Announcement PDF ANNUAL REPORT Annual Financial Report For the year ended 30 June 2023 Element 25 Limited ABN 46 119 711 929 ASX E25 element25.com.au 2023 ANNUAL REPORT | 1 2023 The future has always been electric... 2 | 2023 ANNUAL REPORT TABLE OF CONTENTS Chairman’s Letter 05 Principal Activities and Review of Operations 06 Directors' Report 18 Audit Independence Declaration 28 Corporate Governance Statement 29 Consolidated Statement of Profit or Loss and Other Comprehensive Income 30 Consolidated Statement of Financial Position 31 Consolidated Statement of Changes in Equity 32 Consolidated Statement of Cash Flows 33 Notes to the Consolidated Financial Statements 34 Directors' Declaration 64 Independent Auditor’s Report 65 ASX Additional Information 70 Corporate Directory 73 2023 ANNUAL REPORT | 3 Highlights Feasibility Study (FS) demonstrates compelling economics for E25’s proposed first ever US-based battery-grade, high purity manganese sulphate monohydrate (HPMSM) facility. HPMSM is required for the production of pre-cathode active materials (pCAM) used in electric vehicle batteries, with US EV demand expected to grow 12x by 2030. HPMSM is an increasingly important critical battery raw material as global battery technologies make the shift to higher manganese content to achieve improved cost, safety and performance metrics. E25’s proposed Louisiana-based facility is positioned to be a leading US source of HPMSM after commencing production in 2025. Offtake and financing agreements signed with Stellantis N.V. (Stellantis) and General Motors LLC (GM), providing US$115M in project financing via equity, pre-payment and debt. Stellantis and GM transactions combined offtake commitments cover approximately 65% of Train 1 plant output. First tranche of Stellantis funding completed (US$15M at A$1.00 per share) to take a 10.2% shareholding in Element 25. Stellantis is now the Company’s largest shareholder. Pilot plant testing confirms Element 25 flowsheet as technically robust, delivering high quality HPMSM samples for final product qualification with offtake partners. Independent Life Cycle Assessment confirms industry leading ESG credentials - E25 HPMSM calculated to produce ~1.7kg of CO2 for every 1kg of HPMSM, approximately ~ 67% lower than competitors in China and ~26% lower than closest non-China optimised case. Commenced trading on the US-based OTCQX® Best Market under the symbol “ELMTF” to improve liquidity and provide greater accessibility for global investors, particularly in the US. Continued work to optimise manganese production at Butcherbird Manganese Mine (Butcherbird) in the Pilbara region of WA in including engineering and design for the proposed plant expansion to a nominal 1Mtpa. Dense media separation (DMS) trials confirmed DMS as the likely technology for final stage beneficiation. 4 | 2023 ANNUAL REPORT Chairman’s Message Dear Fellow Shareholders, It gives me great pleasure to present the 2023 Annual Report for Element 25 Limited (ASX: E25) as we reflect on our achievements and our progress towards becoming a high purity manganese producer over the past year. Delivering our Feasibility Study examining the viability of the first United States-based high purity manganese sulphate production facility was a critical milestone in our journey, and the results of this were incredibly encouraging. The FS demonstrated pre-tax cashflow of US$155 million per annum at full production, with a Net Present Value (NPV) of US$1.66 billion pre-tax at full production with an 8% discount and an Internal Rate of Return of 29%. The study’s robust financial outcomes provide us with a really solid case for becoming a key supplier to the battery raw materials supply chain in a strategic location. Our decision to evaluate a US-based location for our initial facility was driven by increased demand from OEMs in the automotive industry, as the US Government looks to inject substantial investment into clean energy initiatives – such as electric vehicles – through the Inflation Reduction Act. We have selected a preferred site in Ascension Parish, Louisiana, and activities are underway with local engineering and construction contractors as we negotiate agreements and partnerships that are mutually beneficial, leading up to our Final Investment Decision. Core to our strategy is to partner with like-minded stakeholders, and we have demonstrated this through our offtake and financing agreements with global automakers Stellantis N.V. and General Motors LLC which we have executed in the past 12 months. These deals are critical to our ability to develop our HPMSM capacity, but also to Stellantis and GM to help them build their aspirations around electric vehicles. Manganese is one of the key ingredients automakers need to fulfill their targets in terms of electrifying the global vehicle fleet and we believe deals with such prominent global manufacturers underlines just how important our HPMSM development