OTCQX:TLGRF | ASX:TLG
Tom Kerr, CFA: Hi, I'm Tom Kerr, Senior Equity Analyst at Zacks Small Cap Research, and welcome to another episode of our Fireside Chat Program. Today, we have the managing director of Talga Group Ltd, Mark Thompson. Talga Group is a global leader in the development and production of graphite battery materials. The company is based in Australia, but primarily, mining and production facilities are located in Sweden.
The stock trades on the Australian Stock Exchange under the ticker TLG and on the OTC Markets under the ticker TLGRF. Zacks Small Cap Research initiated coverage of Talga with a price target of $1.50 per share, and that is US$1.50 per share. Welcome, Mark.
Mark Thompson: Hi, Tom. Pleasure to be with you.
Tom Kerr: So maybe just start off with a little bit of the background of the company and its history for a few minutes, just kind of what led up to where we are today, and sort of the dynamic things that are happening right now.
Mark Thompson: Yeah, sure. I founded the company in 2010. And in early 2011, recognized I wanted to pursue the battery material space, saw batteries as being a very long-term growth area, and started looking for graphite assets around the world. Identified graphite for the anode part of the battery because it was the largest volume mineral of the battery, and also it was the most dominated by China. By 2012, we'd established ourselves in Sweden, where we found this fantastically high-grade deposit that was unique; all of the graphite flakes were battery-sized in it. And it would be perfect for that. In 2018, we produced our first battery anode products, active anode material, fully coated downstream, and started creating our own processing technology, which is 100% owned. We published various studies, of course, going from scoping and up to DFS, final engineering and design studies as well, and built Europe's first ever coating.
Meantime, we've been permitting both the mine and a refinery. It's a fully integrated project in Sweden. We're still based here in Australia as an admin center and on the ASX, but we also now trade in the US, and we've got plans to expand into the US. But most of our operations are in Europe. We're in Sweden, and we have operations in the UK and also in Germany.
Tom Kerr: Great, since you've mentioned you are vertically integrated, before we get to the products and sort of the new anode refinery, maybe just talk about the mine for a little bit. Where are we permitting, final investment decision, and where do we stand on that?
Mark Thompson: You can imagine that process in Europe is extremely long and difficult, so it's quite significant on the downstream, on the anode refinery, that's fully permitted, both for processing and environmental work. Transport, logistics, you name it, it's all ready to go. The mine is actually fully permitted now for mining and environmental as well, after many, many years.
It's waiting on one permit, what's called the Detaljplan, which is sort of like a building slash rezoning permit. We actually currently do have permission to mine. Both European legislation with the Natura 2000 permit, so full environmental permitting is complete, and no further appeals are required. And the mining is also complete. The Detaljplan for construction of the actual site is just in the process of finishing up with the county authority, going to the government. And that's the last permit required, for full development of the mine for its production of about 110,000 tonnes a year of ore.
As a vertically integrated project, the whole project, mine combined with anode refinery, we're hoping to be at FID on that by mid-year. And at the same time, we'll be at FID also on the anode refinery by itself as a staged build of modules of the downstream plant, getting built even prior to the mine being ready.
Tom Kerr: You mentioned the staged approach, and you guys look at this as an integrated project: mine, refinery, and everything else involved. Kind of go over funding, what you need, the economics of it, and just sort of the rationale for doing that.
Mark Thompson: Graphite projects are really unique in that obviously the natural graphite has got benefits over synthetic graphite in that it can charge faster, it can be lower cost, it's definitely environmentally a lot cleaner, like our product, about 92% less emissions than the existing anode products out of China.
The real thing is the mid to downstream. The ability to not just purify the material, but shape and coat it decides how the graphite is priced and what it's used for. So, it's no longer a raw material. It's actually an active anode material. It's purified, it's shaped, and it's coated. You're producing something similar to what currently today is made by POSCO Chemical or Mitsubishi Chemical or Shanshan, or BTR out of China or Putailai. To play in that arena, you're very technologically refined on the downstream.
