I believe Li-Cycle Holdings Corp. (NYSE:LICY) is worth over 20 times its current value. At the time of writing, shares are below $4 each, and I think they should be over $80. The price is low for several reasons; a key one is a 2022 short-seller report that made allegations about LICY, which I believe to be gross exaggerations and marketing spin that do not stand up to investigation. LICY is loss-making and likely to remain so until 2026. It still has not finished the construction of its first “Hub,” and some investors see a typical busted SPAC growth story.
I think LICY has a first-mover advantage in what is soon to be a vast market, the recycling of Lithium batteries from EVs. It has backing from Glencore plc (OTCPK:GLCNF), the European-based conglomerate with near bottomless pockets and a similarly large need for the metals LICY will retrieve from old batteries.
Blue Orca Is Short LICY
In March 2022, the renowned short-seller Blue Orca Capital published a report on LICY. They gave six reasons to justify their belief that LICY is “a near fatal combination of stock promotion, laughable governance, a broken business hemorrhaging cash and highly questionable Enron-like accounting.”
The 6 points were
- The LICY chairman is a serial penny stock promoter sanctioned by the Canadian Regulators.
- LICY diverted half a million dollars to the family entourage of its founders.
- LICY revenue is an Enron-Esque Mark to Model Accounting, and it does not have any customers.
- LICY requires a billion dollars in funding.
- Margins are negative.
- They are involved with Blood diamonds.
Short sellers often uncover essential facts about companies, and sometimes they are right. When I wrote about Hyzon (HYZN), I used information from a short seller report to avoid what looked like a good investment. However, when I looked at EHang (EH), I managed to quadruple my money when I discovered the short report that had caused a share collapse was an irrelevant rumor of no consequence to the business proposition.
I believe the drop in share price following the Blue Orca report (LICY was at $8.40 on publication day and had been at $14 weeks before that, likely when Blue Orca took its position; it is now at $4.10) presents an excellent opportunity.
Dealing with the allegations one by one
- This is true, but it is immaterial. Tim Johnston is the president and CEO of LICY, formerly Desert Lion Energy’s CEO. When Desert Lion faced bankruptcy, he arranged two financing deals to keep the company afloat. In subsequent fillings, Desert Lion did not correctly disclose the financing deals. In particular, they did not mention the size of the discount used to secure the deal. The regulator decided that Johnston may have been partly responsible for the failure to disclose and placed extra requirements on him to seek permission when and if he launched a new business.
- Instead of “diverted half a million dollars to family entourage,” Blue Orca could have said. Licy disclosed $529K of related party transactions, including $85K to buy promotional goods to be given away at launch, +$100k to a company owned by the Chairman’s brother for internet security services, and $4,500 a month to rent an office from the CEO’s family.
- LICY has an off-take deal with Traxys for 100% of its black mass output (see below). It recognizes revenue on delivery. Blue Orca maintains that because Traxys is a broker and not the end user, it cannot be classed as a customer, and revenue should not be recognized until Traxys sells the product. It is immaterial to the business proposition; the date of recognition is just a timing issue as long as it is sold. (see below for an analysis of the Traxys deal)
- $1 billion is an underestimate. LICY intends to be one of the world’s leading Lithium battery re-cyclers with owner-operated facilities throughout the US and Europe. The current Hub in Rochester will cost $500 million alone, and they are building a bigger one in Italy. Plus, this is just the beginning.
- What you decide to put into the cost of production rather than fixed costs is always debatable. LICY is loss-making and will be for several years. It may have negative margins at this stage, but it doesn’t matter.
- Blood diamonds? One of the investors in the SPAC owns a diamond mine in Tanzania with a questionable worker rights record. It has no bearing on the future success of LICY.
In my view, the Blue Orca report is a collection of irrelevant facts with a marketing spin to make them look really bad.
Recycling Lithium Ion Batteries
It is a two-stage process, and the players in this industry are trying to develop technical and geographical competitive advantages in both stages.
Stage 1 Produce Blackmass
The process begins with end-of-life batteries; they need to remove any residual charge and then be crushed into small pieces so that sorting can occur. At the sorting stage, plastic and metals are removed by magnetism and size of particles as well as other methods depending on the company. Most of this is done under liquid to reduce the chance of fire or rapid heat exchange from the batteries. After sorting a mass of chemicals and debris remains, the valuable chemicals and rare metals that are the target of the recycling process are in this mass. It is known as Blackmass and is like a powder; generally inert, it is far safer to transport than lithium batteries.
Stage 2 Process the Blackmass
The valuable metals for cathode and anode production material are separated from the blackmass using hydrometallurgy, each company has its proprietary process, and many are patent protected. Hydrometallurgy is the name of various techniques that recover metals from ores and waste using chemical reagents with or without a pressurized environment. The process typically involves leaching, solvent extraction, and absorption. The output from stage 2 is battery-ready materials, including Li, Ni, and Mn.