is to this market. Post year-end, we have completed several important steps in our agreement with GM and we look forward to finalising this as we progress our Louisiana plans. With the first stage of our strategy complete, we are working towards expanding production to 1 million tonnes per annum through optimisation, de-bottlenecking and plant expansion. We have commenced upgrades to our plant and are assessing further improvements as well as making key appointments to our team to ensure we have the knowledge and skillset to achieve this goal. I thank our Shareholders for your continued support over the past 12 months, particularly those who participated in our A$35 million capital raising in November 2022 which enabled us to continue our progress. Our share price has unfortunately not reflected all that we have achieved and the partnerships we have forged with global brands but I am confident this will improve as our HPMSM plans continue move ahead. I also thank the members of our management team for the continued hard work and dedication each of them has demonstrated, as well as my fellow Directors for their efforts, including our new Board additions, Fanie van Jaarsveld and Sam Lancuba, who have both brought extensive industry knowledge and business development experience to our Board. In the year ahead, our priorities are dual pronged as we want to grow the business through the downstream processing of the ore into manganese sulphate while also expanding concentrate production at Butcherbird to improve performance and economics of that part of our business. These strategies are complementary and will help us be a pivotal player as demand for high purity manganese continues to grow. We have the funds and partnerships in place to achieve this, and I look forward to reporting on our progress and achievements in FY24. Seamus Cornelius Chairman Element 25 Limited In parallel to our HPMSM development, we have continued to optimise our operations at Butcherbird mine in Western Australia. We will use manganese ore from Butcherbird in our HPMSM strategy, enabling us to deliver a mine-to-market solution, and as it hosts Australia’s largest onshore manganese resource of more than 260 million tonnes, it provides opportunity for a multi-decade expansion pathway. 2023 ANNUAL REPORT | 5 Review of Operations KEY OPERATIONAL MILESTONES FOR FY2023 HPMSM Project • Feasibility Study (FS) demonstrates compelling economics for the proposed first ever US-based battery grade high purity manganese sulphate monohydrate (HPMSM) facility. • Offtake and financing agreements signed with Stellantis N.V. (Stellantis) and General Motors LLC (GM), providing US$115M in project financing via equity, pre-payment and debt. • Independent Life Cycle Assessment (LCA) confirms industry leading ESG credentials - E25 HPMSM calculated to produce ~1.7kg of CO2 for every 1kg of HPMSM, approximately ~ 67% lower than competitors in China and ~26% lower than closest non-China optimised case. • Heavily oversubscribed A$35 million Placement completed to fund HPMSM feasibility, engineering optimisation works and costs, and working capital. • First tranche of Stellantis project funding completed (US$15M) for HPMSM process design and engineering. Butcherbird Manganese Mine • Manganese concentrate production of ~223,000 tonnes. • 280t bulk processing trial using an established production dense media separation (DMS) plant confirmed DMS as the preferred processing technology for Butcherbird’s expansion. • Trialling a secondary feeder to significantly debottleneck front end feed rates at Butcherbird which provided immediate and material throughput improvement. • Successful pilot scale testing of the proprietary E25 process flowsheet as a key Feasibility Study input. Overview Element 25 Limited (E25 or the Company) operates the Butcherbird Manganese Mine (Butcherbird) in Western Australia’s Pilbara region. Butcherbird hosts the Australia’s largest onshore manganese resource with current JORC resources of more than 260Mt of manganese ore1, and is located 1,050km north of Perth and 130km south of Newman. The Company plans to integrate renewable energy into Butcherbird’s power solution in Stage 2 operations to target a zero-carbon footprint, which is expected to also reduce energy costs. E25’s goal is to become an industry leading, world-class, low-carbon battery materials manufacturer, producing high quality manganese concentrate and battery grade HPMSM products for traditional and new energy markets. The Company plans to develop HPMSM production capabilities in multiple global locations and in April 2023, it delivered a FS which delivered compelling economics for the proposed first ever HPMSM facility in the USA to supply critical battery raw materials to the US electric vehicle (EV) manufacturing supply chain. E25 also commissioned an independent LCA for its HPMSM production process which confirmed the mine-to-market carbon footprint