Euro Managanese Inc

Thank you for standing by. This is the conference operator. Welcome to the Euromanganese Inc. third quarter 2022 conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue from the phone line, you may press star then 1 on your telephone keypad. Webcast participants are welcome to submit questions through the form on screen. Should anyone need assistance during the conference call, they may signal an operator by pressing star then zero. I would now like to turn the conference over to Dr. Matthew James, President and CEO of Euromanganese.

Please go ahead, sir. Thank you. Well, welcome everyone to our third quarterly conference call. I'm joined here by my CFO, Martina Plohova, and also our commercial director of communications and investor relations, Louise Burgess. So without further ado, I'd like to carry on with our conference call. So in the conference call, we're going to touch on an overview of our value proposition. The quarterly highlights, including our financial position and feasibility study results that we've announced this quarter, where we stand on project finance, and also our lifecycle assessment results, and look forward to our next steps, and particularly the 2022 catalysts for the rest of this year. So it's been a very good quarter for the company. We really are poised to be a leader in high purity manganese. We have a very strategic position located in the heart of the EU, which is the world's fastest gray EV battery market. Obviously, a low carbon economy and shifting to that is paramount to our value proposition in terms of producing materials for the EV battery market in Europe. We still are well-funded. We're well-backed by EU institutions. As you'll see from our lifecycle assessment, I feel that we are achieving our aim to have best-in-class environmental and social performance from our project. And we're building our team with even more skill sets as we move into a very important engineering procurement construction management phase. And I do say this is the first step in building a multi-asset manganese platform. And in our release on Friday, we touched on the fact that we are starting to explore what opportunities may lie in North America for the company. So just, again, homing in on those Q3 highlights. I will talk more about the feasibility study. It has robust base case economics, which have validated the project. And shown in our pricing sensitivity analysis, there's real upside potential. We'll also be touching on our life cycle assessment and its results, and that validates the environmental credentials of the project as well. Just covering off the other highlights of the quarter, which we're not going to go into a lot more detail, is during the quarter we appointed Stiefel Nicholas Europe as the project finance advisor to help with us in terms of structuring and securing the project finance for the project. demonstration plant which left China in late June has now arrived in Europe. One part of the shipment has been unloaded at Hamburg and the other consignment of the shipment is scheduled to be unloaded later this month. There has been some industrial action at Hamburg port which has slowed down the unloading of the demonstration plant And it should take about 10 days to get to site. So we are expecting arrival of all the modules at site in late August, early July. The site buildings have been completely refurbished, ready for the acceptance of that demonstration plan, two main buildings. And I believe there is a link from our announcement which shows those change in those buildings from before and after shots. We joined the Global Battery Alliance, and we are the first high-purity manganese company to join the Global Battery Alliance. So we have a seat at the table in terms of discussing the global battery passport and other lobbying that the Global Battery Alliance do on behalf of its members. Now that the feasibility study is finished, we're starting the preparation of our engineering procurement and construction management tender documentation. And we intend to go out to tender around September this year and be ready to appoint that EPTM contractor early in the new year. I'm going to hand over to Martina to talk us through the financial highlights and position of the company.

Thank you, Matt. I will briefly comment on our cash position and the use of these funds in the coming 12 months. Please note that all figures that I will be mentioning are in Canadian dollars. We started the quarter with $32.1 million in cash, and we spent $3.1 million on advancing the feasibility study, which was completed in late July, and the final report is being prepared and will be released in early September. The operating expenditures also covered the advancement of the environmental impact assessment and corporate office costs. A half a million was spent at site, as Matt mentioned, improving the two buildings that will host the demonstration plant, and the work is now close to complete. Another half a million we spent on land acquisition by making first installment on a land package, which is adjacent to the tailings area. It will provide additional room and flexibility for the Chvalichice Residue Storage Facility. We closed the quarter with $28 million in cash, and that balance will help us fund the completion of the EIA to cover other permitting costs for the project, as well as to install, commission, and operate the demonstration plant for one year. We will also use these funds to complete or advance certain critical land acquisitions for the commercial plant area and the tailings area and to complete the EPCM tender process. These funds will also cover our corporate costs for the next 12 months. I will now turn it back to Matt.