What we've found is that to qualify the material, unlike a metal, graphite is not as long as you promise to sell it to someone at a certain purity, they can agree on some price and want to buy it. Graphite's different in that it doesn't really matter what the purity is. It actually depends on how it's shaped and how it's coated, how the interior crystallinity affects the battery. Its performance in a battery is driven by the graphite in the anode, and so they have to test it first, which is called qualification. They start with, say, one kilo; they end up moving up to tens to hundreds of tonnes, and then going into production. It's actually one continuous process from piloting to demonstration plant to commercial production. And during that time, you're actually providing customers the whole way through with their product to the point where they're just agreeing to now take it off your commercial line, the way they were taken off your demo plant, which is the way they were taken off the pilot.
It's quite difficult management insofar as it's not binary and you can just plan it and then just go build it. You actually have to build these intermediate stages as well in reality.
Tom Kerr: For people who aren't familiar with the industry, the end product is an anode. Maybe just describe that flagship product and who buys that?
Mark Thompson: Talnode, yeah. Because we're truly fully integrated from the mine to the downstream anode, we actually make what some people call CSPG, which stands for Coated Spherical Purified Graphite, or is also called technically active anode material, meaning it's the part of the graphite anode that interacts with the lithium and does the energy storage.
It's the bit that does the heavy work and forms the lungs of the battery. Graphite absorbs electrons essentially and breathes them back out again every time you're using a battery. That's why it's so critical to performance. Our material we make, especially, is good at fast charging, meaning that it's a really high-power anode product. So Talnode is our trademarked family of battery anode products, meaning they're fully ready to use in a battery.
Our customers are battery cell makers. So that is your Panasonic, that's your CATLs, that's your ATLs, that's your Gotion, that's your SK, that's your LG, that's your Samsung, that's your FAAM, that's your Saft, that's your Verkor, who are getting into the startups that are making it like ACC, obviously, who we have some offtake materials with, and Nyobolt, who make special high-performance battery cells. We've recognized for a long time that there's a trend towards faster charging. There's an energy storage demand for AI, which needs faster performance. You need it if you've got limited amounts of solar or wind on the grid, but you need to recharge these batteries faster and have a higher work-to-charge time, which means you want to charge faster with less heat, and then you've got more work – your work-to-charge ratio.
And this applies also to robotics, somewhat less so to drones, but drones need high power. Essentially, then you've got large market segments, which are premium pricing, focused on high performance. And the high performance isn't just energy density for distance, like you get in a car. It's more about the speed of the power going in and out. So that's what we specialize in with Talnode-C. That's what that is.
And then we've got Talnode-R, which is a recycled anode product, which is where we take the graphite from people that recycle batteries, they get all the metals out, they can't deal with the graphite because it's not a metal, and we put that into our same technology and it purifies it and brings it back into anode and that makes essentially a longevity battery product for say the car market, which is a different pricing structure.
We're probably somewhat unique in the world in being not only fully vertically integrated, but we've already built a plant that's been running now for nearly four years that makes this material and already has finished qualification with various customers. And there's binding offtakes for that with some of them, and others that are under negotiation. It's a family of anode products that we make; we don't have to sell a basket of leftover industrial products. It all ends up in the final product.
Tom Kerr: I think it's important for investors to understand that although the mine isn't operating, you guys have a stockpile where you can develop this in the current test mine and in the future mine. Maybe explain the stockpile that exists really quickly.
Mark Thompson: To add flexibility, we conducted some trial mines, and we've actually got stockpiles of just under 30,000 tonnes of graphite ore. We've been processing that through toll parties, making a concentrate, and then we take it to our facility to purify and make the final anode product.
We've scaled up all the way from the lab in 2018 to in 2021, having gone through the pilot stage and then going into the demo plant, qualification plant stage. That stage is now coming to an end over the next year, where we can now start building the first commercial plant. The commercial refinery design is just under 20,000 tonnes a year, and it's in modules of lines of 5,000 tonnes. We're working towards getting the first 5,000 tonnes of commercial production there. It may not sound large, but it's technically extremely difficult to do.