for the production of E25 HPMSM as the lowest in the global manganese industry based on published data2 . The Company’s strategic vision can be summarised in four key stages: STAGE 1 STAGE 2 STAGE 3 STAGE 4 Stage 1 365Kt per annum: In production and optimising processes Stage 2 1 Mt per annum: Engineering optimisation cost study in progress 365Kt per annum: 1 Mt per annum: Battery grade MnSO4: MnSO4 Expansion: 3 Stage 3 Battery grade MnSO4: Feasibility study completed in April 2023 Engineering optimisation Long term – multiple In production and Feasibility study Stage 4 MnSO4 Expansion: Long term – multiple HPMSM modules globally cost study in progress HPMSM modules optimising processes completed April 2023 1 2 3 E25 ASX Announcement 17 April 2019 E25 ASX Announcement 21 February 2023 E25 ASX Announcement 12 April 2023 6 | 2023 ANNUAL REPORT E25’s export business continues to demonstrate the Company’s reliability as a trusted supplier of manganese concentrate to global markets, at a time when commodity producers are facing extensive disruptions from a complex array of factors. Butcherbird Operations, WA Safety For the 12 months ending 30 June 2023, E25 sustained two Lost Time Injuries (LTI’s) and one Medical Treatment Injuries (MTI’s). The 12 Month LTI and MTI rates were noted as 63 and 0 respectively. E25 instigated several proactive programs including an independent audit of the Company’s Safety Management System, increased first aid training and the engagement of an external safety consultant to review safety systems in accordance with new legislative requirements. The Company implemented the WA Department of Mines, Industry Regulations and Safety’s (DMIRS) Safety Audits and is using outcomes to assist with safety program development going forward. Mining and processing Mining and processing operations continued at Butcherbird throughout the period. E25 implemented initiatives to improve operational performance, including debottlenecking the processing plant and this delivered significant improvements from the March 2023 quarter. Since commissioning, Butcherbird production volumes had been negatively impacted by clay-rich material that typifies ROM feed through the primary grizzly and crusher configuration into the downstream processing stages. The operational team worked to identify and resolve the root cause of these issues and to devise a solution. Analysis of the production data generated through plant ramp up concluded that the optimal solution was to install a secondary feeder into the plant whereby the undersize plant feed material not requiring crushing bypasses the grizzly to minimise the blockages created by clay-rich feed material. E25 installed and commissioned the secondary feeder in February 2023, resulting in an immediate and material improvement in throughput rates. Extensive work was completed on the optimisation of maintenance and uptime rates, and a specialist maintenance planner was engaged. 2023 ANNUAL REPORT | 7 Butcherbird Expansion E25 business development and production teams are actively investigating optimal processing technologies to expand production at Butcherbird to improve profitability by reducing unit costs of production as identified in earlier studies. The expansion project will utilise the past two years of operational data from the existing small-scale Stage 1 processing facility to inform the correct technology and equipment selection to expand the production of manganese concentrate to a nominal target of 1Mtpa. The basecase technology selection for the expanded plant is likely to be a DMS circuit, however other technologies are still being assessed. The technology selection will aim to eliminate any remaining bottlenecks, improve grade and recoveries, with processing data collected during the Stage 1 plant operation invaluable in guiding this process. E25 has met with equipment suppliers and engineering consultants to advance the Expansion Project, under the leadership of new General Manager (Manganese Ore Business) Gideon van Wyk. Key design parameters for the base case include: • • • ~4Mt per annum of ore feed. ~1Mt per annum of manganese concentrate production. Processing flowsheet summary: • Dry screening to remove clay waste material. • Dry crushing of material >65mm. • Attrition scrubbing of coarse and fine ore using feed using a log washer to remove further clay waste and further break down barren shales. • DMS to separate heavies (manganese) from lights (waste shales). In the first half, the Company completed a bulk Dense Media Separation (DMS) processing trial, processing approximately 280 tonnes of Butcherbird manganese ores through a DMS plant at the Bootu Creek Manganese Mine in the Northern Territory, and results indicated the use of a DMS drum could meaningfully improve manganese product grades by improving waste and gangue material elimination from the product stream. E25 will complete further optimisation of the mass