Thank you, Martina. Just one point of clarification. In the certain critical land acquisitions, they are already under option. So we are just exercising those options to complete those land acquisitions for the Kuala Lumpur plant site. So this is the plant that we're going to build. This is a still picture from the feasibility study 3D model. You can see the tailings in the green area to the left and a tailing building where we will take the tailings, surrey it, and pipe it over the fence across the road and the railway line to the main plant site. The large gray area there are rail sidings that we're going to build. And you can see we have tanks for bringing in reagents and then the main processing plant buildings. The feasibility study has a number of impacts. I guess the first is we can now convert our resources to reserves. And with 98% classified in the proven category, it shows that the reserves are well distributed, evenly distributed through the resource. production profile which those resources will enable. You can see the head grade of the resources is fairly consistent between 7.3 and 8% manganese. And we're mining about a million tons of ore a year. We have the commissioning plan in 2026. So 2027 is a ramp up year. And then full production in 2028 through to 2051. You can see 100,000 tons of high-purity manganese sulfate monohydrate. And then the balancing item is the high-purity electrowind manganese metal. So for every one ton of metal, there is about three tons of sulfate. That's the ratio. So overall, we're producing about 50,000 tons of contained metal. About one third stays as metal. And two thirds, i.e. 33,000 tons, is converted to the high purity manganese monohydrate, giving about 100,000 tons per annum of the actual sulfate product. The capital cost to build the plant is just over $750 million. I would like to point out that includes a robust plus 100 million contingency, which includes an actual contingency figure as well as 25 million of growth capital on the direct costs. I think it's also worth pointing out that the European supply chain environment is still recovering from the COVID disruption, leading to high steel prices, high concrete prices and other pricing yet to find a natural lower equilibrium. This has also been exacerbated in part by the Ukraine situation as well. Ukraine did supply steel into Europe. By the time that we are in purchasing procurement mode for that steel and concrete, we are there's an opportunity for those to normalize back down post sort of the COVID reset. There are signs in the Czech Republic of this starting to happen, but our feasibility study was really priced at the high point. We used the current steel prices and concrete prices and other prices when we costed the feasibility study. Similarly for equipment costs, When we went out for RFQs for all of our equipment, those reflect the list prices from the manufacturers that we collected. And there is an opportunity during our EPCM procurement process to package up a lot of this equipment into a small number of packages and get competitive bidding on those packages and beat those list prices. So there are a number of areas there that provide additional potential cushion as well as the contingency on that capital cost number. And then also, it's worth noting that all the main infrastructure to site is already there. We don't have to build power lines, long roads or rail lines or anything like that. So we have a very low infrastructure cost. An area that is particularly prone to cost overruns, we're not exposed to. We have a small power connection from the power plant next door to us and building that rail yard. Of our site infrastructure, that's about a quarter. The remaining of what we call site infrastructure is the civil works, the actual buildings that you saw on that previous slide, the water distribution network, and a small amount, less than $5 million on mine infrastructure. Again, with those tailings there, all we have to do is dig that material up and put it into a slurry. It's already very finely ground. Being tailings from a previous flotation plant, all the blasting, grinding, crushing, grinding, that's already been done for us. We don't have any of that infrastructure to build on that site. Obviously, to bring a project on cost and on time, you need a quality EPCM contractor with experience