And it's been the sort of missing part of the mid to downstream that the, shall we say, Western companies have not been very good at, which is that we're good at mining. Sometimes we're good at some chemical downstream, like the next stage of upgrading. But the final part, where you make essentially a pharmaceutical or food-grade product. It's not just battery grade, but it's coated to the point where someone gives an eight-to-10-year warranty for it in their battery. That's normally only been done in Asia in the decades. And there aren't many people who can make that in the West. And that's the product that we make from our own tech, our own processing tech that we developed ourselves.
Tom Kerr: I know you guys are working on a lot of those, and those are essential to the process. But are those sorts of requirements required for financing packages? Are those essential to get those approved?
Mark Thompson: Yes and no. They're essential if you've got commercial debt involved and things like that. There's a certain level of binding agreement that you want. For some people, where some of the financing is coming from within the customer, there may be some more flexibility around them. There's a big difference between the product application.
So if it's, say, a car model that has to run for an eight-year product cycle, then that offtake will be different from a drone or a robot or something that's got a shorter product cycle. In general, you certainly want to target over 70%, say, of your material to be under some sort of offtake. That offtake, though, is only proven by making the material itself. I'm talking about making the final end product. It would be the equivalent of a lithium mine selling an actual electrolyte product directly to the battery market. If you imagine what would be involved in retailing an electrolyte to the market. That's the equivalent of what we do in graphite anode. But that's where the margins are. And that's the bit that no one has been doing in the listed company space, or at least very successfully. That's what Talga has been specializing in.
Pretty much everything we do is product-based. So you measure the batteries, your performance of your material is all measured from the battery, and then you take it back. And so we've actually adjusted all our technology and all of our processing, and everything we do up in the mine site is actually all dominated by the performance characteristics we get from the batteries with our material, if that makes sense.
Tom Kerr: You guys have been very successful at getting EU grants or EU loans or climate-related loans, so sort of summarize that for us, what do we have so far?
Mark Thompson: Yeah, so importantly, graphite's a critical and strategic mineral; it's defined as a project that has actually been defined legally as a strategic project for the EU underneath the Critical Raw Materials Act and also under the Net-Zero Act within the EU. And this is supposed to provide various benefits in permitting and development but also helps sustain applications for grant funding. The grant funding that we're applying for in Europe has been at an EU level, from the innovation side of things that we're creating with new technology. We're creating more efficient ways to make anodes than are currently being made in the world, with not only low emissions, but low costs as well. So we've managed to be awarded 70 million euros, which is the equivalent of about US dollars, as a grant from the EU Innovation Fund.
We've also, from the Swedish Energy Agency, we've applied for a project that is the startup of our commercial project at a cost of about 300 million euros. And of that, the first 100 million would be ascribed to Talga or potentially awarded to Talga. We've scored the first part of that, which is 8 million. We're waiting on the balance of it to be decided at the end of February.
Then, separate from that, the European Investment Bank has pre-approved up to 150 million euros in concessional debt for us. There's also a grant funding program that we've previously been doing in the UK, which is very successful. And also, we are applying for more grants throughout Europe, and we will also be working with grants in the US expansion strategy as well.
Tom Kerr: Okay. Great. Probably the most important question of this interview is industry dynamics, particularly in China. China dominates the graphite anode supply chain, and almost to, I mean, you can talk about the percentages but just talk about how critical this project is relative to not relying on Chinese sources.
Mark Thompson: So the global graphite market used to be about 2 million tonnes a year. About half of it was synthetic graphite made from fossil fuel products that get cooked to very high temperatures, a very highly emission process, a very energy-intensive process, and still is. And then the other half was natural graphite, which went into thousands of different uses. It's only in the last two or three years that battery demand has now overtaken industrial demand for the first time in 400 years of this commodity.
And so more graphite today is going into battery materials than is going into industrial purposes. And it's growing exponentially. It's growing really rapidly. So in that time, China has been building overcapacity. They've been using state funds, and the state has been taking over some of the natural graphite fields in the north, like in Heilongjiang and down in Hunan province. And what they've been doing is flooding the market, dropping the prices.
