about to have to start paying in principal on their Nordic bond, which was at 12% and they managed to get that completely refinanced at 5%. Again, in a terrible Spodumene price market. And that was led by BNP Paribas, again, sustainable finance. So that was a USD$100M refinance.

Further, Nemaska just announced they got a bid from Pallinghurst, a major private equity group, up to USD$600m in combination with the Quebec Investment arm, Investment Quebec. People were talking about, Nemaska is a basket case what’s happening in Quebec? Forget about Quebec for the next 5 years, but again – hard-rock project, while Bucci, with the converter to hydroxide, has had an outcome.

Finally, we talked about an advisor and investor in Piedmont Lithium, since we last spoke, they raised USD$20M in straight equity; that’s not a small amount of money in this market for advanced development. They raised a lot of it in their US listing on NASDAQ, which is the first time they actually did it there, as opposed to just raising the money from sophisticated institutions like Aus. Super and Fidelity, which also participated in that raise. That important actually, from a Piedmont perspective, Aus. Super is one of the biggest funds in Australia. Fidelity – obviously one of the biggest investors in the world – there’s real institutional backing for a hard rock story in North America, similar to Nemaska. So hard rock has been financed.

There’ve been some DLE companies like Vulcan Energy raised AUD$4 or 5M at a reasonable valuation. $25 million. Lake Resources has managed to raise USD$3 to 4M. They are making progress. It’s not real dollars. A private company, Lilac, that got a lot of press because Bill Gates Breakthrough Energy Ventures came into that. There’s some interest in DLE, but not big dollars yet. The only big dollars that have been put into Brines has been Livent Refinancing. They are a producing company, a big 3 company. They were financing their expansion in Argentina with a short-term revolver, which made no sense. They were struggling with their covenant because they were in debt to EBITDA. They were couldn’t draw on the loan anymore. They had to refinance about USD$250M They did do a USD$250M deal. The interest rate was 4% and 8%, but it was also convertible, I think at USD$8.37. That was also sustainable finance though. It was under the sustainability guidelines. The movement in sustainability to finance Lithium mining is an interesting development that’s happened in the capital markets in the past few months.

Matthew Gordon: You’re feeling quite positive about the way that these big funds are looking at Lithium again?

Howard Klein: I’m not feeling positive so much yet about the big funds. Hedge funds and mutual funds selectively, like I said, in Piedmont’s case, these were existing shareholders who are making bags. They have endless amounts of money and they continue to support Piedmont, but you’re not seeing like Livent has 17% short interest. Albemarle has an 11.5%. Lithium America, strangely, because I looked at this: only has about 2.5%. Lithium American is very much a retail stock, and that stock has had a very volatile Robin Hood-kind of trading. But if you look at the hedge funds on Wall Street, New York and elsewhere, they’re still largely listening to what I believe is the wrong Morgan Stanley, kind of South American commodity narrative are looking at the short-term price, which has been going down, in fairness. Albemarle stocks ticked up a bit, but less than the broader market. I think a short squeeze is going to happen in Livent, in Albemarle in the next 3-6-months.

Matthew Gordon: How do they solve the problem technically? What’s your view on both of those companies?

Howard Klein: I’ve represented both of those companies. I don’t represent either of them now, but very familiar with them. There was a thought that Ganfeng being partnered with Lithium Americas in Argentina and also invested at the parent level at Lithium Americas, I went to Lithium Americas site visit when they announced their Pre-feasibility Study in 2018. And at that point, they were advertising how Ganfeng had tested their clay material and it looked like Ganfeng was going to be partnered with Lithium Americas. But then Trump’s trade war last year and all things, China, Strategic Minerals, et cetera, made that kind of untenable. I think Ganfeng’s taste of clay with Lithium Americas, but then their realisation that they couldn’t do a deal with the Americans attracted them to Bacanora. They did a deal with Bacanora and they got a very good valuation because their valuation is very low.

Ganfeng is the most astute dealmaker in this space, in my observation. They’re also the greatest technical partner that you could have for a Lithium project. Clay is very difficult, I can’t remember if I said this already earlier in this interview, but Elon Musk tweeted that Lithium is abundant, but making high-purity Lithium hydroxide from clay is a challenge, right? If anyone’s going to crack that challenge, it’s going to be Ganfeng first, in my opinion. If Ganfeng and Bacanora approve the process, then other investors will start to believe in, let’s say the management of Lithium Americas, that they can pull off something like as well.

I have great respect for the management of Lithium Americas. Rene LeBlanc, Jon Evans – these guys are very well-skilled, but no one at that company has ever built a project or undertaken a project of the magnitude that they’re contemplating with their Thacker Pass. At their draft EIS, they had some hearings, they’re in this period where they’re awaiting comments, they’re trying to get permitted, but this is a very big project. Having represented that company for 7 years and just spoken to a lot of strategic investors, a lot of hedge funds, mutual funds and say, hey, come and invest in this. And they’re like, wow, there’s hard-rock, there’s Brines. Clay is hard, it sounds good but there are lots of hard-rock stories out there right now that are less risky. Why wouldn’t I just do that? The premise sounds great, but if Gangfeng proves it with Bacanora, I think those sceptics will say, oh, if they’ve done it – okay, great. Ganfeng has proved it. This is in America – that’s great. I think Lithium Americas is going to continue to have a challenge. I could be wrong, but companies like Piedmont are speaking to the same people that Lithium Americas are speaking to. If you’re a strategic investor and you’re thinking, should I try clay or should I try proven hard rock, which am I going to do? I think on balance, and the valuation is very different, but there’s a lot of retail enthusiasm for Thacker Pass because it’s in Nevada, Tesla’s in Nevada, it’s had 10 years of this connection so it’s good marketing.

I’m watching Bacanora, which is a very low valuation. I believe it’s already permitted, Thacker Pass, isn’t even permitted and it’s not a slam dunk that it will get permitted on the timeline that they’re anticipating. From a value perspective,  Bacanora is much more attractive, but I wouldn’t rush into their stock now either because they’re still waiting to redefine their definitive Feasibility Study with Ganfeng’s impact, but they’re going to come to market at some point and say, this is the cost, and Ganfeng is going to write a cheque to build this. Bacanora is going to need additional funding for it. At that moment, that might be the right time to enter Bacanora, my preference in clay would be Bacanora, certainly before Thacker Pass.

Matthew Gordon: The Robin Hood effect, is that what you’re saying?

Howard Klein: I would say, be careful.

Matthew Gordon: Why don’t you tell people what it is and the state of the market?

Howard Klein: I don’t know about bursting to talk about it, but Direct Lithium Extraction, I’m not a technical guy at all, but it has the promise of, there’s a lot of assets in the world that are in, let’s say, first-world jurisdictions: safer jurisdictions, closer to where car manufacturing and cell manufacturing are happening. Livent, a producer for the past 20 years, never really talked about Direct Lithium Extraction using those words. But their methodology of producing Lithium is different than the pure evaporation ponds that are used by SQM and Albemarle in Chile. They’ve cottoned on to DLE. You don’t have to use the pond. It’s more environmentally friendly, it’s more sustainable. It’s good marketing for Livent to say DLE has the perception that it’s more sustainable.

Until recently, in a similar way that clay is unconventional, unproven, the concept of DLE has never been proven before. There have been companies like Tenova Bateman and Pasco who have had partnerships in Argentina. Eramet is another company in Argentina that has Direct Lithium Extraction technology different than evaporation ponds.

Actually, that story – Eramet, the most amount of money that was ever invested, I think in a DLE project was Eramet. They invested about USD$150M. Earlier this year they said, they’re not out advancing the project. So DLE hasn’t attracted a ton of money. However, Livent is saying, you know what? For the past 20-years, we’ve been doing DLE. They’re positioning DLE as conventional even though it’s not fully conventional.

Standard Lithium is a company that Elon Musk tweeted about. He was reading a technical article, and in a couple of days when he had Lithium on his mind, he said, oh, Lithium is not rare, it’s common, Lithium is everywhere. Standard Lithium, this looks like it has potential. Standard Lithium has partnered with Lanxess – a German company with an asset in Arkansas. They are taking a Bromine, ex-oilfield, but they’re producing Bromine from it. And the Lithium is kind of a waste, right? So Standard Lithium said, we could take your waste and turn it into sellable Lithium. And with their Toronto Venture Exchange-listed company, they raised USD$30 to $40M. They built the demonstration plant. They’re still at PEA level. There’s still a lot to prove, but Lanxess basically said, if you prove the concept, we’ll fund it. Lanxess will get 70% of it and Standard Lithium will get 30%.

The fact that that stock has risen and has been performing well, combined with the breakthrough energy ventures, Bill Gates invested USD$20 million in a private company called Lilac which is partnered with a company called Lake Resources in Argentina. Lake has managed to raise USD$4M to $5M. There’s a company called Vulcan in Germany that managed to raise USD$4M to $5M. And they came out of nowhere. That’s a geothermal brine. There’s geothermal Brine there’s oilfield Brine, there’s DLE that could be applied to conventional Salars.

As sustainability is gaining traction and as people like you think that Chile, Argentina has the cheapest Brines, there are big knocks and worries about the traditional Salar technology where you’re really only recovering 30%-50%. So DLE has potential: it’s faster, you don’t have to wait 2 years, it’s in good jurisdictions, and it produces higher recovery and a cleaner, consistent high-purity Lithium. So, this is interesting.

The last thing I’ll mention, we’ve done some work for this company in the past, not currently representing them, E3 Metals in Alberta. This is an oilfield brine. What’s interesting about that is they partnered with Livent. Livent is the technology leader in DLE. They’re now saying we’ve been doing DLE for years They made a small investment; up to USD$5.5M, they’ve put in, I think, USD$1.5M so far, but that stock, E3, is sitting there at below USD$10M market cap, whereas some of these other stories I mentioned have started rallying a bit, like Standard Lithium and Vulcan. But people seem to be ignoring this one that’s partnered with Livent, one of the big 3 Lithium hydroxide producers.

Matthew Gordon: What you said at the beginning, I’ve got to keep coming back to this, 4 companies effectively: Ganfeng, Livent, Albemarle, and Mineral Resources? Was that the 4th?

Howard Klein: Mineral Resources are correlated to hydroxide.

Matthew Gordon: How do we pick companies that we can make money on outside of your top 4? What are we looking for?

Howard Klein: Ganfeng is listed in Hong Kong. If you can invest in Hong Kong that’s okay. I’ve invested in Ganfeng. In China, it’s like impossible, but I prefer these five companies listed on the US exchange, properly listed with reasonable liquidity. Your choice: there’s Albemarle, Livent, SQM. I don’t love SQM for a variety of reasons. I think I mentioned before, Livent is poised for a hydroxide price spike and short squeeze. I like that story quite a bit, it’s risky still because it’s Argentina, but they got their financing out of the way. And the overhang of the convert is behind them.

Albemarle – very good company. It’s the proxy, it’s the most liquid. As I said, I’m an advisor to Piedmont so take this with a grain of salt, but Piedmont, at USD$65M valuation for a plain vanilla Spodumene to hydroxide story – there are very few pure ways to play hydroxide or Spodumene at a low valuation in a good jurisdiction. At USD$65M market cap, just last year, Kidman got bought at 10 times that valuation and Albemarle paid nearly USD$2Bn for Mineral Resources’s Wodgina asset in terms of economic value.

When the market turns and if I’m right about Ganfeng saying that in 1 to 2-years, Australia is going to be in short supply, the probability that Piedmont attracts a bid similar to Kidman or Wodgina is high, and the evaluation – they own 100% of their project. They have 100% of off-take to give. 100% equity structure. There’s no debt, there’s no risk of them going bankrupt. And they just raised USD$20M to further advance their studies. And they just announced a further drilling campaign to enlarge the size of the resource. I think Piedmont’s, to be honest, a no brainer.

Lithium Americas has been a good trading stock. I mentioned that in our last conversation, it more than doubled in 3-months. Now I think it’s overvalued. I think there will be a turn in hard-rock sentiment. Altura and Pilbara might be good plays. Altura still has to restructure their debt so there’s some consideration there, but they got a further reprieve from their bankers announced this week, so that’s interesting.

There are some places like in Quebec, like Critical Elements and Frontier – again, hard rock, good jurisdictions, you people aren’t paying attention to that might be of interest. And a few South Americans, as I said, I like Lithium Power. If they cut their deal with Codelco. Again, these stocks are cheap. Millennial and Neo Lithium have cash, they could weather the storm. They don’t have debt. And then, as I said, in Bacanora’as case, I would just wait to see what happens with the Ganfeng DFS, and what the costing is, and when they do that capital raise.

Matthew Gordon: Thanks for that. I think we had better cut there; I have taken enough of your time today

Howard Klein That sounds great, Matt. I really appreciate sharing our thoughts with your audience and I love the relationship. So happy to be back.

Company Website: https://www.libull.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Ideanomics (IDEX) – Complex Chinese EV Story with Innovative Solutions

Ideanomics Inc.
  • NASDAQ: IDEX
  • Shares Outstanding: 237M
  • Share price US$1.10 (11.09.2020)
  • Market Cap: C$261M

Interview with Alf Poor, CEO of Ideanomics (NASDAQ: IDEX).

This is a complex story that slots nicely into the EV thematic. It is a little different to the mining stories we usually bring you, so let’s break it down.

Ideanomics regards itself as a global company driving mobile energy transformation and the green fintech revolution. Headquartered in New York, NY and with offices in Qingdao and Beijing, China, Ideanomics is focussed on driving commercial momentum into electric vehicle adoption. The company is also focussed on developing innovative and futuristic financial services and fintech products.

Matthew Gordon talks to Alf Poor, August 2020


With many analysts claiming EV penetration will reach 25% of all car sales by 2030, and with aggressive subsidisation packages to entice EV consumption being discussed by numerous governments, the EV macro story is gathering pace.

Some battery metal players are experiencing welcome boosts to their share price, especially with Elon Musk’s request for as much green, efficient and sustainable nickel as possible. However, investors should remember there is also plenty of money to be made from those who will provide the technical solutions to tomorrow’s needs.

The main topic of this conversation was Ideanomics’ electric vehicle division, Mobile Energy Global (MEG). MEG provides different services to the EV market. This includes providing purchasing discounts on commercial EVs, EV batteries & electricity, and also financing charging solutions. MEG also offers fleet-order services of various vehicle types, like taxis, buses and industrial vehicles. However, the ultimate prize is clipping a coupon on all energy sales at the vehicle charging points as they are built. Currently, in China, the target is over 100,000 charing points.

Ideanomics also has a commercially-focussed division, Ideanomics Capital, which includes the Delaware Board of Trade (DBOT ATS) and Intelligenta, an AI solutions provider, which offers up some innovative financial services solutions with blockchain and AI at their core. I think these are, at best, a distraction from the main event. The companies sounded like they could come together and seamlessly enhance each others propositions, but that is always harder than it sounds. The CEO sounds like he has recognised this and is actively cleaning up the portfolio of companies and sorting out the balance sheet. The focus is China and collecting a fee on all energy sales. To do this they are having to help build a series of vehicle electrification infrastructure and sales projects, from the upgrade of ore transportation trucks in mining from diesel to electric, the build and sale of electric scooters and electric car sales, and the conversion of petroleum based stations to electric charging stations (+100,000).

This is shaping up to be a great EV-related story, so why was a recent class action lawsuit brought against the company by stakeholders in July? It was announced by Zhang Investor Law, and pertains to several potential areas of either deception or false promotion. Specifically, the key arguments are that Ideanomics’ MEG centre is not in “a one million square foot EV expo center” as claimed, the company had been using doctored or altered photographs of the purported MEG Center in Qingdao, the company’s EV business in China was not performing nearly as strongly as it had represented, and as a result, the company’s public statements were both materially false and misleading at all relevant times. These are some extremely strong allegations, but the suit alleges that these details were disclosed by market research firms.

It is little surprise that investors may have been disappointed with the company’s market performance, especially with the share price declining for most of the last 2 years, but this will all have to play out in court. It looks really messy and reflects poorly on the company, regardless of the outcome, but this news had not dropped at the time of our interview so we were unable to request Poor’s comments.

Some have even called Ideanomics ‘one of the most suspicious stocks trading on the market today.’ The main reasons for so much doubt appears to be questions surrounding the company’s business model. Some feel that there is little evidence that a Chinese shift towards fleet orders for electric vehicles is currently happening, or will happen in the short-term, on a major scale. If it does work, the broader ICE market where most industrial vehicles and transport vehicles either use natural gas or gasoline, makes this opportunity look much more marginal. There are doubts about the long-term economic efficacy of these fleet supply contracts, because with the average lifespan of a car being 10-15 years, these contracts might not provide enough of a recurring revenue base. We’d love to hear your thoughts on this issue.

Investors need to understand how Ideanomics plans to make most of its money. MEG supplies the order processing and fulfilment of fleet-level vehicle orders. It achieves this by streamlining the documentation and verification of some rather complicated operations, as well as leasing and inspections. By providing this service, it can collect a fee ranging from 5%-10% of the transaction. While this may make the company some money, the transactions it will be dealing with are specifically retro fitting batteries to vehicles (BEVs) for commercial automotive fleets. It remains to be seen how big of an opportunity this is compared to Joe Public’s EV transactions, where the bulk of current and future automotive sales will generate revenue. Again, this is perhaps a commercial distraction, but does build reputation and positions them as an electric vehicle company in China.

