It’s paywalled so a link isn’t much use so here’s the text of...

It’s paywalled so a link isn’t much use so here’s the text of Alan Kohler’s Eureka Report interview with Chris Reed from earlier this week. Apologies if it has already been posted in another thread but I can’t see it anywhere. About a 10minute read and a useful explainer for those maybe not quite across the business the model. Cashflow neutral by the end of the year Chris reckons.

Alan Kohler here and I’m talking to Chris Reed, who is the CEO of Neometals, a very interesting business, a mining company that’s now moving into recycling, or at least that’s its main business now, recycling lithium-ion batteries mainly, in Germany mainly. It’s also working on some recycling of vanadium out of steel slag, but the main business is car batteries in Germany where they extract the nickel, cobalt, manganese, graphite, you name it, and Chris calls them an urban miner and he reckons that it’s the only business where the ore body is growing all the time. But the interesting thing is that Europe is requiring car makers to recycle a proportion of their batteries, so it’s actually demanded that they have to do it, not yet in the US, but he reckons that’ll probably happen and I think that’s probably right. Anyway, the recycled material is very low on the cost curve and the percentages are very high, so it’s an interesting way of looking at recycling. He sees himself as, as I say, an urban miner. They’ve got a patented process and the reason that they’re doing this with German car makers instead of somebody else is because, he says, nobody else is really in the business of recycling in the same way, working for the car makers. Other recyclers are collecting the material themselves and then selling it, whereas the car makers want it back, according to Chris. So, look, I think it’s a very interesting business and it’s long-term, they’re still burning cash, he says they’ll be cash positive by the end of the year, so we’ll see about that. But they’ve got plenty of money in the bank, so they’re not about to run out of cash, it would seem, and they’ve got no debt. So, here’s Chris Reed, the CEO of Neometals.

Chris, we always talk about cash to start these interviews. Tell us — you’ve got a fair bit in the bank, $32-odd million. How much are you burning at the moment?

Alan, look, you know, as an average over the last year, we’ve been burning about $4.5 million per quarter in our operating business. We have been doing a fair bit of investing with some of the cash balance, but yeah, we’ve got $32 million in cash in equivalence at the end of the quarter and investments receivables of about $30m as well.

So, what, $60 million available to you?

Yeah, some of those assets are listed in the investments, some are private, but yeah, we’ve got no debt and $60 million bucks’ worth of short-term assets.

Do you have a time in your mind when you expect to be making positive cash?

Yeah, so look, our main business is the lithium battery recycling, we’ve got our own operation that we own 50 per cent of that business with German company, SMS. And so, we are providing disposable services to all the German car makers at the moment and receiving – we get a tipping fee for taking the battery modules and we also get to sell the black mass that we produce, it’s a bit like a concentrate. So, we are generating cash, we expect to be cash flow neutral by the second half of this year and making cash next year.

Okay, so let’s go through that business, you mentioned the main one you’ve got which is half of the lithium battery business. You collect the batteries off the German car makers, is that right?

They actually deliver them. We provide a service, we shred batteries for all the German car makers, we get about three trucks a week rocking up. We’ve got 50 tonnes a week coming from one of the large German car makers, we sort of top that up with some consumer electronics batteries that we buy that are cobalt rich.

How do the batteries end up at the car makers, because obviously they’re coming out of the cars? Do people deliver them back to the car makers?

Yes, it’s interesting. Yes, the seller of the final product has the obligation to take them back, right?Is this just in Germany or elsewhere as well?

No, this is around Europe. So, you know, they’ve got the strictest battery regulations that are coming in and some states in the US like California, you know, make it compulsory to take it back and you’ve either got to recycle or fund the recycling of it…

After how long? Oh, no, as they come back to you.

So, you know, we’ve got two main plant sizes that we’re offering, 50 tonne a day plants or sort of 20,000 tonnes per annum, that’s designed to take the production scrap out of your typical gigafactory. Then we’ve got a larger plant we’re working on for end of life. Now, statistically, we should just have majority of production scrap until the end of their useful life. But what we’re finding is that there’s recalls, so you know, General Motors and Hyundai had recalls over the last couple of years for cells, so there’s volume there and if we look at a statistical crash rate of 1 per cent, we’re getting a lot of modules. So, if you’ve got an electric car and you’re involved in a crash, there’s pyrotechnic fuses that go off and isolate the battery and because we’re just at the nascent stage of EVs, essentially what they do is they take the whole module out and they ship it to us to recycle. So, 70 per cent of the feed that we get are modules, so not the individual cells, but the whole module that bolt on to the car.

