Avalon Advanced Materials (AVLNF): Building North America's Rare Earth and Lithium Processing Platform

In this episode of the WTR Small Cap Spotlight, Avalon Advanced Materials CEO Scott Monteith, CFO Lorin Crenshaw, and VP of Corporate Development Chris Sinek join WTR's Tim Gerdeman and Dmitry Silversteyn to discuss the company's strategy to become a North American rare earth and lithium processing platform. The conversation covers Avalon's Nasdaq listing ambitions, a €100 million Finnvera Letter of Interest, current rare earth and lithium market dynamics, and the execution milestones that could reshape the company's valuation over the next 12 to 18 months. 

Transcript

SPEAKER_00 0:01

Welcome to the WTR Small Cap Spotlight Podcast. I'm your host, Tim Gerdeman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research. In today's podcast episode, I'm being joined by Scott Monteith, CEO, Avalon Advanced Materials, Lauren Crenshaw, Avalon CFO, and Chris Seneck, who recently joined Avalon as VP of Corporate Development. Also joining is my WTR equity research colleague, Dimitri Silverstein. Avalon Advanced Materials, OTC ticker symbol AVLNF, and TSE ticker symbol AVL is a critical minerals company focused on advancing lithium and rare earth elements, two of the fastest growing segments of the global energy transition. The company is advancing the Nechalacho Rare Earth Elements and Zirconium Project in the Northwest Territories, and is also focused on vertically integrating the Ontario lithium supply chain through the development of Lake Superior Lithium Inc., Ontario's first midstream lithium hydroxide processing facility located in Thunder Bay. So without further ado, gentlemen, good morning and thanks for joining the call.

SPEAKER_02 1:12

Morning, Tim.

SPEAKER_04 1:13

Morning, Tim.

SPEAKER_00 1:16

So, guys, to kick things off, Avalon has been around for a long time, yet some investors likely still incorrectly frame the company as simply a legacy exploration company. Over the past year, Avalon has refreshed the management team, restructured the company, eliminated debt, simplified the portfolio, and repositioned the business. That's a lot. What is fundamentally different about Avalon today that investors may not fully appreciate? And please walk us through why the company is now in a very favorable position to execute on your business strategy.

SPEAKER_02 1:48

Thanks, Tim. I'll take that question. So Avalon Advanced Materials today is fundamentally an execution-focused, debt-free midstream, and critical minerals platform moving away from its legacy as a highly diluted junior explorer. We uh today we are um some things that investors may not yet appreciate is that we have a zero debt balance sheet right now as a result of various moves over the past uh several quarters. Uh we have a normalized capital structure. We've dropped from uh hundreds of millions of shares outstanding to to to uh to uh in the in the five million-ish range, uh which uh which allows us to uh can contemplate a NASDAQ listing in the fall. We're excited about that. Uh and we're we're more of a pure plate portfolio. We are we're really focused on critical minerals rather than five or six different um um resources. And uh, you know, it's it's really we transitioned from being uh a junior mining model, which was really geologically focused, to being an operational model. We um we today, instead of a company that owns a bunch of resources, we're a company that is actually a holding company that owns two main assets. One is a lithium hydroxide refining asset, the other is a rare earth mining and refining asset. Uh, we're really focusing on the midstream processing, that's important. That's really my background and Lauren's background and Chris's background, as well as several other people in the company. Uh, we've transitioned over the over the past several years to being more of a tier one institutional leadership platform. With my background in operations and industry, it's a whole new ballgame for Avalon. And bringing in uh Chris as well, you know, he comes from big corporate operations and uh Corp Dev. He's a big ad to the company. And with Lauren, Lauren Crenshaw and uh PJ Juvicar joining the board, we're bringing in uh you know capital markets institutional leadership, which really adds to the uh the whole um uh ESG platform. And we have a dedicated project delivery team. We have offices now in Thunder Bay, which is driving the lithium hydroxide refining asset, which we call Lake Superior Lithium Inc., Leslie for short. And we've opened an office in Yellowknife, uh, which is overseeing the Nachulacho Basel Zone PEA with the with the hope of um, not the hope, but the the uh plan to update and refresh the 15-year-old feasibility study that we completed years ago.