Now, we’ve looked at some of the negatives, so let’s take a balanced view and look at the positives too. Many shareholders remain very bullish and feel the stock is undervalued. This is hardly a surprise, but is there any hard evidence to reinforce their positivity?

Ideanomics’ Q2/20 financials were reasonable. The company strengthened its cash position to $36M, which is especially useful at this time. Revenues for the 3 months ended June 30, 2020, were $4.7M, including a big increase in revenue for MEG, but this is perhaps below what one would expect from a company with a $263M market cap. However, it is important to note that COVID-19 has created short-term operations issues for EV progression in China. The company’s loss from operations was $16.3M, but most EV and battery metals players are struggling right now, other than Tesla.

The fundamentals of this business are undeniably smart. I expect to see increased revenue in Q3/20, with profits following in Q4/20. Many investors are hoping for high ticket orders and exciting catalyst moments like a potential US exclusive partnership. Others are arguing that the lack of financial targets for the next few years makes the management team look like dreamers, but this is a very unconventional path to value creation. However, this is China, and things can get complicated very quickly, especially when trying to push ahead on the global front. Many great companies start from the depths of obscurity, and it is undoubtable that Ideanomics has a distinct first-mover advantage. A US company operating in China is something to be applauded, and it is something more US investors need to recognise.

In spite of this fairly underwhelming performance, Poor and his team remain confident that the long-term vision for the company remains extremely promising. The company’s Sales to Financing to Charging (S2F2C) component of the business model intends to provide energy to EV consumers and gas stations by taking a fee on the energy provided. It is a smart way to insert itself into the EV value chain, and the slowly increasing pace of the company’s sales growth appears to be a major reason for positivity.

Ideanomics reminds me a lot of an Australian company that also offers up technical, futuristic solutions to problems pertaining to future energy needs. That company is Neometals, and with around A$80M in the treasury, it has a portfolio of highly-prospective projects, is undervalued, and doesn’t have an outstanding lawsuit against it. Just something to consider…

So, Ideanomics: is this a great opportunity to leverage EV demand growth, or does this company have something to hide? I am totally on the fence right now, because I’m hearing bad press, but I am also hearing reputable, knowledgeable investors who have confidence in the company’s ability to deliver returns. What will your next move be?

Company Website: https://ideanomics.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

BHP Labels Nickel as 1 of its 3 Future Commodities

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 68M
  • Share price C$1.66 (11.09.2020)
  • Market Cap: C$113M

Stay ahead with our weekly Nickel Market Insights with Mark Selby, Nickel Market Commentator and CEO of Canada Nickel Company (CNC).

Let’s get straight into it. What is the major nickel news this week? There has been a major price move, with nickel now trading at $15,000/t ($6.75/lbs) and this momentum is continuing to grow. Iron ore prices are up to a 6.5-year high, copper price have broke through the $3/lb barrier. The growth of these industrial metals has been greatly aided by the Chinese reflation package, a typical Chinese go-to strategy for much of the last 30 years, which aims to kickstart the Chinese economy post-COVID lockdown with investment in industry and infrastructure.

Though the pace of the reflation trade has slowed somewhat because of poor weather, multiple commodities setting new multi-year highs cements a sense of bullishness. In fact, China has reflated so ferociously that year-on-year (YoY) numbers actually look strong, despite months of COVID-induced stagnancy. As the hub of stainless steel growth and nickel supply/demand, alongside Indonesia, China is a great indicator for global nickel performance, and with a continued rate of c. 17% growth YoY, and stainless steel prices going up more than 10% in a week, things look like they are only going to go north from here.

On the fundamentals side of things, nickel looks strong too. With ore prices, MDI prices and stainless steel prices going up, it finally looks like the stars might be aligning for a meaningful nickel bull run.

Another big piece of news that has created excitement within the nickel and EV investment community emanated from a BHP report. As one of the world’s leading resource companies, BHP probably knows what it is talking about, and it has labelled nickel as one of its 3 future commodities, the other 2 being potash and copper. This is quite ironic considering BHP has spent 7 years of the last decade trying to sell its nickel business! Even the doubters are becoming believers. This is a full 180° flip, and if a major player like BHP has done it, nickel and EV investors can expect to see many more follow suit. RioTinto, Anglo American and Glencore are all names that Selby touted. If big takeout are going to take place, these are the players with the cash necessary to make things happen.

Over on the macro/geopolitical front, investors are beginning to appreciate the scale of the EV opportunity, especially in China. Companies like Ideanomics, who we interviewed recently, are looking to take advantage of the huge opportunity that presents itself to provide electrical power to the vast fleets of new electric Chinese vehicles. As the transition from fossil fuels to electricity accelerates, so will the development of new charging infrastructure. In fact, the number of public charging stations for EVs in China surged 50.5% in May. This is only the beginning.

The growth of the EV thematic has continued to drive battery demands up, despite short-term consumer capital difficulties caused by COVID-19. Investors who bought good battery metal stocks in recent months will have made more money than those with money in most gold companies. This is a rare occurrence and is especially remarkable given the huge run that gold has been going on, breaking through the $2,000/oz barrier at one point.

Elon Musk’s quarterly conference call attracted much interest from the investment community. He appealed to nickel producers to make as much clean, efficient and sustainable nickel as possible for use in Tesla batteries. However, a recent Bloomberg article questioned this strategy, claiming that ‘Elon Musk Is Going to Have a Hard Time Finding Clean Nickel.’ Selby thinks Bloomberg did a great job with this article and so do we. It is a very comprehensive look at the logistics behind these “giant contracts” that are being offered to clean miners and the disparity this has with the mining industry’s messy track record. The CEO of CleanTeQ, which is developing an Australian mine to supply nickel for vehicle batteries, pointed out the folly of the current EV supply chain. Whilst no gas is being using to fuel the vehicles during daily operations, gas was certainly used in their production, because ‘Nickel projects being built in Southeast Asia will rely on coal, fuel oil or diesel to run their operations and will leave a very large carbon footprint.’ The industry needs a top-to-bottom transformation; that doesn’t happen overnight.

Moreover, recent high profile accidents, such as a diesel spill in Arctic Russia and a burst waste pipeline in Papua New Guinea, suggest the industry with struggle to reform and fulfil Musk’s appeal for a large quantity of “efficient” and “environmentally sensitive” nickel. What do you think?

What did you make of Mark Selby and his nickel investment coverage this week? Comment below and we will respond. You can listen to his weekly commentary on nickel investing at cruxinvestor.com/club

Company Website: https://canadanickel.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Rodney Hooper #01 – Investing Basics for Lithium: What to Focus On (Transcript)

Stay ahead of the pack by listening to this conversation with Rodney Hooper, Research and Corporate Advisor and Co-Host of “Lithium-ionRocks!” Podcast

This is quite an entry-level interview that covers the basics of the lithium space and lithium investment tenets. However, it also serves as a useful reminder to established lithium investors about what they should be focussed on. It is easy to get side-tracked when investing in mining, so what components of lithium should you be focused on? We get a few clues in this conversation.

Rodney Hooper works for a consultancy firm called RK Equity. The company focussed on lithium and other battery metals with an outlook towards the exciting future growth opportunity created by the EV revolution.

Hooper chimes in on the popular debate regarding the pros and cons of lithium brine, clay, hard-rock, hydroxides, carbonates and spodumene. That is the technical side of lithium covered. Then, we move into the commercial side of lithium investment. What sort of lithium companies should investors be looking to throw their money at?

We take a good look at the fundamentals of successful lithium explorers, developers and producers. Which partnerships are key for lithium players? How can lithium players capitalise in the current depressed marketplace?

We Discuss:

  1. 2:06 – Coping with COVID-19: Bans and Society
  2. 5:08 – Rodney’s Background
  3. 8:17 – Back to Basics: In-Depth Look at Lithium
  4. 14:04 – Size of Market and Implications for Growth
  5. 15:02 – Know What Good Looks Like: Criteria for Success
  6. 22:18 – Cost Structures for Different Types of Lithium
  7. 26:02 – Do Your Homework: Where Does Value Lie?
  8. 28:24 – Misunderstood Clay: Young Tech and Possibilities
  9. 34:59 – Nickel’s Role in the EV Thematic

CLICK HERE to watch the full interview.

Matthew Gordon: Rodney, how are you doing, sir?

Rodney Hooper: Good, and you, Matt?

Matthew Gordon: Yes, not too bad. Not too bad. You’re calling us from South Africa. How are things there?

Rodney Hooper: I’m calling from Cape town. We’re in mid-winter not midsummer like you, and like everyone else trying to cope with COVID.

Matthew Gordon: And how are you coping with COVID? What’s that like?

Rodney Hooper: For me personally, I’ve always worked from home and then travelled. So the travel bit, of course, has been impaired, but yes, South Africa; it’s not often we rank fourth on the list, and we ranked 4th in total cases in COVID. I’m trying to get that under control.

Matthew Gordon: It’s not good. And there’s a real expense to that as well. Isn’t it? That’s the bit that people forget. How is South Africa coping?

Rodney Hooper: We’ve set aside quite a large support fund, but the balance sheet, isn’t that of the US and the UK. We recently got a loan of about USD$4.3Bn from the IMF, but we have some fairly tough measures in place here in South Africa. We’ve got curfews, we’ve got bans on alcohol and cigarettes sales. It’s been really difficult for certain sectors.

Matthew Gordon: That’s quite serious: curfews but why the ban on alcohol and cigarettes?

Rodney Hooper The cigarette ban was around respiratory, believing it to be respiratory-related. But the interesting thing is that British American Tobacco, obviously losing sales that its own survey and and came up with the numbers that about 95% of smokers are still getting cigarettes, just illegally, so no government the taxes are being paid on the sale. And then the other issue, which I found really interesting is they said because of the cost under the black market, which can be as much as 4x to 5x the normal price that people are sharing cigarettes, and then of course, that poses a risk of passing on COVID.

On the alcohol side, what the hospitals were finding, particularly in the regional areas where they don’t have big hospitals, is they were facing an enormous increase in alcohol-related violence. So emergency beds were being filled up with non-COVID related patients to the point that they were putting lives at risk. They took the view to ban alcohol sales. Again, we’ve been open, so it’s not like they didn’t have the stats. We were closed and then open and now we’re closed off again.

Matthew Gordon: We’ve instigated 14-day quarantine for people coming back from Spain to the UK because there has been an outbreak there. Melbourne in Australia – the same, and the States as well is a whole, whole other story.

Well, we’re not here to talk about COVID we’re here to talk about Lithium – something you know a lot about. We had Howard Klein on recently, your business partner. You guys focus on Lithium. Maybe give people a bit of background about yourself.

Rodney Hooper It was an interesting one. Being South African mining has always been part and parcel of our history, and I’ve dealt in other areas in different shapes and forms, but a few years ago, I had a look at the landscape. I actually did an in-depth thesis for a family office on oil, which turned out to be successful at the time. If you remember: oil plummeted into the $20s back then, but I did quite a lot of research around the threats and risks to the future demand for oil, and came across Lithium. Now, in South Africa a lot of the companies were hoping that fuel cells would come through because that needs platinum. But it was around the time that Elon Musk was emerging and the potential for, specifically for electric vehicles, was becoming apparent because the cost of renewables was plummeting.

So the potential to have a closed loop of batteries and charging using clean energy was starting to form. And looking amongst the energy vehicle battery metals, and I still think there’s some good prospects in others, but Lithium is the irreplaceable element of the Lithium-ion battery. And in terms of impact on size of market and shifts going forward, Lithium is the most impacted of the EV battery metals.

So for the last 4-years, I’ve literally 7-days a week, 15-hours a day, just gone down the Lithium wormhole and never come out. It’s a very nuanced industry and complicated. And I have spent that time literally dedicated. We do cover the EV battery metal space, but Lithium has dominated our work. And we’ve worked with a lot of company and people and we speak to the Lithium battery supply chain from spodumene from the precursor providers, right to the other end of the supply chain. We chat to everyone and have a fairly good handle on everything that is happening across the space.

Matthew Gordon: You’re spending a lot of your time involved with Lithium and you provide analysis and do consultancy work for us companies. You are really involved with it. I want to start from the beginning though, because there’s quite a few people, who made money on Lithium about 2, 3-years ago, and then the price dropped off. But they’re starting to look at it again. The EV thematic is starting to grow. Lithium is coming back on the agenda. If you don’t mind, we’re going to go back to basics:  let’s start with terminology first of all. You mentioned spodumene. There’s also hydroxide and carbonate. So maybe you can describe what each of those things is?

Rodney Hooper: People must understand is that the Lithium industry didn’t start and evolve, it has been going since the ‘1950s in the States. It didn’t start with the basis of supplying electric vehicles. Lithium started out, as an example in one of the places that you can produce Lithium is out of brine. South American brine was a by-product of potassium. And so one of the things that people need to understand, and it’s something that we’ll discuss as we move forward from here, is the quality of Lithium that is required to supply the industrial market, which is the history of Lithium, which is grease, glass, ceramics, is not the same as what is required in the battery industry. The purity levels are completely separate products. When people think of Lithium as a commodity, it might have some merit in looking at it in that shape and form for the historical industrial applications, but for the battery industry, it’s very much a specialty chemical.

Matthew Gordon: It’s been around a long time. There are other uses, which probably make up the bulk of the market at the moment. But investors are getting excited for companies based on what they’re hearing around the battery thematic, what automotives are going to be doing going forward

Rodney Hooper: The historic application is very much GDP growth related industries. They are linked to industrial applications and they’re GDP-related. The excitement is around the Lithium-ion battery industry, which is going to compound at, call it 25%, 30%. And that’s unprecedented. So when people say Lithium is abundant, Lithium is abundant, but so is Nickel, so are other things, but can you commercially extract it and can you produce the product that’s needed? And it’s one of the stumbling blocks in investors’ mentality looking at it, is they don’t consider the nuance of what it is to produce a product that has sometimes 10 parts per million. You need impurities at less than 10ppm (parts per million) of a product. It really requires a specialty process and that’s where the margins are at and that’s the excitement.

Lithium started out in the US, it was based on hard-rock. It was mostly spodumene-based material. You process that into Lithium chemicals. Then in the ‘1980s the brine opportunity arose in South America, and the US pretty much shut down and it went to South America and then back again, Green Bushes in Western Australia saw the rise hard rock money, again. So from a brine perspective, the sun and the wind does a lot of the processing for you. It upgrades the Lithium content in the brine without having to do anything. So from a carbon footprint perspective, brine is actually quite low, but you need an enormous amount of land footprint to have ponds as you pump it up and then move them from one to the other, increasing the grade. And the issue that is always raised, and it has been raised now again in Chile, is what is the impact on the sustainability and the impact on the local community and flora and fauna of pumping brine out from under the surface. But typically, a brine will be processed into Lithium carbonate, you can do chloride as well, from a battery perspective, which is really where we focus in this conversation, is you make a Lithium carbonate. You can reprocess that into hydroxide, but it’s an initial step, and then a secondary step. The other way to make Lithium is hard rock spodumene concentrate, you dig up Lithium oxide. It’s mostly in Oz, but there’s other places, like Brazil. And you purify, you increase the grade of that to a 6% spodumene concentrate, and you ship that. It’s pretty much exclusively done in China where you need 7.5t to 8t of spodumene concentrate to then put through a rotary kiln, sulfuric acid and you can produce carbonate, but is the preferred route for Lithium hydroxide.

Matthew Gordon: That’s some of the terminology. And then also some of the history around this. Can you give us a idea of the size of the current markets and projected for each of those?

Rodney Hooper: The total Lithium market is just over 300,000t. If you assume an average of USD$10,000/t, it’s a USD$3Bn market. You compare that to Nickel – it is tiny. This is the complexity of what we’re dealing with. It was a very small industry. And now of course, with batteries, we’re expecting the size of that market to grow like 10x in the next 10-years.

Matthew Gordon: Seeing 10x potential growth, from the demand side of things, investors are going to get very excited about Lithium, especially with such small market. A USD$3Bn market is nothing. But if you suddenly become USD$30Bn over a relatively short period of time, that gets people excited. It gets investors excited if they can pick the right company. You touched upon a few things: Brines – +/- . Hardrock – long history. Where should people be looking? Should they be put off by brines or hard-rock, or even clay’s?

Rodney Hooper: If I can simplify the Lithium thesis down to one thing, so you can start from there and then ask the question. The Lithium applications for industrial uses have GDP-like growth. So there’s nothing sexy and exciting about that. They are good margin businesses, make no mistake, Albemarle – they do pharmaceuticals. They make good margins, but there’s limited growth. You must only invest in a company that is going to achieve battery quality and qualified material into the EV and rechargeable battery supply chain. If the company that you back does not achieve that qualification, the margins that can be earned on supplying into the non-battery application and into the oversupply market, are not there. They don’t justify the investment yet. So just as an example, if you look at Ganfeng, which is the world’s number 2. They are currently trading on an EV to EBITDA multiple of 70x, because there is no competition. The markets has been slightly oversupplied and tight, but they are able to literally take any material and turn it into battery quality material, and that skill, and that ability has a huge value to it.

Matthew Gordon: You touched upon that earlier. You talked about technology that is able to create high-grade , battery-grade materials. So companies that ‘talk’ about that is one thing, companies that are able to ‘deliver’ that is a completely different thing.