From a crash, from crashes or something else?

Well yeah, and so they test the cells so, you know, the cell maker makes the cells, he does QAQC. There’s a fail rate…

What does that stand for?

Quality Assurance and Quality Control.Right. So they test before they go to the car makers and then the car makers put them in modules or packs, larger packs, and then they form a larger module, which can be like the size of a desk and that goes into the car. So you can get failure rates there and obviously as they roll off the production line, they give them a final test and some can just fail. So, you know, it’s too hard to unpack them and to try to individually test them, so the whole module – and look, I realise that’s slightly inefficient, but it’s good for us because the trucks just keep on coming and we’re having to put in additional equipment and try to scale up.

So, how much are you getting a week? I think you mentioned that, but how much are you getting?

From one car maker we’re getting 50 tonnes a week.

What’s that one?

I can’t tell you which one it is.

Alright, 50 tonnes of modules?

Of modules, correct.

And do you charge them for that?

Correct, we charge them a tipping fee, yeah.

Right, okay, how much?

It’s slightly less than $1,000.

And then…?

And then we sell the black mass, so if you’ve got one ton of cells, you can produce about 400 kilos of black mass, which is the crushed-up anode and cathode.

What’s in the black mass, what is it?

So, the black mass is black because half of the black mass is graphite, which is the anode or negative material. The cathode or the positive material is lithium, nickel, cobalt manganese. And so, it looks just like a mineral concentrate, the stuff they used to produce down at Kambalda. And at the moment, we’re selling that to smelters. Now, we have our own demonstration refiner which is going to recover the individual products from hydromet processing, but at the moment that doesn’t match the commercial operation that we’re running in terms of the installed scale, so we’re just selling that.

Who to?

To smelters, both in Europe and offshore.

And what do they pay for it?

We get paid for the nickel and cobalt contained and you can get anywhere from 60 to 80 per cent pay-ability for the nickel and cobalt.

They’re not paying you for the lithium at the moment because if you sell it to a smelter, they incinerate it, right?

So the graphite gets incinerated and releases carbon. You incinerate any electrolyte and lithium that’s there and you end up with a dirty metal button which is nickel, cobalt, manganese and aluminium, essentially.

Right.

Yeah, so that’s why we’ve developed a hydromet refinery, so that we don’t incinerate it, we dissolve it in sulphuric acid, and we use solvent extraction to take out the nickel cobalt and manganese, right? It’s just like they do at Mt Isa, it’s just solvent extraction, so nothing overly difficult in terms of the solvent extraction, but you’ve got to run it at certain PHs and temperatures and you’ve got to pull them out in certain order and use certain reagents, so it’s not rocket science, but it’s not a walk in the park either.

It doesn’t sound like the carbon footprint’s very good because if they’re incinerating graphite and distributing carbon dioxide into the air…?

Yeah, well it’s not, but it’s better than the mining. So, if we just use lithium that comes from converted Australian spodumene or Indonesian pig nickel or cobalt from the Congo, you generate about 8 tonnes of carbon per ton of batteries. If you use recycled material from pyrometallurgy or smelting, you halve the carbon footprint to about 4 tonnes of carbon per ton of cells. Our process, we generate about 1.5 tonnes of CO2 per ton of cells, so we’ve already stripped out about more than 80 per cent of the carbon footprint from making new cells. That means that the EV can be a net benefit to the environment, instead of year seven, we’re targeting year one to two.

Did you say you’re going to do your own smelting soon?

No, no, our own hydromet refining, so what we’re going to do, is we’re going to take that black mass and dissolve it in sulphuric acid and then use solvent extraction and chemical precipitation to separate all the individual elements. So, you know, our pay-abilities go up because the car makers, we’ve got to close the loop. The car makers are facing an existential threat. They’ve never had to worry about the fuel for their cars, now the battery’s the fuel, or the electricity is the fuel, but they’ve had to worry about all the battery materials, because you can’t sell an electric car without all the battery materials. We can see that there’s not enough and that to close the loop and to build a more circular resilient supply chain and to reduce your carbon footprint, you have to recycle. Now, recycling will take over from mining for those battery materials, my guess is 2040 or slightly after…

When you say “take over”, do you mean replace?