SPEAKER_00 4:32

Great, that's a great overview. I love the streamlined focus and also congratulations on the ballot strength. We do dozens of these calls per quarter, and very few have that luxury. And lastly, before I turn it over to Dimitri, I totally forgot that PJ recently joined your board. PJ and I go back. Uh we were actually fellow colleagues at Solomon Smith Barney and Citigroup, so that's great. Uh so with that, Dimitri.

SPEAKER_04 4:55

Oh, thank you, Tim. Uh guys, uh, thank you for joining us today. Uh let's uh dive a little bit deeper into a couple of things that you said, uh Scott. The company recently completed, as you mentioned, the 180 to 1 share consolidation, which management at the time uh has consistently described it as an enabling step rather than a value creation event. Can you walk investors through why this was an important decision and how it changes the conversation you're having with institutions, uh particularly investment institutions, and what milestones need to be achieved before potential US exchange uplisting you referenced uh becomes a realistic possibility.

SPEAKER_01 5:35

Dimitri, I'll I'll take that one. And we are so excited that we received an excess of 80% shareholder approval to do this reverse stocks split. And the thesis that we have is that this is going to broaden investor access, it's going to improve the marketability of our shares. It's aligned strategically. Many of the conversations that we're having are in America. And when we position our company, it is as a solution to North America's challenges, not just Canada, but all of North America. We believe we ought to be a solution to the G7, and this is in step with that thesis, and it gives us flexibility in terms of raising the kind of capital that's going to be required uh over the course of the next decade. And so we are excited to get 80% approval, and for any U.S. exchange, it is necessary that our share price be at a certain level. I like to say, just like a politician, this expands the universe of investors who can vote for us. And there are investors who buy stocks that are worth dollars who don't buy stocks that are worth pennies. And so we're quite excited. It doesn't create value, but it does broaden the universe. I would say that we're 90% of the way there to the extent that we uh are focused on listing on one of the U.S. exchanges. We are actively at work on our F1 document. I would say we're we're in the final stages before we would then actually submit to the SEC. We have completed the uplift of our financial statements to PCAOB level standards. We have completed an SK1300 MRE technical document, which we will release in the coming days, and we are very excited about that SK-1300. It's going to revalidate in many ways the economics of natural for the modern economic environment in terms of pricing and in terms of cost. And so with this year consolidation behind us, uh there's no good reason that we could not be in a position to list subject to a comment period, which you can never predict how many rounds of comments that you get in the coming uh couple of months. And so we're excited to be where we are, and I would say the heavy lifting is is largely done.

SPEAKER_04 8:14

Great, Lauren, thank you. So let's move on a little bit here. Another interesting development uh recently with the company is the letter of interest from Finra uh Finvera that you got. And that appears to be more uh kind of a than simple financing equipment, if you will. Uh it potentially introduces export credit financing into the capital structure and it basically covers your purchases of capital equipment. How meaningful is this development in a broader funding strategy for the Lake Superior Lithium project? And does it change the way you think about minimizing shareholder dilution as the projects advance? You mentioned you're a holding company with a couple of main projects as you advance both of them. Um how is this structure going to uh work in your in your capital raise as you continue to advance these projects?

SPEAKER_01 9:02

That's another great uh finance question, Dimitri. And I would say we are thrilled to have the FinVera uh letter of interest, and I don't want to understate uh the importance of of that letter of interest. It provides 100 million euros worth of credit support, think backstop to a bank that would come into the capital stack, and that's uh quite significant. When we think about funding this lithium asset at the asset level, we think we'll have a 60% debt, 40% equity type of structure. And so if this refinery cost, let's say, a billion dollars US, and we'll know the real number, the refined number with the upcoming feasibility study, you're talking about 600 million of debt. And this speaks for a substantial portion of that, and I would call it our first institutional financing anchor in uh uh aspect of the capital structure. We have already received inbound calls, inbound uh interests from one of a suite of about 40 different institutions that Finvera works with. We're getting inbound calls from project debt financiers who are saying, I'd like to know more about this project. I would have an interest in coming in, and the fact that Finvera is going to backstop it uh will we think result in a lower interest rate and better terms. And so it is not cash, but it is the next best thing, which is a bank guarantee. And so we're very excited about it, and it goes exactly to your point of minimizing equity at the parent level. This is going to incentivize capital at the asset level, and that's precisely what we want. It also brings strategic partners to the table. When the equity sees the debt coming along, uh it brings them both to the same place. And so we're very excited, and we expect there will be more announcements uh in the coming quarters.