of plant construction in Europe. And that will be one of our selection criteria for the EPCM contractors that we are going out to. From an operational cost perspective, the main cost is obviously in the process itself, the magnetic separation, and then the purification and processing for the electro wind metal and the high purity manganese sulfate. GNA is a small component. We do have contingency in there as well, and also a figure for the royalty, freight, and insurance and other selling costs, giving us about $215 per ton of plant feed. As you can see, reagents account for about 30% of our costs. And energy, and that includes electricity, hot water, gas for steam generation, and diesel account for about 38% of our operational costs. We are in discussions with long-term contracts with renewable power purchase sorry, with renewable power companies on power purchase agreements. Those are the MOU stages at the moment, but we got long-term power prices from those MOUs discussions, which we have used in the feasibility study for our power pricing. Obviously, higher at the moment, but the long-term price does mean that we're seeing not at the peak that we see them in Europe today, but a long-term tenner on those pricing, bringing that pricing to a more normal level. Obviously, in the Czech Republic, we have very competitive labour costs, and there are opportunities, again, for reduction of our operational costs. Obviously, the contingency is in there. Again, with the normalisation of the supply chain, we could expect reagents to decrease. We've used, for example, $230 a ton for our sulfuric acid in our operational costs. Three years ago, that cost us $80 to $90. So with supply chain normalization, we could see that one of our highest cost reagents come down. So I've talked about the power cost and the potential for that to normalize. and bring down even that long-term price. And then not for this stage, but potentially for a later stage, there may be an opportunity to build our own sort of gas supply and benefit from that cost saving that that would create. So where does this lead us? So we have a base case of a $1.34 billion net present value post-tax, and a 22% un-geared post-tax IRR. I'm very happy with these robust numbers. Strong revenue and cash flow gives us just over a four-year payback on a 25-year life of mine. And Basecase Economics used a risk-adjusted pricing forecast. The unadjusted pricing forecast from CPM Group, who are really the market leaders in high-purity manganese space in the market, that represents our upside case. So the only difference is the pricing profiles, which the base case and the upside case, the only way they differ. And so you can see the NPV goes to $1.8 billion debt present value post-tax with a slight increase on the IRR ungeared and an increase in the revenue and therefore increase in the margin. So since we put this out, I have been asked, well, how are you going to fund $750 million? And as I mentioned before, we've appointed Stifel as our project finance advisor. And we're exploring multiple pools of debt capital. The EBRD is one of, that's the European Bank of Reconstruction and Development, is one of our largest shareholders. And we have had preliminary discussions with the EBRD. And they have certainly stated quite strongly that they're interested in participating in the next round of debt funding. The EBRD do both debt and equity funding when they allocate their funds out to projects, and having the EBIB as a cornerstone debt provider will be a great start for our banking. The EIB, the European Investment Bank, have a policy to support EU policies and a mandate to support the energy transition in Europe and the localisation of electric vehicle supply chains. They don't view us as a mining project. They view us as a recycling and remediation project with excellent ESG credentials. So we meet their criteria. And again, they have expressed interest in participating in our debt funding package. Stephen have reached out to the traditional commercial project finance banks and have had inbound expressions of interest. from that pre-marketing announcement on project finance. A lot of these commercial banks, project finance commercial banks, are looking to extend their exposure to ESG-focused projects. And again, that is a strong card that we can play with those commercial