Euro Manganese Incorporated Specialty Minerals and Metals Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX) The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and all the companies and securities that are the subject of this report discussed herein. 6 February 2019 SPECULATIVE BUY PRICE TARGET A$1.10 Price (5-Feb) Ticker A$0.28 EMN-ASX; EMN-TSX 52-Week Range (A$): 0.16 - 0.33 Market Cap (A$M): 48.7 Shares Out. (M) : 170.7 Enterprise Value (A$M): 38.3 NAV /Shr (5%) (A$): 2.30 Net Cash (A$M): 10.4 P/NAV (x) (A$): 0.27 Major Shareholders: Terra Capital (9.1%) Tribeca Investment Partners (5%) FYE Sep 2018A 2019E 2020E 2021E EBITDA (C$M) (6.4) (8.9) (9.2) (5.1) Net Income (C$M) (14.2) (8.8) (9.1) (5.1) 0.34 0.32 0.3 0.28 0.26 0.24 0.22 0.2 0.18 0.16 Nov-18 Dec-18 Jan-19 Feb-19 EMN Source: FactSet Priced as of close of business 5 February 2019 Canaccord Genuity (Australia) Limited has received a fee as the Lead Manager to the Euro Manganese Inc Initial Public Offer in September 2018. Larry Hill | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.2.9263.2745 Eric Zaunscherb, CFA | Analyst | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.869.7299 Initiation of Coverage Czech mate! - Positioning the Manganese piece Strategic asset under the radar: EMN's primary asset is the 100% owned Chvaletice Manganese (Mn) Project (CMP) in the Czech Republic. The project has excellent infrastructure access, low cost base (taxes, transport, power) and is within the epicentre of a burgeoning European lithium ion battery (Li-B) manufacturing hub. As Europe's only sizeable Mn deposit, the CMP is a strategic asset with the potential to serve the commitments to fleet electrification of some of Europe's major automotive companies (currently nine battery and twelve EV factories in construction). In a market where product purity, traceability and extraction process are increasingly scrutinised by potential offtake customers, we view the CMP as demonstrating the credentials to be a key supplier in a high growth market. Attractive project economics highlighted in recent PEA: The CMP hosts 27Mt at 7.33% Mn (98%M+I) of waste tailings (no previous Mn recovery performed) that are proposed to be recycled with minimal environmental footprint to produce ultra high purity manganese (>99.9% Mn) products. A recent PEA indicated the potential for a 25 year operation producing ~50ktpa of high purity (>99.9%Mn) electrolytic manganese metal (HPEMM) with 65% to be converted to a sulphate product (HPMSM), used in the manufacture of Nickel-Manganese-Cobalt cathode materials for Lithium-ion batteries (Li-B). Low site operating costs (US$2,500/tMn) combined with high purity price premia (LT pricing of US$4,617/t for HPEMM and US$2,666/t for HPMSM) offer potential EBTIDA of +US$150m pa and a payback period of ~4 years, with total project capex at US$404m. As part of ongoing DFS work (due Q1’20) EMN have formed an MoU with Chinese Engineering major CINF to deliver a turn key EPCC package for the CMP. This EPCC package is intended to be an alliance model that in our view will reduce cost and timing risks, as well as providing EMN with more certainty on project financing. High purity Mn: The forgotten battery metal but for how long? While Mn is the fourth most shipped ore globally (60mtpa) product markets are clearly demarcated between traditional ferroalloys (90% of ore demand) and specialty products (10% of ore demand). Speciality chemicals consumers are less price sensitive, with the ability to achieve requisite purity fundamental in product acceptance. This is increasingly apparent in the Li-B sector where a rapid migration to ternary (NMC) cathode (CGe 8x growth by 2025) is occurring where Mn comprises <2% of input costs. The desire to thrift on higher cost metals (Co, Ni) while also pursuing higher performance will in our opinion, heighten purity standards of Mn inputs. We understand that only Mn produced as HPEMM (+99.9% Mn) can effectively respond to forecast cathode demand (CGe 5x growth by 2025). With substantial technical challenges for incumbent Chinese EMM (i.e Selenium use), we view EMN as well positioned to enter the market in 2022 at a time of material product deficit. Valuation and Recommendation Our A$1.10/sh. price target is based on a NAV/share approach, applying a multiple of 0.4x to our project NPV12% of C$523m to account for development, permitting and finance risk. We have diluted our NAV for assumed new equity (C$10m at A$0.30/sh) over H2’19 to progress works. With an implied upside of +300% to our target price, we initiate coverage with a SPECULATIVE BUY rating. For important information, please see the Important Disclosures beginning on page 43 of this document.
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Euro Manganese IncorporatedSpecialty Minerals and Metals
Canaccord Genuity is the global capital markets group of Canaccord Genuity Group Inc. (CF : TSX)The recommendations and opinions expressed in this research report accurately reflect the research analyst's personal, independent and objective views about any and allthe companies and securities that are the subject of this report discussed herein.
Canaccord Genuity (Australia) Limited has received a fee asthe Lead Manager to the Euro Manganese Inc Initial PublicOffer in September 2018.