This is not an exhaustive list but contains the companies I believe to be the most important competitors to LICY.
American Battery Technology (OTCQX:ABMLD)
They begin with manually disassembling the battery packs into smaller pieces before the crushing process begins. Battery casings, wires, and other components can be removed at this stage. This process will take 4-6 person-hours per battery pack until it is automated. I wrote about ABML in March and the stock is down 30% since then.
UMI is a multinational material sciences company based in Belgium. They recycle lithium batteries as well as other products. Their technology begins with shredding in a closed environment. They recover existing energy from the old batteries and have almost zero additional energy input to the system. UMI quotes a recovery rate of 95%. UMI uses recycled materials in a closed-loop manufacturing process to produce and sell new batteries.
Ecobat (private company)
Probably the world’s biggest battery recycling operation, like UMI, they recover energy from batteries before beginning the process. They start with manual dismantling and re-engineer at this point for some second-life applications. Ecobat sends their blackmass to other companies for processing. They have an extensive network of facilities in Europe and the US. Ecobat hopes to reduce disassembly time to 90 minutes in the future with automation.
RecycLiCo Battery Materials (formerly American Manganese) (OTCQB:AMYZF)
RecycLiCo starts with black mass and claims 99% recovery of battery metals in a patented process. They have an operational demonstration facility.
Only ABML and LICY focus on turning end-of-life batteries into recycled materials and selling them to manufacturers.
LICY – the Spoke and Hub plan
LICY is developing what they have trademarked as “Spoke and Hub” technology. The spokes perform stage 1 of the recycling process, producing blackmass, which is shipped to a Hub for hydrometallurgical recycling of the high-value anode and cathode materials.
LICY envisages putting spoke facilities near the source of end-of-life batteries and imagines far more Spokes than Hubs.
LICY is now on its third generation of Spoke technology. Generation 3 is a modular build with multi-stage shredding capabilities and the ability to shred entire battery packs. Licy is not planning to disassemble batteries, choosing to shred whole packs into small pieces and begin material recovery at that point. (this was one of the reasons I thought the ABML tech was superior; it may still be, but like VHS and BETAMAX, you don’t have to be the best if you are first)
In the Q2 2023 earnings slide show, LICY confirmed the following.
Operational Spokes are in Arizona, Alabama, Ontario, and New York, with the first Hub under construction in Rochester.
Operational Spoke in Germany and further ones under construction in Norway and France, Hub under construction in Portovesme, Italy.
The Arizona, Alabama, and Germany spokes are generation 3, with New York and Ontario currently being upgraded.
ABML is still developing its first at-scale site; they are still in the pilot and demonstration stage. LICY has five commercial-scale sites in operation. As I said, it might not be the best tech, but it has a first-mover advantage.
Generation 3 spokes have a capacity of 10,000 tonnes per annum, twice that of earlier generations. The German Hub has a second main doubling capacity. Ten thousand tonnes is equivalent to 2GWh of annual production; Tesla’s (TSLA) Nevada Gigafactory has a capacity of 37GWh, implying that LICY would need 19 Spokes to recycle the output of 1 Tesla battery factory.
Rochester will be the first operational Hub for LICY (costing $560 million, Q2 slide show). It will take in blackmass feedstock from the LICY spokes and will have the capacity to receive 35,000 tonnes of blackmass per year, equivalent to 90,000 tonnes of lithium-ion batteries going into the spokes. One Hub can process the output of half a Tesla gigafactory.
The output from the Rochester Hub will be around 45,000 tonnes of nickel sulfate, 8,000 tonnes of Lithium Carbonate, and 7,000 tonnes of cobalt sulfate. The Q2 slide show had some photographs and a discussion showing that the site is approaching completion. This image is from slide 7
Glencore, the Ace in the hole
The backing of Glencore has transformed my forecasts for Licy; it is a game-changing tie-up that provides almost limitless cash and product demand. It also presents a possible future buyer of the company. In a recent press release, LICY and Glencore announced they are accelerating plans for a European Hub and that it will be a 50/50 JV.
The mining and commodity giant Glencore has a turnover of $250 billion with 135,000 employees, and 2022 profits came in at $34 billion. In 2022, it announced that it wanted to start trading lithium. It already mines and trades in nickel and cobalt. Glencore is no stranger to controversy. The Glencore Wikipedia page is full of allegations about dealing with rogue states and other practices, not unlike the blood diamond accusation made against Licy by Blue Orca. The mining industry is full of this kind of allegation; mines typically operate in third-world countries, and corruption claims are never far below the surface.
LICY and Glencore will be re-purposing an existing Glencore site that has been performing hydrometallurgical operations since the 1920s. It is a stated aim that the facility, due to begin construction in 2024, will be the largest source of recycled battery-grade lithium on the continent. The press release suggested a figure of 70,000 tonnes of BlackMass processing per year, twice as big as the Rochester sight, making it capable of recycling the complete output of a Tesla Gigafactory.