Yeah, not replace it, but to take over as the primary source of the materials.

Really? So you reckon recycling these batteries will take over as the primary source of battery materials?

Yeah, not for 18 to 20 years. But if we have a look at the European battery regulations that should get passed by the EU parliament, in 2026 they have to recover 90 per cent of nickel, cobalt and copper, and in 2030, they’ve got to recycle 95 per cent of nickel cobalt and copper and I think 75 per cent of lithium, right? So, Europe, obviously wealthy, high-value cars and they’ve imported for the last couple of years, the majority of cells out of Asia. So, the cells are in Europe and they’re going to be producing their own material and they don’t want it to leak, so they want to create fortress Europe. There won’t be export of black mass, you won’t be able to use pyrometallurgy because you lose too much material, your recoveries aren’t high enough. So, you know, we’ve got fantastic tailwinds when the governments make it compulsory and then to use technologies like we’ve been developing for the last seven years, it's happy days.

And what about the graphite and the anodes?

Well, the graphite, we can recover because that won’t digest in the sulphuric acid. Now, we, as yet, have not been able to reuse that directly, you know, to make a second life out of it in the battery, but it will displace currently mined material in other applications, so it’ll still be a net benefit, but we are going to do some research on trying to see if we can’t make that into a synthetic graphite with a graphite producer.

Can you take us through the business model of this operation? Yeah.Just in terms of money in, money out, how does it work?

So, we’ve got flexible business models, right, so we were never ever worried about the volume of material, because we know that scrap rates are very, very high and we’re at the nascent stage of this EV transition. So, there’s more production scrap than we thought, there’s end of life vehicles and warranty returns coming back in larger volumes and quicker than we had dreamed of. So, we partnered with 150-year-old German plant builder called SMS Group, so we can just do a cookie cutter approach. The different business models are, we can provide recycling as a service and we’re doing that at the moment for the German car makers at a small scale. We’ve also got the ability to do joint ventures as we scale those plants up, so to exploit our exclusive access to the technology.So, we developed it, and we own now half of it with SMS group. Then ultimately, for the larger plants, to preserve capital and to give us the highest return on invested capital, we move to a plant supply and royalty model, so that we make money out of supplying the plant and we get royalties based on a gross sales royalty.

So, one of the challenges, is recycling is…I don’t understand this, how come it’s a royalty model rather than you just sell the stuff? Who’s selling it?

So, at the moment, we’re capable of doing all of them. At the moment, we’ve got our own operation as principal, where we’re getting paid to take the batteries and sell the materials. We’ve also got deals for joint ventures, so where we’re building larger plants.

But you’re talking of a business…You’re leaving me behind here… You’ve got this one joint venture with SMS, but you’re saying you’ve got other joint ventures going on?

Well, we co-own the business with them and it’s called Primobius. Primobius is operating as principal in Hilchenbach in Germany. Primobius has a deal with Mercedes Benz where we’re supplying them a small-scale plant and teaching them how to operate it under a five-year R&D collaboration. When we look at bigger plants, we’ve got different business models for Mercedes, so for when they produce their own cells, we can build plants on a joint venture. But ultimately, some customers will want – and we’ve signed licences, so that we supply them the plant and they just pay us a royalty, so we’re into providing solutions. If they want us to do it, we do it. If they want to do it in a joint venture and share the economics and to get the material back into their supply chain, we can either do joint ventures or plant supply technology licencing.

Why do they need to deal with you, I mean what’s your IP in this, what do you bring to the table?

So, our IP is, and what’s unique about us, is you can’t ring up our competitors and ask them to build you a plant because they’re not in that. If you look at Glencore and Umicore, they’re doing it for their own businesses because they are either commodity traders and need to sell recycled material as part of their product mix which is their regulations that are coming in too. Or these guys are doing it so that they’ve got their own resilient supply chains. In a market that’s going to be in deficit, for every ton that they don’t recover by recycling, they have to compete against their customers, the car makers, to buy material. And, you know, the forecast for lithium, nickel and cobalt, is to go into deficit. So, like I said, we’ve partnered with a plant builder, we want to deploy as many plants as possible…

So, you’re saying that your plants will be in partnership with the car makers and that’s your business model? Your business model is to do it with the car makers, rather than to collect the material off them and sell it as a commodity trader, is that what you’re saying?