Larry Hill | Analyst | Canaccord Genuity (Australia) Ltd. | [email protected] | +61.2.9263.2745Eric Zaunscherb, CFA | Analyst | Canaccord Genuity Corp. (Canada) | [email protected] | 1.416.869.7299
Initiation of Coverage
Czech mate! - Positioning the Manganese pieceStrategic asset under the radar: EMN's primary asset is the 100% owned ChvaleticeManganese (Mn) Project (CMP) in the Czech Republic. The project has excellentinfrastructure access, low cost base (taxes, transport, power) and is within the epicentreof a burgeoning European lithium ion battery (Li-B) manufacturing hub. As Europe'sonly sizeable Mn deposit, the CMP is a strategic asset with the potential to serve thecommitments to fleet electrification of some of Europe's major automotive companies(currently nine battery and twelve EV factories in construction).In a market where product purity, traceability and extraction process are increasinglyscrutinised by potential offtake customers, we view the CMP as demonstrating thecredentials to be a key supplier in a high growth market.Attractive project economics highlighted in recent PEA: The CMP hosts 27Mt at 7.33%Mn (98%M+I) of waste tailings (no previous Mn recovery performed) that are proposed tobe recycled with minimal environmental footprint to produce ultra high purity manganese(>99.9% Mn) products. A recent PEA indicated the potential for a 25 year operationproducing ~50ktpa of high purity (>99.9%Mn) electrolytic manganese metal (HPEMM)with 65% to be converted to a sulphate product (HPMSM), used in the manufacture ofNickel-Manganese-Cobalt cathode materials for Lithium-ion batteries (Li-B).Low site operating costs (US$2,500/tMn) combined with high purity price premia (LTpricing of US$4,617/t for HPEMM and US$2,666/t for HPMSM) offer potential EBTIDA of+US$150m pa and a payback period of ~4 years, with total project capex at US$404m.As part of ongoing DFS work (due Q1’20) EMN have formed an MoU with ChineseEngineering major CINF to deliver a turn key EPCC package for the CMP. This EPCCpackage is intended to be an alliance model that in our view will reduce cost and timingrisks, as well as providing EMN with more certainty on project financing.High purity Mn: The forgotten battery metal but for how long? While Mn is the fourthmost shipped ore globally (60mtpa) product markets are clearly demarcated betweentraditional ferroalloys (90% of ore demand) and specialty products (10% of ore demand).Speciality chemicals consumers are less price sensitive, with the ability to achieverequisite purity fundamental in product acceptance. This is increasingly apparent in theLi-B sector where a rapid migration to ternary (NMC) cathode (CGe 8x growth by 2025)is occurring where Mn comprises <2% of input costs. The desire to thrift on higher costmetals (Co, Ni) while also pursuing higher performance will in our opinion, heightenpurity standards of Mn inputs.We understand that only Mn produced as HPEMM (+99.9% Mn) can effectively respondto forecast cathode demand (CGe 5x growth by 2025). With substantial technicalchallenges for incumbent Chinese EMM (i.e Selenium use), we view EMN as wellpositioned to enter the market in 2022 at a time of material product deficit.Valuation and RecommendationOur A$1.10/sh. price target is based on a NAV/share approach, applying a multiple of0.4x to our project NPV12% of C$523m to account for development, permitting andfinance risk. We have diluted our NAV for assumed new equity (C$10m at A$0.30/sh)over H2’19 to progress works. With an implied upside of +300% to our target price, weinitiate coverage with a SPECULATIVE BUY rating.
For important information, please see the Important Disclosures beginning on page 43 of this document.
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Figure 1: EMN Financial Summary
FINANCIAL SUMMARYEuro Manganese EMN:ASX EMN:TSXAnalyst : Larry Hill
Date: 4/02/2019
Year End: September
Market Information Company Description
Share Price A$ 0.30 C$ 0.27
Market Capitalisation A$m 51.2 C$m 46.1
12 Month Hi A$ 0.33 C$ 0.44
12 Month Lo A$ 0.16 C$ 0.15
Issued Capital m 170.7
Options m 21.2 Profit & Loss (C$m) 2018a 2019e 2020e 2021e 2022e 2023e
HPEMM HPMSM as Mn All in Sustaining Cost Onsite costs (C1)
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Sales and Marketing
EMN have commenced strategic and offtake discussions with several of the
world’s leading consumers, buyers and traders of EMM and other manganese
products used in traditional and cathode applications. We expect that the
Chvaletice project will garner interest of the European lithium-ion battery
participants some of which are listed in Figure 40 below.
The potential of the CMP as a long- life project, compliant with stringent EU
standards and verifiable materials location is aligned to the procurement
strategies of many regional customers. We consider this to add a meaningful
strategic advantage to the project.
Figure 40: Major Li-ion Battery and Precursor Plants in Europe
Source: CMP GROUP
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Project Timeline
Based on the positive outcomes of the PEA, EMN is expected to progress through
to PFS stage assessment of the CMP. We expect this study will to look to optimise
key project parameters such as mine planning, process flow sheet design, and
capital/operating cost estimates.
In addition, EMN plans to undertake further extensional/infill/exploration drilling
in 2019, which has the potential to lead to project life extensions through
increases in Resources/Reserves.
The major activity over 2019 is the construction and development of an onsite
pilot plant to develop operating process, train staff and scale up key units of
equipment. The pilot plant is expected to cost around C$2m to run and is
expected to run over H2’19 to generate large samples of finished product for
customer testing and qualification
In our view, the major risks to the development timelines include permitting and
approvals, financing delays, and securing offtake arrangements.
