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Being interested in the space of green energy and sustainability, we were following with curiosity and a positive outlook the activities and the results of RecycLiCo Battery Materials Inc. (TSXV:AMY:CA), formerly known as American Manganese. The recent surge in stock price of 46% on October 4 took us by surprise. The company is still unprofitable, and as such, they are also in the process of burning cash, but the underlying technologies for battery recycling are interesting as it pertains to the energy transition and mitigating sustainability issues for batteries, as well as to the process of de-globalisation and being a lever to shore up supply chains for automakers. For now, we think it’s best to avoid any stocks with reflexivity risks and other severe dilution risks from warrants and options, since AMY is pre-revenue and low-cost equity financing cannot be relied upon when prices could still go lower, but we do continue to be curious about the stock for the future.
On Battery Recycling
RecycLiCo Battery Materials Inc. owns a proprietary technological process, RecycLiCo TM, for extraction of cathode metals from used Lithium Ion batteries and the scrap from Li Ion battery production. The company also owns mining exploration interests for potential extraction of reserves of critical and precious metals in Canada and the US.
As far as the secular picture goes for battery and battery materials demand whether produced from recycling or not: green energy, net zero and sustainability will accompany global growth in the next 30 years. According to McKinsey, reaching net zero by 2050 will require a 60 % increase in capital spending on physical assets. In particular, AMY’s business model is contributing to the growing the momentum of EV development and the associated environmental benefits.
According to the EY Mobility Consumer Index, today more than 52 % of prospective customers are planning to buy an EV or hybrid vehicle, up from 7% in 2020 and 20% in 2021. The EV sales are rising with the passenger vehicles leading the way – other classes of vehicles are less liable to become electrified. Battery cost is not a detrimental factor as the prices of fuel are rising in tandem with the EV battery materials. The EVs are being increasingly adopted by consumers with the trend set to continue. Sales of plug-in vehicles worldwide are expected to rise from 6.6 million in 2021 to 20.6 million in 2025, which will be 23% of the total new vehicle sales globally up from 10% in 2021. In China and EU, this percentage is expected to reach 39% in 2025. The significant increase of micromobility in large cities is driven by the need to improve the daily commute and goods delivery. Electric scooters and bicycles are also perceived as status symbols of the well-heeled according to Quartz.
The main components of EV batteries consist of a mix of metals. These extractable metals from EV battery waste are critical metals Nickel, Lithium, Cobalt, Aluminum and of course Manganese which are all officially proclaimed as US Strategic Metals. The US Government has stimulated their production, mining and recycling in the US, as currently they are mostly imported. Apart from Li Ion batteries, these metals are used for a number of strategically very important products such as steel alloys, aluminum alloys and semiconductors often used in the defense sector. The Executive Order of the President confirms the decision to seek a detachment of the US on reliance on critical metals sourced from abroad.
Legal requirements present an important driver for the demand of AMY technology. The future or EVs is connected to the quest for cleaner energy. The increase of EV use contributes to a cleaner environment by reducing the dependance on carbon fuels. However, at the same time more waste is generated from used EV batteries and the waste in the battery production process.
The major sustainability challenge lies in the successful recycling of Li Ion batteries at their life’s end and the recycling of very high percentage of battery waste created during production of batteries. The quality of the recycling process determines the overall efficiency of the EV carbon footprint. This is why the battery producers in the developed countries are legally bound and stimulated to incorporate recycling in the production process. The production loss was on average 39% from 2017 to 2019 at the Tesla Panasonic Gigafactory, which provides a space for efficiency improvement and recuperation of precious metals which are now a loss for the producer.
Much like hydrogen being a way for renewable energy installments to have higher capacity factors, recycling processes enhance the effectiveness of electrification as a means of reducing carbon footprint and actually being sustainable. Legal requirements or at least incentives will support the demand for these technologies. These concerns apply not only to EV producers but also producers of electronics, which has been the other source of a pile-up of old batteries. Also, with high raw material prices, recycling processes will help with bottom line efficiency. Finally, recycling is useful because it guarantees some local supply of key minerals for batteries.
According to Bloomberg in a Net Zero scenario by 2050, the demand for Li, Co and Ni exceeds the known reserves of these metals on earth, to the recycling will play a huge role. According to Electrek, in the US, 13 new gigafactories for the production of Li ion batteries for EVs are expected to be built in the next 5 years.
On AMY’s Proposition
Since 2016, RecycLiCo Battery Materials Inc. (previously known as American Manganese) is committed to bringing to the scene a new battery recycling technology. This evolved from theoretical applications to the demonstration plant which is now fully operational. There is no other recycling technology for batteries that has been commercialised and rolled out. The current plant is chemically intensive and very multi-phase and these sorts of projects are going to be rather capitally intensive, so there are questions about the business model that the company plans to deploy the technology with and the associated cash intensity. The focus on this technology is part of the rationale for the name change, where the “American Manganese” name implied that RecycLiCo’s focus was mining and reserve development. Indeed, the company also owns the rights to properties on which there may be reserves of some value, including the search for manganese, niobium or possibly other minerals like gold, copper and rare earths on the Rocher Deboule property. These are still in the rights purchase stage, and very little exploration has happened – they have only just gotten the drill permits from the native groups in Rocher Deboule, and the others are just sitting there for now. These can be ignored at the moment, with the amount of money invested into the developments here not even being in the millions yet.