Rodney Hooper: If I can stop you there, there’s even another qualification. So, producing battery grade, doesn’t get you qualified. If you have the wrong impurities within your battery grade, such that it doesn’t pass the battery supply chain qualification process, that material then has got to be sold into whatever market for whatever application. It still needs to be qualified. And each cathode maker has different impurities they don’t want. So that’s why I said it’s a rabbit hole – once you go down this thing, you never come out.

Matthew Gordon: This is really simplifying it for us, because it helps us point towards the right companies. Once we’ve identified companies that are saying the right things, how do we know if they’ve got the right battery-grade materials?

Rodney Hooper So here’s an example: in our estimates as RK Equity, I’ve run through the numbers, because of the what EVs, the ex-China market want: they want high Nickel, cathodes, they want fast-charging, long-range that can only use if your cathode composition is more than, the tipping point is around 65% Nickel, then you can only use Lithium hydroxide in that cathode. You cannot use carbonates, it’s to do with the centring process when they do it, it can damage the crystal structure. They are only really 3 qualified companies into the Lithium hydroxide markets outside of China, that’s Albemarle, Ganfeng and Livent. There are other companies that supply smaller amounts, but those 3 are dominant. So when somebody says, I’m going to do X, Y, and Z, you’ve got to make sure that they’re doing the right testing and, and they’re going about it in the right way, because it’s a very exclusive club that they are looking to join. And it’s the reason why a lot of junior projects will partner with those three in order to get where they’re going, or look to pinch personnel from them in order to get the job done.

Matthew Gordon: So if you’re not one of those 3, you need to partner. This is good.

Rodney Hooper: You can go it alone. I mentioned Piedmont. They are based in North Carolina, and of all the Lithium hydroxide made Albemarle and Livent reprocessed carbonate in North Carolina. There’s a lot of processing skill in that location. We are encouraged by new technologies, like direct Lithium extraction and clay, but they still need to go through the process and doing the pilot plants. It’s one thing to do it at small scale. It’s another to mine a much larger deposits that isn’t homogenous. You have different waste rock, you have different ore body, how consistent is it, so that when you scale up from a pilot plant producing 100kg to 20,000t, is everything going to go according to plan? And that is mining really. In Lithium it’s even more important because the allowed impurities, the specification sheets are extremely stringent.

Matthew Gordon: They are. And, as a small junior, you can’t expect to have all the necessary prerequisite skillsets in-house, from exploration, development, building pilot plants, getting into some level of production and being able to sell into the right market. So again, so for investors, the opportunities are to get in early because the leverage is there, or get in at another point when you think that company has the necessary skillsets or partnerships, JVs, or relationships to process properly. What would you encourage people to be looking at in companies?

Rodney Hooper: If someone’s going to be taken seriously, they’re going to have a lot of chemical engineers and so on, on the staff, less promoters and less geologists. If they are going to progress from being an exploration or development company into a genuine production company.

But yes. That to me would be a key thing to look at. You’ve got to look at how rigorous the metallurgical test work is that people do. And also look at the qualification process. It starts with a few hundred grams then goes to a few kilos and then it goes to a ton: it’s a real process. And you need to see how the guys progress along that chain.

Matthew Gordon: I want to bring it back to clays, brine, hardrock. There are different types of costs to those things. Brine is traditionally viewed as being quite inexpensive, low AISC if you were to produce. Hardrock is seen as much more expensive. If you were looking at these companies, how do you view them in terms of their different cost structures?

Rodney Hooper: So now I’m going to go down another wormhole with you: there is operating costs. Yes, brines typically are the lowest-cost producer for carbonate. SQM, it’s under USD$3,000/t. But there are Royalties in Chile. So does one look at the operating costs or does one look at what the ultimate cost is in order to deliver the final product? Because that is what’s going to generate your EBITDA and your earnings. If you ship into China there are import duties and VAT. And then if you ship out again as a foreign company, there is VAT on top of your product leaving it. There are cost curves and there are cost curves. And it’s another added layer because if you just look at what operating costs are, and then you look at the financials that are released by companies, you wouldn’t think that it’s the same people, because you’re missing out on all of this hidden layer of expenses that happen between operating and sale.

From a pure operating perspective – yes. In theory, brine to carbonate, it is the lowest-cost route to the point that it’s probably going to put a lot of the non-integrated producers in China who take independent spodumene and convert that to carbon, it’s going to put them under pressure. And in theory, a hardrock to hydroxide is the cheapest route.

But it depends on whether you’re integrated or non-integrated where you source it, and government royalty taxes and so on. Because again, Australia has a 5% royalty on spodumene and you ship it out to China and so on. We do a lot of work around what is the actual ultimate cost to produce the product, because investors need to know that in order to determine how profitable the company will be, which I’d like to think is what matters.

Matthew Gordon: Apart from Royalties, what are the other components?

Rodney Hooper: Obviously, the shipping, depending on where you’re shipping it to. Argentina has an export tax. Chile has a Royalty on Albemarle and on SQM for what they set it to. If you ship it into China, there is import duty and VAT. And if you reprocess it and ship it out, there is another export tax or VAT, if you will, when you ship it out. So that’s applicable to Livent and to Albemarle.

Matthew Gordon: So we need to start looking at financial modelling before we actually make some decisions.

Rodney Hooper: Yes. So it really does. It depends on where do you do your investing? If you like to take early exploration plays and run them to Feasibility, these things don’t matter. if you’re actually looking at worrying about operating companies and what the margins are, then these things do matter.

Matthew Gordon: It’s an interesting mix for investors, because most of them don’t do a lot of homework, and feel it doesn’t really matter. And perhaps, early investing, based on what the company says, the promotion… it does have an effect, but it’s not really going to move the dial when it comes to creating real value. You’re saying you need to pick development companies with real chance of getting into production with some real partners. Is that where the best leverage is? The best value is? Early stage investing is risky by nature. Because they all say the same things. It’s too early to actually have the data, the metrics be able to judge them properly. Where are you advising people to look?

Rodney Hooper That’s a good one. We don’t necessarily promote specific companies, but we will certainly do the analysis to give the ins and outs of each one and the merits. And obviously we represent companies that we believe in and achieve what’s needed to be achieved,

Matthew Gordon: But generally, what’s the best stage in terms of mitigating risk, but also increasing your leverage?

Rodney Hooper: That depends on where the market’s at. That’s a million dollar question, but where are the opportunities where you see the biggest returns happening? And this happens time and time again, through every cycle, that’s from early exploration to proving up a resource and feasibility. There’s always a big uplift there. And then the second opportunity is after Feasibility, around that orphan period where you get that next chance where they, in that 2-year construction period and there’s no excitement around the hard work being done, but they’re undervalued versus where they’re headed to.

Matthew Gordon: So it’s the same as every other commodity: there’s no nuanced difference for Lithium?

Rodney Hooper: It’s not how it’s played out now, but the other thing to mention is unlike Copper or Nickel or what have you, there’s no LME contract on Lithium. So there’s no way to play the raw material. If you want to get exposure, you need to actually physically pick a company because you can’t buy it as a commodity.

Matthew Gordon: I want to come back to clays, because it’s relatively new to the market. I don’t think it’s really well understood and I’m not sure companies that we’ve spoken to or others have demonstrated technically how they can solve this problem at an economic scale. Where are they? Is it relatively nascent? Is it relatively young technology or do you think that people will be able to deliver a clay project at scale?

Rodney Hooper:  That’s a tough question. So the one project that is being funded, and I saw you had them on the show, which is Bacanora. And again, the jury is out, but one way of maximizing the probability of achieving what you want to is having the right partner. And they’ve got Ganfeng. I can’t sing the praises of Ganfeng enough – these guys have taken concentrate brine from SQM and turned it into battery material. They take spodumene from anywhere. They seem to get everything right, and they are Bacanora’s partners and they’re having a go at the Sonora project. So I would say, if I’ve mentioned before that you need the due diligence of the chemicals skills and that’s in conventional projects, in clay projects, you absolutely need to back a team and management and look to make sure that they have the right skills.

My preference on the clays would be to see some type of … Ganfeng will maximize your probability of getting it done. When it has proved to be as economically viable as the Feasibility Studies say that always remains to be seen. I’ve seen some Feasibility Studies already moving where the OPEX has jumped 50%. So, it’s again, the one thing I would say that’s possibly in its favour is I’d say it’s a fairly homogenous deposit. In terms of what you’re mining is fairly consistent. So if you can get the process right, you can probably start working at efficiencies because I don’t think there’s as many curve balls, but it is unproven.

There’s a reason it’s behind brine and behind hardrock in being tested. And it’s worth being explored. It’s worth being tested in the same way that I am quite partial to DIRE – to direct fm extraction. But I don’t believe it’s going to revolutionise CAPEX and OPEX but it could produce the material. It goes back to the question of who is going to produce battery quality and qualified Lithium into the supply chain, is people that can produce a consistent product time and time again.

Matthew Gordon: I take your point about Ganfeng and having them on board as a partner. For any company it is very important, in the case of clays, it increases the chance of success. It doesn’t guarantee it because even they at this moment have not demonstrated economic economically viable solution for clays, that is to come

Rodney Hoope: Bacanora has run a pilot plant of about 600t a year. Again, it’s going from that to 1,750t to 3,500t. Is there a mystery problem in the mix or is it going to be simply just scaling it up? Because Nemaska was supposed to do the same on its process. But you also can’t underestimate the benefit of someone like Ganfeng with deep pockets and skills backing you so that if you do hit a few snags, it’s not the end of the road for you. You can work your way through it. And that is important, all mining companies look for maximum leverage and maximum returns, but if they run into snags, is that the end of the road and you’ve been bought out in a fast sale, or do you keep going? Ganfeng is a USD$10Bn market cap company. It’s real.

Matthew Gordon: I understand that. What I’m trying to get at is protecting investors, to walk in knowing what the risks are. And then you put that as part of your evaluation, your own personal evaluation, as to whether or not that’s suits your strategy. It’s just important to demystify the language used by certain companies. This is not a Bacanora conversation. This is generic conversation around what companies say they want and what the reality is are 2 different things. Because they have got to paint the best possible picture. You as an investor better not be walking into either a trap or a position where the company, despite its best endeavours, cannot solve a problem.

With Ganfeng and their balance sheet, it helps in that particular case. Not all companies have that. This whole exercise and this whole series is about helping people walk into investments with their eyes wide open. Thanks for talking about clays. It’s an interesting space. If they solve the problem, potentially very huge for a handful of companies there.

Rodney Hooper: They don’t define or have a separate set of economics that’s special to them. They’ve still got to make money in the environment like everyone else. And there is potential in the same with the others, but one must understand that the incumbent Lithium majors have not chased that space; take that for what you will. They had the choice and they’ve passed on it.

Matthew Gordon: But it comes back down to the technology. It’s the uncertainty: you need to stick with what you know. 1 -it’s a small market, even the major players are not that major. Capital is tight. The market has GDP like growth. It’s not been that exciting. And the thematic has been a bit slow to materialise. It’s ramping up, but it’s still not there. COVID doesn’t really help things either.

You did a commentary the other day on Nickel. You were interviewed about Nickel. And we’ve seen Tesla’s quarterly. Last week we heard what Elon Musk said and the impact of that for certain companies as being huge because it’s been hard to get a Tesla away from the Lithium story. They’ve suddenly just almost overnight recognised that Nickel is important to them. What was your take on his commentary with regards to Nickel?

Rodney Hooper: If do the breakdown of a, high-nickel cathode battery, the biggest expense of the entire of the high-Nickel cell is Nickel, and then second is Lithium. So, the way I see it is, if you look at Tesla, if he hits 500,000 sales this year, by our estimates, he is 25% of the EV market. For all the talk of Tesla killers, he might have increased his share of EVs this year. And it would appear that he has an ambition to continue to do that. What he’s realised is, he is looking to expand Giga Nevada and Shanghai and start Berlin and Port Austin, which is already under construction as well. And if you are going to look to launch the semi, which could have anything up to 800Kw to 1,000Kw hour battery in it, which is like 15 model threes all in one. And the cyber truck, all of these need high-nickel cathode. And he said that because the semi is all about haulage weight . He needs the best energy density and last this way on his battery packs. I never thought he was going to look to launch all of those in one go. It would appear that he’s looking to maintain a very high percentage of the EV market share. And he can if he launches. It depends on tastes, but the cyber truck looks to have a lot of back orders waiting for it.

So what is interesting is when he did make that comment, he made it almost quite clear that he’s not going to do the Nickel mining, he’s telling everyone else to get on with it. When he’s spoken about getting into mining previously, he clearly didn’t mean Nickel, because from the way I read that he’s not going to do it.

 I do think one possible elegant solution to him securing more Nickel to do physical streaming deals, which is effectively like prepaid offtake with fixed pricing. Tesla is, let’s assume it gets into the S&P 500. If you look at other companies in the S&P500 with USD$250Bn to USD$300Bn market cap, they have funding rates of like half a percent term funding rate. There is balance sheet arbitrage between the people who need the physical raw materials and junior miners. You have to borrow at 12%, 15%. I’s not just about, you don’t necessarily have to buy the company, but there are ways of structuring it, which you can effectively help fund the development of raw materials, which is where we’re going to get to. A physical streaming deal with a fixed price guaranteed to him might be an elegant solution where he helps everyone. But in terms of raw quantum numbers, he’s about to send Nickel and Lithium hydroxide demand into the stratosphere. If he is going to launch the semi, the Cyber, have the Y this year and the 3 back. It’s going to require an insane amount of materials.

Matthew Gordon: It’s an insane amount of material, but he also gave a clue about the type of Nickel he wants. He said, ‘you produce it, we’ll give you a long-term contract, but it needs to be efficiently mined and it needs to be clean’. And there’s this debate going on about sulphide versus laterite Nickel: dirty versus clean. And that is an interesting conversation. It’s certainly for people like if Tesla’s thinking that, are big funds thinking that? Should investors be thinking like that? Again, he puts something out there for debate.

Rodney Hooper: It would assume that it will favour high-grade Nickel sulphides with what he’s asking. But in the end, this is a tall order with Nickel at $6/lbs, to have all these other requests of how you monitor and where you source your energy and what have you. And I’ve seen your Nickel expert on here. He can discuss it as it’s quite a lot of requests going into the back of this when prices are quite low. So, it is possible to do it. And let’s be honest: if you look at the price of renewables these days, it’s a natural progression that’s going to happen. And there’s a lot of acidic waste rock, if you do that leaching on laterites and so on.

But what we’ve seen though is in the same light is he did an offtake agreement with Glencore for the Cobalts, and they also, they and BMW and others have offtake agreements with Ganfeng, which produces hydroxide in China, which is never going to have the same grid. So is one going to allow for a lead time in order to get a progression towards a clean and mining and energy sourcing of all of these raw materials? That that’s fair. And it seems to be starting further downstream. Northolt is going almost is completely carbon neutral and so that cell, and then we can move up to cathode. I guess VASF is now going to give you effectively almost a carbon certificate on every product that they make, but it’s going to take a little longer as we go upstream into the chemical processing and mining. You need to give some grace period.

Matthew Gordon: Rodney, thank you very much for your time today. Seriously, you’re extremely knowledgeable on this subject. You say you did live and breathe it 7-days a week. When we spoke a few weeks ago, it was obvious to me that you love this space. And there’s a lot going on. And the nuance is really, really important.  there’s some real key learnings for people new to Lithium just coming up to the first time. And maybe even people who haven’t really looked at Lithium the right way before. I appreciate your time today, and you’re going to come back every couple of weeks and talk to us and tell us what’s going on in the world. Because it looks like it is rapidly working it’s a way for some meaning, for sure.

Rodney Hooper Excellent. Thanks very much for having me on, Matt.

Company Website: https://www.libull.com/

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Nickel Prices & Demand Up, Inventory Down. What Next?

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 57M
  • Share price C$0.92 (02.07.2020)
  • Market Cap: C$52M

Stay ahead with our weekly Nickel Market Insights with Mark Selby, Nickel Market Commentator and CEO of Canada Nickel Company (TSX-V: CNC). Stay up to date by listening to our weekly market roundup on Nickel.

What has been going on this week in the world of nickel? This week, we talk to Selby about market fundamentals, both in terms of base metals and battery metals like nickel. The Chinese market is absolutely key to nickel demand and with the price of nickel creeping up with inventory reducing, what geopolitical events will unfold in the near future? China is driving most of its investment into manufacturing, infrastructure and primary industry. There has been an utter startling 17% increase in the consumption of the nickel 300 series (chromium-nickel alloys). The Philippines is currently the only source of nickel supply and Selby covers the potential ramifications of this.

In addition, we ask Selby some questions about the nickel space that have been provided by our Crux Investor viewers. We also cover Canada Nickel Company’s Crawford Nickel-VMS Project in relation to Elon Musk’s recent quarterly conference call. Canada Nickel is one of the few nickel players than can produce with no carbon footprint, but are nickel investors attributing value to this and do they even understand it?

We Discuss:

  1. 2:51 – Week Overview
  2. 6:02 – What’s Happening in China?
  3. 7:59 – Price Up, Inventory Down: Who’s Providing More Nickel?
  4. 11:00 – Demand and Intermediate Material Solutions
  5. 14:10 – Efficiency and Innovation in the Nickel Space
  6. 17:48 – Elements of Control: “Control the Mill, Control the District”
  7. 21:00 – Forward Guidance: Why Do Nickel Producers Need it?
  8. 22:43 – Shaky Economics: Manipulations of AISC
  9. 27:14 – Clean vs Dirty: Lower Mining Ethics Mean Lower Cost?
  10. \30:43 – Understanding NetZero: Are People Buying it?
  11. 32:28 – Funding Nickel Companies: Changing Criteria
  12. 34:21 – Insight into Partnerships: Orford Minerals

CLICK HERE to watch the full interview.