Figure 41: Project timetable
Source: Company Reports
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Feasibility Study
EIA for Mining License Application
Build/commission/run pilot plant
Product offtake progress
Detailed Engineering
FID and Project Financing
Construction
Start up/commission CMP
2022202120202019
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Appendix – Board and Management
Roman Shklanka – Chairman & co-founder
Roman Shklanka is a geologist with roles including Chairman, Director and co-founder
of Sutton Resources, Canico Resource Corp, Polaris Materials, International Barytex,
Kobex Resources, Delta Gold and Pacific Imperial Mines. He was previously VP
Exploration with Placer Dome and was inducted into the Canadian Mining Hall of
Fame in 2009.
Marco Romero – President & CEO
Marco Romero has over 30 years of experience in the resource sector in leadership
roles across, exploration, mine planning and operations, permitting and finance. He
co-founded several Canadian companies, including Eldorado Gold, Polaris Materials,
Delta Gold, and Euro Manganese.
David Dreisinger – Director
Dr. David Dreisinger is a world leading expert on hydrometallurgy as well as Professor
and Chairholder of the Industrial Research Chair in Hydrometallurgy at the University
of British Columbia. He has published over 300 papers and is co-inventor of 21 U.S.
patents for work in hydrometallurgical research. His previous experience includes
director positions at PolyMet Mining, Search Minerals, LeadFX and officer positions
with Camrova Resources, Clifton Star Resources and South American Silver.
Gregory Martyr – Director
Greg Martyr became a director of the company in March 2018 with over 30 years’
experience in resources investment banking and corporate finance. From 2011 to
2016, Mr. Martyr was a Managing Director with Standard Chartered Bank, ultimately
as Global Head of Advisory, Mining and Metals. From 1994 to 2003, he was employed
in several executive roles by Normandy Mining Ltd., including President, Americas.
Harvey McLeod – Director
Harvey McLeod is a chairman of the ICOLD subcommittee on tailings dams and active
in the Canadian Dam Association. He is currently Vice President, Strategic Marketing
for Klohn Crippen Berger. He is a Fellow of the Engineering Institute of Canada.
Jan Votava – Director and Managing Director Mangan Chvaletice sro
Jan Votava is a highly skilled and respected Czech engineer and executive leader who
holds a doctorate in mechanical engineering. He was formally Technical Director for
Central Europe, Executive Chairman and Managing Director for the Czech Republic for
LafargeHolcim, the world’s largest construction materials company. Key roles included
oversight of the construction of a €250 million cement plant in Hungary using Chinese
technology, equipment, engineering and construction companies. He is now
responsible for leading EMN’s activities in the Czech Republic.
Thomas Glück - Vice President, Project Development
Thomas Glück has a 35-year track record of successful development and operation of
production facilities in the mining and chemicals processing industries. For 23 years
he undertook various development, management and leadership roles for Manganese
Metal Company, a subsidiary of BHP Billiton, the world’s leading producer of high
purity, selenium-free EMM.
.
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Appendix - Investment Risks
Risks to our valuation include:
Financing risks
Our analysis suggests that EMN will require additional capital to fund the development
costs for the Chvaletice Manganese project. As a pre-cashflow company, EMN is
reliant on equity/debt/external capital to fund capital commitments, and there is no
guarantee that accessing these markets will be achieved without dilution to
shareholders.
Furthermore, accurate estimates of capital costs for the project remain subject to
completion of pre-feasibility and feasibility studies, which may see capital
requirements exceed our model assumptions. There is no guarantee that studies will
result in a positive investment decision for the project.
Operational risks
Once in production, the company will be subject to risks such as plant/equipment
breakdowns, metallurgical (meeting design recoveries within a complex flowsheet),
materials handling and other technical issues. An increase in operating costs could
reduce the profitability and free cash generation from the operating assets and
negatively impact valuation. Further, the product purity may differ from initial test work
interpretations which can also materially impact product acceptance by customers
and therefore earnings from forecast production.
Exploration risks
Exploration is subject to a number of risks and can require a high rate of capital
expenditure. Risks can also be associated with exploration techniques and lack of
accuracy in interpretation of geochemical, geophysical, drilling and other data. Our
model assumptions include a significant amount of Indicated, Inferred and assumed
resources, which may or may not ultimately be proven to be economic and converted
into Reserves.
Market risks
EMN is involved in the development of a high purity product into a sector that is
projected to have rapid growth. Given that EMM’s level of proposed production is
close to the current global supply, market discovery will form a large part of sustaining
the potential earnings of the CMP.
Commodity price and currency fluctuation
The company as a near term manganese producer is exposed to commodity price and
currency fluctuations, often driven by macro-economic forces including inflationary
pressure, interest rates and supply and demand of commodities. These factors are
external and could reduce the profitability, costing and prospective outlook for the
business.
Sovereign risk
The Czech Republic is a fiscally stable jurisdiction but has a small and tightly
regulated mining sector. The CMP as a waste reclamation project offers a
development aligned to current regulation with in country permitting and approvals
risks highlighted in our Investment in Czech Republic section here.
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Appendix - Manganese Market Overview
Supply
Manganese (Mn) is the twelfth most abundant element in the earth's crust and
the fourth most used metal in terms of tonnage after iron, aluminium and copper.