SPEAKER_04 11:14

Great, Lauren. Thanks. I certainly look forward to those announcements as well as your uh uh visibility study. Um let's move on to the lithium uh question a little bit more deeply. Lithium prices have been extremely volatile over the past couple of years, and we've also seen growing policy support for domestic battery supply chain across North America. Given that lithium, uh your Lake Superior lithium project is a processor rather than a traditional mine, at least that's how it's envisioned. How has your view of opportunity that is offered here changed? And where do you believe Avalon sits in the lithium supply chain or the value chain as the market evolves? Um I will caveat this by saying that in my opinion, and you know, I'm at a battery conference right now, listening to other people's opinion, and they all seem to be on the same page. Um it's not so much the mining that's the bottleneck when it comes to critical metals uh and materials, it's the refining, it's the processing and turning, you know, that that rock into a usable product. And that's exactly what your Lake Superior lithium asset is designed to solve. So can you give us a little bit more detail and talk a little bit more about that?

SPEAKER_03 12:20

Yeah, Dimitri, I'll take that. And uh you pretty much answered the question, you know, a little bit yourself. But uh, you know, it is true that the lithium markets have kind of gone through uh uh you know a peak in a trough. We're coming out of the trough, you know, of a couple years ago where the lithium space was almost not investable just because the prices were so low. Uh China and a lot of their uh manufacturers were buying up a lot of the resources, whether in South America or in Africa. But you know, while the while the lower prices did create near-term challenges for the lithium sector, they've also reinforced the importance of building a resilient, I'll call it regionalized or domestic battery supply chain that is, I'll say, less dependent on uh overseas processing. When you look at hard rock and spogenines specifically out of Australia or Brazil or Africa, over 90% is basically processed in China today, right? There's a few exceptions. You've got a Corpus Christi facility, you've got you know some in in South Korea, but for the most part, it is based in China. So trying to make that uh make a more resilient domestic battery supply chain that is less dependent on overseas processing is absolutely critical. Um, the governments in both Canada and the US continue to prioritize critical minerals through funding programs, incentives, industrial policies designed to support what I would say long-term supply security rather than short-term commodity cycles. For us at Lake Superior Lithium, being a processor rather than a traditional mining company, it positions us differently as people compared to others in the value chain that you think about for the lithium space. Most people are integrated and you know, or are trying to get to a point where they control the you know the processing themselves. I I think chemical processing has historically been concentrated, as I mentioned, in Asia, creating a supply and strategic gap in North America's battery ecosystem. Um, you know, talking to customers, they've you know, you know, in the OEM space, they all kind of say, you know, Chris, it's um there's a gap. We haven't really thought about that. We always think about the resource and not so much the processing or not so much the cathode manufacturing. You know, we we've got the we've got the resource and we've got the OEM and we've got the gigafactories. What we don't have is is what's in the middle. So our focus is going to be helping address that gap by converting lithium feedstock, spogamine, into battery-grade lithium hydroxide that can be supplied to regional battery cathode manufacturers, EV manufacturers in North America as part of Fortress America, which Scott likes to promote. As battery manufacturing capacity comes online across North America, the need for domestic processing infrastructure will become increasingly important. So for us, our strategy has really evolved from simply developing mineral resources to building an integrated critical mineral business. We see ourselves as an enabler within the North American battery supply chain, connecting with upstream resources, with downstream cathode and battery manufacturing. This approach should provide enough exposure to long-term growth and electrification while reducing reliance on the economics of single mining asset. So I think it's it's critical that understanding prices will remain cyclical. We believe that the structural drivers where the cathode manufacturers are coming into North America today and really driving that growth and being able to participate as a market leader in lithium hydroxide to the cathode makers who focus on nickel-based chemistries.