balance during the design process and the key deliverables from this work will include a capital cost estimate to install the expanded facility as well as a project schedule based on lead times as advised by key equipment vendors. Team Appointments E25 made several key appointments to the Butcherbird operations team as part of its production improvement plan, including Clint Moxham as General Manager Operations and Gideon van Wyk as General Manager (Manganese Ore Business). Clint is responsible for statutory and operational oversight of Butcherbird; implementation and oversight of improved operational processes; and targeting improved run times to increase production. Logistics Ocean freight rates returned to pre-Covid levels mid-year and these are now in line with long-term forecasts. The use of supra-max vessels contributed to increased load rates at Utah Point and achieved a reduction in ocean freight rates. Increased production volumes in the second half of 2023 required additional road transport capacity and a record of ~30kt of manganese concentrate was transported in March 2023. A record of ~64kt of manganese concentrate was transported for the quarter. In the second half of 2023, diesel fuel costs stabilised from historical highs in 2022. 8 | 2023 ANNUAL REPORT High Purity Manganese Development Element 25 plans to produce HPMSM from manganese oxide concentrates currently produced at the Company’s 100%-owned Butcherbird Project via a vertically integrated battery grade HPMSM facility which will produce a monohydrate manganese sulphate with the chemical formula MnSO4H2O. The HPMSM will be suitable for use in the manufacture of electric vehicle pCAM. This is important to continue growth in the electric market vehicle sector, with US EV demand expected to grow 12x by 20304 During the year, E25 completed a FS which used a US location as the base case in favour of a previously proposed Malaysian location, with the location transition driven by legislative changes in the USA which now offer significant incentives for battery raw material production in the USA via the Inflation Reduction Act (IRA). Results of the FS confirmed the feasibility of producing HPMSM at a location in Louisiana, USA for sale to local and international offtake partners with an environmental impact that is significantly lower than incumbent producers to supply the rapidly growing electric vehicle supply chain in the United States5. The proposed project is uniquely positioned to benefit from its highly favourable location, with exceptional infrastructure, a deep local talent pool, low-cost energy, and proximity to local markets for the repurposing of by-product industrial materials to maximise circular resource use. The FS reflected conservative costing assumptions and included provisions to take into account recent inflationary pressures impacting both capital expenditures and operating costs. Table 1: Feasibility Study summary financial results Financial Summary Unit Value Capital Cost (Construction) US$M 289 Average Operating Cost/tonne of HPMSM at nameplate production US$ 1,188 Pre-Tax Net Present Value at 8% discount rate (NPV8 (real)) US$M 1,662 Post-Tax Net Present Value at 8% discount rate (NPV8 (real)) US$M 1,161 IRR Pre-Tax % 29.4 IRR Post-Tax % 25.0 Average annual steady state EBITDA at full production US$M 178 Average annual steady state after tax cashflow at full production US$M 155 E25 has developed a proprietary flowsheet which is covered by multiple patent applications for the conversion of the Butcherbird manganese concentrates into HPMSM. The E25 process improves on existing HPMSM processing currently in use by reducing energy and reagent consumption and producing solid by-products in a form that can be repurposed, maximizing resource utilisation and minimising local waste and therefore also minimising the environmental impact of the complete operation. This project scope comprises a production facility capable of producing a nominal 65,000 tonnes per annum of battery grade HPMSM per train. The FS assumed a start-up production train with a second train to be constructed in subsequent years to increase production volumes up to 130,000 tonnes per annum. The HPMSM plant will also produce re-usable material in the form of a fertiliser feedstock, a ferro-silicon (FeSi) smelter feedstock suitable for use in steel production processes and a gypsum by-product for industrial use. Independent Life Cycle Assessment An independent LCA for E25’s battery-grade HPMSM production process confirmed the mine-to-market carbon footprint for the production of E25 HPMSM as the lowest in the global manganese industry based on published data 6 . The LCA was based on data from E25’s Butcherbird operations in the Pilbara region of WA and its FS for a proposed HPMSM plant in Louisiana, USA and was compared to publicly available LCA reports from peers Euro Manganese (ASX: EMN) and Giyani Metals (TSXV: EMM), which are also developing HPMSM projects as well as independently validated data on the carbon intensity of current Chinese production methods. E25’s HPMSM process is estimated to produce just 1.7kg CO2 equivalent per kg of product, which is ~67% lower than competitors in China, and up to 47% lower than planned projects located outside China. 