Hallgarten & Company: Coverage Update for Manganese X Energy Corp.

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Hallgarten & Company: Coverage Update for Manganese X Energy Corp.

Multitrade/Hallgarten

By Christopher Ecclestone

[email protected]

Manganese X Energy

(TSX-V: MN, FSE: 9SC, OTCQB: MNXXF)

Strategy: Long

Manganese X Energy

Momentum Regained

Pros

- The battery space has lifted off again since 2020, after a period of quiescence after the enthusiasm of 2017

- Maiden resource on Battery Hill came out in July signaling 34.86 million tonnes of Measured and Indicated mineral resources grading 6.42% Mn, plus an additional 25.91 million tonnes of Inferred mineral resources grading 6.66% Mn

- Sensitivity analysis, utilizing a cut-off grade of 7% Mn, indicates 12.25mn tonnes of Measured & Indicated mineral resources at 8.77% Mn and 10.61mn tonnes of Inferred mineral resources grading 9.05% cent Mn,

- Manganese Flake prices have soared over the last twelve months reaching levels not seen since 2010

- Electrolytic Manganese (EMM) production outside China is minimal providing an opportunity for Manganese X to become one of the few Western players in EMM

Cons

- Project is early stage therefore priority will be publishing a PEA and proving up the potential for production

- Chinese dominate the EMM space and can move the price up (or down) at will

The Strategic Role of Manganese

With no current supplies of Manganese in the US or Canada, and battery-grade Manganese processing capacity held in a headlock by China, the US ambitions in the EV space are essentially at the mercy of taking whatever scraps the Chinese feel inclined to sweep off their table. The US is reduced to the status of a Manganese scavenger unless it has access to not only non-Chinese sources of ore (which it has in Gabon and South Africa) but also, and more importantly, regional Manganese Sulphate (MnSO4) sources.

With the strategic stockpile starting to rebuild holdings of EMM, for the first time since 2004, there is clearly rising concern in Washington. It needs more though than just ferreting away a few months’ worth of consumption. It needs a complete North American supply chain.

Solutions that involved Electrolytic Manganese Dioxide (EMD) open up the interesting possibility that EMD, the production of which is currently dominated by China, might be tempting as an alternative within China in light of that country’s lack of guaranteed Cobalt supplies.

In terms of environmental and cost considerations, EMM/EMD is likely to maintain its advantages as an energy material for the future generation, as it has been in recent decades.

Manganese X seeks to move into the empty space for North American production and has been developing its Battery Hill project while also evolving technologies to enhance recoveries and processing of the ore.

In this note we shall review the most recent developments and strategy evolution at the company over the last twelve months.

Battery Hill

The property covers a significant portion of the known historic Manganese-bearing horizon(s) in an area approximately 6.3km northwest of the town of Woodstock, southwestern New Brunswick.

Subsequent to Manganese X obtaining the asset, the project has grown to be comprised of Mineral Claim 5816 and Mineral Claim 5745 (63 claim units in total) that cover approximately 1,407 hectares of surface area. Both mineral claims are 100% owned by Manganese X.

The USA-Canada border is approximately 12 kilometres west of license 5816. Route 95, a twinned highway running from Woodstock to connect to the US interstate I-95 highway, is located approximately 3 km south of the claims.

Geology

The Woodstock manganiferous banded iron formations (BIFs) are known to be one of the largest Mn resources in North America and were mined as a source of iron from 1848 to 1884. Six major ferro-manganiferous bodies were identified by gravimetric surveys (circa 1954). The strike of these BIF's extends from Jacksontown to Plymouth, western New Brunswick, and similar deposits are known to occur nearby in Maine.

Three of the main historic Manganese occurrences plus at least two additional showings are located on claims of license 5816. Starting from the south, the Moody Hill occurrence was reported in 1957 by Sidwell (the area manager of Stratmat, that held the project at that time) to contain an estimated 9,072,000 tonnes, the Sharpe Farm occurrence an estimated 7,257,000 tonnes and the Iron Ore Hill occurrence 22,680,000 tonnes, all of an estimated average grade of 13% iron and 9% Manganese. These estimates are obviously not NI43-101 compliant.

North of the Iron Ore Hill occurrence approximately 2 kilometres, the Maple Hill showing is reported to have grades of 13.9% iron and 6.97% Manganese. Located a further 1.5 kilometres north of the Maple Hill showing, at the far northern end of license 5816, the Wakefield Showing is reported to have tested 20.9% iron and 8.86% Manganese.

Houlton Manganese Globex

Exploration Results under Manganese X

Since Manganese X acquired the Battery Hill project it has completed gravity and magnetometer ground geophysical surveys, three programs of core drilling that total 53 holes (9697m) plus a robust program of metallurgical investigation.