Correct, because the car makers, they don’t want to pay you and they don’t want to get paid for the batteries. What they want to do, is they want the materials back to make new cells, to close the loop.

But do they want to make the batteries themselves or do they just want to buy them?

No, no, you’ve got all of them, so you know, Tesla, they’ve got their own gigafactories; Mercedes want to build five of their own plants; Stellantis… All the big car makers are moving to build their own cell making plants and eventually, some of them have to go back to mining. Like, Ford’s putting investments in hard rock mines in WA, in lithium brine deposits in Argentina. So you’ve got car makers now who have never ever had to worry about upstream because everyone’s just dying to do business with them. In this new model, they’ve been forced to invest upstream and they all have to recycle. So, they come to us with a volume of, this is what’s going to happen over the next 20 years, we’ve got a high and a low. So, we map out what size plants, when and where.We give them a capital cost, we give them an NPV and then we give them the option. If you want us to do it, this is what it’s going to cost. If you want, we can share the profits and do a joint venture, or to deliver you the total lowest cost of recycling, we will sell you a plant, we will make money on selling you the plant and we will give you a technology licence where you pay us a percentage. So, we’ve got a licence that we’ve granted to Stelco, Steel Company of Canada, it’s a 10 per cent gross sales royalty, right? So, they want to recycle end of life cars to get more scrap steel to feed their transition from blast furnaces to electric arc furnaces. More of those cars are going to have batteries, they need a solution. So, we said, “Look, we’ll supply you a plant and you pay us a 10 per cent gross sales royalty.”So, we will get royalties on lithium, nickel, cobalt, aluminium, copper. Those five are 90 per cent of the basket of goods and you can hedge them on the LME. There’s manganese, graphite and because we use ammonia as our PH adjuster, we get ammonium sulphate tails, which is a fertiliser product and we got into the finals of the German National Sustainability Award for 2022 because, you know, you’re saying what do you bring, we bring our hydromet recycling which is what is needed for the new legislation.

You better describe – because this is one I’m still trying to get my head around, why these companies, Mercedes Benz and all these other companies including the Canadian one, come to you, Neometals in Australia, to organise their recycling for them? You’ve got this process, right?

Yeah, we developed the process here and our main operation is in Germany, right? So, outside of China, Europe is going to be the second-largest lithium battery and EV producing hub, followed by the US. So, hence why we decided to setup our headquarters for Primobius, which is the joint venture with SMS, in Germany and our demonstration plants in Germany and we are providing services to all the German car makers. So, we will scale up our business and provide solutions to the car makers, initially in Germany, Europe and then we’ve got a foothold into North America, we’ve got an MOU with Itochu to put one in Japan, and now we’re working with some Korean partners.

So, what exactly is your process?

What we do, think of a ton of batteries, Alan, from EVs, it would be equivalent to having a ton of ore that’s 15 per cent nickel, 15 per cent copper, 2 per cent cobalt and 2 per cent lithium, right? It’s very, very hard not to make money out of ore which is, you know, that’s what these batteries are. And so, we’ve got a concentrator, what we call a shredder, so we discharge and disassemble the modules, we take the electricity out, put that into the grid, make them safe to process. Then we shred them up, we physically take out the aluminium and copper sheets, any casings, plastic separators and then we’re left with the black mass. The black mass, we then put into the hydromet, so we put it into a sulphuric acid solution, we take out any copper that we don’t catch in the concentrator.We then take out manganese and cobalt, we then sparge in ammonia gas to take any aluminium and iron out of the product, take out nickel, we take out the lithium and then we’re left with ammonium sulphate, which is an ammonium sulphate solution which we concentrate up and that becomes a fertiliser.Is this process patented in some way?

Why do these companies have to come to you to get it?

Well, we’ve been in it very, very early. We developed Mt Marion with MinRes and Ganfeng into the world’s second-largest lithium operation, we started constructing that in 2015, in 2016 we moved into battery recycling, up the other end of the cost curve or the other end of the supply chain.