Matthew Gordon: Mark Selby, how are you doing, sir?

Mark Selby: Very well, Matthew Gordon, how are you?

Matthew Gordon: Not bad, but then I haven’t had the car journey you have just done. Tell us all about it? You told me before we started, I was impressed. Where are you?

Mark Selby: I am in Timmins which is an 8-hour car journey North of Toronto. I had stopped in Sudbury on the way up and got up here. It’s trying to minimize contacts. Things in Ontario are pretty good, but it’s safer to drive than to fly at this point. So rather than take any additional risks with contact at home with some higher risk people I got to see a good chunk of Northern Ontario that I hadn’t seen before.

Matthew Gordon: That’s rather gorgeous. And a lot of thinking time, a lot of phone calls made I suspect. That would be like the entire length of Britain and some. In fact, a little bit more, about an hour into The North Sea. So that’s very impressive. We’re here for our weekly catch up. What’s going on in the world of Nickel? We talked for the last 2-weeks about fundamentals. We have also talked about price in the market and this week has not disappointed.

Mark Selby: Nickel continues to surprise, and I was wrong once. What we’d seen the last 4 to 6-weeks, you have seen some momentum stuff come in. Last week was obviously the Elon Musk comment that popped Nickel prices up about 4%. And then. just yesterday, in the last 72 hours, Nickel prices have moved up another 4% or 5%. And in this case, we’re finally seeing some real fundamental numbers come through. What was amazing was Chinese stainless-steel production. And, 2/3rds of Nickel goes into stainless-steel. So that’s the big number and China is about two thirds of all stainless steel these days. Their year over year, 300 series, which is the one that has the most Nickel, was up 17% year over year.

I’ve ranted on a few prior conversations about analysts being very, very nervous about stepping away from a 2% to 3% growth number. The reality is in Nickel, it has these kinds of moves. So all of a sudden, people’s demand forecasts for Nickel and then, what you’re going to use this year as a base and then go forward, all of a sudden the base is going to be materially higher the amount of extra Nickel that will now need to be consumed in an analyst forecast is going to be raised by several hundred thousand tons over the next 4 or 5-years.

I don’t think this one month is a blip; the good thing is you have seen stainless prices go up during that timeframe. People are really demanding it. You are seeing inventories drop. There’s a whole set of now fundamental numbers that are finally pointing in the right direction. We didn’t see those fundamental numbers showing up, which could suggest that there was a bunch of hidden stocks that are taking care of whatever additional demand is coming through. And maybe that was the case, but now obviously the call has gone out.

In terms of the Nickel market, the other part that is constructive in terms of where we are at this point is you’re seeing ore prices also move up with the stainless price, the Nickel price, and the ore price has moved up. If there was enough Nickel pig iron floating around right now, the NPI producers wouldn’t necessarily be bidding up ore prices to produce a bunch more. So that suggests that as things are produced, they are buying more ore at higher prices because they need to.

These moves are good. We’ll see how the fundamentals hold up here. But, holding USD$60, if we end up with between USD$6.25 and USD$6.50 through the end of the year here, then that is a great position for what’s coming down the pipe.

Matthew Gordon: What’s happening in China. What is happening in China? Because there’s a lot of stimulus, but they’re coming out at a different way from the West where we’re just helicoptering money in, dropping it, scattering it and throwing it in a very random fashion. These guys seem to be driving it towards infrastructure, manufacturing, and obviously, primary industry we’re seeing we’re seeing here. Because to get 17% year over year on the Nickel 300 series – that’s nuts. It’s insane. So what’s happening?

Mark Selby: The Chinese, the way they reflate their economy is to basically get a bunch of infrastructures built, get a bunch of housing built. Social housing is a big driver in China. And so, we see that the East coast, which is very well developed now, but there’s still hundreds of millions of people who still haven’t fully participated in what Shanghai and Beijing look like today. So, the overall macro theme you see in a bunch of numbers, so Copper production, they’re running at 101% of capacity right now, year over year. Steel production is in very healthy growth territory. So, they’ve done it in 2003, 2008, 2009, there’s been a number of cycles where there is the button that the Chinese government hits to try and build up their economy. This is going to continue for a good 6 to 12 months and perhaps longer. And we’ll just have to see where the Chinese economy lands.

Matthew Gordon: We will also be able to work out who got it right in terms of their approach to stimulating the economy, which is a fascinating one. We are going to talk to a couple of US funds about next week. But prices are up, inventories are down. Imports are on the rise, where are they getting it all from?

Mark Selby: Right now it’s just the Philippines. The catalyst for the end of the year is that they need to build inventory, or inventories, because the Philippines has the rainy season from November through February. And if they haven’t built their stockpiles up, things will get even tighter by the end of the year.

There was news yesterday: New Caledonia approved 2 mines: Agoro and another mine to export about 2Mt each of ore. That will work out to, depending on the grade, 50,000t to 70,000t of additional Nickel ore availability. But we lost several hundred thousand tons of availability from Indonesia when they put the ban in place in January. It will help a little bit, but it’s not going to change the fundamental picture.

And New Caledonia is really the only proximal source of large volumes of additional materials. So, that’s it that can come to the market, from the biggest potential supplier, then that’s a good medium-term view. You may see some additional quantities from West Africa, Guatemala and a couple other locations, but there’s not another Indonesia they’re waiting with ore ready to go to China. It really does help the end of the year picture and into 2021.

Matthew Gordon: New Caledonia is 2 x 2Mt – that’s 4Mt in the market, but it doesn’t touch the sides. If Indonesia continues with this ban on exports, things are going to get tight for sure. Is there any chance that the Indonesians say, ‘well, actually, we’re going to come back on online. We are going to be supplying to the market’. Is there any chance of that?

Mark Selby: No, that would be zero. This has probably been the most successful developing country mining investment program ever. They’ve literally seen tens of billions of dollars of investment pour into the country. And, I would love to see someone put a chart together of what that investment looks like over the last 5-years. And they’ve got to be top of the list in terms of attracting investment. They flipped themselves and in 2014, and that was really in response to a short-term issue where that the home team player, PTN Tam who the government also owned, was really struggling to produce enough of ore to meet Chinese demand from the plants that had been built at that point. And they pulled the ban forward this time to make sure that they were going to get the investment that they wanted. So there’s zero chance that they would flip it back at this point in time.

Matthew Gordon: Let’s talk about where the demand is coming from. You mentioned a few of the places that that’s going to come from, and you have got lots of different grades and scales of operations, but something that you mentioned in the past, and it’s question that has been sent in. We’ve talked about intermediate material and how that may be a solution for this demand that’s coming, coming down the line. Can you just remind people of what the intermediate solution is and perhaps how that could affect the market?

Mark Selby Yes, so over the 3 or 4-years, and as capacity starts to get built, to continue to supply the EV market, what you’re going to see and what makes most sense from the supply chain for the auto industry, what’s the lowest cost to get it out of the ground and into an EV is to really make the highest quality intermediate product that you can from either a laterite or a sulphide deposit, and then take that product and then put it into a plant, that then takes it down the path into a product that’s much closer to what can be used for the auto company. There are 2 main reasons for that. One is, if you’re going to make a Nickel sulphate, there’s a huge amount of the cost is crystallizing the sulphate out of solution. You use a massive amount of energy, and then the first step in the next process that uses the sulphate then re-dissolve it all. In terms of that end to end cost, that’s a very wasteful step. The other piece of it is a lot of Nickel intermediates on the laterite side. You can have material that’s 45% to 50% Nickel and other ones that are 65% Nickel. But a pure Nickel sulphate, just because you stick a bunch of…it ends up effectively water molecules in there. It’s only 22% or 24% Nickel.

If you then have to ship it somewhere, it’s much more expensive per unit of Nickel to ship that material around. And all you’re doing is at taking a bunch of sulphate, paying for a bunch of sulphate ions to travel around the world.

So for those 2 reasons, the companies that I’ve been discussing, that’s very much conceptually where they see the industry going. And so producers who are looking to get into production over the next 3, 4, 5-years, that needs to be where you head to.

Matthew Gordon: We have interviewed a few companies recently who are looking to, because the market is tightening, and they’re seeing the ability to capture value further down the supply chain. Nickel is seemingly a quite expensive industry, just the mining component. You need to raise a lot of capital. The CAPEX is vast. Are there solutions that you think, looking forward, this is stemming from my question for someone saying, well, could innovation, is there innovation, that’s going to come into the Nickel space from the likes of people like Elon Musk, with that comment last week saying, well, there must be a more efficient way to capture Nickel, to be able to provide high-grade Nickel to battery manufacturers. Are you seeing much innovation? Are you seeing people wanting to move down the supply chain or just is it miners focus on mining and processors focus on processing?

Mark Selby: There was a whole flurry of people talking about making Nickel sulphate at their mine site or somewhere in between, if you’re in production right now you still have avoid the ‘cartel’, the oligopoly that really manages Nickel supply. It is good to have some downstream path, but don’t build the plant at your mine site. The industry is definitely talking about it. That’s where they want to go.  it will be the next generation of plants that get built, will be  built with that concept in mind. The challenge for them is, there isn’t a lot of intermediate. It’s a bit of a chicken egg: there’s not 5 x 50,000t p/a Nickel production plants coming online outside of our mines coming online outside of Indonesia. And the Chinese are busy basically getting their plants in place in Indonesia, so that they’re going to own the entire chain right through to final product, so it won’t be available to Western suppliers.

Matthew Gordon: Talk to me about this next generation of plants. What do you mean? What are they going to do that the current plants don’t do?

Mark Selby: Right now, they’ve been quite happy to buy sulphate from Glencore, Vale, other producers. But right now, we’re just in the baby stages of Nickel in the market; it’s basically 3% or 4% of overall Nickel demand, and we’re talking about going from 80,000t to 400,000t to 500,000t by 2025, and 1Mt to 1.5Mt by 2030. They were thinking about, ‘how do I make the 8x, the 5x the amount of Nickel I need by 2025’. And as they gear up to get that level of production in place, they’re thinking about, ‘I was fine when I was buying 20,000t of Nickel sulphate, but then when I need 5x that then I need to start to think about what that cost looks like and how I want to position myself I going forward.

One thing that Tesla has been really focused on is just scale. The Gigafactory’s: they are huge, they are built to be expanded even further. Because they realise there’s a scale curve to this production. And they just want to make sure they’re as far out in front of the rest of the pack as possible to be able to have a cost advantage versus them. And in the production of the products that are necessary for the chain, scale will help, because in the auto industry, it’s all about trying to be the lowest cost supplier and continuing to modify your supply chain. It’s the absolute lowest cost possible.

Matthew Gordon: Talk to me about this oligopoly, because when you say words like that, it says, well, they can control pricing in the market. They can control supply processing which may affect my decision making as an investor. So was it tongue in cheek, or do you mean there is something that we should be aware of?

Mark Selby: It’s tongue in cheek, but 10 and 20-years ago the reality was there was really only a handful of downstream smelter refiners, but unlike Copper and Zinc where you have benchmark treatment terms that are negotiated with some competitive tension between producers and suppliers, in the Nickel space. They effectively had a lot of pricing power over miners in terms of who got what share of the profit from digging it out of the ground. That has been loosening as these alternative production channels open up in China, pricing terms have moved higher. But we’re still, we’re only about 20% of the way down that path. In another 3 or 4-years, you’ll see a lot more capacity come on in China to handle Nickel intermediates to get them into a form that can be used by the auto industry. That this is exactly what happened in Cobalt in the mid-2000s, and I expect a similar thing to happen in the Nickel space here.

Matthew Gordon: There’s a saying in mining, which is: ‘he who controls the mill controls the districts’. Been around for a long time. There is certainly something to it. Is that even more the case with things like Nickel? We’ve talked about it in the context of Cobalt previously and Copper, but is that the case now with Nickel or is there a bit more to it?

Mark Selby: It was definitely the case like 15, 20-years ago. In the past, the Inco and Falconbridges’ of their time, it really helped limit supply. As a miner, couldn’t really get a path to market for your product other than selling it to them at a price that ensured they made a lot of money on it. Today, that’s less the case, but you need to further process your material to actually get cash. When I was with RNC, when we looked at Dumont, that’s where we came up with this roasting approach, effectively that gave us a channel to bypass the existing smelters and refiners to get material into a much more competitive market where there’s dozens and dozens of Nickel pig iron producers to take advantage of. Miners need to think that way, but over the next 3 or 4-years, that hold on the market that the existing players have is going to continue to diminish as these alternate paths to market start to appear from China.

Matthew Gordon: Just a few questions that have been sent in by people who listen to the series. A lot of questions around the same thing. I’m going to paraphrase them. People want to try and understand what do you mean by, and in one case, ‘would challenge your assertion’ around the need for forward guidance in the automotive industries. Shouldn’t you be able to just stand on your own 2 feet and get on with it in a bear or a bull market? Why do you need guidance from the automotive industry?

Mark Selby: I was talking about it when Nickel was USD$6/lbs. At $6.50, it’s better for the miners, but at USD$6/lbs, there are no projects outside of Indonesia that can move forward at a USD$6/lbs price. Elon Musk, in his set of comments, he said, ‘don’t wait for prices’. One of them was, don’t wait for prices to go back to prior levels, and that is a reflection of there aren’t projects that can go ahead at the current level. They do need higher prices to be able to get going. And, it’s fine for him who’s not investing a billion dollars in capital, to say, ‘trust me, we’re going to use all the Nickel you need just go ahead and spend that billion dollars and yes, don’t worry about it’. If they want the Nickel, they’re going to really need to provide guidance to the market as to how much Nickel the market is really going to need in that 2025 time period to 2030 time period, to be able to help shift the investment community. To be ready to write a cheque to the mining companies, to be able to build these projects that’s the bottom line and that’s why I made that assertion.

Matthew Gordon: ‘No companies outside Indonesia are going to be economically mining Nickel for under USD$6/lbs’. That is what you just said. Because you and I’ve been on the finance side of things for long enough, and we’ve done enough in mining to know when a company’s going to splurge the AISC numbers. Those numbers can be managed, manipulated to a degree. We’ll just say that. That’s just a big macro statement, not a reflection on your companies or any company specifically. I’ve been in rooms where that happens and things can look economic when you’re using a AISC. It gets really difficult when you have got companies that are saying: hey, we’re economic at USD$5/lbs Nickel. But the underlying reality is that they need USD$6 Nickel to actually be profitable. So that happens. And I’m talking about Gold and Copper, Silver, all companies play, that game. So your assertion that no companies can economically mine for under USD$6 is what?

Mark Selby: I wouldn’t say economically mined. It’s basically to get a project financed. So, if you need a billion dollars…Voisey’s Bay underground, Voisey’s Bay is USD$1.5Bn. Onapping Deepest Glencore’s project, that’s USD$800M. Those are the scale of the tickets that are required to bring new Nickel production in. And the cash costs can, using Dumont Feasibility Study numbers as an example, the cash costs are around USD$3/lbs, the All in Sustaining Cost is well below USD$4/lbs. They will print money at a USD$6/lbs Nickel price in the future. It’s just a matter of getting enough, getting a billion dollars to be able to build the plan, to be able to make that quantity of Nickel to generate a return on that billion dollar investment.

This is something you bring up the case of the C1 and AISC, I would really encourage investors… high grade is sexy and it looks great, but I would really encourage investors, if you’re looking at a high-grade operation to go to the free cashflow page, because the issue with a high-grade mine is that you have the exploration costs. You then have to develop the mine to get out to where you just found the Nickel that you just drilled, and that number piles up pretty quickly. And they might say, ‘oh, we’ve got this cost and then we’ve got this cost’, and you think, they should be making USD$2/lbs to USD$3/lbs. And then you go to free cash cashflow statement, and you look to see actually how much free cash flow they generate, and none of it’s there. Because when you do All in Sustaining Costs, that’s one of those things where companies play a little shell game in terms of, ‘well, that’s not sustaining capital, that’s exploration and development, so we’ll leave it on that side of the fence’. So their AISC number looks lower.

So yes, I would highly encourage people to do that. There’s one example in the industry that has very much twisted the definitions of C1 costs more than –

Matthew Gordon:  we all know who you are talking about.

Mark Selby:  a lot of people would be uncomfortable with this.

Matthew Gordon: Let’s definitely not mention any names, but I don’t think it’s unusual; it happens all the time. I see it across all commodities, it’s the dance that the CFO plays and that’s why fundamentals have got to be there. You do need to look through them.

Mark Selby: The cash flow statement never lies. That is the best of all of the financial statements.

Matthew Gordon: So maybe that’s something we can pick up on another time, just to maybe help people understand it and go through that more in the actual reality of what some of these costs are.

The next question was: since you have come up with your ‘NetZero’ trademark, or pending concept, and you’re starting to talk about it in the marketplace and we’ve seen it everywhere. You have got some amazing coverage from that from mainstream press as well. It was really good. People are starting to come to us and talk about the difference between clean Nickel and dirty Nickel, and some are saying that sulphites are cleaner than laterites. And somebody was saying some of the practices are cleaner than others. This whole ESG component is so, so important. Elon Musk said it was so it’s got to be true. I’m thinking for example of practices, what is the actual cost of trying to be a clean, responsible, ethical miner v miners who don’t have those problems in some jurisdictions where they’ve got deep-sea tailings, where they are literally dumping stuff out deep into the sea, ‘but at very big volume so it shouldn’t be a problem’! How do you balance that off? Because obviously with lower ethics come lower costs, potentially, and with the ESG come higher costs, potentially. What’s your take on it?