While Mn is contained in various geological settings, the two main minerals of
economic value are principally oxide, carbonate and silicate compounds, namely
pyrolusite (MnO2) and rhodochrosite (MnCO3).
Pyrolusite deposits are usually hosted in haematite (iron-oxide) provinces such as
the Northern Cape of South Africa, with oxide ore bodies accounting for 85% of
the world’s identifiable resources and ~30% of production of global ore production
as indicated in Figure 42 and 43. These deposits are typically a higher
concentrate (30-50% Mn) than carbonate deposits (10-30% Mn); however, the
mineralogical complexity and presence of certain impurities can impact
downstream process alternatives, production costs and the purity of end products.
Figure 42: Global Reserves of Manganese ore - 2017 estimates Figure 43: Global Production of Manganese ore - 2017 estimates
Source: USGS Source: USGS
Manganese ore is the predominant seaborne market of ~60 mtpa (contained Mn)
globally which is classified according to grade as high (46% Mn), mid (~38% Mn)
and low grade (~30% Mn) along with iron content (% Fe) as indicated in Figure 44.
Market price is influenced by smelter treatment costs, ore availability and
prevailing end-product demand. Throughout the supply chain from ore through to
99.7% manganese metal and alloys, there is no organised market with price
estimation published through price discovery between traders, end users and
producers.
Demand
The product markets for manganese are classified as either traditional or
speciality segments having completely different characteristics, with manganese
content being the only connection. For instance, the traditional markets behave
like a metal market, closely correlated to the steel industry. This results in
substitution of ferro-alloys with other alternative products for price sensitive
The specialty markets are for pure metals and compounds of high purity with
consumers less price sensitive than the basic metals market. In these markets,
product purity, supply traceability and increasingly extraction method are the key
determining factors in product placement.
Australia
Brazil
China
Gabon
South Africa
Ukraine
Other
Australia
Brazil
China
Gabon
South Africa
Ukraine
Other
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Figure 44: Manganese Market – Blue denotes ore supply, black intermediate products, grey product demand, orange process steps. Red section
denotes EMN are targeting direct production of HPEMM and HPMSM to supply the high growth LiB batteries market (green). The CMP is expected
to have direct exposure to the Li-B market, bypassing the influence of traditional market supply steps.
Source: International Manganese Institute, CMP GROUP, 2017 actual Figures
Traditional segment: ~93% of demand
From the 60Mtpa (~22Mtpa Mn containing) global manganese ore market,
feedstock for ferro alloys dominates overall demand (90%) with a tonne of steel
typically containing 0.5% to 1.0% manganese. This increases towards 10% for
some specialty metals. Demand is broadly categorised across the below products:
Silicon Manganese (SiMn) – This category accounts for ~60% of overall
ferroalloy demand. The main use is in foundry and welding and chemical
compounds (~15% Si, 68% Mn) used to enhance strength and function.
High Carbon Ferro manganese (HC FeMn) – This category accounts for
manganese demand of ~4mtpa and is used in speciality steels.
Refined Ferro manganese – (Ref FeMn) – Demand of ~1mtpa
Slag Manganese – Slag from the smelting of Manganese generates
~3mpta of product for use in the cement industry mostly as a binder.
Figure 45: Manganese processing for ferroalloys
Source: CMP GROUP
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Speciality segment: 7% of demand
From the 22Mtpa Mn containing manganese ore market, approximately 7% is
converted to speciality products, albeit at a higher processing cost than standard
smelting. The speciality segment of ~1.7mtpa contained Mn is either classified as
‘conventional’ (~99.7% Mn) or ‘high’ (99.9%) purity.
Electrolytic Manganese metal (EMM): 1.6mpta of demand as described below.
Production is dominated by China with ~97% market share, produced using a
conventional electrochemical process to obtain conventional purity of 99.7% Mn.
A very small subsector (~50ktpa) and the focus of EMN’s work is HPEMM
produced through Selenium Free electrowinning which is the main distinguishing
impurity. Product is usually in a flake form as depicted in Figure 33.
As depicted in Figure 44 the majority of EMM production is directed into
conventional smelting markets (85% towards ladle metallurgy steel) and
aluminium alloys. Electronic demand through cathode powders used in
rechargeable (lithium-ion) batteries is expected to consume ~120ktpa of Mn.
Electrolytic Manganese Dioxide (EMD): 400ktpa of Mn is expected to be produced
through electrochemical processes shown in Figure 46 below. This is the
incumbent market for primary batteries (non-rechargeable batteries such as AA
type) and earlier stage rechargable batteries (Lithium Manganese Oxide) and is
only expected to provide benign growth in comparison to rechargeable batteries.
Chemical Powders: This incorporates Manganese Sulphate Monohydrate (MSM) of
which 17% is produced as a high purity product for a market of ~170ktpa of Mn.
Production is either through the leaching (with sulphuric acid) and precipitation of
HPEMM flake or carbonate ores as described more extensively below.
Figure 46: Manganese processing for chemical and pure metal use
Source: CMP GROUP
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Appendix - EMM Market Overview
Conventional EMM
EMM production was ~1.6mt over 2018 with the majority (97%) produced in
China through the electrolysis of a manganese-rich solution obtained from a
calcined manganese ore. There are two primary forms of electrolytic manganese;
Electrolytic Manganese Metal (EMM) and Electrolytic Manganese Dioxide (EMD).