So, what, you invented a process for extracting this stuff…?

Yep.

And then what, have you got global patents for it?

Yep, so we have got national phase patents that are going through in the EU and we’ve lodged PCT, so in all the civilised countries in the world we have IP protection.So, have you got competitors…?Of course.Is somebody else doing this? Umicore and Glencore, their smelters, so they do it and then we’ve got Fortum up in Finland, they’ve got a plant. There’s Li-Cycle and Redwood, Redwood was founded by the ex-Tesla Chief Technology Officer. So, you know, we have Li-Cycle, Redwood in the US and a couple others, but they all want to do it themselves. They’re buying batteries at the moment and selling black mass and then they’re building their own refineries, but the car makers don’t want to sell their batteries, right? They want their materials back because if you recycle, you get back lithium, nickel, cobalt, manganese, copper and aluminium at the bottom-end of the cost curve.

But also, they’re required to recycle anyway, aren’t they?

Yeah, not so much in the US yet, but certainly in Europe – and you’ve got minimum recycled content in the production of new cells, then you’ve got carbon footprint, you know, you’ve got CO2 levels and so, in new cells they’ve got to put stickers. When you used to go to a car yard and have a look at the fuel consumption, now you have a look at what the carbon footprint is on these things. So, what we’ve developed is a new style of base metal refinery at a very, very high level to accept batteries as its feed other than mineral concentrates, because we knew this was coming and that’s why we got into it early.

And when do you think you’ll make money from it? You said this before but let’s just circle back on that.

Yeah, yeah, so we’ll be making money from supplying Mercedes Benz the plant, that’s a plant supply contract that we make money on. From our operations as principle, we’ll get to net positive cash flow by the end of the year, as we scale up. And then we’ll announce more and more deals, so we’ve got opportunities to provide a service, we’ve got opportunities to do joint ventures and we’ve got opportunities to do plant supply and licencing, it’s whatever the customers want. None of our competitors are in the business of providing plants to third parties. So, we’ll not cut our nose off despite our face, if we can be in it for equity, that’s great. If it’s ultimately a car maker, because you know you’re at only the start of the EV transition, so you can imagine the best years for recycling are 2030, 2040, 2050, so you don’t want to cut your nose off the small plants to give up the opportunity for the big plants.If you have a look, we can recover probably $US10,000 to $12,000 per ton of cells and my guess is, the studies will come in midyear, but I’d say we’re perhaps on target for somewhere around $4,000 or slightly below, all US dollars. So, if you’re doing 20,000 tonnes or 200,000 tonnes per annum, they’re big numbers that we’re talking about. You know, for Mercedes Benz, by 2030, they’ll be producing 900,000 tonnes of cells per annum. Now, at a 10 per cent scrap rate, that’ll be around 100,000 tonnes that needs to be processed, so we would have to supply them five 50-tonne plants and then for the end of life, say, in 10 years, we’d need to supply them five 500-tonne plants.

Are those once-off deals, supplying them with a plant?

No. We’re doing a really small plant for them, 10 tonnes a day, we’re building that at Kuppenheim in Germany, so that’ll be up and running around the end of the year, first quarter of next year, but that’s only 10 tonnes a day, right? These guys are going to need, in say 15 years’ time, they’re going to need 3,000 tonnes a day of capacity.

So, why don’t these companies just buy you?

Well, half of the business is in 150-year-old private German company owned by one bloke.

Oh, I see.

Yeah, so it’s not so easy. But, if – Tesla sent its Chief Technology Officer off in 2017 to build recycling, so they came up with Redwood materials and they’ve all raised more than a billion Australian dollars to get into production, but they’re ahead of where the supply’s at and they’re actually having to buy cells and it’s very difficult to keep plants full. Whereas we’ve taken the approach that we can build whatever the market wants, when it wants, wherever it wants, because SMS has got 14,500 employees in 95 sites around the world and production facilities on four continents, right? So we will build it as it’s required and we will build it for the car makers and that’s what’s appealing for them. And hence, why we provide services to all of the German car makers.

We’ve spent a lot of time talking about lithium-ion battery recycling, but you’re also doing vanadium, aren’t you? Or you’re going to?