SPEAKER_04 16:05

Understood. Thank you, Chris. That's a good explanation. Um let's switch gears a little bit and talk about rare earths. Um over the past year, China's uh export controls have reminded governments and manufacturers if they needed a reminder how strategically important heavy rare earths have become. The nachulacha uh project or or deposit uh contains both light and heavy magnet rare earth rare earths uh that has uh changed the level or you know nature of interest that you're seeing from governments, um strategic customers or potential partners. Um how has the fact that nachulacha has these rare earth magnet rare earths, you know, the highly rare earths uh really impacting the conversations you're having uh with the governments of strategic investors?

SPEAKER_03 16:52

Yeah, I'll take that again, Dimitri, um, focus on the market here. You know, I I I would say the interest in rare earths is probably at an all-time high, you know, with China's export controls um being, you know, being implemented, it's kind of reinforced what many government and industrial type customers were already uh realizing, you know, that not only is it price, but it kind of jumps to the top where securing a reliable, diversified supply chain of these critical minerals is now a strategic priority. Um, you know, so it's not just a commercial one, it's more you know, security of supply. Um, I'll call it allied base security of supply, you know, in short term. You know, heavy rare earth elements, uh, which are essential for high performance uh permanent magnets that can go into everything from electric vehicles, wind turbines, robots, um, uh many, many defense applications, which you've which has been prevalent in the news, um, have become a particular focus because global supply and processing remains obviously highly concentrated in the Asia region. Netulacho is a little bit different because it contains uh high concentrations of both light and heavy magnet rare earth elements, providing an exposure or a um what somebody called it a buffet of critical minerals or rare earths that are increasingly important to Western supply chains. Therefore, we've kind of seen growing recognition of the strategic value in Netchilatco as governments, both in Washington, D.C. and in Ottawa, along with industry, are extremely interested in our process and our progress at Netchilacho. I think from an engagement perspective, we are seeing uh multiple stakeholder groups, government agencies, downstream manufacturers, potential strategic partners who are trying to strengthen their domestic and allied supply chains. We obviously can't comment or you know, shouldn't comment on specific commercial discussions that we're having in the marketplace. However, there is a greater um greater interest or appreciation for the importance of netilatro and securing that long-term supply for both light and heavy rare earths, um, even compared to just a few years ago. So for us, Avalon, with this reinforces our broader strategy of developing uh critical minerals that support North America's energy transition and advanced manufacturing sectors. Um we believe that netilatcho will will play a strategic role in this overall environment as we go through the next couple of years.

SPEAKER_04 19:32

And that that's great. Thank you, Chris. And you know, uh just thinking about the Northwest Territory is certainly not the most hospitable place to do a mine, but it but it seems to be better than Greenland uh in terms of infrastructure and and even the weather a little bit, just a little bit aside. All right, well, let's move on. Uh looking ahead, investors can see several important milestones on the horizon for you guys. The updated Machelacho PEA that you mentioned that's coming out in a couple of weeks here, hopefully. Uh continuing uh financing discussions, progress towards the Lake Superior lithium visibility study, which is targeted for completion in early 27, if I'm not mistaken, and potentially broader capital market initiatives uh that can come about uh as you talked uh, you know, as Lauren mentioned, uh, with the consolidation of the shares and potential uplifting to uh U.S. exchange. Which of these milestones do you believe would be the most important in demonstrating that Avalon has successfully transitioned from an exploration company into a critical metals development platform? Great.