EMM production in China is mostly consumed in the steel industry where
manganese substitutes provide a lower cost alternative to nickel in producing
200-series stainless steel. In addition, Chinese EMM is exported to European and
Asian markets as a specialty steel and aluminium product. Electronic and
chemicals account for only about 2% of overall EMM consumption, of which EMD
forms a nominal amount for dry cell cathodes.
Of the 1.6Mtpa of EMM production in China, almost all (~98%) is produced
exclusively through the addition of selenium dioxide and chromium as catalysts to
improve energy efficiency within the electrowinning step. This is achieved through
modifying the crystal structure of the plated metal. Since power is a large
operating cost driver, optimising this process is a key consideration to producers
despite the highly hazardous (carcinogenic) effects of using Selenium. Selenium
also introduces impurities (up to 1200ppm) which results in this production route
not being able to achieve HPEMM specification.
Eramet SA is the only other producer of conventional EMM outside of China to our
knowledge, with a ~20ktpa capacity EMM plant in Gabon.
Figure 47: Cost structure of conventional EMM in China
Source: CRU, IMnI
In addition, declining domestic manganese carbonate ore grades in China, much
tighter environmental regulations, and increasing labour/energy costs are
expected to impact the cost of EMM production longer term. Over 2018, Ningxia
Tianyuan Manganese Industry (TMI) (~30% global supply) reduced output by 50%
to curb loss making production as a result of failed project financing. Product
specification is typically 99.7% Mn as a flake with the price presented in Figure 49
for a domestic China product. US and European imports are usually subject to
tariffs, increasing market price ~ 15% on Chinese domestic pricing.
A manganese compound used in mature markets is Electrolytic Manganese
Dioxide (EMD) produced through roasting/leaching of pyrolusite (oxide) ore. EMD’s
main application is in disposable alkaline batteries along with some minor use in
elementary Lithium Manganese Oxide (LMO) formulation. EMD is not suitable for
52%
29%
8%
5%4%
2%
Ore
Power
Suphuric Acid
Reagents
Labour
Transport
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use in higher performing cathode (i.e. NMC) and hence does not present as a
substitute to high-purity EMM or MSM products. The market for EMD is quite
mature (~400ktpa) and as such demand growth is expected to be negligible.
Figure 48: EMM represents ~10% of the market of Mn end products Figure 49: +99.7% EMM flake domestic China pricing
Source: Company Reports, Canaccord Genuity estimates Source: Shanghai Metals Market
High purity EMM
A further sub-sector of the EMM market exists that is known as 99.9% selenium
free high purity EMM (HPEMM) for high specification products in the alloying and
chemical markets. We understand that only three companies in the world produce
selenium free manganese metal: Manganese Metal Company (MMC) in South
Africa and CITIC Dameng and Luxi County in China. Production capacity was
around 30ktpa (MMC) and 15kpta (CITIC) in 2017.
Figure 50: Conceptual flowsheet for selenium free EMM production
Source: Manganese Metal Company
Most HPEMM is used to produce carbon and speciality steel along with flat rolled
sheet aluminium with our understanding that ~50% of production is directed
towards NMC (Nickel-Manganese-Cobalt) cathode powder manufacture. Given the
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
SiMn HGFeMn
MG+LGFeMn
Alloys EMM Slag
Mtp
a
Asia Rest of World
1500
1700
1900
2100
2300
2500
2700
2900
3100
01/2018 03/2018 05/2018 07/2018 09/2018 11/2018
US
$/t
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strong demand outlook for this market segment, we expect an increased
proportion of HPEMM will be converted to sulphate product as indicated in Figure
51 below. Aluminium (34%) and steel (21%) alloys are expected to comprise the
balance of demand segments.
A key distinction of HPEMM over conventional EMM is in pricing with a significant
premium provided to producers reflective of reduced impurities (from 30 to
<10ppm) and the more environmentally friendly process (selenium free). While
premia are often negotiated, we understand that this can be over 50% on the
prevailing conventional 99.7% EMM price depending on quantities required. For
our modelling purposes we have used the price provided in EMN’s PEA of
US$4,617/t (~50% premia on long term forecast pricing), which we view as
conservative noting the importance placed on product purity for use in high end
applications such as Nickel-Manganese-Cobalt (NMC) cathode powders and
potential lack of alternative suppliers.
Conversion of HPEMM to HPMSM
The requirement for Ultra High Purity Manganese (HPMSM) in NMC formulations
results in the processing of HPEMM through a conversion process as indicated in
Figure 51 below. Key technical specifications include particle size and purity
levels (low iron or magnetic elements). Within the crystallisation step, high quality
sulphuric acid is also required, with the crystallisation step controlled within a
tight operating range to classify product as high purity.
Figure 51: HPMSM production process
Source: CMP GROUP
HPMSM can also be produced through leaching manganese containing carbonate
or oxide ores. While oxide ore is more readily available (85% of global resources)
and higher grade (40% Mn vs ~15% Mn), it needs to be calcined first, which incurs
energy cost and yet does not satisfactorily remove contained impurities. The
inherent variability of ore feedstock makes it a necessity to use HPEMM to
produce MSM for high purity markets.