4 5 6 Benchmark Minerals Reference: Company ASX Release dated 12 April 2023 https://www.mn25.ca/post/comparative-lca-study-results-show-emn-s-battery-grade-manganese-products-have-lowest-co2-footprint 2023 ANNUAL REPORT | 9 Table 2: HPMSM Life Cycle Assessment published result comparison LCA Comparison for HPMSM – based on publicly available data Element 25 Euro Manganese (Grid) Euro Manganese (Renewable) Giyani Metals Units per Kg of HPMSM Scope 1 0.07 0.4 0.4 0.2 kg CO2 eq. Scope 2 0.38 3.3 0.7 1.2 kg CO2 eq. Scope 3 1.21 1.2 1.2 1.8 kg CO2 eq. Global Warming Potential 1.7 4.8 2.3 3.2 kg CO2 eq. Impact Category Perth-based consultancy Super Smart Energy completed the cradle-to-gate study, which means the life cycle has been assessed from the point of resource extraction (cradle; including pre-extractive removal of overburden and waste rock) to end gate, which is HPMSM ready for distribution7. Kg C02 eq. per kg (Contained metal basis) The study aimed to assist in project development and improvement by identifying environmental hotspots, and was completed in accordance with ISO14040/44:2006 and ISO-14044:2006 standards, with 16 Environmental Footprint 3.0 impact categories evaluated. Climate change and water scarcity footprint impacts were investigated in more detail via contribution analysis. The most significant contributors in the production of E25’s HPMSM to climate change impact are the reagents required for the process and electricity associated with the plant. The plant is initially expected to source electricity from the grid based on natural gas fired generation, which does not include optimisation using renewable energy (RE) integration. Ternary Battery Metal Comparison 28.2 17.1 13 5.1 Nickel Maganese The LCA recommended that E25 focus on sourcing RE for the plant, which is expected to further reduce its carbon footprint. Cobalt E25 HPMSM carbon intensity vs current cathode metal production. E25 intends to include RE in preconstruction optimisation work, either sourced from the grid via established RE producers or by utilising on site roof top solar and other similar technologies. Climate Change Potential Kg C02 eq. Per kg HPSM 2 HPSM plant Extraction & mineral processing Total Tranpsortation 1.5 1 0.5 7 Subtotal Intermediate ore haulage - shipping E25 HPMSM carbon intensity vs current cathode metal production. Intermediate ore haulage to port lory Reagent 3 Reagent 2 Reagent 1 Electricity HPSM plant Other Diesel mining fleet 0 There is also opportunity to consider the environmental impact of reagents by transitioning over time to reagents produced using RE and/or nonpetrochemical feedstocks. E25 will further investigate these opportunities as part of a longer term decarbonization strategy. Supersmart Energy: Prospective Life Cycle Assessment Study of Element 25’s High Purity Manganese Sulphate Monohydrate Manufacturing February 2023 10 | 2023 ANNUAL REPORT As a base case, this LCA has successfully shown the Element 25 process can produce HPMSM with the lowest global warming potential compared to all available competitors and there remains significant potential to further reduce the carbon intensity of the E25 HPMSM product. For this LCA, the functional unit was one kilogram of HPMSM at >32% manganese content and the reference flow is 1kg of HPMSM at >32% manganese content produced at the HPMSM plant from manganese concentrate extracted and processed at E25’s Butcherbird mine. The study was performed in accordance with ISO 14040/44:2006 standards 8,9. The study was based on data from the operational E25 Butcherbird mine, and work completed as part of the FS for the production of HPMSM. Background data was sourced from Ecoinvent 3.9.1 and some global averages were used for reagents, creating associated limitations to the study. The LCA study was completed by Super Smart Energy and a subsequent critical review was carried out by two independent external experts, covering the required competencies relevant to the critical review. The critical review was performed at the end of the LCA study. Offtake and funding agreements with Stellantis and General Motors In January 2023, E25 entered a binding agreement with global automaker Stellantis N.V. to supply HPMSM from E25’s proposed USA-based processing facility10. The Agreement combines take or pay offtake commitments for 45Kt of HPMSM from the facility over five years with US$30M in two tranches of project funding towards the facility capital cost. Stellantis owns 14 vehicle brands including Jeep, Dodge, Chrysler, Maserati and RAM and two mobility brands. More detail on this is included in the Corporate