In mid-February 2017 the results from the first diamond drill program were released. That program consisted of 16 holes totaling 3,589 meters, and was designed as an initial evaluation of three historic Manganese occurrences on the property (Iron Ore Hill, Sharpe Farm and Moody Hill). In addition, the drill program provided core samples for metallurgical testing.

Five holes totaling 1,051 m were completed in the Iron Ore Hill sector of the property and eleven holes totalling 2,538 m in the Sharpe Farm/Moody Hill sector. Drilling was completed over a 1.8 km strike length of the prospective Manganese occurrence trend. During the drill program, emphasis was placed on the Sharpe Farm - Moody Hill sector.

In 2020, Manganese X completed 28 additional diamond drill holes totaling 4,509 m of NQ-sized core on the Moody Hill target areas. The drilling program was designed to further delineate, expand, and improve the structural understanding of the iron-Manganese mineralization on the property.

Resource

First it should be noted that management’s objective is potential future development through low cost open pit mining.

In early July 2021, the company announced the maiden Mineral Resource Estimate for the Battery Hill project, which was prepared by Mercator Geological Services Limited. The estimated mineralized ore was 34.86 million tonnes of Measured and Indicated mineral resources grading 6.42% Mn, plus an additional 25.91 million tonnes of Inferred mineral resources grading 6.66% Mn.

The Battery Hill Deposit is comprised of the Moody Hill, Sharpe Farm, and Iron Ore Hill Zones. On a contained tonnage basis the Moody Hill, Sharpe Farm, and Iron Ore Hill Zones comprise approximately 56%, 29%, 15%, respectively, of the Battery Hill Deposit mineral resource. The Moody Hill and Sharpe Farm Zones, just a few hundred meters apart contain all of the Measured and Indicated mineral resources for the Battery Hill Deposit.

The mineral resource estimate utilized a 2.5% Mn cut-off grade that reflects total operating costs having “reasonable prospects for economic extraction.” Mineral resources are defined within an optimized pit shell with average pit slope angles of 45⁰ and a 3.7:1 strip ratio.

Pit optimization parameters were:

- Pricing of US$1500/tonne for High Purity Manganese Sulphate Monohydrate – 32% Mn (HPMSM – 32 %)

- an exchange rate of CAD$1.30 to US$1

- Mining costs at CAD$6.50/t

- Combined processing and G&A costs (a 1,000 tpd runrate) at CAD$86.22/t processed

- Process recovery of Mn to HPMSM of 65%

Iron (Fe) content was not included in the pit optimization

Next Steps

With a large defined inventory of Measured and Indicated mineral resources the company intends to ramp up now to the Preliminary Economic Assessment stage. We would antiicpate this to come out in the first half of 2022.

The upcoming drill program is directed towards converting more of the Inferred resource to Indicated status on the Sharpe Farm targets. It is not expected that the pit-shell design will be expanded at this time.

Once the PEA is in hand the next target in view will be to move to a PFS, which will involve the creation of a reserve. Most likely further drilling will be required to achieve this.

Manganese Formulations

Kemetco has designed a processing flow sheet with the process focused on production of 99.95 % High Purity Manganese Sulphate Monohydrate (HPMSM) for the EV and back up energy storage sectors. This innovative process will produce HPMSM that will be devoid of selenium, the bane of some 98% of current producers. The company’s current focus is on the HPMSM market.

High-purity Manganese, also known as battery-grade Manganese, is sourced by cathode and battery manufacturers in either a metal or sulphate form, ergo High Purity Electrolytic Manganese Metal (HPEMM) or High Purity Manganese Sulphate Monohydrate (HPMSM). These products are produced by a handful of producers globally (of which only three companies are located outside of China). Meanwhile China supplies over 90% of the high-purity Manganese market. However, to put the nascent nature of this market in perspective, in 2020, the battery-grade market represented 0.5% of the total contained Manganese consumption.

Besides its use in battery cathodes, high-purity Manganese is also used in speciality steels, aluminium, and chemicals.

HPEMM is a 99.99% of contained Manganese, low impurity, metal.

HPMSM is a pale pink inorganic compound with typically 32% of contained Manganese. The chemical symbol of this low impurity salt is MnSO4·H2O.

The forecast demand for Manganese in NMC and LNMO battery formats is weighted towards HPMSM in preference to HPEMM.

Source: Cairn ERA

It is possible to make HPMSM directly from ore (carbonate, semi-carbonate or oxide) as is done in China. Alternatively, HPMSM can be dissolved from EMM. The economic viability of each operation is influenced by a number of factors such as; cost and access to electricity, cost of acid, access to infrastructure, soluble Manganese grade, ore impurities and metallurgy.