Yeah, so we’ve developed a process to recover vanadiumfrom steel slags. Up in Scandinavia, their iron ores have a lot of vanadium in them and they’ve just been building up the world’s highest grade vanadium bearing slags for like 30-plus years, so we developed an environmentally friendly process to take out the vanadium as very, very high purity that can go into these new vanadium redox batteries that the Chinese are really pushing, at the bottom-end of the cost curve. So, we’re in the financing stage for that now, so that’s getting financed down in the special purpose vehicle, we own 72.5 per cent of that with another company and we’re bringing in external funding for the moment. I think it’s €250 million Euro of debt, cornerstoned by the EIB and then bringing in institutional investors for the balance.

Will you be able to keep 72.5 per cent?

No, we will dilute down, Alan.

And how big of an operation, how much vanadium will you be producing?

It’ll produce about 5 per cent of the world’s vanadium.Which is what? About 9,000 tonnes of V205 per annum. But, depending on where we get our carbon from for the process, we will be either 90 per cent less carbon than the traditional route or negative carbon footprint.

And how much do you sell a ton of vanadium oxide for?

The pentoxide is about $22,000-odd US a ton.

And what does it cost you?

A bit over $4,000, so it’s a good margin.

Yeah, right, okay, and that’s, what, 9,000 tonnes a year of that?

Correct.And you’ll dilute down to, what, 50 or below?

I think we’ll go below that. At this stage, it’s a very large project, right?

So it’s €400 million, so that’s $600 million Aussie and our market cap’s, what, about $350 million, so very hard to maintain our equity exposure in that and we invest our capital as we de-risk these projects, we find partners and then we try to invest as little capital in the business and retain as much equity as we can. I mean, you know, you have a look at Mr Buffett’s rules, rule number one, don’t lose your capital; rule number two, look at rule number one. So, the less you put in, the quicker you can get your capital back and share it with your shareholders. We’ve been able to do that, we did that with Mt Marion, we ended up returning about $82 million bucks in cash, capital buybacks and distributions.

You’ve also got a titanium and vanadium mine in Western Australia, right?

Yes.

Are you going to sell that because it’s non-core anymore? We’ll look at the most appropriate structure to do that. I mean, we returned our nickel business back to shareholders via Widgie Nickel, which we did an in-specie distribution and an entitlements issue, so that delivered about $26 million bucks, that’s probably around $40 million worth of value to the shareholders now. So, we would look at returning that, I mean, it’s the world’s second-highest grad hard rock titanium deposit, we’ve just signed an offtake term sheet with the largest chloride slag producer in China that will use the feedstocks. We’re looking at a DSO for 12 months followed by concentrate production for four years.

DSO is direct shipping ore?

Yeah, direct shipping ore, yep. So, yeah, I mean, titanium, the world’s running out of good quality mineral sands, you know, the Americans have run out, Australia’s sort of peaked, you’ve seen Iluka now sort of pivot towards rare earths, as opposed to just solely mineral sands. Rio Tinto sort of controls the pricing through a similar sort – the only deposit that’s got a higher grade and they smelt that up in Canada, and so they smelt the titanium to produce a titanium slag and that pretty much sets the world prices. So, we’ve spent $40 million on that project, it’s got granted mining lease, mining proposal approved, ministerial approval to build a concentrator and now we’re in the final stages of the feasibility studies in all of that final phase.

But it wouldn’t be stupid of me to assume that eventually you’ll become a recycling business entirely.

Yeah, for us – and look, my family’s been in the mining industry for 100 years, we started off as underground gold miners, open pit gold miners and lithium miners and now we’re urban miners. So, if I have a look at the trends, the ore deposits are getting lower grade and deeper, so the mining cost per unit of output is going up, the carbon footprint per unit of output is going up. The megatrend that we want to get exposed to is the battery materials and we know that the market wants greener, more sustainable battery materials and so that’s why we pivoted and used our processing experience to really develop different processes to recover these battery materials from either recycled product or waste, right? And hence, the three technologies that we’re commercialising will produce battery materials at the lowest end of the cost curve, the lowest quartile or the absolute lowest, with the lowest carbon footprint. So, you know, for recycling, I’ve got the only ore body in the world that’s grown every day.

Interesting. Thanks, Chris.

No worries, Alan.

That was Chris Reed, the CEO of Neometals.