It's allowed for cheaper batteries in China. It's also kept companies, listed companies around the world, from starting up new projects. So there really hasn't been anything new built. The Chinese demand is actually also the largest in the world for batteries. So they're now the largest market for batteries in the world, both for EVs, battery energy storage, military purposes, you name it. So while their demand goes through the roof, they've sucked up most of their capacity now.
Just in the last quarter, we've seen graphite prices start to rise pretty much for the first time in 10 years. They probably control about 99% of the anode market, meaning what goes into the battery. And when I say that, you'll see data that says they only make 70% of the graphite. That's 70% natural graphite. They also have a huge amount of synthetic graphite capacity.
If you get anodes made in Japan or Korea, they're actually being made usually from a Chinese source of material. So in reality, China's 99% of the market. And yet there's really been no downstream active anode material being made by external companies. They're just trying to get going in the last few years. Talga has been very successful at it. And we're the only company in the world, as far as we can tell, that uses its own technology. So now that China has clamped down on exports of not only synthetic graphite and natural graphite, but they’ve also clamped down on the equipment and the technology to use those. So if you are an anode-making company and you're using any of their technology or processing equipment, it means that if you want to expand, you may have problems getting more of that equipment, for example. So you're going to have to rejig your processing, which means you're going to probably have to re-qualify your material as well.
So there are some challenges about the world creating non-Chinese suppliers. And as long as you're freely getting material from China, which they all do at the moment, then no problem. But as we saw recently, when China threatens to turn the tap off or does turn the tap off with new legislation, then the rest of the world gets zero. I mean, it's totally binary. They have no other suppliers, and that's why they panic. So that's why there needs to be an investment in graphite anode making, in the actual anode being made in the outside world, not just the mining.
Tom Kerr: You can see why the Talga projects are really, truly critical, and compared to you know, almost the entire western world is depending on you guys.
Mark Thompson: Yeah, Tommy, it's not just about the mines, right? It's actually about the tech. It's about can you make an anode? You can make all the graphite you want. If someone can't make a fully coated active anode for a battery maker, then you still haven't diversified your supply.
Trillions of dollars of investment, the entire economy of lithium-ion batteries, rechargeable batteries, is entirely based on graphite anode. So it is the least invested and least known supply chain. Being not a metal makes it a bit more complicated to get your head around, and yet it is the one stick holding up the entire mountain at the moment of any battery-powered technology.
Tom Kerr: And speaking of Western countries, I know you've got some recent developments about expansion or projects in the US.
Mark Thompson: Yeah, it's been really exciting to see the developments in the US where they're starting. The government policies are recognizing from a defense point of view that every single one, whether it's a fighter jet or a laptop being used in the field or night vision goggles, they're all actually running on Chinese graphite anodes, and they didn't seem to realize that. They sort of thought that if they bought a battery in America or Japan or Korea, or Switzerland that it was actually made there. Batteries are assemblies. They weren't manufactured there. All the stuff was being manufactured in China and just assembled somewhere. So, there was a weakness in that supply chain that they only just became aware of, amazingly.
We took ourselves into the graphite space, into the battery space, 14 years ago now, just for this purpose. We thought it was obvious, and our investors thought it was obvious. Eventually, it's taken that long for everyone to get it. But the US policies have been quite supportive of things getting built there for that and spreading into the rest of the electrification story over time.
So about six months ago, we discovered that we could recycle graphite anode, which meant that for the first time we could have downstream anode production based on any one source of graphite, including black mass suppliers from battery recycling. So that gave us the ability to essentially say, hey, why don't we just copy our downstream anode refinery, and we could put one in the US, for example. We know exactly how it works. We know what it costs. We know how much it produces. We know what it will produce. Is there a market there for it?
And so, we've been working in America for the last couple of years, sniffing around a little bit, starting with IRA under the Biden government, more recently under the Trump government, looking at the DOE, DOD-type funding opportunities, and also the demand. And it looks pretty good. We have started a partnership in South Carolina, and we've been up in DC, and there seems to be a very high interest in both us coming to America to build production, potentially America coming to our project in Sweden to be involved in some way, both the stockpiles or the mine itself. So yeah, there seems there's an opportunity, and that's because North America strangely doesn't have a lot of graphite capability. Exxon has recently moved into the synthetic graphite space and taken over a local company, so they're getting into it. Mitsubishi Corporation is getting into it on the synthetic side.