Mark Selby: Yes. And that’s the thing, it is the opportunity, and this is why we want it to be so far out in front of it is, there are situations, and our project is there. There are other projects that have a set of an intersection of things that make sense that allow them to do it. When we look at the ability of the location where we’re at with the hydroelectricity, and then the nature of the rocks themselves to absorb CO2. What we need to do to get there is because we’re starting out and we’re going to design it in from the beginning, our expectation is as we go through the engineering here that we’ll have basically, minimal to no impact on capital cost and minimal to no impact on operating costs.

Every operation can’t say that, but it’s those opportunities and that’s where people, one of the dimensions now, as you start to look at mining projects is to say, okay, is it a good deposit? Is it in a good location? And then the next question, and if you want to really make a lot of money in mining is to identify those opportunities where you can mine at zero or close to zero carbon going forward. It is an equal pillar in the the pillars of what you need to look at as you look at new projects.

Matthew Gordon: So now I know what you have got. There are other companies who have similar capability and similar situations, spent on similar situations. I’m going to be careful. This is a macro show. I don’t want to say that some companies are perfectly capable of achieving the same goals as you, some a lot less. They’ve got a whole different set of problems. And we just want to talk about it, because we must have 40 questions here about clean and dirty Nickel and investing in ethical investing, and what’s going to get funded, what are institutions looking for? You have answered some of those questions over the past few weeks. Are you getting much feedback as part of your NetZero conversations? What are people trying to understand about NetZero, and do they buy your version of it?

Mark Selby: Yes, the feedback over the past week has been very positive in terms of making that an objective. And, I’ve had a number of conversations with a number of different mining companies and other groups in the last week and a half here. And, with people that I’ve known for quite a while and aren’t afraid to tell me that I’m full of something on something. And, I’ve had no pushback in terms of the concept itself, because, there’s no rocket science involved for our particular project. And given the location that it’s in, to be able to do that, there’s a couple of engineering issues in terms of how you would take off gas and what’s the right way to blend it in with the tailings. But other than that as an issue, there’s really not any anything particularly fundamental at that point.

And, there’s more operations now. You’re starting to get more electric mining fleet become available. For some underground operations that are going to an all-electric operation that opens up the possibility for those types of operations to be able to do it. It is just looking for the right set of opportunities: deposit, location, and now it has to be net zero carbon potential is one of the key colours as you look at projects that you want to get involved in.

Matthew Gordon: We’ve mentioned in the past people like KoBold and the BlackRocks of this world, are they actively now seeking like yours or making demands of projects, which perhaps aren’t, but could be, or should be? How are they affecting funding in the marketplace? Because they’re slightly unconventional in a way because they are coming from non-money backgrounds, but they’re seeing opportunities. They are hedge fund-ish in their approach, and saying, ‘well, if we put money into the right companies, but even we have standards’.

Mark Selby: Yes, in terms of the larger, there are more and more large investment funds that are, ESG is part of the large funds are deploying capital and they have added that 3rd column in terms of where they’re evaluating companies. If you’re a junior, if you’re now operating in that industry you are now being evaluated on that column, it would be good to take that column and put it into your day to day investment decisions. With the energy metal space. KoBold, it is good to see  Silicon Valley money coming into the mining sector and think about ways to try and find more, they’re focused on looking at trying to find other sources of Nickel and Cobalt that aren’t in the Congo, and in the places that have some political and environmental challenges associated with them.

So, I’m hoping that is a sign of more capital to come from that space. We’ll see what happens over the next four months. We’re at day nine post-announcement so it’ll take a while for it to trickle through. But I’m hopeful as we go through the rest of the year here that we should have some pretty interesting discussions with a bunch of investors that we wouldn’t have been able to talk to before.

Matthew Gordon: I don’t like rumours, but I’ve heard one: Orford, West Raglan partnerships, what can you tell me?

Mark Selby: So yes, full disclosure: I’m chair of Orford as well as my role at Canada Nickel. Yes, the reality is there are very few high-quality Nickel sulphide projects globally. The West Raglan property we picked up at RNC in 2014. It was one of our first acquisitions of something else other than Dumont. We continue to look at all Nickel sulphite opportunities, and when it makes sense for us, we’ll look at doing something with that Nickel sulphite property. But at the current time, there’s no deal on the table or anything like that. But it’s great, as an Orford mining chair, it’s a great opportunity.

Matthew Gordon: I was looking for signs, Mark. You have got your poker face on, and I know you’re a very good poker player, so I got nothing from you. Mark, thanks for this week’s roundup. When we first started talking about it, we said, ‘well, things don’t move that much in the world of Nickel. We’ll see how it goes. It may not last’, but here we are 10 episodes later. It’s getting exciting.

Mark Selby: The thing with Nickel is it’s always been the most volatile base metal. I would encourage people to not wait for the perfect set of indicators to come in place. The mid-May trade in the base metals that I said was the right time to step your foot in. This has been great. And, now that we’ve got this momentum, the moves over the last 6-weeks, 8-weeks have been momentum based. This is real, solid fundamental, there’s a set of fundamental things that says, this level is going to be interesting for a period of time. And, now with New Caledonia just providing a little more and a lot more ore to the market. It will set up an interesting end of year 2020 to early 2021 timeframe. So yes, stay tuned.

You can watch, listen and read Mark Selby’s insightful weekly Nickel investing commentary at cruxinvestor.com/club

Company Website: https://canadanickel.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Elon Musk wants Green Nickel – What Does This Mean for Investors?

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 68M
  • Share price C$1.78 (17.08.2020)
  • Market Cap: C$121M

I just finished writing an article about Mark Selby’s recent interview with Crux Investor. He discussed the nickel market fundamentals a market dynamics that dictate nickel market behaviour and require the attention of investors if they want to make informed decisions. I’ll put a link to that article here.

I mentioned at the end of that article that I would be looking at a unique element of Canada Nickel’s Crawford Nickel-VMS Sulphide Project, which plays nicely into the green energy/ESG thematic. I’ve also decided that, while we’re at it, why not weigh up most of the nickel players in the space to give investors some perspective on the extremely volatile space?

We recently spoke to Selby about NetZero. Canada Nickel has really started talking it up this week; why? If you remember Elon Musk’s statement in his recent conference call, he appealed to producers to immediately start producing as much “green, efficient and sustainable nickel as possible.”

Matthew Gordon talks to Mark Selby, August 2020


Let’s put some emphasis on the “green.” Courtesy of environmentalists and the scientific community, enormous pressure has been placed on battery metal supply chains in recent years; the Responsible Cobalt Initiative is a great example. Institutional investors have been paying attention and for good reason. It makes no sense creating a green solution to our transportation problems, in EVs, if the front end of the process is occupied by environmentally detrimental mining practices and dirty nickel. Why would we create a large environmental footprint to contradictorily ‘solve’ climate change, requiring individuals to drive the EVs for years before they can offset their carbon footprint? Neometals’ Li-ion battery recycling project is a great example of a company creating a coherent, clean green circuit for batteries. Battery recycling resolves the end of the battery production cycle, but how will the front be resolved?

Away from the Class 1 (battery-grade) and Class 2 (NPI, etc.) debate, investors need to compare nickel sulphide and nickel laterite: the two most common nickel projects globally. There has already been an article on the Crux Investor website regarding the key differences between these two categories. Essentially, sulphide is high-cost to mine but low-cost to process via conventional smelting methods. On the other hand, laterite is cheap to mine but is extremely expensive to process and requires expensive HPAL plants that have only been built commercially for a CAPEX of over US$1Bn. However, I didn’t touch on a key consideration: environmental factors. Is laterite dirty nickel?

Musk’s demands for clean, green nickel will be followed by the large funds and automotive manufacturers; there is no doubt about it. Canada Nickel recently created a wholly-owned subsidiary, NetZero Metals. It aims to begin the research and development of a processing facility that would be located in the Timmins, Ontario region with the goal of utilising existing technologies to produce zero-carbon nickel, cobalt and iron products. The company has applied for trademarks in the US, Canada and other jurisdictions: NetZero NickelTM, NetZero CobaltTM, and NetZero IronTM.

Canada Nickel already has the scale to be attractive to majors, considering Crawford is the 11th largest nickel sulphide resource in the world after just 6 months of development. Now, it appears to have the green credentials that Musk and other major institutions will demand. However, Selby was keen to explain that laterite projects may now have moved to the back of the queue when it comes to financing. Who is going to foot the bill for a US$1Bn+ HPAL plant when it will be producing dirty nickel with a high carbon footprint? I imagine that many CEOs of companies with laterite assets will be sweating right now.

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SOURCE: CNW Group/Canada Nickel Company Inc.
Y-axis = tonnes CO2/tonne of nickel produced

Crawford is a relatively low-grade bulk-tonnage nickel sulphide operation, and Selby believes he can get that carbon footprint down to net zero.

So, with this in mind, and with an emphasis on the green side of things, how is the rest of the nickel market shaping up?

Cassini Resources

  • The company made a great decision to return value for its shareholders by selling its 30% remaining interest in Nebo-Babel.
  • Promisingly, its land position is on the same set of discovery as Chalice Gold’s discovery.
  • Its flagship West Musgrave Project is in the early stages of exploration. The first few drill holes haven’t exactly thrown up any sexy high-grade numbers, but there is still lots of room to go.

St. Georges Mining

  • Many investors have been excited by some really impressive shallow high-grade intersections at its Mt. Alexander Project on multiple targets on the same set of structures that host multiple nickel deposits.
  • However, the company has yet been unable to continue extending these structures much, predominantly because it is busy talking about new targets.
  • I actually took a look at the company’s website, and this is where things get confusing. The company is already talking about mining, but I can’t even see if it has defined a resource.

Glencore

  • It is obviously a massive nickel trader, but like most of the majors involved in the nickel space, the nickel component of the company is not large enough to provide investors with meaningful exposure to rising nickel prices and demand.

GIGA Metals

  • GIGA Metals’ flagship Turnagain Project is a massive nickel and cobalt resource in Northern BC. It is a low-grade, bulk-tonnage operation like Canada Nickel’s Crawford, but it does appear to be in a much more remote location. GIGA Metals is likely to have to shell out cash on infrastructure.
  • The company has previously had issues with lower grade concentrates, but it has now found its footing and seems to have come up with better grade concentrates.
  • GIGA Metals has zero carbon potential, which means it could fulfil some of Musk’s appeal for green nickel.

FPX Nickel

  • The company’s PEA-stage Baptiste deposit has the potential to become one of the largest nickel deposits in Canada.
  • It is a large, low-grade awurite deposit, and it has suffered from being the first of its kind. The market doesn’t seem to fully understand the value proposition.
  • The management team has done well to keep the share structure tight and intact.
  • Baptiste is in quite a remote location, but not as remote as GIGA Metals’ Turnagain project. It would require cash for infrastructure and plant development/construction.
  • FPX Nickels needs to do large-scale met testing in order to confirm the recoverability of the nickel product. This will take time and cost money.
  • It also has zero carbon potential, so could plug some of the gap for Mr. Musk and other battery/automotive manufacturers

Talon Metals

  • The Tamarack Nickel-Copper-Cobalt Sulphide Project is an exploration play that is actually really promising. However, it is situated in Minnesota, US, a horrible mining jurisdiction. The company is likely to take at least a decade to be permitted, if not longer. If one wants to see evidence of this, they only need to check out what Polymet/Glencore have been through with their Minnesota-based project
  • Moreover, the project is a JV with Rio Tinto, so investors won’t even receive access to all of the upside. The original deal was poor. It has since been renegotiated by it is still far from ideal. Talon Metals doesn’t appear well-positioned for a takeout by a major.

Garibaldi Resources

  • Its Nickel Mountain discovery was originally drilled in the 1970s, and the company has discovered a really exciting 3 massive sulphides in 3 years.
  • The company has hit some super high-grade sections and has been talking up its ‘global’ potential. However, most of its 3 years of drilling has been in the same little patch of ground.
  • This isn’t to say that the company won’t find some more exciting prospects in other parts of the property; it just doesn’t seem in a hurry to do so.
  • At one point, the company was valued at c. $300-400M. The value has since tailed off to $85M today, which still looks a little overpriced to me.
  • Feel free to check out some of the Angry Geologist’s blog posts about Garibaldi Resources.

Chalice Gold

  • A new Aussie discovery. It is in a brand new region for nickel and appears to have good potential.
  • It is very well-funded.
  • There has been a huge run up in the share price on the back of several good drill holes, but it appears the company is struggling a little with the continuity of higher grade material.
  • In fact, Chalice Gold is morphing into more of a palladium story with a nickel by-product.

Legend Mining

  • Like Chalice Gold, Legend Mining is a new mineral explorer based in Australia. It is a brand new discovery in the same region as the Nova Bollinger nickel operation.
  • It is backed by famous West Australian explorer, Mark Creasy (27%).
  • Again like Chalice, the company hit several good holes, had a massive run in the share price, but now it is tailing off because it is struggling to get continuity. It is tough to enough to get a high-grade nickel hit, but it is even more difficult to get any continuity.
  • Legend Mining is quite early-stage, but it seems to be valued like it already has a sizeable nickel resource.

Centaurus Metals

  • Centaurus Metals has one of the best nickel sulphide projects. I’d say it looks like one of the best chances for a new nickel mine in the next 5 years.
  • It is located in Brazil’s world-class Carajás Mineral Province, which is a great mining jurisdiction if not as stable as Canada.
  • The company has a sizeable 1% resource with potential for higher-grade areas with plenty of exploration potential.

What is your nickel stock pick?

Company Website: https://canadanickel.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Elon Musk Statement Shakes Up Nickel Market – Time to pick some Winners

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 68M
  • Share price C$1.78 (17.08.2020)
  • Market Cap: C$121M

With nickel shooting up to US$6.50/lb, the nickel space is finally starting to deliver on its lionised potential. Most excitingly, things might just be getting started.

So, what are the main catalysts behind this nickel value bump? The Chinese reflation is ongoing, with infrastructure and industry experiencing heavy investment. Considering that the primary driver for nickel market growth right now is industrial demand for stainless-steel, it is no surprise that demand fundamentals suggest there is more to come.

Ore imports for June 2020 have dropped YoY, primarily because Philippines miners can’t make up for the shutdown of the key Indonesian nickel projects. Whilst ore stockpiles are growing, they are only increasing slowly. There will need to be a huge multi-million tonne build up during the Phillipian wet season and ore imports drop off.

Matthew Grdon talks to Mark Selby, July 2020


Another bullish stat is found in stainless steel imports, up substantially YoY. A leading, reputable nickel analyst has claimed there is enough NPI currently floating around to cover all nickel demand until 2025.

Then, came the real surge of momentum: a CEO of a major EV manufacturer talking up nickel demand. We’ve all heard Elon Musk’s comments in his most recent quarterly conference call. He stated that Tesla wants nickel producers to produce as much clean, green and sustainable nickel as possible, and it sent a wave of bullishness through the industry. If, as the aforementioned analyst claims, nickel is covered by Indonesia until 2025, why did Musk talk about nickel as a primary constraint for the growth of Tesla, and why did he ask for nickel producers to pull the trigger now rather than waiting for higher prices?

However, whilst nickel is up >5%, it doesn’t yet appear there has been any fundamental change to nickel market dynamics. This appears to be the first indication of what to expect in the near future. There is still no clear and definitive support for higher nickel prices right now, and nickel supply/demand fundamentals remain nebulous for the time being with no concrete numbers on the table. Moreover, there is yet to be an outright number communicated to the market regarding the quantity of nickel sitting in inventories. We all know what a lack of certainty equates to in the world of investment. In the meantime, let’s explore what we do know.

Some industrial metals with major EV battery applications have been performing exceptionally, even more so than the soaring gold market if you can believe it. If copper investors picked a copper winner like CS, TKO, or any other copper stock with liquid high torque at the right time, their investment would have outperformed the majority of gold companies. If that isn’t a reason to be bullish and believe in the macro story, I don’t know what is.

Nickel commentator Mark Selby, CEO of Canada Nickel (TSX-V: CNC), recently spoke to us about Musk’s demand for a new wave of nickel production. We covered some really eye-opening topics about nickel and arrived at some robust conclusions based on what we know rather than what we might know somewhere down the line.

A common misconception in the nickel space is that there is a premium for nickel sulphate. Around 40,000t of the highly soluble blue-green salt is produced each year, and it is predominantly used for electroplating for nickel. Selby was keen to dispel any misconceptions: the nickel sulphate premium is not sustainable. There will always be additional transformation costs, but by and large, the premium should be zero or close to zero.