Global production of MSM is estimated at around 500ktpa (~170ktpa contained
Mn), with less than 20% classified as HPMSM. Production again is dominated by
China (~85%) with the only producer of HPMSM externally being US-
headquartered Prince International Corporation (“Prince”), with plants in Mexico
and Belgium. Prince, along with Japanese-based Nippon Denko, claim to be able
to supply ~15% of the HPMSM market, and it is these companies that provide the
most direct competition to EMN. It is our understanding that EMN’s production
cost base of around US$3,000/t is very competitive against Prince and Nippon
Denko, even though these companies directly leach Gabonese mixed
carbonate/oxide ore instead of through HPEMM feedstock.
While there has been commentary around existing Chinese EMM plants to be
refitted for HPMSM production, we view this as being challenged by the ability to
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secure carbonate (rhodochrosite) ore and the suitability of conventional EMM
plants rather than HPEMM for this to occur.
EMN’s Chvaletice project offers the unique ability to manufacture HPEMM and
quickly upgrade to HPMSM production. Within the flowsheet description section of
the report we have highlighted the cost/benefit of HPMSM production as market
discovery occurs.
Pricing for HPMSM is through offtake negotiations with reference to the prevailing
conventional EMM price, purity and other technical specifications. Industry
research suggests HPMSM was priced at US$3,860/t (~80% premium to
conventional EMM price; see Figure 49) in 2018. Premia will also vary by region,
with 40-125% noted across Japan to Europe and dependant on end use in the
cathode market. We have used an assumed price of US$8,330/t for HPMSM for
our forecast purposes, as shown in our pricing section.
Manganese in the Lithium Ion Battery Market
Demand
We understand that the current demand for manganese in the form of high purity
MSM is ~35ktpa of contained manganese, as indicated in Figure 55. We
understand that all of this is produced through dissolution of EMM fragments
(rather than direct ore leach), with around 10ktpa being sourced from selenium
free producers (~30% of supply).
We expect the Li-ion market that uses Mn will increase 5x from ~150 GWh of
annual production capacity in 2018 to 700 GWh in 2030, as indicated in Figure 2.
The strongest demand segments within the Li-ion market are those within electric
vehicle and grid storage applications. Superior performance owing to specific
energy, stability and range is likely to place tertiary cathode chemistry using a
combination of Nickel:Manganese:Cobalt as the preferred chemistry. We expect
growth in this cathode segment to increase ~8x from 60GWh of installed energy
capacity in 2016 to ~500Wh in 2025 as indicated in Figure 53.
Figure 52: Li-B demand by sector Figure 53: Li-B demand - 6x forecast growth in NMC cathode to 2025
Source: Company Reports, Canaccord Genuity estimates
Source: Company Reports, Canaccord Genuity estimates
Manganese in the form of HP MSM is only a minor raw material cost within the
cathode and represents <2% of costs within ternary NMC constituents. Hence it is
expected that manganese will remain a low cost, reliable source of metal sulphate
as part of the cathode formulation. Depending on battery chemistry (i.e., NMC
proportions) and the size of the pack and electric vehicle, manganese between 6
0
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2018e 2019e 2020e 2021e 2022e 2023e 2024e 2025e
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LCO LMO LFP NMC NCA
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37
to 50 kg is required per vehicle. For an average battery pack (~55kWh) price of
~US$10,000, manganese represents only around US$200 of raw material costs.
We expect the overall demand for manganese (contained Mn) within the battery
segment to increase to ~140ktpa by 2025, with the likelihood that EMM
producers will assess upgrading facilities for direct production of MSM to better
capture operating margin in response to growing customer demand.
Figure 54: Percentage of raw material costs as Manganese Figure 55: Manganese demand from the Li-B sector
Source: Company Reports, Canaccord Genuity estimates Source: Company Reports, Canaccord Genuity estimates
Key sensitivities to our demand forecast (Figure 55) are the migration towards
higher nickel content NMC formulations that will proportionally reduce the
required manganese unit demand as per Figure 54. While this is not being driven
by raw material costs with regards to manganese, there is an inherent theoretical
benefit from migrating towards higher nickel content to increase battery capacity.
For instance, a 20% increase in content from NMC 622 to 811 can increase
capacity from 160 to 200 mAh/g.
Ternary cathode composition (as per Figure 57) is likely to migrate towards
NMC811 in time; however, we highlight key technical limitations associated with
maintaining cathode structural stability (Ni4+ reactivity) which results in a trade-off
between capacity and cycle life of the battery.
As manganese only represents 2% of current cathode material costs, we expect
that required tolerances will be higher to offset potential cost out strategies by
cathode manufacturers such as thrifting (i.e. less cobalt) or product specification
Industry estimates are for a material deficit to occur in the supply of HPMSM over
the long term, with emergent supply either through the direct leaching ores or the
requirement to go through the EMM route, quite often requiring costly calcining of
the more abundant oxide ore.
This potential market deficit presents an opportunity for prices in the HPEMM and
HPMSM markets to appreciate further; however, we have used the midpoint price
guidance of US$4,617/t (for HPEMM) and US$8,331/t (for HPMSM) for our
modelling purposes.