banks. Likewise, the ESG funds that are out there, the BlackRock's of the world and others, we will be extending the potential for debt financing from those funds through STIFLE as well. Part of our EPCM tender process will be to ask firms to show how they would maximize the potential for export credit agency support, and that is support for the procurement of equipment through export credit agencies. Then the final pool is the customers. OEMs, and we've seen a number of examples in the market already for potential for these customers and OEMs to provide whether it be soft loans, prepayments, or equity support. There are a number of examples in the market today where purchases of critical battery metals are going beyond a standard off-take contract and adding various forms of funding for the projects that they are looking to offtake material from. And we intend to seek the best terms from our customers, including that additional financial support for the project. I just want to spend a bit of time on that ESG credentials, because as you can see from the previous slide, From a financing perspective, it's really important. Not only from the finance perspective it's important, it's also extremely important for the customer side as well. We're uniquely positioned to provide secure, traceable, responsibly produced purity products to the European Union. We are the only sizable firm of manganese in the EU. The Czech Republic is a stable and business-friendly jurisdiction, and we are remediating through our project significant support from the local communities and the governments. We touched on earlier that we intend to use renewable electricity sources, and that leads to a low carbon footprint for the project. We don't use any fresh water. We only use industrial wastewater recycled from the power plant next door to us. When we put our tailings back, we'll be using best practice tailings management, which is filtered dry stack tailings. Our LCA, Life Cycle Assessment, shows that we have a net positive impact on the environment as we remediate this site. as well as creating obviously local jobs for the community. We've already started hiring from the local community and we will continue to do so. The corporate taxes and royalties over the life of the project will give a significant source of revenue for the Czech government with over $1.5 billion from the project. It's been long on this, but this is life cycle assessment our life cycle assessment numbers and the table you can see here clearly co2 footprint renewable electricity sources on the left which is our target scenario 0.3 grams kilogram of high purity manganese sulfate and that's scope one two and three it's important to to note that we are reporting to scope 3. If we were to use electrical grid mix, we intend to use a renewable energy, we'll go up to 4.8. Electrical grid mix is about 50% nuclear, 40% mixture of other renewable energy. have a look at the full feasibility study, if you were to look at the life cycle assessment, see that for the soil and water, we actually have a negative number next to the various measures. It shows that it's actually a net positive impact on soil and water quality for the project. And I think we are probably only attaining remediation such as ours can get that benefit. when you're talking about extractive industries. Pleasing benchmarking exercise to compare our carbon footprint to other high-purity manganese-producing operations. But I'm confident that we will have past warming potential CO2 footprint simply because of the fact that we'll be beyond renewable energy. Then we look forward from here. is obviously a key area for us. We will submit our environmental social impact assessment in the back half of 2022. With that, we'll be able to submit our land planning and construction permit. in 2023. On the project side, we'll be focusing on project financing, package in place, our EPCM process with the tender and bid process, contractor and starting front-end engineering. And then once the final investment decision is made, with our detailed engineering, which will allow us to then move to construction before 2025 and commissioning in 2026. Aside all of that, to underpin the project finance, customer off-take contracts as well. Forward, we look to make additional customer off-take contracts. is the key catalyst for the project.