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We then touched on a topic we’ve previously mentioned in an article: Class 1 (battery-grade) and Class 2 (NPI, etc.) nickel. It has been getting a huge amount of air time from many, with many commentators seeming to think it is an integral part of market dynamics. However, as we previously concluded, it is not really an issue of note. Nickel will flow through from ore source to end product regardless of its purity or status as an intermediate. This is because of simple supply-demand laws and the ability of the Chinese, the biggest consumers of nickel to quickly respond to any market arbitrage opportunities. China will always ensure it has sufficient processing capacity to produce enough nickel for its needs. This renders the intricate chemical differences almost irrelevant in an investment context. However, nickel sulphide vs nickel laterite vs nickel saprolite vs nickel limonite is an entirely different debate…

EV investors have seen the sky-high projections for nickel demand. It is the largest metal by mass in the cathodes of most EV batteries. Its main competitor is lithium iron phosphate streams. However, nickel will have a unique, symbiotic duo of growth drivers: industrial and EV. If we look at the nickel that is coming out of Indonesia, most analysts are expecting the country to be producing 900kt pa more nickel by 2025 when compared to 2018. While some may use this statistic as a means to fortify the argument that Indonesia has got nickel covered, where is the remaining 1.6Mt going to come from by 2030? It quite clearly doesn’t add up, and the supply deficiencies of nickel are now beginning to be exposed for all to see. New capital will need to start flowing into some of the better junior nickel projects, and Canada Nickel’s Crawford Nickel-VMS project will look to benefit.

Nickel is very high growth and very volatile. Some years it grows 8-10%, which exemplifies just how much value investors can squeeze out of nickel investments if they know how to play the market. However, there are also years when nickel dwindles and grows 0% to -2%, which we have been going through for the last year-or-so. Investors should note that when nickel rebounds, it has always rebounded with sizeable YoY growth. On a peak-to-peak basis, nickel ends up with a 4-5% trend for demand growth.

Realistically, with no definitive forecast from consumers on their electric vehicle consumption, analysts will really struggle to produce an aggressive forecast for nickel supply-demand. It is all up in the air at the moment, and investors should take all forecasts with a pinch of salt.

So, whose responsibility is it to provide the data that the nickel analysts need to gear up and produce it? The onus clearly lies with auto manufacturers; they are the ones asking for more nickel than ever before after all! It is obvious that every automaker’s projection will be idiosyncratic and proprietary, but they can at least provide a range to the market so there is some transparency. If the automakers don’t release such numbers, investors will not cotton on to the nickel value proposition, and the automakers will have to pay more to access the limited supply of nickel. It is in everybody’s best interests that we now mobilise the nickel industry and start edging towards the EV revolution with more unity and less uncertainty.

Selby had a final few areas of interest he discussed with us. First, the high-carbon, non-Chinese ferro-nickel producers will be squeeze by this new ESG/green wave of momentum, and he expects this to offset the rest of nickel supply growth from Indonesia. Western automakers will quite simply never use high carbon footprint nickel in the production of their vehicles. Does this mean they won’t be relying on Indonesia/China as a primary source? Will they instead be looking for greener, cleaner nickel sulphide projects? Canada Nickel’s Crawford Nickel-VMS Sulphide Project certainly has the scale to be relevant here because of its unique carbon credentials. Check out my next article to see exactly why…

Company Website: https://canadanickel.com/

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

Neometals (NMT) – Battery Recycling Project gets Major Boost from giant SMS Group (Transcript)

Neometals Ltd.
  • ASX: NMT
  • Shares Outstanding: 545M
  • Share price A$0.16 (30.06.2020)
  • Market Cap: A$87M

Interview with Chris Reed, CEO of Neometals (ASX: NMT), and Accompanied by Jeremy McManus, General Manager.

READ ARTICLE FOR THIS INTERVIEW HERE

Neometals is a ‘Project Developer.’ A technological innovator with a diverse portfolio of intelligent, economic projects, many of which position it in the incoming EV revolution. This includes a lithium refinery, a low-cost vanadium recovery from slag tailings project and their vast titanium-vanadium project. The most advanced project is a proprietary hydro-metallurgical technology that offers a much cleaner, more efficient means of recycling lithium-ion batteries than conventional pyro-metallurgical and mining methods, helping automotive manufacturers with their goal of NetZero carbon footprint.

The project has an ESG component that has become increasingly useful after Elon Musk’s request for as much clean, green and sustainable nickel to be produced. It is clear, the front-end of supply chains is under more scrutiny than ever before, and Neometals has the solution to fit perfectly into the backend of this green narrative. This will help deliver a solution for full supply chain.

Today, we’re talking about Neometals’ JV with SMS Group, a multi-billion dollar German conglomerate (Matt mistakenly refers to SMS as SGS on 2 occasions- apologies!). It was announced today, and Neometals now has a major partner for its flagship battery recycling project. It’s definitely a major milestone. We dig into the details, looking at the terms of the contract and the size of the opportunity that this could present for Neometals.

The company, as we’ve mentioned repeatedly, has more than enough cash, with $85M in the bank, to get this operation moving forward at an accelerated pace, and the next 12 to 18-months look like an exciting runway for catalyst moments. Expect an FID at the end of this period.

We Discuss:

  1. 2:38 – Company Overview
  2. 4:51 – JV with SMS Group: Diligence Process
  3. 8:53 – Potential Size of Market & How They’ll Capture it
  4. 15:28 – Barrier to Entry: Differentiating Neometals
  5. 17:47 – Elon Musk’s Requirements: Greenest Tech Ever?
  6. 22:15 – Terms of the Deal with SMS Group: Liabilities and Funding
  7. 30:37 – “Dividends? Keep ‘Em!”: Addressing Shareholder Concerns
  8. 32:29 – Building Neometals: A Look at the ESG Movement
  9. 36:04 – Raising Money: Do Funds Care?
  10. 38:25 – Understanding the Potential: Timing for Studies and Numbers
  11. 43:55 – What Happens Next?

CLICK HERE to watch the full interview.

Matthew Gordon: Gentleman, how are you? How are you, Chris? How are you Jeremy?

Chris Reed: Very well. Thank you, Matt.

Jeremy McManus: Good. Thanks, Matt.

Matthew Gordon: Thanks for joining us. I know it late your time, so we’ll get straight into it. We have seen the press release came out this morning. It looks like pretty good news. You have actually managed to get this JV together and created a company called Promobius. Do you want to tell us a little bit about it? Maybe start at the beginning for people new to the story, and then we will pick it up from there and get into the weeds with you in a second.

Chris Reed: Neo Metals is an ASX-listed project developer. Historically, we developed the Mount Marion Lithium project, which is one of the world’s largest sources of Lithium. Immediately in 2005, after we started construction we started looking at where in the supply chain we should be next, and all roads lead to recycling. These batteries are a mix of Lithium that’s been mined in Australia up to China, into Europe. Cobalt that has been mined in the DRC into China, into Europe or into Asia into the US. We have gone to such great lengths to combine all these materials in the battery. Surely at the end of life there is significant value to be had by processing these and recovering the battery materials as opposed to, to keep mining primary sources of ore that have got a massive carbon footprint.

So, over the last 3 or 4-years, we have been developing a process. We have been scaling that up from bench scale work in Australia, through continuous lab scale into a pilot plant that we ran at SGS in Canada in 2019. We finished that early in 2020. We executed a MOU with a very large German engineering group SMS Group last year. They have done extensive due diligence. We finished the pilot plant and today is really the culmination of about 9-months of work to incorporate what will be a 50-50 joint venture to develop initially what will be Europe’s largest battery recycling business.

Matthew Gordon: Can we just talk about some of the moving parts first before we get into the detail around the deal itself? SMS Group. Who are they? You say they are a big German group, but tell us a bit more.

Chris Reed: SMS, they have been around for almost 140-years. Privately owned. More than 14,000 employees in 95 sites around the world. They are one of the largest builders of processing plants in the world, based in Germany, which for us outside of China is the largest Lithium battery production hub and emerging. A natural target; they are, what we would say is a high capability partner in terms of delivering what have been successful R&D outcomes from Neo Metals. They are eminently equipped to build and operate these plants on behalf of the joint venture. They are one of the largest generators of German-backed import-export financings. They have been around a long time more than €38Bn sales last year. And I had a look in the annual report that they have got almost €1Bn cash. So, they are a very, very strong capable group and they bring a lot to the transaction.

Matthew Gordon: It would be nice to talk about one of the other variables, which was the market for this. What I’m trying to do is work out the scale of the opportunity, and then be able to get a sense of the quantum that you’re going to be able to capture. SMS – they are German, is that’s why you’re focused on the European ecosystem? You have got this battery metal thematic going on throughout Neo Metals, but what is it that you have been doing with them over the last 9-months to get them through to this stage? Can you tell us what’s the diligence process? What’s the problem you’re trying to solve?

Chris Reed: So essentially, you have got these batteries at the end of life and they have a lot of base metals in them, they have Lithium in them. It is hard to store them safely and they’ve got very high value in terms of the in-situ metal in those batteries. So, we have had to develop a process that can deactivate those batteries. We shred them, make them safe to downstream process. And then we developed a downstream process to recover the cathode chemicals that can be reinserted back into the supply chain. And, you hear about, Elon Musk has come out and said, we need Nickel and the Nickel producers to produce more Nickel sulphate. Okay, I do need more Nickel sulphate, but the Nickel is going into these batteries, you can capture it at the back end and you don’t need to have big mines that make concentrates and then they get shipped to refineries around the world and then they get made into metal and then they get dissolved into sulfuric acid and make sulphates and then go to cathode manufacturers. We can actually regenerate exactly what needs to go back into the supply chain at a fraction of the carbon footprint of virgin-mined materials. My offer to Elon Musk would be: we will recycle all the Tesla’s batteries forever for free. And if you want to phone me up, hit me up and I’ll even let you share in some of the profits.

Matthew Gordon: That’s a big offer. I hope he’s listening. You never know. So that’s interesting. You’re saying that you have got a green solution for providing Nickel back into the battery cycle. But part of what I wanted to understand is the size of this market. What is the total potential size of this? What is the bit you’re going to capture and how do you do that?

Chris Reed: Our initial deployment, so we own a 20,000t commercial scale shredding plant, or a comminution circuit. So you have got to make it safe to process. Then you have to separate out the plastics, the steel, the Aluminium, and Copper foils, and then you are left with a black powder or what we call a black mass. We then leach that and recover the cathode chemicals. So that’s essentially the process in a nutshell. And that addresses pretty much what the market needs. It needs to process them safely and it needs to close the loop. And if we have a look at, perhaps the timing of the deal and you go back to, what have you done in the last nine months – so what we have done is, is we have shown them the scoping study, the results we have then walked them through and they have been able to witness the pilot plant. We have wound that up. They have seen the recoveries we get, they have seen the purities that we can make. We have got the format test where it reports the mass energy balance and it goes into the engineering studies, and the guys are comfortable. And the opportunity in terms of the size of the market, so they’ve deduced what we have got to process. It is technically feasible. What they’ve told us so far is that it is economically viable. But when you overlay that, what is the opportunity into Europe? The investments in the EV sector in Europe have outweighed what has been invested in China for the last three years. The Chinese were there, they’re bigger, but they were there earlier. Europe has been where the factories have been committed to. And so,  what you have found, even from the start of the year to where we are now, it has gone up to 415 gigawatt hours. It is now over 500 gigawatt hours. And when you translate that into batteries that will hit the market and then how many batteries will come after they used for life, somewhere between 7 to 10-years, you are looking at a multimillion ton potential feed.

And so initially we’re going to roll out a 20,000t plant, and that’s designed really to take the production scrap from a gigafactory, not necessarily Tesla’s, but LG or any other, or indeed dealing with the car maker who gets their batteries from different sources, but initially designed to take production scrap. And then we would scale that up for the end of life applications. It is a big market. And if you multiply a couple of million tons by the in situ value, you are well into the double digit billions in terms of the market, and hence why for us, some might look at the transactions and go, well, you are giving half away, and then I would say, well, are you? You have approved a technology that cost you X to this point, and you have got to make it a reality for your shareholders and turn it into cash. What is the most efficient, timeliest outcome here, which is to get someone who is perfectly capable of delivering on time and scaling up to whatever the market needs? , SMS aren’t in there to build a little dinky 20,000t plant, they are there to build multiple 200,000t or larger plants. That’s the game.

 So, quality product meets all the regulatory requirements, meets the needs of the market. This is a step away and you look for minerals and materials for a sustainable future – that way. And so, we are giving them materials for a sustainable future in a sustainable process. It is a step away from mining, but it is lower risk than mining. We have done is we have partnered with someone who can actually make our 50% worth multiples more than what we could do. Now, we could deploy this in Australia, but Australia wouldn’t be big enough for 5 to 10-years. Europe is big enough. We can say with confidence that the money that is being committed, last month you had the German government commit €135Bnto the health of the EV carmakers. All of a sudden, this €6,000 cash subsidy to go with the €3,000 from the producer – that’s the carrot. And then they’re going to invest €65 billion investing or installing 77,000 high voltage charges in 14,000 service stations in Germany. That’s €135Bn. That is more than my country has committed to COVID relief for the whole country. And this is Germany just for the car makers. And you have got the French who have committed €12,000 for every domestic. And then you have got penalties if your fleet produces more than 95g Co2 p/km. You have got the carrot and the whip, just driving this transition to decarbonise transport and circular economies.

We started out 3 or 4-years ago, we thought this will grow into a good business. And we get into these businesses early. We were first into Lithium, we were first out of Lithium production. We’re one of the first into large scale recycling. But what has surprised us, has been the confluence of all these regulatory and ESG and circular economy and just these massive tail winds and these volumes just, they keep coming at us.

Matthew Gordon: Europe is the right place to be, and you have got the right partner in SMS because they have got the capital and connections. I understand that. You talked at the beginning about – you have developed. I’m trying to understand what are the barriers to entry for people coming in to try and get to capture some of this? And also because I understand the first mover advantage that you have got, but have you got proprietary technology? Have you got intellectual property? What’s to stop other people coming in and talking the same game?

Chris Reed: Yes, sure. We have developed own flow sheet. We have EU and Australian provisional patents pending. We have done the normal freedom to operate searches. I guess anyone that tries to follow us will be getting a nasty letter from our employees, our lawyers. And probably the employees. We have learned a lot over the last couple of years; it is called research & development for a reason. If you knew what you were doing, you wouldn’t call it research & development. So equally as we have found a process, we have found not what to do as well.

So you have got to be careful with these batteries. I remember early on, my chief operating officer gave me a book on Lithium batteries called ‘Canned lightening’. If you don’t shred them the right way, we have all seen from the press what can happen? Safety primarily and then recovery of value with an eco-friendly footprint. That would be pretty much the 3 drivers that that I would espouse that our process has.

Matthew Gordon: So talking about the Elon Musk statement last week about Nickel. He wants a green, efficient production of Nickel. And some of the Nickel companies, especially the Sulphate guys, reacted quite positively to that. You are at the other end of the scale, but nevertheless, as important, it seems. That seems to be the story: you are saying that you’re nevertheless important in terms of the total carbon footprint associated with car manufacturers, products being the car. With your technology, can you claim to be the greenest battery? Because there are battery recycling companies out there, you’re not the only battery recycling company out there, but are you saying you are the cleanest or you have got scale? What’s your USP?

Chris Reed: If you have a look, and people say recycling and it covers a lot of business models. In Australia, people say, I’m battery recycling. And really what they’re doing is taking the batteries, they’re deactivating, they’re shredding them and they’re separating out casings, foils, plastic and the black mass and the black mass is going offshore. And then you can go to Europe, with some of our competitors, who are using traditional pyro-metallurgy routes. They would take either the battery or the black mass and basically melt it. You would incinerate the graphite, which is about 50% of the mass. The plastics, the electrolyte hydrocarbon that’s bearing the Lithium. And so instantaneously you are below 50% recoveries. Whereas the EU Battery Directive is heading towards higher than 85% recovery, which is where our process is now. We’re hoping to get well into the nineties.

Our process has higher recoveries. And if you have a look at, as Elon said: more efficient, and even if you go to Rob Friedland’s comments last week about his high-grade Copper in the Congo, which will also need to go on the batteries, he has got a 10% grade. If you compare that to a 1% grade, say in a big bulk Chilean operation, you have to mine 10x less ore – that has a lower footprint. And then when you put that in your processing plant, you have to process 10x less ore to get a ton of Copper. It is just arithmetic. It then follows, if I’ve got a battery, the battery has the highest purity, metal oxides, or metal sulphides to get converted to metal oxides that you can get. The metals that are in there were high purity. And we’re recovering. If I have a look at an Apple battery, by weight it is 20% Cobalt. It has got incredible value: USD$6,000, USD$7,000 p/t of the ancillary stuff. That is incredible. If you had a look on a Gold basis, that’s 3oz p/t, right? There’s fat in it.

Our process is, is not the cheapest. The cheapest would be just burning them, but they then have to factor the losses in. And so, we are confident that we have almost a future-proof process. And it is a technology, so we have to look at what the market wants in the future. They will need get down to ‘net zero carbon’.

And if you have a look at so you buy an internal combustion engine or a car, a normal car with an internal combustion engine, it has a lower carbon footprint from the EV. What’s different in the car? One has got a battery, ergo that difference is in the battery. And the battery, it is mainly materials, otherwise it is electricity and robots and a bit of labour. It is in the materials where the carbon is. And if you can recover that, recycle, recover, produce a secondary material, you massively reduce the carbon footprint. And then all of a sudden, the EV is not as far behind the internal combustion car so you actually can get to what the car makers want.

Matthew Gordon: That’s good for me. Because we have talked about some of the variables, which I needed to understand, the macro component, which is what you’re working towards. What technology you have got, and what you’re you think you’re going to be able to capture? Can we just talk about the deal then? Okay – so SMS – big company. 1) why on earth would they team up with a small Australian company? 2) once you have explained that, talk to us about how has the deal been broken down? Who gets what? Who provides what? What are both sides bringing to the table?

