CM – First Cobalt Corp .: North American battery materials powerhouse in the making

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Source: Peter Epstein for Streetwise Reports (07/22/21)

Epstein Research’s Peter Epstein introduces First Cobalt and explains why he’s optimistic about the company.

The global electric vehicle (EV) story just keeps getting better as over three dozen automakers with a market capitalization of> 1 billion US Dollars are fighting for the world’s attention. In addition, there are a few dozen manufacturers of lithium-ion batteries (Li-ion) who need long-term, sustainable and clean battery materials. The demand for metals such as lithium, nickel, cobalt and copper will be strong to extremely strong in the coming decades.

Nickel (Ni) heavy Li-Ion (Li-B) batteries are standard in luxury models, SUVs and vehicles that can cover 400-500 km per charge. Lucid Motors will deliver a mainstream sedan with a range of 653 km next year.

Cobalt (Co) offers safety, stability and longevity for batteries made of nickel-manganese-cobalt-oxide (NMC) and nickel-cobalt-aluminum-oxide (NCA). At lower concentrations, the Co price becomes less important. It pays (modestly) for Li-B manufacturers and the OEMs they serve to protect valuable brands from harmful headlines and battery failure lawsuits.

First Cobalt Corp. (FCC: TSX.V; FTSSF: OTCQX; FCC: ASX) is a North American battery materials company with leading ESG credentials, ideally positioned to play an important role in Ontario’s rise as a major regional EV and Li-B. to play the hub of material manufacturing.

The company is currently expanding, optimizing, and commissioning North America’s only licensed refinery capable of producing clean, conflict-free, battery-grade cobalt sulfate (CoSO4). FCC’s competitive advantages include its existing hydrometallurgical facility, best quartile carbon footprint, and proximity to US and European markets.

Phase 1 will be completed in October 2022. At this point the plant will be ramped up to 25,000 tons of CoSO4 per year, making it the second largest producer outside of China. Please note the new company presentation.

Management is keen to formulate its new strategy to deliver not only battery-grade CoSO4, but also recycled Co and Ni battery plus (potentially) battery-grade lithium and manganese. In addition to processing Co-Hydroxide into CoSO4, management is carefully reviewing the profitability of refining Canadian-derived Ni.

The aim is to produce CoSO4 from the end of 2022, to recycle disused Li-Bs from 2023/24 and to achieve Ni refining in 2024/25. It is important (subject to further analysis) that all of these activities can be performed at the same time. The cap-ex growth for recycling and Ni refining is likely to be relatively modest and will be financed partly or largely from free cash flow.

Management believes that one or more Li-B manufacturers or OEMs will have one or more Li-B manufacturers or OEMs in addition to its Refinery want to set up a cathode or precursor factory in order to create an integrated battery park. Synergies and cost savings for FCC and co-location parties would make sense.

Partner companies could share the expenses (personnel, energy, infrastructure, material and equipment handling and procurement). CEO Trent Mell believes his operating costs could be reduced by 10% (by skipping the crystallization step) or> 10% including other synergies and savings. This arrangement would score high on the ESG charts.

Management is actively engaged in discussions with OEMs and Li-B manufacturers with offices in North America and Europe. Ontario has a number of significant advantages over Chinese competitors in terms of delivery times, costs and logistics, security of supply and tariffs.

Security of supply is paramount? End users see that almost 80% of battery-quality Cos is produced in China, and that affects them.

FCC and its world-class partners guarantee that the companies they work with adhere to fair and safe labor practices. End consumers therefore enjoy security of supply with clean, conflict-free CoSO4, diversification away from China and a transparent, sustainable product chain from start to finish.

Potential purchasing partners must reduce the ecological footprint by purchasing locally or at least regionally. FCC’s refinery is powered by a green hydropower grid. It emits half the greenhouse gases of a similar size Chinese power plant, which is most likely powered by coal.

In addition, the co-hydroxide raw material comes from mines that are operated with hydropower. The location of the refinery reduces the distance raw materials and finished goods must travel. This lowers CO2 emissions and the risk of supply chain interruptions.

The FCC refinery is expected to produce ~ 11 million pounds / year of CoSO4 by 2023. However, when market conditions are tough, mgmt. believes it can bend those 11 million pounds by up to 30% to ~ 14.3 million pounds, with relatively minimal incremental cap-ex. Please refer to the new company presentation.

President and CEO Trent Mell commented, “This is the first large battery-powered CoSO4 refinery built outside of China in over 20 years. This is not only an exciting project for us, but also for the western battery supply chain. Cobalt prices have increased> 20% in the past five weeks and we are seeing increased interest in purchase agreements as the battery supply chain shifts focus from Europe to new investments in North America. « 

Lenders include due diligence on a credit facility $ 45 million = ~ $ 57.5 million (USD / USD FX = 1.277), which, along with working capital of $ 13 million plus $ 10 million in committed government funds, should cover the FCC through a refinery start-up in 4th Quarter 2022.

One of the more compelling developments at FCC is the fairly new Li-B recycling strategy, and when I first heard about it, the plan was to focus entirely on CoSO4, debt eradication and to optimize operations before thinking about recycling.