Matt, I'm so sorry to interrupt you. I'm just wondering if maybe you come off the earphones because we're losing every couple words here and there. I'm so sorry to interrupt your flow.

Okay.

Is that better? I think so. Is that better? Yeah, I can hear you.

Okay. So the key catalysts, we've completed the feasibility study and we'll be lodging that on CDAR and ASX early September. And then completion of the, sorry, commencement of the EPCM tender process. We've spoken about that. The demonstration plant is a key catalyst for us. The installation and commissioning of that and being able to ship first samples from the demonstration plant to customers is another key catalyst, which we'll complete by the end of this year. Land access and permitting are an important part also. We have three or five land access agreements in place. Two of those are with the local municipalities, and we have two remaining which are progressives. Land rezoning for mining use is also important. One of the municipalities has converted their portion of the land for mining use, and the other municipality voted unanimously to do that and is now just going through the process, expected to be completed by the end of the year. And then, obviously, the other catalysts are the financing and the off-take contracts. to the project finance is putting in place sufficient off-take contracts and we anticipate those initial contracts by the end of Q4 or certainly binding term sheets by that time and once they're binding then we can announce to the market all of the discussions that have been ongoing for the last couple of years ESG we've published the Life Cycle Assessment, a key document for both the financiers and the customers. And we'll be following that up with the benchmarking assessment, and then also the publication of an inaugural sustainability report. Just to have one look on the market outlook. Because we're seeing an interesting development in the use of manganese. As the cathodes for batteries increase in cost due to raw material costs, we're seeing more and more discussions and commercial rollout of high-purity manganese-rich chemistries. A really interesting announcement just last week was with THL. This included manganese in their LFP chemistries. So they're now saying LMFP. And they're going to be supplying Tesla from late 2022, early 2023, with this LMFP chemistry. And the manganese content is anticipated to be in between 40% and 60%. We're also seeing other NMC chemistries going to high manganese BASF, and they're actually scaling up of their 70% containing NMC chemistry. Then other high manganese chemistries with NMX, nickel manganese X is dopants in that chemistry with SFOG, and LMNO, lithium nickel and is so robot with Moro and Toxo announcing they're scaling up that operation. And only last Friday, a major announcement in the U.S. when they had the representatives pass the act to their proposed Inflation Reduction Act, Only there it needs to be signed by President Biden, which will have a major impact on raw material supply and EV markets in the U.S. The act requires by 2024 that 40% of battery raw materials are sourced from the U.S. or a country with a U.S. free trade agreement. And that rises 10% each year until 2027, and that Requirement is 80% of battery raw materials. Critical materials that are listed in the Act include manganese and other battery chemicals. And we keep on seeing the growth of the overall EV market continue quarter on quarter. We've now over 1.4 gigawatts of planned battery capacity by 2030 in Europe. And it accounts for about 25% of the global high-purity manganese demand. The amount of high-purity manganese that needs to be produced needs to increase tenfold globally from where it is in the world today. And it's not the resource, which is the bottleneck. It's the high-purity manganese refining capacity that's the bottleneck. So just to finish, what is our value proposition? I think we have a number of privileged assets. Our location, our oil type being carbonate, the fact that we can have 100% traceability of our product, and our low carbon footprint. Being the only EU source of high purity manganese is a privileged asset that no one can tackle. No one has that. Then our core competencies. We have now developed the processing capacity for high purity manganese, the technical capacity for that. And mine dominates this industry, but we now have a process which is robust, which we can replicate in different geographies. And that is now a core competency of the company. And then potential for growth. We are Western-focused in Europe, and I've talked about at the very start, we are starting to look at the North American market and looking at what is our potential for growth there. We have a first-mover advantage in Europe, and if we can move quickly, I believe, in the manganese space, we can also have a first-mover advantage in other geographies. You know we will get a premium product, we have a premium product, and for that we will get a premium price. And this is even more the case now with this North American Act and EU's demand for supply security, a premium price for our product. And we have developed over the years very key strategic relationships with customers, with some partners, investors, our host government, and especially our local communities. Thank you so very much. That concludes the presentation part of this quarterly call, and we can move on to any questions we may have.

Certainly. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. you'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Webcast participants are welcome to submit questions through the form on screen. And if there is insufficient time to respond to all questions, the Euromanganese Investor Relations team will follow up in the coming days. Our first question is from Tim Hoth with Canaccord Genuity. Please go ahead.

Thanks, guys, for the call today. I just wanted to go through project financing. I think you've got that in there sort of starting Q3. Is financing largely going to be contingent around your offtake agreements? And then I guess how do you consider financing a project like this Can you run us through what the Europeans are talking about in terms of, I guess, some of the support that they might be offering?

Sure. So, yes, I mean, you know, project financing process has started with the appointment of Stifel. I think I ran through sources of debt that we have been targeting and I think that high confidence from the team that we'll be able to debt finance these projects. Clearly, the off-take contracts are an important part of that and getting sufficient, whether that's 70% or 80% of our off-take under contract by the time the banks are completing their due diligence, which will be in the first half of next year is our target. And we're well on track to achieving that, I believe. I know we haven't announced any key off-take contracts, but we're going through a lot of discussions with the major players across both the cathode industry, the battery industry, and the OEMs themselves.