To be clear, this is a pre-revenue company. Neither its technology nor any of its reserves have been commercialised. But they have demonstrated the technology, have the patents and started to deliver samples from the process to third parties for inspection and consideration for the process to become eventually commercialised.
AMY’s technology is in theory well positioned as it is providing a technological process which can be directly incorporated into the battery production facilities, thus using the same footprint as the facilities themselves and significantly reducing the supply chain constraints. The Reciclyco TM technological process is also adaptable to the use of the new cathode metals mix which will be used in the future as the EV batteries evolve. Consequently, the future value of RecycLiCo Battery Materials Inc. will be determined by its position and relationship with the battery production facilities and a driver will be funding for battery production, and the velocity of battery turnover. At present, in the US, 13 new Li-ion battery production facilities from Panasonic (OTCPK:PCRFY) and Tesla (TSLA) are expected to be built in the next 5 years according to Electrek.
We mentioned that legal incentives or regulation is likely to be the driver of AMY’s business. One example of such legislation, highlighted by AMY, is the recent US Inflation Reduction Act (IRA) which provides incentives when a certain percentage of critical metals in the production of EV batteries is sourced from recycling.
Additionally, the concentration of upcycled metals is very high from the process, much higher than in direct mining. Upcycled means that the process not only recycles the metal but brings it to a point where it can be used immediately in the production process.
One of the key deliverables of the company was reporting from the first wave of text operations from the demonstration plant. According to Zarko Meseldzija CTO of AMY, in his recent interview, the results of testing for scale production are exceeding expectations. The planned production of 500kg/day was exceeded by 163%. The independent Life Cycle Assessment (LCA) Report, is verification of the environmental impact of the extraction process. According to the recent LCA report, the RecycLiCo TM process produces 3 times less CO2 than the traditional extraction methods such as mining and refining, when producing lithium hydroxide monohydrate. This serves as the benchmark that AMY can approach potential customers with when courting business.
Commercial Plans
Given that the RecycLiCo TM technological process seems promising and the demand for critical metals remains high, the evolution of the RecycLiCo Battery Materials Inc. business model in the future is something to watch, because as of now management has not made it clear what their plan is. A listing on the larger stock exchange such as NASDAQ, where they now trade on the TSX Venture, is one possibility as mentioned by the CFO 4 months ago, although the tangible benefits of doing so would be difficult to predict, and any previous plans have been explicitly delayed by management till markets become less choppy. A merger or a choice of a strategic partner is also an option. The negotiation of a favorable relationship with the gigafactories will be challenging, as the EV producers are giants with the likes of Tesla, and Volkswagen (OTCPK:VWAGY) leading the charge. So how does a small company like AMY negotiate a good deal with them?
This question leads to the possibility of the sale to a large EV producer or proceeding with a franchise model bestowing the rights to the technology on customers and technical services for setting up and engineering the plant. The latter would be an ideal business model because it would shorten the cash-burning horizon as royalty models are not capital intensive at all. With financing conditions being what they are, this is what we’d hope for as prospective owners.
Risks
The potential detrimental scenarios for the success of AMY may be:
- It is reasonable to assume that a period of some years will pass before the company could hope to be cash-generative, consequently reflexivity is a serious risk as the company only has $20 million in cash. The cash burn has been $4 million annualised, and the company will have to raise capital again soon, perhaps before markets recover. Dilution could be substantial with the current market cap being around $100 million.
- There could be a significant technology change in EV battery production, rendering the RecycLiCo TM process less applicable.
- The production of batteries could become much more efficient, creating less waste in the manufacturing process. Even in this scenario, at least the end-of-life EV battery recycling will still provide an application for RecycLiCo TM.
- The price of strategic metals could fall as the forces of demand and supply work to balance the markets, although we believe that there will be a secular increase.
- Technical problems and diseconomy could emerge for the use of RecycLiCo TM technology on a very large scale.
- RecycLiCo could end up competing with better capitalised competitors.
- The mining fields owned by AMY could turn out to be with a very low content of metal ore but still be a significant CAPEX sink.
- There is a liquidity risk for investors.
- At the current $100 million market cap, there is a dilution risk of about 30% from outstanding options and warrants.
Final Remarks
Overall, the technology is interesting, supported by secular trends and also evident and immediate efforts to build up battery production capacity. Supply chain shoring is going to be a secular tailwind as well. However, this is still a pie in the sky. AMY is a patent box, doesn’t produce cash, could cause lots of dilution from options and warrants exercising as well as from equity financing should it be needed sooner than expected, which is likely because there’s still stuff for AMY to do that would increase its burn rate – the 5 years given above is very conservative. As such, it is too risky for now, but we will follow it and consider it more strongly once there’s more commercial proof for the concept.
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