SPEAKER_02 20:32

Thanks, Dimitri. I'll I'll take that one. I think it's my turn. So, you know, I'll start with the continued financing discussions and the capital markets initiatives that we're undertaking. And to point out our our our strategy to give confidence to investors, given that we're on the TSX and planning to be on the NASDAQ exchange in the fall, the bulk of the scale-up costs at the mine and the two refineries will be um will be undertaken by the subsidiaries. So we will be raising money at the asset level, not at the top goes. Okay, so we're trying to minimize dilution to the shareholders at the top goes, at the listed companies, and and really focusing on the uh the capital stacks within the two subsidiaries. And the capital stacks will consist of government, strategic, and financial investors. And that that's our main main thesis with with with the financing strategy. Um, you know, institutional de-risking uh is important. Um two things. One, we're very, very um uh focused on government commitments, we're focused on uh federal Canadian government commitments financing and offtake. We're focused on the provincial government of Ontario financing uh of the lithium hydroxide refinery, and we're focused on US federal government financing as well, and possibly offtake. So we're we're uh We're really uh focused on government involvement. And we need government involvement to stabilize the risk of these endeavors because these are truly virgin industries in North America. You know, these industries have predominantly been monopolized in Asia, and uh we've been the customer. So we're we're trying to take we're trying to onshore these these uh resources, uh both from the mining and the refining perspective, but we need government support and validation to really crowd in private capital. So I'd like to point that as probably being the most important thing. Uh and then secondly, in that category, the infrastructure validation by receiving commitments is really important. And the Finvera commitment of 100 million euros uh is a step in the right direction. So we're hoping to assemble more of those sorts of uh you know indications of interest to uh to create the cat that start creation of the capital stacks within the two subs. Um, you know, and with the listing on NASDAQ, you know, what when we list in the fall, uh it's going to open up our company to a much deeper pool of capital. Our market cap will be validated against other market peers, which I think there's a big disconnect between uh Avalanche market cap and our and many of the peers uh in our group's market cap. So we're hoping to really write the ship there. Uh secondly, the Lakesphere lithium feasibility study, which we've undertaken, is is really important. It's proving the midstream viability of lithium hydroxide on the North American continent. And again, we really do focus on land-based supply chains. We're allergic to over you know global shipping. Uh global shipping is equal to massive carbon emission. So, you know, I'm I'm a clean tech guy, so I'm very uh cognizant of that. And and with the feasibility study complete next year, we'll validate the toll mining model. And again, we're not a sole source spodjamin refining play. We're a toll mining play. We'll take spod from anywhere. You know, we ultimately want to source the spod locally, preferably from northwestern Ontario. Um, but you know, North America is great, and uh, if necessary, we we can look abroad. Um and then uh of course there's Nacho Lacho with the PEA refresh, it's going to uh it's going to um uh modernize the flow sheet both in real dollars. We'll be using $2,026 versus $2,013, and uh we'll be able to implement the efficiencies of our new refining process, which we've invented in collaboration with the University in Toronto. And um it's a proven bench scale model, which we're taking a PDS process demonstration system in Saskatchewan. And once that's completed, we're we're targeting um uh commercial size or close to commercial size rare earth refining assets in both Saskatchewan and the US in Louisiana. Um and then lastly, and this is this is sort of the the sort of ace uh ace in the pocket, but we've got several several non-core assets that we think we can derive you know significant monetary uh benefit from, and that's non-dilutive uh uh money. So we can we can raise working capital through the sale of non-core assets, which we're actively pursuing right now.

SPEAKER_04 25:26

Great, Scott, thank you. So there is a bunch of catalysts coming in in the next months to two quarters here, it sounds like, um, that should help the company get to the valuation that it needs to uh to push these projects forward. It's it's hard to raise a billion dollars uh you know when you're a sub-100 million market cap, and I think people understand that. But as these milestones are achieved, uh climbing that value curve, you know, limiting the discount versus versus peers uh should follow, or has in the past, let's say, with other companies. So let's uh kind of branch off on that and maybe as a last question, let me ask a 30,000 foot view question. There are dozens of companies developing lithium projects and and a growing number of rare earth developers uh competing for capital. We just mentioned uh there's a lot of capital that's required for these projects. Um if you were sitting in an institutional portfolio manager's chair with a limited budget uh of critical mineral investments, what would you say makes Avalon stand out from the crowd?

SPEAKER_01 26:31

You know, Dimitri, I'll I'll take a stab at that. Um always like to put on my old uh uh Tim and I go back uh quite a ways, all the way back to when I was uh buy side equity analyst and had a large cap value fund. And if I were making a pitch to a portfolio manager, I think it would have several pieces to the to the thesis. One are the assets. You can't argue with the quality of our assets, and uh they're they're fan the quality is just fantastic. Those assets give you access to two of the fastest growing critical minerals uh uh for the next decade or more in rare earths and lithium. And so you sort of have two for the for the price of one in terms of this particular opportunity. This opportunity is then trading at a valuation that's literally 10% of our peers. We added a slide to our investor presentation to objectively just demonstrate that, despite the value of these, the despite the quality of these assets, uh, we're trading at a tenth of our peer group. And there's multiple near and intermediate term catalyst. Um I'll clarify a point you made earlier, Dimitri. Uh our PEA is still on track for the fall. What I mentioned was that we intend, in order to list on a U.S. exchange, you've got to do a technical report that's under SK 1300. And the technical report that we've chosen is an MRE for the sake of US listing. My point is that that report uh is the sort of catalyst that will refresh the economic uh validation of these assets. But in the fall, we expect it to be followed with a PEA. The catalysts around strategic and financing partners, the potential for U.S. listing, the feasibility study in the spring of 2027. Uh all those are the kind of things that I think could drive a re-rating of the shares. And so we're excited, and we just are going to continue to put one foot in front of the other. I don't know, Chris and Scott, if you have any more you want to share on what you think about it.