And

I said at the start of the year, we anticipate September Q4 to be announcing our first off-take contracts, and I'm confident that we're still on schedule for that. Yes, off-take contracts certainly play a key role in the underpinning of the project finance. In terms of what support the Europeans are offering, we have a tax break from the Czech government, which we need to extend, But in terms of European Union support, at the moment, they're focused on earlier stage projects. They put a lot of money into developing the middle of the supply chain, the battery companies and supporting the REMs with their EV. And they recognize that they've kind of left behind the supply chain. raw material supply, and also haven't focused that much on this item. The next finance packages that you're going to see coming out of Europe are going to be focused on those two ends of the supply chain. But from my discussions with the Vice President of Europe, Mark Sikovich, I believe that they're going to be focused on earlier stage projects than ours, those which are yet to publish a feasibility study. to generate opportunities to develop more mines in Europe. They're putting the money at the early stage, exploration and project development. And then they're gonna put money into the recycling side as well. So we kind of are too advanced almost for that, for those sets of funds. So at the moment, obviously with the major support of the EDRD and the EIB, we're going to access European debt finance, but I don't think it's going to be free money. It's not going to be in the form of grants. But they are not commercial enterprises, so they don't require the same level of commercial return as a project finance bank, for example.

Excellent. Thank you. And perhaps just one more quick one, if I can, Nick. I think we're seeing some pretty stark photos coming out of Europe around the drought. I guess mining projects, when they come up against farmers for water, will often sort of be in that conflict area. Can you give us an idea on what it's like at site at the moment? Is water supply an issue here? And if it's not, why so?

Well, it's not for us. I mentioned we're actually sourcing wastewater from the power plant next door. The power plant do draw their water from the local river, the Labbe River, but they, you know, they, being a power supplier, are not going to be cut off from that water supply. And I haven't heard, I can't say precisely what the river levels are, but I haven't heard any in terms of water.

Excellent. Thank you. I'll pass it on.

Once again, if you have a question, please press star, then 1. While we wait for other callers to join the queue, I'd like to hand the call over to Louise Burgess with Euromanganese, who will moderate the webcast Q&A. Louise?

Thank you, operator. A couple of questions here from James Barr with Canaccord. The first is, when do you expect commissioning of the pilot plant? And when do you expect samples to be sent to customers?

Okay, so there's a bit of terminology here. So the pilot plant was done in China. We did run a second run of the pilot plant, which has been completed. And those samples are on the way to the Czech Republic, where we will do our own certificate of analysis and then send some samples from that prior plant to customers that have been requested. These are kilograms of samples. If you need a demonstration plant, we expect commissioning of the demonstration plant in Q4 this year. And depending on how that commissioning goes, It will be sent to customers either at the end of Q4 or early Q1 2023. But fairly shortly after that client is installed, it has been called commission prior to shipment to us and inspected by SGS during that process. So we know that everything's connected up correctly. So it will be reconnecting that client in our building and then commissioning it starting from the first part of the process working your way through. When that is producing in tune and producing on-spec samples, we'll then be able to send those on to the customers.

And the second question here also from James is, With offtake, are customers discussing fixed price contracts as well as moving with the market? And are their price expectations the same as ours?

There is a mixture of pricing mechanisms being discussed. We recognize that from an equity shareholder perspective that we want to give ourselves exposure to what we believe will be an increasing manganese price with the timing of the market and the large deficit that's forecast. And we're going to balance that, though, with what the banks want, which is certainty on price or at least a certain floor level on price, whether that's floor or cost plus methodology. We'll be balancing that mix when we are talking with the customers and at the same time analyzing that impact on the bankability of the debt. So I say it will be a mixture, balancing those two opposing forces, if you like. Thank you, Matt. As well, just one more point on that. But we won't be signing up 100% of our product, so there will always be some left purely to market pricing as well.

Thank you, Matt. Those are the questions from the webcast, so I'll pass it back over to the operator should there be any further questions from the conference call line.

There appear to be no further questions at this time, so I'd like to hand the call over to Dr. Matthew James for closing remarks.

Okay, well, I thank you everyone for your time and attending our third quarterly call. I am pleased that we are doing these calls to reach out to our investor base and those interested in the project and look forward to our next one in the Approximately three months' time.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.