Now the goal is to further investigate the recycling of black matter this year after removing plastics, copper (Cu), graphite and aluminum from e.g. Smaller batteries are left with a muddy mixture of Ni, Co and lithium (Li), which is black mass. Previous tests have shown that the hydrometallurgical refining process used at FCC’s refinery produces high yields of Ni and Co from black bulk raw materials.

Why the change? The team realized that with refinery improvements on time and on budget, new hires available, and near-full funding, they could pursue multiple initiatives concurrently. With this in mind, management is also starting exploration activities in Idaho (more on this later).

This year management learned that black bulk raw materials are readily available to meet the company’s initially modest needs. Several companies have been collecting used consumer electronics for years. These devices typically contain Li-Co-oxide batteries, which have a higher Co content than the latest NCA and NCM batteries used in electric vehicles.

As a result, the team can launch co-operations that could generate $ 44.7 million in pre-tax (pre-debt) annual cash flow from 2023 while ramping up recycling operations. Management believes recycling margins could be higher than the Co / Ni refinery. I don’t know how much higher, but the Li-Cycle, which is soon to be listed on the stock exchange, is forecasting EBITDA margins of> 50%.

FCC’s refinery is a natural black matter processing option as it already has Ni and Co extraction circuits in place. Management assumes that its yields will be significantly higher than those of competing pyrometallurgical plants. And greenhouse gas emissions are negligible compared to Chinese alternatives.

Another important consideration in the recycling equation is that scrap from primary battery material (from current electric vehicle production) is growing rapidly. In the first few years, new mega-factories scrapped 30% (or more) of their battery metal use. FCC will be able to handle defective material from precursor, cathode and other material manufacturers / users as well as defective batteries from cell production lines.

In Phase 2 of the refinery expansion, FCC will add a Li-B recycling facility. Used black mass batteries are processed to reclaim Co, Ni and possibly other critical materials.

FCC owns a growing Co-Cu mineral deposit in the US state of Idaho, which forms the basis for a secure, strategic supply of critical raw materials. Known as the Iron Creek Project, the deposit is located on patented property within the Idaho Cobalt Belt. To date there is a combined total of 25 million lb Co 69 million lb Cu (Indicated and Inferred).

A $ 2.5 million exploration program totaling 4,500 meters over two drilling seasons was announced last month. Field work is ongoing consisting of geological mapping of bedrock and geochemical surveys.

Management is optimistic that it can potentially double its existing resources in known mineralized zones and potentially make significant new discoveries in undrilled areas. The vision is to build an underground « mine of the future » that uses best practices and technologies to minimize the ecological footprint.

If Co and Cu prices continue to rise, FCC’s small resource could be become much more valuable, especially when their size can be doubled (or more with discoveries).

First Cobalt is well on the way to future proofing its business. If the co-demand grows too slowly, management can expand its recycling activities. There are significant exploration benefits in the United States, but history does not depend on new discoveries. New discoveries would be the icing on the cake of battery materials.

The flagship refinery has a useful life of decades, much longer than most mines! If everything goes reasonably as planned, cash flow is only ~ 18 months away. A full financing package should be in place by next month. The Proforma Company Value of the FCC {Market Cap ?? Cash Liabilities} will be approximately $ 170 million ($ 0.265 / share) after management puts in all of the Cap-Ex-Dollars.

Compare that $ 170 million figure to the dozen of new high-tech Battery, drone, electric vehicle, energy storage and charging infrastructure companies with a 10 times 100 times larger market capitalization. Unlike most of these high-flyers, FCC should have a strong positive cash flow in less than two years.

Once the FCC gets a full listing on the NASDAQ or NYSE American (in the next six months), the valuation could rise significantly.

Peter Epstein is the founder of Epstein Research. His background is in corporate and financial analysis. He holds an MBA in Financial Analysis from the Stern School of Business at New York University.

Disclaimers / Disclaimers: The content of this article is for informational purposes only. Readers understand and agree that there is nothing herein published by Peter Epstein of Epstein Research [ER] (collectively [ER]) through First Cobalt Corp. including, but not limited to, comments, opinions, views, assumptions, reported facts, calculations, etc. should be considered investment advice, implicit or explicit. Nothing herein is a recommendation or a solicitation to buy or sell any securities. [ER] is not responsible for investments made by the reader. [ER] has not been and is not currently a registered or licensed financial advisor or broker / dealer, investment advisor, stockbroker, trader, asset manager, compliance or legal officer and does not engage in any market making activities. [ER] is not directly employed by any company, group, organization, party or person. The shares of First Cobalt Corp. are highly speculative and not suitable for all investors. Readers understand and agree that investing in small cap stocks can result in a 100% loss of the funds invested. It is understood and accepted by readers that they should consult their own licensed or registered financial advisers prior to making any investment decisions.

At the time of this interview, Peter Epstein owned shares in First Cobalt Corp. and the company was an advertiser at [ER].

While the author believes he is carefully screening out companies that for whatever reason are not attractive investment opportunities, he cannot guarantee that his efforts will (or have been) successful. [ER] is not responsible for perceived or actual errors, including but not limited to comments, opinions, views, assumptions, reported facts and financial calculations, or for the completeness of this article or future content. [ER] is not expected or required to follow or report any later event or news, or to write on any particular company or topic. [ER] is not an expert on any company, industry or investment topic.

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