The scale of Glencore is astonishing; listening to the CEO discuss the investment with LICY put into scale how important they could be. LICY needs cash, and Glencore has the scale to provide it.
soon we’ll make an announcement, $40 million here, $50 million there. I mean this year 2022, we put the $200 million into Li-Cycle. I mean it is a convertible, so it’s CapEx, in a sense, but there is a repayment of that through — we — through the repayment of the convertible. And we take equity and do something with that. So it’s not big, but it’s key in terms of building the network, building the distribution channels, building the R&D.
$40 million here, $50 million there, and $200 million in 2022, so it’s not big? I guess it is small when you make $34 billion in profits and pay over $7 billion in yearly dividends, but for LICY, it is transformational. They get access to capital, a fully operational site with all permits in place, and a customer prepared to take 100% of the output into its trading arm.
From page 11 of the LICY Q2 2023 slide presentation
Glencore is not the only major contract LICY has.
Both LG Chem and Glencore have designated Li-Cycle as a preferred recycling partner.
The recently completed long-term in-take and off-take commercial agreements with Glencore and LG are expected to deliver significant economic value to Li-Cycle.
(CEO Q2 Earnings call.)
LG will supply battery scrap for recycling at its spokes, and LICY will provide LG with output from its Hubs. It is a long-term (10-year) deal, as is the Glencore deal also covers some chemicals that LICY needs for their hydrometallurgy and provides an off-take agreement for the output from the Hubs.
Blue Orca made a big deal about Traxys; they are a third long-term partner of LICY. In February, Traxys announced that its management was buying Traxys out from the Carlyle Group (CG). Traxys revenue grew from $5.5 billion to $10 billion between 2014 and 2023; Traxys is a global commodities group focused on EV production, and the new managers/owners have the liquidity provider Optiver as a partner investor.
Traxys has contracted to take 100% of the US production of LICY on a decade-long deal. With over $10 billion turnover and a focus on EV batteries, they are another significant support to the strength of the future LICY business.
I have produced a three-statement mathematical model for LICY; the revenue forecasts used are based on forecasts from management and the likely starting dates of the two Hub operations.
The model is my work; it contains many assumptions, from inventory days and PP&E to tax rates and expenditures. I use these models to track the performance of the companies in which I invest. They are beneficial because they give early warning signals of potential problems. The model provides a fair value of $82 per share on a discounted cash flow (“DCF”) calculation. I wouldn’t take that value in isolation, so I present other independent views here.
SimplyWall.st (whom I use a lot) also uses a DCF model to create a fair value. They use Wall Street analyst predictions and figures to base their model on. They came up with a value of $74.
Seeking Alpha presents Wall Street analyst views, and there is a lack of consistency here. One Analyst sides with Blue Orca and rates LICY a strong sell; the average forecast is only $7, a mere 73% higher than its current value.
The balance sheet looks reasonably healthy; they have $284 million of debt for a debt-to-equity ratio of 66%, which is a little high, and $288 million of cash on the sheet. As I have already explained, they will need lots of cash. LICY expects to close a DOE loan for $375 million later this month. (Slides 14 and 15 cover this on the Q2 2023 slide show.) giving them a cash bridge of $664 million
What are the risks?
They are many, and they are significant. Firstly, cash; if they don’t get the DOE loan, the U.S. development will slow, but Glencore is funding the European development. If Glencore, Traxys, and LG Chem were to withdraw support, then my bullish thesis would be seriously undermined. At the moment, these three seem committed and have had a decade-long agreement with LICY.
We know the spokes work; they produced 1,700 tonnes of blackmass in Q2 2023. However, the first Hub is still under construction so the Hydrometallurgical process has only been tested on a small scale.
There is some big-name competition, but it will be a big market, and LICY will have a mover advantage, the largest facility in Europe, and probably the biggest name of all on the LICY side.
I think Li-Cycle Holdings Corp. is an exciting proposition; they have a unique scalable business model through their Spoke and Hub technology. They have developed five commercial Spoke sites on two continents, are close to completing the build of the first Hub in the U.S., and will start building the second Hub in Europe in 2024.
LICY has developed some excellent, long-term partners. Glencore has provided the site for the European Hub and is a 50/50 partner. Glencore has the cash to scale the European business and may become a global partner. Traxys has a long-term contract to buy LICY output in the US, and LG Chem has a deal as both supplier and customer.
LICY has been a story stock, but it is now on the verge of full-scale commercial operations. They have a first-mover advantage, enough cash on the balance sheet, and will be ready to recycle the tsunami of end-of-life EV batteries that will arrive within the next five years as all of the EVs produced in the 2010s begin to die. End-of-life EV batteries will follow the near-exponential growth of EV cars with a time lag of 10-15 years.
I am long Li-Cycle Holdings Corp. and intend to add while the stock is cheap, believing it will not be affordable for long.
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