New Year, New Strategic Investor and New CEO for EMN

Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 1,733,000 EMN shares at the time of publication. S3 Consortium Pty Ltd has been engaged by EMN to share our commentary on the progress of our investment in EMN over time.

Our investment in Euro Manganese (ASX:EMN) is getting off to a strong start to the new year - an EU bank just bought a 4.5% chunk of the company.

And, just before Christmas, EMN appointed a new CEO.

The new CEO has plenty of experience taking companies from the development phase through to construction and production, which is just what EMN needs right now.

EMN is developing a High-Purity Manganese resource in the Czech Republic, by recycling historic tailings waste from an old mine.

High-Purity Manganese is an important ingredient in most EV batteries - and EMN has the largest manganese deposit in the EU.

Furthermore, EMN stands to become the only primary producer of battery grade manganese products in Europe.

It helps that European governments are now determined to shift to domestic supply of battery metals, and the greener and more sustainable, the better.

With that in mind, we note that EMN has the potential to provide up to 50% of projected 2025 European demand for these products, and 28% of its anticipated 2030 requirements.

We first invested in EMN at 6.5 cents in September 2020, well before EU battery metals companies entered the limelight. Our best performing investments are in the EU battery metals theme - and the decade to come promises to deliver more of the same as the EU transitions to an EV future.

Yesterday we learnt that EMN got backing from the European Bank for Reconstruction and Development (EBRD) to the tune of C$8.5M (~A$9.3M) via a placement at C$.4775 (A$.52) per share.

Following the placement, the EBRD will hold 4.5% of EMN shares on a fully diluted basis - and has been granted rights that allow participation in future financings to maintain its pro rata equity interest in EMN.

Beyond the welcome funding injection, this investment by the EBRD signals renewed institutional interest in EMN’s project and further enhances the project's ESG credentials.

We believe these credentials are closely bound up with yesterday’s equity stake announcement and subsequent funding potential.

The EBRD had a respected third-party consultant examine EMN’s project - and it met the requirements of their clearly defined green mandate.

This additional vetting process helps validate the project, and could open up new opportunities for financing/offtake agreements.

The deal also demonstrates EMN’s relationship with EIT InnoEnergy is bearing fruit. Back in February 2021, the European Battery Alliance’s industrial stream arm, EIT InnoEnergy, invested €250,000 to fast track EMN’s project, help EMN secure offtake agreements, AND help raise up to €362M to develop their project.

We had been waiting for more on this partnership throughout 2021 - and now it seems to have delivered a major milestone - with EIT InnoEnergy facilitating the strategic investment from the EBRD.

The EBRD has deep pockets - and according to their Strategic and Capital Framework, will be doling out some $20 billion annually across the three continents they work in, the large majority going to green, private sector projects.

It’s been a while since we wrote about EMN, and given the recent news, plus industry movements, in the rest of this note we will:

1. Break down the details of the new investment by the big EU Bank,
2. Why we think their new CEO is the right fit for EMN’s next phase of development,
3. We’ll also discuss the push towards ‘vertical integration’ in the EU by Volkswagen in the context of EMN’s manganese project.

That last point is crucial. With EU battery metals it's not just enough for offtake partners to have future supply locked away - they may want to actually have a stake in the prospective projects.

That trend could be beneficial to EMN down the track, as well as our other EU battery metals companies.

You can click here to read our latest Investment Memo on EMN which details why we continue to hold EMN, 2022 objectives we want to see the company deliver, investment risks and our investment strategy.

So firstly, let’s focus on why a big EU institutional investor just snapped up a piece of EMN and what that means.

Here are the key details of yesterday’s funding deal with the EBRD:

• Placement of C$8.5M (~A$9.3M) at C$0.4775 per share (A$.52 a share) which is around a 5% premium to the previous closing share price.
• After the placement the European Bank for Reconstruction and Development (EBRD) will hold a 4.5% stake in EMN.
• EBRD’s shares are subject to a hold period expiring four months and one day from

the closing of the Placement, but we believe EBRD is in it for the long haul because they’ve entered into a ‘project support agreement’ entitling them to participate in future financings to maintain their pro rata stake.