But on the natural side, it's been a bit of a struggle for people. Either the projects are at a very early stage, or they rely on sources that are far away in other countries. Sweden is not very far away, and it's a NATO country already. So, everything works out pretty well. So yeah, we're investigating, shall we say, with great commitment, the opportunity in America.
The opportunity is basically to build a copy of our Swedish operation there. It would produce about 20,000, 24,000 tonnes of anode per year. The financial metrics would reflect what we did in our DFS some years ago, which was an output of about 170, 200 million a year in revenue. Obviously, huge potential to grow. We have studies going all the way up to 50 times our current planned output, but we want to walk before we run and make sure everyone's logged into that equipment, logged into that material, and using it, then you can expand into that.
Tom Kerr: Yeah. A company with your advanced technology should be part of the battery belt. Some viewers may not recognize that the southeastern part of the United States is sort of the forefront of battery technology. The Carolinas and a few other states.
Mark Thompson: That's why we like it. We work from fundamentals on where's the power, what does it cost, what sort of sites are available, what's the permitting regime like. These are chemical rather than thermal type plants, so they need to be somewhere where you've got access to water. In places like South Carolina, you have an extremely supportive state government, as a lot of them are in the battery belt. Certainly, there are a lot of customers there.
We liked the battery belt in the East quite a lot. Power costs can be very, very good for the Western world. Not as good as in Sweden, but they're very, very good compared to the rest of the world, far better than Australia, and most of the rest of Europe is in the battery belt. So, Georgia, North Carolina, South Carolina, those areas. We're still reviewing individual sites, but so far, we do like that area a lot, and up and down the battery belt has got many, many opportunities, many partners that we already work with. They've already tested our material in different countries and on different continents. It looks like it's coming together to be a really big '26 for us.
So, currently we're working very hard on getting the first production going in Sweden. Pulling together the funding package in the next couple of months that by mid-year, we're in a position to actually push the button on going ahead to start construction with the first commercial-scale lines in Sweden. At the same time, we're copying that over. It's a very low-cost cookie-cutter approach to saying, well, we can just copy it over and just see what the local conditions are.
So, commissioning studies on the American opportunity and continuing to seek counsel and engagement with the US government about what exactly they need, who else in the supply chain are you working with exactly? Obviously, EVs there are much slower than the rest of the world and will not be that supported going forward, but there are some. The new legislation just came out a few days ago, stating that advanced batteries for military purposes have to be guaranteed more than 95% China-free, not only in the materials, but the technology. Because we put together our own technologies for our anode-making process, we don't use standard Chinese processes. We created our own, which frankly was to cope with our different graphite ore body, but also, we were a bunch of science geeks and techno people who thought that long term this was a good idea. We've always thought strategically about these things, but it's only been valued more in the last six months.
Tom Kerr: Great. Any closing comments or important information that we may have missed?
Mark Thompson: As usual, I'd fly the flag to say how undervalued we are and all that sort of thing. But, no, I'd also probably state that for quite a few years now, we've been very, very hamstrung by bureaucracy and administration being so slow around permitting. That's all to an end now. And I think we've also made a lot of investments in the tech, which are now able to spread around the world and make a much bigger pie than we had before.
I'm feeling very genuinely confident about the support we're seeing financially that the governments are getting more involved in financing. That takes away the weight from the equity market and leaves it more to essentially a grant-led funding strategy with some sort of trying to get away from equity capital markets going forward. But no, we think Talga is in great shape. We're going to have a massive year.
Tom Kerr: Sounds great. Thank you so much for your time. To read all of our reports at Zacks SCR, you can go to scr.zacks.com as well as our social media channels. And you guys can go to the company directory at talgagroup.com. And that concludes our fireside chat. Thank you so much.
Mark Thompson: Thanks, Tom. Good to see you. Cheers.
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