SPEAKER_03 28:51

Yeah, I'll I'll I'll take uh I'll add on to not only the resources, but the status of the particular projects. When you look at uh Lake Superior lithium as an example, we're trying to raise capital for a refinery. You've got approximately 14 miners in Canada and the U.S. who plan to over the next decade bring on spodjamine to the North American market. So they've got to raise capital for the mining perspective. We're focused on the midstream creating that refinery value. Those 14 miners, you know, that are trying to develop those mines, that equates to well over 400,000 tons of LCE equivalent. That in short terms would mean there's needs there need there has to be a need for about 15 refineries the size of Lake Superior lithium. The fact that we're advancing, we're already advancing to FS stage from a refining perspective, um, kind of positions us to be, you know, the market leader or first in entrant outside of you know what's happening in Korea and the factory in Corpus Christi. So there's definitely going to be a need over the next five to seven years, if not sooner, for lithium hydroxide. So we're an advanced project compared to others that haven't really gotten to that stage of development. And I think the same is true for netulacho, right? We did the 100 million um uh FS study back in 2013. We're refreshing it. So, you know, you want to say we're in PEA or FS phase right now by by mid next year, um late Q3, we should be done with our FS study for Netchulato as well. Um, that positions us well ahead of um several other critical minerals, rare earth facilities in North America. So I think not only is it our resources, but the stage of development that we've progressed already over the historical part of Avalon will play critical roles in terms of raising capital and gaining customer confidence.

SPEAKER_02 30:56

Yeah. And I'll I'll I'll add uh I'll add one last thing, and it's the icing on the cake, and that is the team. You know, we've got a world-class management team. Our board is is is certainly in the world-class category, especially with the addition of PJ. Um, you know, we know what we're doing. We're not we're not uh isolated to just geology and mining. We have geological and mining expertise on the team, but we've got processing experience, capital markets markets experience. Um uh we have uh I think the the sort of the hidden gem is we've decades of government relations experience. We know how to work with governments, and and we we are very cognizant, cognizant of the cognizant of the fact that you know a healthy government relations program involves an ecosystem uh of the sharing of information. So we educate each other. So you know, we're well down the path with uh, you know, the federal government in Canada, the federal government in the U.S., the provincial government in Ontario. And again, underscoring the need to get government support for these projects, you know, the government affairs side is extremely important. So I'd like to emphasize that as well.

SPEAKER_04 32:06

Thanks, Scott. That certainly is uh given the state of the industry and how far behind we are in you know China in terms of uh these critical metal processing and and and manufacturing. Um as much of a free marketeer as I am, having grown up in the USSR, uh, there are some roles for government to play in industries, and this certainly seems to be tailor-made for that. So thank you, gentlemen. I'll turn those over to Tim. It's been very interesting.

SPEAKER_00 32:33

Yeah, thank you, Dimitri. Uh Scott, Lauren, and Chris, thanks so much for joining us today. I know you have several milestones coming up yet this year, so know that you do have an open invitation to come back on the podcast and address our rather large global platform of institutional retail investors when those milestones hit. And I would be remiss if I didn't say to Lauren in closing, who used to be my client 30 years ago on the buy side when I was a sell side analyst, you do not appear to have aged, so please send me a list of your supplements and your exercise because you seem to have nailed it. So thanks, gentlemen.

SPEAKER_01 33:03

That's a different stock. That's a different stock.

SPEAKER_02 33:07

Great. Thanks, Tim, and thanks, Dimitri. Thank you. Thank you.

SPEAKER_00 33:11

Thank you for listening, and don't forget to subscribe, as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules. We will see you next time for another edition of the WTR Small Cap Spotlight Podcast. Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.