• EBRD’s due diligence involved a ‘international natural resources consultancy’ which attested to the ESG credentials of EMN’s high-purity manganese project across a range of metrics.
• Agreement was facilitated by EIT InnoEnergy (a key component of the European Battery Alliance) which will be paid a 3% cash finders fee for their work.
• Funds to be used by EMN for feasibility study, operating costs for the Demonstration Plant and further ESG works.

All in all, it's a significant win for EMN, and a big part of that is the new partner they now have on the register.

What is the European Bank for Reconstruction and Development?

The EBRD was founded as the Cold War wound down in April 1991 to help Europe transition to more open-market style economic activity and has funded some €160B across 6,000 projects in the last 30 years.

From its end of Cold War origins, in more recent times it has pivoted its focus.

It now bills itself as a, ‘climate finance leader [that has] committed much of our activity over the last 18 months to countering the economic impact of the coronavirus pandemic.’

In addition to its financing projects to the order of $20B a year over the next 4 years of operation, the EBRD also provides business advisory services, promotes trade finance and loan syndications.

It’s upped its funding in the pandemic age to accelerate Europe’s green transition.

Remembering that EMN’s project is in the Czech Republic, today’s announcement is fortunate for EMN due to historical circumstances.

You see, the Czech Republic ‘graduated’ from EBRD in 2007 following the country’s request to stop being a recipient of the Bank’s funds.

But at the onset of the pandemic, the Czech Republic returned to the EBRD to help deal with its energy transition as its one of the largest greenhouse gas emitters in Europe.

The EBRD notes that ‘the green energy transition remains a high priority of the Czech Republic’s agenda’ - and we believe EMN’s project may well become a flagship project of that agenda as the EBRD pours funds into mining and infrastructure projects like EMN’s.

Why is this placement good for EMN?

Here’s the key bit - EMN didn’t just complete a capital raise - they got a highly supportive new partner on the register:

‘In connection with the Placement, EMN and EBRD will enter into a project support agreement

whereby, subject to certain conditions, the EBRD will be granted rights that allow participation in future financings to maintain its pro rata equity interest in the Company.’

That means that the EBRD is entitled to get more shares in future financing rounds to keep its 4.5% stake. Which for us means the EBRD wants to back EMN for a significant amount of time.

This agreement is explained by the Mr. Eric Rasmussen, Director of Natural Resources at EBRD:

‘As a new shareholder, the EBRD will help Euro Manganese develop a local source of high-purity manganese, which will improve Europe’s security of battery raw material supply.’

‘Will’ is a strong word and we like that.

We pay attention when an institutional investor takes a stake in a company, as it's a big signal of support and faith in both management and the company’s product.

Placements like the one EMN just completed help progress a company towards financing a full-blown commercial project - one of the 4 key objectives we highlight in our Investment Memo on EMN.

Frequently though, institutional investors just buy the shares and step back.

In this case, the EBRD’s role may be more than that.

They aren’t just looking for capital gains - they are taking a hands-on approach to achieve a stated goal - to get EMN’s High-Purity Manganese project to production.

We think progress towards that stated goal could take the form of business advisory services and additional help with financing arrangements.

So with the EBRD onboard, EMN can now turn its attention to getting samples of its high-purity manganese into end-users’ hands for use in their supply chain qualification process, which could lead to binding offtake agreements and subsequently open up further financing options.

What’s more, is that this new high-profile institutional investor comes via their arrangement with EIT InnoEnergy, an arm of the European Battery Alliance, which leads the organisation's industrial stream.

EIT InnoEnergy happens to be the exact same EU backed group that invested in Vulcan Energy Resources at 51c in May 2020.

This is a relationship we flagged in February 2021, one which could be critical to EMN securing up to €362M to develop their project.

While big EU organisations like the EBRD generally move slowly and methodically when it comes to financing decisions, it looks like EMN now also has a resource development expert steering the ship too.

As a result, although the deal with EBRD was down to the work of the previous CEO and the EIT InnoEnergy tie up, the new EMN CEO has plenty to work with coming into the job.

Who is the new EMN CEO? Introducing Dr. Matthew James

We believe the new CEO of EMN has a really strong CV to help EMN in its next phase of growth.

Dr. James worked as Vice President, Strategy & Corporate Communications at Lynas Rare Earths from 2002-2011.