Jeremy McManus: At a high level, Matt, the way the deal works is, we have worked for years on the technology, and that’s patent pending. And there’s a chemistry flow sheet there, which, we have covered it for a long time. We bring that into the equation and what SMS bring to the table. Again, this is at a high level, but they bring the ability to help us design, build, operate, and maintain that very complex plant. And that’s one of the key reasons why we’re keen to partner with them because ultimately if you want to appeal to the world’s biggest OEMs, they need some confidence that you can get this done. Having a neat technology is great, but actually having the ability to deliver. And there’s lots of USPs associated with our technology, but really the thing that’s most interesting about it is actually the business case itself, and having SMS on board is probably one of the biggest ticks because it means this has a chance of actually happening.

So, in terms of how else does this deal look? We’re looking to share the costs as we evaluate through building a demonstration facility in the heart of Germany. That allows potential partners and others to touch and feel and look at this showcase, see what comes out the backend and evaluate products. We will do a Feasibility Study in parallel with all of that. We will get a stronger grip than we already have on the economics. And ultimately we will make a decision to roll this out commercially, and Europe looks like an interesting place to start doing this, but of course, we need to attract the people with the feed, which we’re busy doing already. And also the people who are going to buy and take in a binding off-take sense for us to make a decision to go ahead and build commercial plants.

Matthew Gordon: Talk to me about it, so what does the deal construct look like? And are you happy with the terms or are you the smaller partner in all of this?

Jeremy McManus: Yes, well, it took a very long time to get to this place, as you would expect with a German company. That diligence was really, really thorough.  most people would see that as a very good thing because no stone has been left unturned with our partners. But yes, we’re exceptionally happy with the deal. It was negotiated very hard, but it is certainly fair to both parties. And we see both parties bringing a lot to the table. SMS can’t do this without us. We have to transfer technology, we have all the insights thus far, but we really do need a presence in Europe, the networks, which pull up with very big OEMs. And even just having a permitted site to demonstrate this, a lot of this is probably lost on people that don’t live and breathe it, but that’s hard to do and it is super time-consuming in the middle of COVID. So there is a fair bit to all of that, that screamed to us that we need to go ahead with this deal.

Matthew Gordon: Give me the terms of the deal. What is it going to cost you? What are your liabilities until you get to a point where there’s an FID on whether to move forward or not? Have you got the money?

Chris Reed: Yes. I can jump in here. We are very well-funded. We have got about AUD$85M in cash and listed investments, no debt – that’s Aussie dollars. So, €50M. In terms of the funding requirement for both SMS and Neo Metals through to the FID, the approved budget is €4M. In terms of moving into our first deployment into Europe, one of the terms of the deal was that SMS uses its best endeavours to procure German government-backed finance. And in terms of funding, our equity contribution, we’re completely able to do that off our own balance sheet with no dilution.

There’s a seamless path in terms of activities: both technical and economic and commercial. In terms of financing, we are good. We financed our entire contribution without debt, still off our own balance sheet. So, we have good flexibility there. It is roughly an 18-month funding requirement and our chip-in is €2M.

Obviously, all of our staff, labour, time. The joint venture will acquire our full commercial scale shredding or combination circuit. In terms of when we make a decision to commercialise, we can actually start up shredding and beneficiation well ahead of building a matching hydromet plant.

Matthew Gordon: Let me be clear, Chris, because we have had the questions sent in and so I want to be really clear: you are a project developer company. Your model is to fund those through to FID. But the company, at that point, whether they be JVs or otherwise will need to stand on their own two feet that, these are commercial operations, which you have got with partners. That seems to be your model. You develop a flow sheet, you bring in a big partner and then you make a decision whether to advance the project or not, jointly. But at that point, you go to market looking for debt or equity for that entity, and that does not affect the balance sheet or the ability of Neo Metals to continue with this current model?

Chris Reed: We have got total flexibility. Obviously, this project is the closest to cashflow for Neo Metals as a combined entity. It is more likely to stay in the group in terms of, we would love a cashflow-generating asset. We sold our last cashflow-generating asset last year, but banked a lot of cash at the front end of that. And the performance of the Lithium chemical prices, the Spodumene price is probably a third of what it was when we sold. So that vindicated that decision to sell early. And then what we have done with our extensive cash resources, as we have continued to share that; we have had five annual dividends back to the shareholders. We have returned more than AUD$55M in dividends and capital returns. We are cognisant of the importance of capital, particularly as you’re going into something like COVID-19. Now they are individually set up to, to be sell financing and non-dilutive, if we so choose, or we can embrace it. And certainly the Lithium battery recycling, we would embrace that as our first cash flow assets.

In terms of the other projects, they all have strong partners. They are all co-funded through the final stages of evaluation into FIDS. And we have complete flexibility whether they move in or out of the group, we can give them back to the shareholders, via an inspecie distribution. We could separately list them, raise capital, raise debt. Having such a strong balance sheet and no debt and a pipeline of projects that are getting to FIDS at the end of 2021, 2022, 2023, 2024. There is a pipeline of projects. , obviously we can’t fund all of them off the balance sheet, but the highest return with the lowest capital investment is going to get the first nod.

Matthew Gordon: Sorry to dig down on this one, but again, we have just had so much feedback from the market. You have been dishing out dividends. You did one recently, a big distribution. Your shareholders are probably happy, you would expect, but some of them came back and say, are these guys cognisant of the fact that we perhaps would rather have the security of knowing that the next project is going to get done, then have dividends. That’s a big group of people out of the shareholders going: keep your money, Chris. I want you to get this deal over the line. What are the discussions at board level around how you manage the capital that you have got?

Chris Reed: It goes through a very comprehensive process, a very highly experienced board. And we are very cognisant of what dilution costs to get projects. We are also aware of our weighted average cost of capital. We are also aware that if you do not have an immediate need, if you’re getting up to it and, you’re going to make the FID, it is different. These projects are advanced, but they’re still in the final stages. You have to have an equal balance. It is the shareholders’ cash. If I have not got a plan to deploy all of it, and we have given that over a 5-year period. So clearly we haven’t had the investments that have needed to be made. And we have taken the decision to return that cash to its rightful owners, which is the shareholders. Unless you have got a better use, right? If I can’t earn my weighted average cost of capital, or if my cost of dilution for an event coming up, then I shouldn’t pay it out, but we do go through a very detailed process.

Matthew Gordon: Do you think that this whole ESG movement is getting more traction now? I know you have been at it for 2, 3-years. You guys spotted it 2, 3-years ago and segued the business over it. Was there any point at which you are going, ‘crikey, I’m not sure people are going to pick up on this thematic other than just the nod to doing things the right way’?

Chris Reed:  it has probably just, just caught up. Look – my family has been involved in the mining industry for more than a hundred years, so we have developed precious metal mines. We have done industrial metals mines. We have explored for base metals. The thematic in there for us, the thematic of minerals and materials for a sustainable future then defines the commodities that you should target. And then you have a look at, okay, well, if I was going to get this out of minerals, what are the trends? And if I have a look at just general minerals projects around the world, the grades are getting lower and they’re getting deeper, ergo, the mining cost per unit of output are going up. And unless you can work out a way to actually change the physical location of your ore body, enrich it and make it closer to the surface, that trend is immutable.

So for us, we thought, well, the only way really that we can level the playing field is to try to innovate on the processing side. And, hence, we had a look at recycling and then we have had a look at Vanadium recovery. And from our background, our background has been in minerals. We were in Lithium minerals, Lithium chemicals. And this is just the next progression. It is producing these chemicals, but without the mine, and so it is lower risk, lower time, lower uncertainty, and hence, we know what’s in the batteries when we process them. With perhaps the Vanadium recovery project we know what the Vanadium grade is in the slag, they see exceptional grade. And if you do your studies right, and we are diligent in our studies, if you have got the grades, the feed grades right, you shouldn’t have massive fluctuations in your operating costs.

Where a lot of these projects go wrong is in the mining: everyone wants them a certain size, and you have got to do your evaluation studies in a certain period of time. And we cut corners. And the results vary a long way away from these Feasibility Studies. But essentially, they rush the front bit and we don’t run that. We don’t rush the front bit. We want to get it right, and we want to get it right. And we want to bring in big partners. We want to get the highest return on capital in the shortest period of time. The board and management of the biggest shareholders in the company. And we want to make our money and share it with our shareholders. That’s what we do.

Matthew Gordon: At some point you are going to need to raise some capital. It is all well and good Tesla saying, ‘give me green, efficient, name the commodity, right? Lithium, Nickel’. And it is all well and good. Your conversations with automotive manufacturers saying, we need to address our carbon footprint, but when it comes down to raising the money, do you think that the funds care? Are they going to give you extra attention because you have got a greener solution? Do you think you are going to be able to raise the capital based on the economics you’re going to be able to achieve?

Chris Reed: Whether or not they are green or not, none of those green funds like losing money, and neither do we. So, you will find in the discount rates we use for the battery recycling, we use a 12% discount rate. We are here to get these projects built. We’re not trying to coddle them to get some outcome in the market. If we need to go and raise the money we will. We have raised equity and debt, probably in the order of USD$180M to $200M over the life of the company, overdue areas, projects, and always paid our debt back. If you do what you say what you say you were going to do with the money and you are open and transparent. I can’t see any reason why we wouldn’t be able to. We haven’t done it for a while. We haven’t raised money for seven or eight years, but that’s not to say that. That’s good I would’ve thought,

Matthew Gordon: Well, it is good, but that’s what : at some point you are going to need to go to market, presumably, in Oz or in Europe.

Chris Reed: We’re not scared of that. If you have a look at the portfolio, our shareholders have four projects, now, if I give it back to them in an end-share distribution, you can either put more money in it. If you don’t want to put more money in it, we have to bring in new money and some debt, you still own the same amount as if I kept it in the head company and did the same thing. Right. But you don’t want to dilute four projects. So, you want to keep your best projects, right. And the ones that have the tightest strategic focus. There’s nothing wrong. Just because we have got a big portfolio, I can return those back to the shareholders. We could do spin outs. You could do any number of corporate finance moves on it.

Matthew Gordon: So at what point, I know you said you’re going to be doing a Feasibility Study for this project going forward, and you will get a better sense of the economics and cost and so forth and efficiencies. What’s the timing of all of that? Because if I look at your business as a whole, people go, certainly the feedback we get: these are smart guys. They are good operators, they are efficient operators and they are straight talking. What they’re trying to do is get a line of sight and go look, how do I start to quantify or value or evaluate these four projects coming down the line? I know 2021, 2022, 2023, 2024 is great. But what do they equate to? Are you going to be able to start giving us and sharing with us that those sorts of numbers going forward?

Chris Reed: Yes, absolutely. We have 4 advanced projects. They are in feasibility and then moving into feed. So, these studies take 12 or 18-months and then they just land. They’re designed to land as we know them too, but essentially, we’ll have Feasibility Studies landing and then moving into feeds for some of the projects, but you will have them landing sequentially. So, we go through a disciplined process of Scoping, Pre-feasibility, Feasibility and then front-end engineering and design. We don’t cut corners.

Matthew Gordon: Help me with the numbers.

Chris Reed: We will be able to put metrics into the market, and if I’m spending the shareholders’ money, I need to tell them why. I need to tell them what the risks and rewards are. And they need to know that because they need to know whether, and I might put it into another company and I might ask them to put more money in and they have a choice whether to, or not, but they need to understand the risks and the reward. We go to some length to share that with them.

Matthew Gordon: So when can we expect you to start adding a bit more colour to the sequence of projects?

Chris Reed: We could certainly provide a consolidated timeline for the various projects to you. Over a long period on a quarterly basis is there’s quite a lot of events. But, for the battery recycling, you’ll have a Class 4, Class 3 Study. Now what we might do is, when I said we will share the risks and rewards, we’ll tell you what the operating and capital costs are. We might not tell you exactly what the financial model looks like because, there are often there some commercial in confidence elements about that. It is not like if you have got a mine; if you have got a mine and you are opening the mine, you can be completely transparent about everything, right? Because no-one is going to come in and take it off your hands. But this is a technology where I’ve got to go in and I’ve got to compete. I don’t want to tell the wider market anything that might prejudice the actual success of the business. People will have to just bear with us then, but just suffice to say, we have put out a Scoping Study, that has got enough data in there where you can work out a financial model. You can work out the operating costs. We have given you the capital cost. We have given you the assumptions on the battery mix, the pricing assumptions. An educated analyst could come up with a number that’s probably 5% of what our management model looks like.

In terms of what the pilot plant told us, we surpassed our expectations. So you can have a look at the Scoping Study and hold those going forward with some confidence.

Matthew Gordon: As a retail, family office investor, we need to get a sense of those numbers. My comfort comes from someone like SMS, a multibillion dollar operation, doesn’t go and do a deal with a small Ozzy company if it doesn’t think it is going to make a lot of money. And I also get that there’s enough data around to be able to create some crude model about what the opportunity is.

Chris Reed: 4 of our other projects, from the Vanadium recovery, the Lithium refinery and Barrambi, we are more explicit. So, for the Vanadium recovery project, we put out a Scoping Study last quarter. We will put out the Pre-feasibility mid next year. We’ll put out the final Feasibility mid the following year, we will make an investment decision and then you’ll have a timeline. For the traditional projects where there’s a known feedstock source secured, I’m happy lifting the skirt, so to speak. The battery recycling one, I just do need to be a little careful. It is a bit like Mount Marion, we developed what is the world’s second largest source of hard rock Lithium units. We never published a resource. We never published a reserve and we never published results of any Feasibility Study because we were negotiating with the Chinese. Only one country by Spodumene, that’s China. The last thing you can do is tell them your costs. If I’m trying to go into the EV market in Europe, these guys love beating suppliers up. I don’t want to tell them everything.

Matthew Gordon: Great catch up, Chris, a great story and well done on the JV. I’m excited to hear what happens next.

Chris Reed: So are we. A demonstration plant is starting up in the new year in the centre of Germany at one at SMS’s has production facilities. The procurement activities are highly advanced. We’ll start construction probably towards the end of September as the European summer starts to wind down and everyone gets a back into the swing of things and do the demonstration plant in the March quarter. We will then do the engineering and Feasibility and commercial in parallel. Come Christmas next year. It is hopefully going to be good times.

Matthew Gordon: Chris, I appreciate the update, Jeremy – thanks so much. Good to speak to both of you as always. Pick up the phone if there is some new news. Thank you.

Chris Reed: Excellent. You have a fantastic day.

Company Website: https://www.neometals.com.au/

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Tesla, “Produce more Nickel. We will give you long-term contracts”

Canada Nickel Co Inc.
  • TSX-V: CNC
  • Shares Outstanding: 57M
  • Share price C$0.92 (02.07.2020)
  • Market Cap: C$52M

Our weekly Nickel Market Insights with Mark Selby, Nickel Market Commentator and CEO of Canada Nickel Company (TSX-V: CNC) will help you stay ahead. Stay up to date by listening to our weekly market roundup on Nickel.

So, what events have transpired in the exciting world of nickel this week? Price movements are at the top of the list: nickel has gone from a low of c. US$11,000/t up to US$13,430/t today. It did actually hit a peak of US$13,512/t last week, but Selby attributes this to nickel trading in synergy with some momentum drivers around the Shanghai Index.

Just as the nickel price was starting to recede, Elon Musk of Tesla, the figure of ultimate encouragement for nickel/battery metals investors, has told nickel miners to produce as more nickel in his quarterly call. He’s clearly gearing up to go big and kickstart the EV revolution in style. After launching the mid-tier Model 3, Musk needs this to be the cash cow for his company. Many have regarded Tesla stock as immensely overvalued given sales figures, but the c. $35,000 Model 3 could be a real gamechanger, building on the success of the Model S and Model X; I’ll hold off on the Cybertruck for now.

Major subsidisation packages in Europe alongside European vehicle manufacturers investing €250B in EV infrastructure, and the Chinese EV space needing to be rejuvenated are compelling reasons for nickel producers to be accelerating their production timeframes.

After touching on some of the macro thematics beneath the surface of the Nickel space, such as the immense difficulties surrounding the production of the huge amount of nickel that may be needed in the next decade, we touch on one of our favourite gold production stories, Karora Resources (TSX: KRR). Selby is already an expert on the Dumont Nickel-Cobalt Project, having developed and de-risked it substantially during his tenure as CEO of RNC Minerals. Karora Resources has sold its remaining interest in Dumont (28%) to Waterton for some cash up-front and a residual payout based on a future sale. The 3 low-grade, bulk-tonnage, advanced nickel projects have all been acquired in the last 6 weeks. BHP, OZ Minerals and Waterton have all moved to secure projects early. Is this a major sign of things to come? Time to invest into nickel?

We Discuss:

  1. 2:42 – Tesla’s Quarterly Call: “Nickel Miners – Don’t Wait!”
  2. 8:54 – Innovations in the Space: How Can it Get Better?
  3. 14:51 – Environmental and Efficient: Impact on Investment
  4. 20:17 – Ways of Validating Company Claims for Retail Investors
  5. 24:09 – Giga Factories and Nickel Uses
  6. 26:45 – Nickel Price Drop: What Happened?
  7. 27:49 – M&A News: Karora Resources Sell Dumont Stak

CLICK HERE to watch the full interview.

Matthew Gordon: Mark, how are you doing, sir?