Figure 64: Manganese specialty market pricing
Source: CMP GROUP
6.00
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8.00
8.50
9.00
9.50
10.00
10.50
11.00
01/18 03/18 05/18 07/18 09/18 11/18
US
$/d
mtu
Mn (46%) Mn Ore (Mn38%, Fe5%)
0
1000
2000
3000
4000
5000
6000
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2018 2020 2023 2025 2028 2030 2033 2035 2038 2040
US
$/t
HPEMM (99.9% Mn) EMM (99.7% Mn) HPMSM (100% Mn)
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41
Appendix - Investment in Czech Republic
The mining industry in the Czech Republic
Mining activities are mostly restricted to coal production for power generation
within both domestic and EU markets. Coal-fired power generation accounts for
around 60% of the country's total electricity output. It is forecast that Czech coal
output will reach 53.4 million tons in 2018.
Mineral exploration has been mostly focused on the Diamo underground Uranium
project and the Cinovec Lithium Project owned by European Metals (ASX:EMH |
Not rated), and expenditure has increased significantly over the last three years. A
notable recent project development has been the 1.8Moz Mokrsko Gold project
which has been held up by a national decree in 1999 banning gold production
due to potential environmental impacts.
Since 1989 the only new mining operations in the country to come into production
are for industrial minerals (cement, lime). EMN are highly engaged with local
stakeholders across all aspects of the permitting process.
New raw materials policy
In June 2017, the Czech federal government approved and updated the former
state raw materials policy from 1999. The most important step is the shift towards
modern high-tech raw materials (i.e., manganese, lithium, cobalt). This has been
driven by the European Integrated Strategy Raw Materials Initiative which is used
in electronics and other modern industries. In addition EMN have indicated that
Chvaletice is widely accepted as an initiative to “reuse industrial waste“, a key,
officially-declared Czech “foreign direct investment target sector”.
Permitting/approvals process
According to the 2017 “Doing Business 2018” report commissioned by the World
Bank the Czech Republic ranks 30 overall out of 190 surveyed countries as
measured across ten key business indicators. This is in comparison to
neighbouring countries Poland (27), Germany (20), Italy (46) and Hungary (48).
The individual indicators are presented in Figure 65 below with the most relevant
relating to dealing with construction permits, in our view.
Figure 65: Key indicators for doing business in the Czech Republic
Source: World Bank report
The World Bank report provided a case study in which various elements of the
permitting process for constructing an industrial facility were outlined. As
indicated in Figure 66, the duration of the permitting process averaged 247 days
entailing 21 procedures. This is against an OECD average of 155 days and 13
procedures with the lengthiest delays associated with;
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42
Procedure 5 - Obtain consent of the project from the Environmental
Department of the Municipality – 30 days.
Procedure 8 - Obtain zoning permit – 60 days. Valid for 2 years. Statutory
period to complete is 60 days.
Procedure 14- Obtain a building permit - 37 days.
Figure 66: Construction permit timeline example within the Czech Republic
Source: World Bank report
Key economic statistics
Company tax rate of 19%, which is average for the region (Hungary 9%), Germany
(30%), EU average (22%).
GDP of US$35k pa.
Unemployment currently ~4% having halved over the last five years.
Government debt at 49% of GDP.
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Appendix: Important Disclosures
Analyst CertificationEach authoring analyst of Canaccord Genuity whose name appears on the front page of this research hereby certifies that (i) therecommendations and opinions expressed in this research accurately reflect the authoring analyst’s personal, independent andobjective views about any and all of the designated investments or relevant issuers discussed herein that are within such authoringanalyst’s coverage universe and (ii) no part of the authoring analyst’s compensation was, is, or will be, directly or indirectly, related to thespecific recommendations or views expressed by the authoring analyst in the research.Analysts employed outside the US are not registered as research analysts with FINRA. These analysts may not be associated persons ofCanaccord Genuity LLC and therefore may not be subject to the FINRA Rule 2241 and NYSE Rule 472 restrictions on communicationswith a subject company, public appearances and trading securities held by a research analyst account.Sector CoverageIndividuals identified as “Sector Coverage” cover a subject company’s industry in the identified jurisdiction, but are not authoringanalysts of the report.
Investment RecommendationDate and time of first dissemination: February 05, 2019, 09:13 ETDate and time of production: February 05, 2019, 09:13 ETTarget Price / Valuation Methodology:Euro Manganese Incorporated - EMNOur A$1.10/sh. price target is based on a NAV/share approach, applying a multiple of 0.4x to our project NPV12% of C$523m to accountfor development, permitting and finance risk. We have diluted our NAV for assumed new equity (C$10m at A$0.30/sh) over H2’19 toprogress works.
Distribution of Ratings:Global Stock Ratings (as of 02/05/19)Rating Coverage Universe IB Clients
894* 100.0%*Total includes stocks that are Under Review
Canaccord Genuity Ratings SystemBUY: The stock is expected to generate risk-adjusted returns of over 10% during the next 12 months.
HOLD: The stock is expected to generate risk-adjusted returns of 0-10% during the next 12 months.
SELL: The stock is expected to generate negative risk-adjusted returns during the next 12 months.
NOT RATED: Canaccord Genuity does not provide research coverage of the relevant issuer.“Risk-adjusted return” refers to the expected return in relation to the amount of risk associated with the designated investment or therelevant issuer.Risk QualifierSPECULATIVE: Stocks bear significantly higher risk that typically cannot be valued by normal fundamental criteria. Investments in thestock may result in material loss.