This was a period where Lynas went from niche junior miner to Rare Earths juggernaut and a market cap of $3.5B in the last Rare Earths boom.

Dr. James is also ex-McKinsey and Deutsche Bank, so lots of finance pedigree.

His time at Lynas resulted in the raising of ‘over A$1 billion of equity and debt funding, including a US$250 million government backed loan and over US$800 million of long-term advanced sales contracts.’

As a result, we think Dr. James is particularly skilled at getting major mining projects operational and we note that Lynas now has a market cap of $10B.

We’d love to see Dr. James work his financing magic again at EMN, seal key offtake agreements and get the project operational.

Something he was instrumental in achieving during his time with Lynas.

Which is why it's nice to see that Dr. James is thoroughly incentivized to ‘pull a Lynas’ with EMN and sees what we see in EMN.

Dr. James’s incentives take the form of 12 million options for a term of 10 years at an exercise price of C$0.58 (AUD$.63) - the large majority of which are subject to performance conditions.

Meaning that if the company’s goals aren’t achieved then he gets far less money.

Here are some of the performance options we really like:

• ‘1.5 million options will vest and become exercisable when the 30-day daily volume weighted average price (“VWAP”) of trading in the common shares is at or above C$1.00 per share.’
• ‘1.5 million options will vest and become exercisable when the 30-day VWAP of trading in the common shares is at or above C$1.50 per share.’
• ‘1.5 million options will vest and become exercisable upon execution of binding offtake agreement(s) with one or more purchaser(s) where the production purchased from the Chvaletice Manganese Project under the offtake agreement(s) is at least equal to 65% of the initial eight years of mine production of high-purity manganese products projected in the Feasibility Study...’
• ‘1.5 million options will vest and become exercisable upon the Company completing and receiving funds under a financing(s) (whether debt, equity, offtake funding or joint venture) which net proceeds are sufficient for the Company to fully fund the initial capital costs required to bring the Chvaletice Manganese Project to production as set out in the Construction Decision Feasibility Study.’
• And 3 million options to vest upon key performance metrics of the high-purity manganese performance plant.

As with all big employment contracts, the employer and employee sit down and have a thorough chat about what is achievable because alignment of incentives and strategy between employee and employer promotes a successful business.

So we think Dr. James signed the contract with EMN based on what he thought was achievable and now has a clear idea of what he needs to get done as CEO of EMN.

And what Dr. James is getting to work on takes place within the context of a massive structural shift by one of Europe’s oldest automakers...

Volkswagen making big moves, EU battery metals players to benefit?

The Volkswagen Group is a household name - the biggest automaker in the world by revenue.

Aside from its flagship VW brand, it owns a bunch of other well known car brands including Porsche and Audi:

The German automaker plans to transition its entire portfolio of cars, trucks and SUVs to zero-emission vehicles by 2040.

Volkswagen previously laid down its strategy to achieve this goal in its VW Power Day back in March 2021.

In mid-December we got a clear look at how Volkswagen is following the strategy it laid out, with a deal with one of our portfolio favourites, Vulcan Energy Resources, being just one of three strategic partnerships signed by the automobile giant that week.

Here is the press release from Volkswagen a trio deals announced late last year.

Below, we break down the significance of these three deals for EMN investors.

VW Deal # 1: VW sign JV deal with recycling materials group

The first of the Volkswagen deals announced was with Umicore, a global leader in clean mobility materials and recycling.

VW has partnered with Umicore to supply VW’s European cell factories with cathode materials.

Both companies want to sustainably secure responsibly sourced raw material capacities at competitive prices.

High-Purity Manganese is required in VW’s battery technology - and EMN’s manganese is sourced from recycling waste.

At VW’s Power Day event, Volkswagen displayed the slide below when explaining what was inside their “Unified Cell” technology - front and centre is Manganese.

EMN is unique in the sense that its manganese project will essentially recycle historic mine waste to produce High-Purity Manganese products that are essential in battery production.

The project is a “tailings resource” which is made up of waste material left over from a long-decommissioned pyrite mine that once produced sulphuric acid for steelmaking.

Effectively EMN will be waste recycling from the historic mine, delivering High-Purity Manganese products to EU battery makers, whilst at the same time cleaning up a longstanding source of water pollution for the local community. This is as environmentally friendly as a resource development project can get.