section of this report. In June 2023, Element 25 Limited and General Motors Co. (NYSE:GM) announced binding agreements for E25 to supply up to 32,500 metric tons of manganese sulphate annually, which will support GM’s annual production of more than 1 million EVs in North America11. Under the agreements, GM will provide E25 with a US$85 million loan to partially fund the construction of a new facility in Louisiana, USA, for production of battery-grade manganese sulphate – a key component in lithium-ion battery cathodes – a key component in lithium-ion battery cathodes – starting in 202512 . Post year-end, GM completed technical due diligence as a condition of the definitive agreement and samples of E25’s samples of HPMSM achieved successful product qualification with GM. E25 expects to invest approximately US$290 million to build the 230,000-square-foot facility. Site preparation is planned to begin in Q1 CY2024, and the plant is scheduled to open in 2025. The facility is projected to create approximately 200 permanent jobs when it is fully operational. 8 9 10 11 12 International Standards Organisation (ISO). ISO 14040:2006 - Environmental Management - Life Cycle Assessment Principles and Framework. (2006). International Standard Organization (ISO). ISO 14044: Environmental Management — Life Cycle Assessment — Requirements and Guidelines. (2006) E25 ASX Announcement dated 9 January 2023 E25 ASX Announcement dated 26 June 2023 E25 ASX Announcement dated 12 April 2023 2023 ANNUAL REPORT | 11 Manganese market Global supply chain and other disruptions due to the global COVID pandemic resulted in cost pressures on all manganese ore producers which put upward pressure on ore prices, however increased shipping costs offset the benefits. Manganese price fell to cyclical lows in the final months of FY2023. The Company’s view is that a sharp slowdown in construction activity in China in part due to unusually hot weather has impacted the demand for construction steel and related materials, including manganese. The impact on the demand for steel has had a flow through effect on manganese ore prices which are at or near cyclical lows. Under the terms of the offtake agreement with OM Materials (S) Pte Ltd (OMS), subsidiary of ASX-listed company OM Holdings Limited (ASX:OMH) (OMH) pricing is set by a formula referenced to the 44% CIF China price. CORPORATE Capital Raising In November 2022, E25 received firm commitments for a A$35 million placement at A$1.12 per share (Placement). The Placement was heavily oversubscribed with E25 management and the Joint Lead Managers (JLM’s) agreeing to increase the raise to A$35 million (minimum $30M). Funds raised from the Placement will fund the Company’s battery grade HPMSM project feasibility works, operating cost reduction capital costs, engineering optimisation works and working capital. Petra Capital and Blackwood Capital acted as Joint Lead Managers and Joint Bookrunners to the Placement. Stellantis Placement completed Conditions precedent for the first investment tranche by global automaker Stellantis N.V. (Stellantis) comprising a US$15 million share placement in E25 were satisfied in July 2023 and this transaction was completed. In accordance with the terms of the agreement, E25 issued 22,569,967 shares to Stellantis at A$1.00 per share for total proceeds of A$22,569,967. E25 will use proceeds for planned engineering and construction activities to advance its proposed HPMSM processing facility in Louisiana, USA. E25’s Agreement with Stellantis combines take-or-pay offtake commitments for 45Kt of HPMSM from the facility over five years with US$30M in two tranches of project funding towards the facility capital cost. 12 | 2023 ANNUAL REPORT Board Changes In January 2023, E25 announced the appointment of Fanie van Jaarsveld and Sam Lancuba as Directors. Both new board members bring a wealth of experience in key disciplines to support the existing board. Mr van Jaarsveld is an experienced company director and has held numerous senior management and executive positions over a career spanning more than 40 years. With a demonstrated history of working in the mining and metals industry, Mr van Jaarsveld is Managing Director for OM Manganese which operates the Bootu Creek manganese mine in the Northern Territory and highly skilled in mining, mineral processing and operational management. He has strong business development expertise and will be a key asset in achieving the Company’s production targets at the current manganese operation as well as helping to guide the planning and implementation of the expanded production plans at the Project and the downstream production of HPMSM. Mr Lancuba is a chemical engineer with more than 40 years’ experience in the global fertiliser industry. Mr Lancuba has worked in research and development, process engineering, manufacturing and management. Following 27 years at Incitec Pivot Limited, an ASX top 50 company, Mr Lancuba