Mark Selby: Excellent, sir. Good to see you once again.

Matthew Gordon: You are here for our weekly catch up on Nickel. And, we were both listening to the Tesla Quarterly call. I thought it was really interesting. I thought it was fascinating because it was quite insightful as to the way that Elon Musk and Tesla are thinking, and others will follow suit quite quickly.  the one big phrase that stood out for me was, ‘Please mine more Nickel. Don’t wait for the price to go up.’

Mark Selby: Yes.

Matthew Gordon: That’s more easily said than done. What was your take on the call?

Mark Selby: Oh no, it was fascinating. To me, firstly I would encourage people who are into Nickel to listen to those two minutes of it so that you can actually hear what the context was. For me, the fact that he was answering and came up to that response to the question of overall battery constraints; so, an investor was asking him, it sounds like you might be less concerned with battery constraints and he launched straight into: ‘Please mine more Nickel.’ And there were several dimensions to that. The key is A) don’t want for the price to move. B) if you can do it in an environmentally sensitive way. And C) if you can do it efficiently. So I thought those are the three key things that they are thinking about, and obviously they haven’t quite got there because he also talks on the call about how he doesn’t need any Cobalt but he has signed a couple of Cobalt deals but he hasn’t signed any Nickel deals at this point. That his comments really highlight some of the key constraints in this industry that we have started talking about on these calls. But he drove it home to what the exact theme is.

Matthew Gordon: Slightly conflicting messages about Cobalt. He is talking about Cobalt-free batteries, then he comes out and then he says, go and invest in some Cobalt. But let’s break it down on more of the stuff that we did understand, which was the phrase he says to Nickel miners, ‘Don’t wait.’ What did you read into that?

Mark Selby: Yes, what that fundamentally is reflecting is that at USDUSD$6/lbs today. There really is no project outside of Indonesia that could go ahead, assuming a long-term USD$6/lbs Nickel price, or at least for a period of time until the capital is paid back. For most projects, anywhere from USD$6.50 to USD$7.50/lbs is required. We are hoping that our project, given what we are seeing so far might be a little bit below that, but realistically, for the next set of projects to be developed, that is the price range that you need. , this is wishful thinking: the Nickel price isn’t quite there. The big miners before they are very confident or before the price is in that range before they are going to push a button on any expansions. So that is the issue there that he is really driving home.

Matthew Gordon: Someone like him who has got all the money in the world, they have no problem raising money. There nothing is impossible. But for miners, there are different constraints, price being one of them and the cost of money being the other.

Mark Selby: No, the key thing is it is always tough, even for someone who is a pretty bold innovator like Elon Musk, is you haven’t seen yet a car company invest directly into a mining company.  if you want Nickel at a price that is going to start at USD$6/lbs rather than higher, then he is going to have to think about that. It just takes corporations time to get around to think about what model might work for them. So, there have been models that have worked for Japanese trading companies in terms of how they invest in projects when other people are investing in joint venture in projects.  that the Tesla’s of this world need to think about how they do it.

To me, one model that makes a lot of sense is, Eric Sprott does a great job of advancing 50 different Gold projects simultaneously. He is not funding them 100% of the cost for each one of those, but he makes a 5% to 10% investment in a company which allows that company to probably raise double that. And once they have been Eric Sprott-endorsed, it makes it much easier for them to raise capital from the group of individuals and funds who follow along with Eric. He is able to put a little bit of his capital in, and all of the smart mining people are really good at using other people’s money to multiply the value on their money.

I’m pretty sure that Tesla is thinking about those types of models, and to me, that would be one way to do it. , you don’t need to pick a winner and you don’t have to bet USDUSD$100M, USDUSD$200M at this point. But even just endorsing two or three companies that could potentially get there. If you want that Nickel in 5 or 10-years, you are going to have to start doing something like that. And, a Tesla-endorsed company, whoever gets those first couple of investments will be well off to the races because all of a sudden there will be a slew of institutional and retail money come at that company to be able to advance that Nickel project.

Matthew Gordon: You are encouraging Elon Musk to be more like Eric Sprott. I am coming at from the point of view that shouldn’t we be encouraging people like Eric Sprott to be more like Elon Musk. How do you innovate in this space, not just Nickel. I have come from outside of the mining space originally and you see these innovators in different sectors solve problems which people who have been in there too long can’t. Do you think, is that coming through AI? How do we get better at doing what we are doing?

Mark Selby: AI on the exploration side is definitely going to open up a huge amount of doors, and you are already starting to see that.  we are just in the early stages. To my mind, we have gone through several exploration waves. If you look at, just as an example, the great VMS deposits that have been discovered globally, in the early 1900’s, you had the  walk-on ones, where a prospector was banging through the bush, saw some interesting-looking rock, banged it, caught an assay and was like, look; I found millions of tons of Copper and Zinc and Silver. And things like Sullivan, in Canada anyway, as examples there are the Sullivan Mine, the Hud Bay and so forth. And so, that was that generation. Then we had the second generation when geophysics started to be really well-used during the late 1950’s, early 1960’s, people stopped finding deposits at surface because they had walked everywhere where potentially you could find one, and then they found deposits like Kidd Creek, in Timmins New Brunswick, sitting not very deep below the surface, but below the surface so they had been missed at that time.

, we really haven’t had that next revolution of exploration discoveries, and I really do think that AI is going to be that, because  we have walked on pretty much everywhere we can go. We have seen the shallowest places where we most likely think about where things could be, and so now we need to use big data with some smart mines to understand where we could find deposits that we hadn’t found before. That’s on the exploration side. And Nickel, we don’t have a large project pipeline. That’s a critical issue in the Nickel space so there’s a significant amount of effort that’s needed on that point just to start of finding some new discoveries.

In terms of the rest of the sector, it really comes down to competition for capital. Mining has always done such a horrible job of destroying capital and not doing a very good job at actually returning much capital to shareholders. At some point, and what I’m excited about is having Tesla in that world to make that connection to the mining space is that if we are able to get some patient, private equity money into this space, then  that will allow more junior mining companies, more different stage mining companies make smarter decisions. Because, private equity; they invest in lots of high-risk businesses, , , things like pharma, high tech, it’s not like every investment you make is a home run, but once  that there is a funding pipeline behind you as opposed to, okay, the price popped today, investors are interested, I’m going to takes as much money as I can right now because I don’t know when the windows are going to open, it just creates a lot of really bad behaviour on both sides that  doesn’t help with the ultimate goal of creating value and returning capital to shareholders in the future. I hope that Elon’s discussions here will lead to more private equity start to look at mining because there is a massive amount of value to be unlocked here if it is done properly.

Matthew Gordon:  You said patient private equity. And coming from a private equity world, patient is definitely not a word I would put with private equity. And because of the impatient nature of private equity, it drives people to do better. And it might be beneficial. That’s why I am intrigued by curious minds like Elon Musk approaching the mining sector and putting a rocket under it, with the luxury of a lot of money behind him too.

Mark Selby: There is one venture: KoBold Metals, that has attracted a bunch of basic private equity money. And this is a venture that has basically said, we need more Nickel and Cobalt outside of high-risk areas and we are going to start to apply big data to solve that problem. That to me was quite encouraging. What was also encouraging was their first land-acquisition was next to a company that I am on the board of called Orford Mining,  the data has pointed to 6 or 7-years ago, but we need more of those types of ventures and we need more of those types of investors in this space if we are going to get all the Nickel that Elon says he needs in the next 5 to 10-years.

Matthew Gordon:  Elon Musk’s statement was, ‘Mine more Nickel’. It came with some conditions to it: it needs to be environmentally friendly and efficient, which I am reading as economic.

Mark Selby: Where that’s really coming from, and I hinted about this in the past and it is something I will be spending a lot more time talking about this, when you look at where most of the Nickel supply growth has come from in the last 5-years, it has been Nickel pig iron (NPI) from Indonesia. Before that it was Nickel pig iron in China and then looking forward over the next 5-years, literally, I don’t know the exact number but it will probably be more than 100% of the supply growth, because there are other supply operations that are still shrinking, it will come from Nickel pig iron and other projects in Indonesia.

The challenge with Nickel in a place like Indonesia is that processing laterite ore requires a huge amount of electricity, and in Indonesia, with the exception of PT and Inco who have built a series of hydro-electric dams in Sulawesi, it all comes from coal-fired power, and then you need to use some more coal to change the mineral into a metal. To make 1 ton of Nickel at one of these NPI projects, you are using 25t to 30t of coal, and when you multiply that by 2.8 it gives you 75t to 90t of CO2 per ton of Nickel. So even if you took 50kg of that and put it in a battery, I’m not sure Elon Musk would like 1t or 2t of CO2 strapped to his Tesla because he used some Nickel that came from that source.

The other projects that are being considered in Indonesia are looking at Hpal projects, and we have talked about Hpal from time to time. The problem with Hpal is you are taking about 1% of the material and you end up with about 99t of it, of tailings for every ton that you process. Piling up that type of waste in a highly seismic area, it is not necessarily, we have seen issues in certain areas when it is not done properly. A bunch of those operations are looking at deep-sea tailings. VW, BMW, Tesla, I don’t think are very happy knowing that the product that they might be purchasing is spewing 99t of tailings in an uncontained way into the sea to get the Nickel and Cobalt that they need. Tesla is stepping back and looking and saying, okay, in this industry, all of this growth is coming from these particular projects which have a pretty high environmental footprint attached them. So that’s where his environmentally sensitive parts are coming from. We have some nice inherited advantages in our project that we’ll be talking about a lot more in the coming weeks here.

Matthew Gordon: It’s not just Elon Musk that that is going to influence, but it’s the big funds. We have spoken to the Fidelity’s and the BlackRock’s of this world who are moving over to their ESG-led investing thesis. That’s going to influence their ability to get financed when they go to the investment committee and say, ‘well, should we be investing in this Hpal project or a Sulphide project?’ You’re going to get 2 very different answers.

Mark Selby: Yes, I know. That’s where mining companies really need to… what worked in the last century, in the last millennium, isn’t going to work in this next one. You really need to think about how are we going to design and construct and operate our project in a way that’s going to have the lowest environmental footprint possible. Because mining, a big part of it is a capital intensive industry, and it’s about competing for… if you’re able to compete for capital, if you are more competitive and you’re able to get it at a lower price, that is going to have, in terms of Elon Musk’s other goal of having the most efficient and lowest cost type of metal to market, if you can do the thing that gives yourself the broadest investor base possible, then you’re going to be a winner. We are going to be talking about that at Canada Nickel, because we realised that we have to start mining for the new millennium and get away from the way we’ve been doing it in the past.

Matthew Gordon: How can a retail investor best validate the claims of a company as it relates to their assets?

Mark Selby: Yes, that’s a challenge. A retail investor can’t go out and hire an engineering consulting firm to evaluate that an institution or a strategic investor could do. I would say there’s 2 things to do: 1) in Canada you get access to the full 43-101 report.  On the ASX, you get the press release that’s attached when they complete the report, but you can’t actually get the full report. But you do get a bunch of the information in the press release. Look at who did the work. We’ve talked about this on another call, but there’s basically, there’s 2 groups of engineers. There’s people who do studies that get hired by junior mining companies to come up with good numbers that someone can sign off on, but they’ve actually never built anything or haven’t built anything in 30-years. So put a big question mark around the quality of those estimates. And then there’s the engineering firms that, actually not just do studies, but actually build things and have built things within the past decade. So, in terms of the quality of the estimate, you’re going to get a much better estimate from those group of companies. If it’s a mining company that’s serious about actually advancing their project, they are not going to use, ‘Joe Engineering Co’ or ‘Jane Engineering Co’. They are going to go with the person who has the reputation that when they go to pitch the project to joint venture partners and other larger mining companies, those companies know they can rely on those numbers.

2) try and find projects that have been built within 5-years or 10-years. Try and find, if it is using Nickel for example, look at Ferro-Nickel projects that have been built in the last few years. Look at HPal projects that have been built in the first few years. And, it doesn’t take a lot of, and maybe this is something we can put together in the next few weeks; just some historical benchmarks that just, look at the capital cost; look at how many tons of ore are they going to process; how many tons of metal; where are they going to produce?; what’s the operating costs?; what’s the capital costs? You don’t need to go through 20 numbers, it’s just pulling those 7 or 8 numbers and looking at those 7 or 8 numbers for some historical projects and just to see, ‘okay, how in line are they?’ And if they’re significantly different and they haven’t explained why they are significantly better, then there is probably a good chance that they are actually not going to be significantly better. So, that’s what I do when I’m looking at other projects and I’ve done a corporate development role. That’s what I would encourage people to definitely go and do.

Matthew Gordon: If we could help maybe be put together the 7 or 8 numbers that people should be looking at.

Elon Musk talks about his Gigafactories. And we talked last week about the fact that currently Nickel is used mostly in stainless steel. But going forward, the Gigafactories are going to be built. Is there a number that people are attributing to them as a percentage of the Nickel market?

Mark Selby: Glencore has put out a few numbers and they’ve probably got as much market presence as anybody and their forecasting a few years ago that we would need 1.3Mt by 2030, and that’s equal to about 60% of what Nickel supply was in 2018. So, and that’s on top of the Nickel growth that’s still not a huge amount that’s basically getting to 25% to 30% of the market going towards electric vehicles being sold on that basis. There are forecasts now that once you get to a certain tipping point, you’re going to see things accelerate much more quickly than people think. I wasn’t surprised to hear Elon Musk talk about constraints around, when the question about constraints came up, he immediately leapt to Nickel, because to even to produce that much Nickel by 2030, in addition to all the growth Nickel is required for stainless steel and all the other applications, in my mind it is going to be extremely challenging.

The other part that he did talk about on the call is that is that they very much see 2 strata. They have lithium iron phosphate, which is for the low end lower-end part of the market. And they then talk about their Nickel-based batteries for the upper end of the market. And that’s the way they are thinking about a lithium ion phosphate supply chain and the Nickel supply chain. Their battery technology day is coming up so the fact that they haven’t stopped talking about Nickel says that Nickel is going to be playing a pretty essential and long-term role as part of their battery platform.

Matthew Gordon: They were talking about mega packs.  They’ve got big plans. The Nickel price has fallen back a bit this week. Why?

Mark Selby: I was surprised that it moved higher and it was trading alongside some momentum drivers around the Shanghai index and then the Copper prices had moved and so had moved along with it. Both of those have come off and it came off until Elon talked last night, and Nickel is now back up USD$0.20, up over USD$6.10/lbs. He is the guy that can move markets. My question is do I fully believe in medium and long-term fundamentals, but I’m not sure that the near-term fundamentals support pricing above that. So we’ll see whether that Nickel price erodes back to USD$6 here over the next month or in a year or so from now, 6-months, a year from now, if he opens his mouth and the market is a lot tighter, then those are the kinds of things that all of a sudden you wake up and the price is up USD$0.50 to USD$1 in over week.  Hopefully we’ll see that sooner rather than later, but it’s not going to happen in the next few weeks.

Matthew Gordon: A little bit more M&A in the market.

Mark Selby: Yes. A project I’m extremely familiar with. Karora Resources, which was RNC minerals, sold the remaining interest in Dumont to Waterton for some cash up front and then some residual pay out based on a future sale. A big plus, a big thing there is you now have all of the 3 large-scale, advanced low-grade Nickel sulphide projects have all been acquired in the past 6-weeks. This is far faster than I thought they would. You’ve got BHP acquiring Honeyman Well Minerals. Oz minerals acquiring the 30% of Nevo Babel that they didn’t own by taking over Cassini resources. And now Waterton consolidating their ownership in RNC minerals. So now you’ve got the 3 large-scale Nickel sulphide assets owned by 3 very tight-fisted owners who will not part with them, or either will never sell them or will only part with them at a pretty high valuation. It’s helpful for the Canada Nickel story and then the other earlier stage Nickel sulphide developments out there.

Matthew Gordon: Discretion may be the better part of valour here, but the market seems unsure. It was effectively USD$10.7M cash, and up to USD$46M, depending on where Nickel goes going forward. Do you feel that’s a good to deal?

Mark Selby: Yes, I know you had 2 specific groups with very specific different sets of interests at this point. Karora is now very focused on Gold. And knowing the gold assets they have, we acquired Beta Hunt and Higginsville while I was there, and they were both spectacular assets. So the opportunity to get some more cash now to unlock even more value at those assets made a lot of sense, and they still retain some upside if and when the project gets sold. But you could easily contemplate a scenario where a transaction for Dumont doesn’t happen for 4 or 5-years because Waterton is going to wait for the absolute peak and then a cold market before they exit that position. In every deal, you have to make a few trade-offs. And that given where Karora Resources is that deal definitely made sense for them.

Matthew Gordon: Another week in the world of Nickel. What’s interesting is the amount of M&A that’s happening in this space now. It helps with Elon Musk saying what he said.

Mark Selby: We said all along that there is only a handful of Nickel assets. It’s not like Gold where you’ve got literally hundreds of gold companies and new ones emerging at every stage. There’s a very short list of Nickel companies. Nickel hasn’t started to move yet, but you can that see one comment from Elon makes the Nickel price go up 3%. I would encourage investors to not wait too long, and then make sure you’re positioned because 3 assets have gone in the last 6 or 7-weeks here that I didn’t think we would see transacted on for at least another year or two.

You can watch, listen and read Mark Selby’s insightful weekly Nickel investing commentary at cruxinvestor.com/club

Company Website: https://canadanickel.com/

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