Traditionally precursor and cathode manufacturers purchased HPEMM and dissolved it in acid to produce HPMSM. This was done to maintain purity levels, however this comes at a significant cost. It is therefore more economical to manufacture HPMSM directly from ore, if metallurgically feasible.

Likely Demand

Electrolytic Manganese Dioxide (EMD) is a vital ingredient in the production of alkaline batteries with total annual production capacity estimated by the International Manganese Institute at roughly 430,000 mt. Battery consumption of Electrolytic Manganese Dioxide (EMD) has been predicted to be fastest growing segment of Manganese production with a CAGR of 5.1% from 2015 to 2022.

Pricing

The devastation caused by the Virus Crisis did not spare the Manganese market in the first half of 2020. Most of the downward pressure could be ascribed to the kneejerk reaction that afflicted all metals, but in the case of Manganese, demand for its applications in construction steel alloys was temporarily depressed during the government-imposed lockdowns to curb the spread of new COVID-19 cases. This has largely bounced back as economies have returned to some semblance of normality.

On the battery front demand continued to power up from the second half of 2020 and still battery usage is not of the volumes to counteract negative tendencies in construction and other usages.

The reactivation has lifted the price of Manganese in all its formulations. The chart below shows the price specifically for EMM min 99.7%, fob US warehouse, US$ per lb, with EMM having a small spike and slump around the time of the first COVID sightings but is now way way higher than it had been pre-pandemic and is clearly marching to the beat of another drum.

Source: Argus Metals

Risks

Amongst the risks at the current time are:

- Manganese price risk

- Chinese price manipulation to the high or low side

- Being superseded by new technologies

- Financing is still tenuous and dependent upon sentiments towards other metals, such as Lithium and Cobalt

- New Brunswick is a tough jurisdiction with a past history of Greenie/NIMBY issues

With the price for Manganese Flake is on a tear reaching levels way above the five-year average therefore a price retreat must be the biggest risk at the current time. The secular growth in battery uses for Electrolytic Manganese seems assured for the foreseeable future and thus any breakthrough mass adoption of LMD battery styles would be an added boost.

The company currently has good relations with New Brunswick and local communities. It seems a sense of reality is finally arriving here as jobs become an over-arching issue.

The Chinese currently have a stranglehold on the EMM space so it will be interesting to see whether they try to earn more from their unique position or sink the price to ensure that interlopers are scared off (as per their actions in the Rare Earth space).

The company also anticipates potentially recovering lower grade Mn to produce additional products such as those used in the agricultural industry.

Conclusion

With the rise of EVs the developers in the battery-grade Manganese (mining) space are few and far between. Increasingly the hunt for enhanced economics in EV production will mean that cheaper, more secure and more efficient battery formulations will be required and Manganese might well be the secret sauce to make EV economics more palatable to the mass market.

The battery metals surge of 2017 proved to be too much too early. While China was rapidly evolving the Western consumers sat on their collective hands feeling no compulsion to make the switch. With government fiat coming into play with deadlines for conversion to EV formats the OEMs finally started to grasp the nettle and from 2020, the EV revolution has started to gain traction and prices of battery metals (and the companies aspiring to mine them) have followed an upward trajectory.

Manganese X resolved to join the fray in 2017 with a rapid-fire campaign to stake out their space in the marketplace for EMD. Exploration results were then topped with the advancement of the project to develop an improved process for the upgrading of Electrolytic Manganese and in recent weeks a maiden resource.

Manganese X has identified a niche that potentially steals the thunder of the hard-to-source Cobalt with the goal of being the only Manganese producer in the US/Canada. Next up is the PEA which should give an idea of the likely capex and the potential economics.

Therefore we reiterate Manganese X Energy as a Long call and our twelve-month target price of $0.75.

Important disclosures

I, Christopher Ecclestone, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers.

Hallgarten’s Equity Research rating system consists of LONG, SHORT and NEUTRAL recommendations. LONG suggests capital appreciation to our target price during the next twelve months, while SHORT suggests capital depreciation to our target price during the next twelve months. NEUTRAL denotes a stock that is not likely to provide outstanding performance in either direction during the next twelve months, or it is a stock that we do not wish to place a rating on at the present time. Information contained herein is based on sources that we believe to be reliable, but we do not guarantee their accuracy. Prices and opinions concerning the composition of market sectors included in this report reflect the judgments of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer to sell or as a solicitation to buy securities.

Hallgarten & Company or persons associated do not own securities of the securities described herein and may not make prchases or sales within one month, before or after, the publication of this report. Hallgarten policy does not permit any analyst to own shares in any company that he/she covers. Additional information is available upon request.

Hallgarten & Company acts as a strategic consultant to Manganese X Energy Corp and as such is compensated for those services, but does not hold any stock in the company, nor has the right to hold any stock in the future.