12-Month Recommendation History (as of date same as the Global Stock Ratings table)A list of all the recommendations on any issuer under coverage that was disseminated during the preceding 12-month periodmay be obtained at the following website (provided as a hyperlink if this report is being read electronically) http://disclosures-mar.canaccordgenuity.com/EN/Pages/default.aspx
Required Company-Specific Disclosures (as of date of this publication)
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Euro Manganese Incorporated currently is, or in the past 12 months was, a client of Canaccord Genuity or its affiliated companies.During this period, Canaccord Genuity or its affiliated companies provided investment banking services to Euro Manganese Incorporated.In the past 12 months, Canaccord Genuity or its affiliated companies have received compensation for Investment Banking services fromEuro Manganese Incorporated .In the past 12 months, Canaccord Genuity or any of its affiliated companies have been lead manager, co-lead manager or co-managerof a public offering of securities of Euro Manganese Incorporated or any publicly disclosed offer of securities of Euro ManganeseIncorporated or in any related derivatives.Canaccord Genuity or one or more of its affiliated companies intend to seek or expect to receive compensation for Investment Bankingservices from Euro Manganese Incorporated in the next three months.An analyst has visited the material operations of Euro Manganese Incorporated. No payment was received for the related travel costs.
Euro Manganese Incorporated Rating History as of 02/04/2019AUD0.35
AUD0.30
AUD0.25
AUD0.20
AUD0.15Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17 Jan 18 Apr 18 Jul 18 Jan 19
Closing Price Price Target
Buy (B); Speculative Buy (SB); Sell (S); Hold (H); Suspended (SU); Under Review (UR); Restricted (RE); Not Rated (NR)
Past performanceIn line with Article 44(4)(b), MiFID II Delegated Regulation, we disclose price performance for the preceding five years or the whole periodfor which the financial instrument has been offered or investment service provided where less than five years. Please note price historyrefers to actual past performance, and that past performance is not a reliable indicator of future price and/or performance.
Online DisclosuresUp-to-date disclosures may be obtained at the following website (provided as a hyperlink if this report is being read electronically)http://disclosures.canaccordgenuity.com/EN/Pages/default.aspx; or by sending a request to Canaccord Genuity Corp. Research, Attn:Disclosures, P.O. Box 10337 Pacific Centre, 2200-609 Granville Street, Vancouver, BC, Canada V7Y 1H2; or by sending a requestby email to [email protected]. The reader may also obtain a copy of Canaccord Genuity’s policies and procedures regarding thedissemination of research by following the steps outlined above.General DisclaimersSee “Required Company-Specific Disclosures” above for any of the following disclosures required as to companies referred to in thisreport: manager or co-manager roles; 1% or other ownership; compensation for certain services; types of client relationships; researchanalyst conflicts; managed/co-managed public offerings in prior periods; directorships; market making in equity securities and relatedderivatives. For reports identified above as compendium reports, the foregoing required company-specific disclosures can be found ina hyperlink located in the section labeled, “Compendium Reports.” “Canaccord Genuity” is the business name used by certain whollyowned subsidiaries of Canaccord Genuity Group Inc., including Canaccord Genuity LLC, Canaccord Genuity Limited, Canaccord GenuityCorp., and Canaccord Genuity (Australia) Limited, an affiliated company that is 50%-owned by Canaccord Genuity Group Inc.The authoring analysts who are responsible for the preparation of this research are employed by Canaccord Genuity Corp. a Canadianbroker-dealer with principal offices located in Vancouver, Calgary, Toronto, Montreal, or Canaccord Genuity LLC, a US broker-dealerwith principal offices located in New York, Boston, San Francisco and Houston, or Canaccord Genuity Limited., a UK broker-dealer withprincipal offices located in London (UK) and Dublin (Ireland), or Canaccord Genuity (Australia) Limited, an Australian broker-dealer withprincipal offices located in Sydney and Melbourne.The authoring analysts who are responsible for the preparation of this research have received (or will receive) compensation based upon(among other factors) the Investment Banking revenues and general profits of Canaccord Genuity. However, such authoring analystshave not received, and will not receive, compensation that is directly based upon or linked to one or more specific Investment Bankingactivities, or to recommendations contained in the research.Some regulators require that a firm must establish, implement and make available a policy for managing conflicts of interest arising asa result of publication or distribution of research. This research has been prepared in accordance with Canaccord Genuity’s policy onmanaging conflicts of interest, and information barriers or firewalls have been used where appropriate. Canaccord Genuity’s policy isavailable upon request.
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All estimates, opinions and other information containedin this research constitute Canaccord Genuity’s judgement as of the date of this research, are subject to change without notice and areprovided in good faith but without legal responsibility or liability.From time to time, Canaccord Genuity salespeople, traders, and other professionals provide oral or written market commentary ortrading strategies to our clients and our principal trading desk that reflect opinions that are contrary to the opinions expressed in thisresearch. Canaccord Genuity’s affiliates, principal trading desk, and investing businesses also from time to time make investmentdecisions that are inconsistent with the recommendations or views expressed in this research.This research is provided for information purposes only and does not constitute an offer or solicitation to buy or sell any designatedinvestments discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the designatedinvestments discussed in this research may not be eligible for sale in some jurisdictions. This research is not, and under nocircumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or companythat is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared forgeneral circulation to clients and does not have regard to the investment objectives, financial situation or particular needs of anyparticular person. 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