Umicore’s expertise is in recycling raw materials.

The specific inclusion in the Umicore Joint Venture to explore other “recycling and refining” opportunities at a later stage could mean projects like EMN’s could be on the JV’s radar.

EMN are in the right place with the right project - developing a green and European source of battery grade High-Purity Manganese suitable for electric vehicle batteries from the recycling of a tailings deposit.

VW Deal #2: VW directly investing in companies

The second of the three deals announced late last year was Volkswagen's direct investment in the Cambridge-based battery-tech start-up 24M Technologies.

24M Technologies is a spin out from MIT (Massachusetts Institute of Technology) - one of the premier research institutions in the world.

The investment is aiming to industrialise 24M’s IP which is focussed on decreasing costs by getting rid of several steps from the conventional production process.

We will skip a deep dive into 24M’s tech, but the key takeaway for us is that Volkswagen made a direct investment into another company to secure its EV future.

We think seeing VW so active higher up the supply chain and directly investing in smaller companies is a massive plus for the industry and other players like EMN.

EMN’s project is located in the heart of Europe, where all of the car-makers are planning investments in their battery focussed, new-age, local supply chains.

Europe currently imports 100% of its manganese requirements and is on-track to become the centre of the EV revolution globally.

We think that securing manganese supply from European sources will become priority number 1 for the transition to be successful.

EMN currently has five MOU’s (Memorandum of Understandings) signed with major prospective customers who intend to negotiate long-term offtake agreements at some stage.

The three key things to note in all of these agreements is always:

1. The strategic position of EMN’s manganese project in the EU,
2. The environmentally friendly footprint of the project, and;
3. The level of purity of the products EMN produced during pilot processing runs.

VW Deal #3: VW buying sustainable sources of raw materials

The final agreement signed by Volkswagen was the binding offtake agreement signed with our other portfolio company Vulcan Energy Resources. You can read our full 2021 wrap of Vulcan’s progress here.

The definitive offtake agreement with Volkswagen Group will see Vulcan supply Volkswagen with 34-42kt of lithium hydroxide over five years with first commercial delivery set for 2026.

For other industry players, this is a clear sign that Volkswagen is ready to go directly up the supply chain and secure raw battery materials directly from producers now, to incorporate in their future plans.

And - VW is going to do it in the most environmentally friendly way possible.

We think that a big part of why VW chose Vulcan was that Vulcan’s lithium is going to be produced locally, and with Zero Carbon emissions.

The wording from the Volkswagen newsroom is very explicit - The focus is on environmentally friendly sources of raw-materials.

VW obviously realises that it isn’t enough to try and produce zero emissions EVs - VW is also focussed on ensuring the raw materials used to produce these cars are also green and sustainably sourced.

Why is this important for EMN’s ambitions?

EMN shares some similar characteristics with Vulcan, and we think those similarities were key reasons why Volkswagen chose to sign an offtake agreement with Vulcan.

• EU Location - EMN’s project is in the Czech Republic, in the heart of Europe’s battery metals hub.
• Large battery metal resource - EMN has the largest manganese resource in Europe. Manganese, like lithium, is an essential raw material in the production of EV batteries.
• Low environmental impact - EMN’s processing of manganese ticks boxes from an environmental and social viewpoint. EMN is mining a historic tailings resource, delivering valuable, High-Purity Manganese, whilst at the same time cleaning up a polluted site for the local community.

EMN - what's next:

Now that we have covered VW’s strategy, EMN’s latest high profile strategic investor and new CEO, let’s have a look at what’s next for EMN.

With the macro thematics lining up for EMN & major industry players committing to the EV revolution, we want to see its project progress closer towards a final investment decision.

As our regular readers would know we recently launched a series of Investment Memos which outline our investment thesis for each of our portfolio companies.

Click here to see our 2022 EMN Investment Memo which has a closer look at the key objectives listed below:

1. Construction the Demonstration Plant
2. Definitive Feasibility Study (DFS)
3. First Offtake Partner
4. Early Progress on Project Financing

Be sure to check that out for a quick refresher on EMN and what we expect from EMN in 2022.

Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 1,733,000 EMN shares at the time of publication. S3 Consortium Pty Ltd has been engaged by EMN to share our commentary on the progress of our investment in EMN over time.