LICY - American Battery Technology: A Rollercoaster Ride For Shareholders Gathers Pace

2023-10-30 11:15:30 ET

Summary

• American Battery Technology is facing financial difficulties and its share price has plummeted.
• Despite the challenges, American Battery has recently announced positive developments, including the start of operations at its battery recycling center and promising results from its lithium mining facility.
• If American Battery can successfully complete its projects, ABAT shares could be a lucrative investment opportunity.

American Battery Technology Company ( ABAT ) is at its defining inflection point: it has burned through its cash and lost the support of Wall Street; its ability to continue as a going concern is in doubt: and its share price is down 60% in the last week and 84% since its April high. The company's failure looks almost baked into the price. Its previous CFO has made some damaging claims that speak to the honesty of the board, and the replacement CFO has been at ten companies in 11 years.

It looks set for bankruptcy; Seeking Alpha analysts rate it a strong sell. Wall Street does not cover it and has completely exited the company; the SA Quant system does not even rank it. The company is now almost entirely owned by retail investors, who often take the losses.

High-Risk High-Return?

A slew of positive press releases in recent days has me looking at the fall in share price in a different light. It is a high-risk opportunity, but with risk can come outsize returns.

The speed of positive news matches the downhill racing of the share price.

On October 11, ABAT announced it had started operations at its first commercial-scale lithium-Ion battery recycling center; on the 12 ^th, FedEx (FDX) chose it as a partner in the national Mail-In electronic waste program; and on October 18, it rang the opening bell on the Nasdaq as its shares were up-listed. And, to cap it all, on October 27 the results of the test drilling at its Lithium mining facility in Tonopah flats were published, showing high levels of recoverable lithium had been found potentially worth more than a billion dollars.

It Is All Ifs, but...

If American Battery Technology Company can:

• complete the second phase of its commercial recycling center, due in 2024,
• begin fully recycling batteries and extracting valuable metals from them;
• Advance the exploration of the Tonopah Flats mining claims,
• start mining lithium ore,
• and use its technology to turn it into salable lithium,

then, right now, at $3.50, ABAT shares are likely to be the cut-price bargain of the year.

American Battery Technology Share Price Collapse

The graph shows the decline of the ABAT shares and how correlated they are with the shares of Li-Cycle Holdings (LICY). The two companies are similar: both start-ups hope to recycle lithium batteries. Recycling lithium-ion batteries requires two distinct processes. The first turns the battery into a black powder known as black mass, and the second recovers the valuable materials from the black mass. ABAT deconstructs the battery before shredding it into powder, whereas LICY ignores deconstruction and shreds immediately. LICY and ABAT have started stage one, hoping to reach stage 2 in 2024.

The correlated drop in share price suggests it might not be a company-specific problem but a more general one.

LICY has just announced a pause to construction at its first stage 2 site. LICY calls these stage 2 sites Hubs, and the first hub is in Rochester, New York. Most of the building materials are already on site, and much of the work is complete. Costs are spiraling, and the management wants to rethink its go-forward strategy; LICY shares collapsed on the news. Pausing at this advanced stage of construction is odd unless the economics of the venture no longer work, they have failed to get the DOE grant they needed, or some other internal issue has surfaced.

ABAT has a different approach; it will house stages 1 and 2 in the same building. ABAT also has a pre-stage 1 operation, automated disassembly of the batteries. Many metals and plastics are recovered before being turned into black mass, perhaps improving the overall economics of the situation. The ABAT stage 2 is a leeching process that does not require the high temperatures of the LICY method and is also suitable for removing lithium from the ore it intends to mine at Tonopah Flats.

ABAT Recycling Has Begun

The first site that began operations this month is in McCarran, Nevada; the project acquired only six months ago was completed with astonishing speed and is now operational. ABAT managed to find an empty factory that had previously been used to recycle Lead Acid batteries, and consequently, a lot of the infrastructure and permits were already in place. Stage 1 is operational, and Stage 2 will be active in 2024.

The acquisition of the site in McCarran does hide an issue. ABAT bought a sight in Fernley, Nevada, in 2020, expected to be the first operational site. Construction work had already started. In the FY 10-K 2023 , Fernley had been downgraded as the McCarran site became a priority and was "expected to be a subsequent site." Fernley was behind schedule and probably some way from operations. The switch to McCarran seems wise and might give the technology full commercial validation in the next six months or so.

The Technology And Margins?

I covered the ABAT process in this article and the rival LICY process in this article . (I lost just under 30% on each of those trades.) The articles contain information about other companies entering this field, and the list of potential competitors is growing as the predicted demand for their services gets closer.

Is the whole thing economically viable? We do not have the answer to this question, which could be why the share price fell; explaining the delay at LICY and the failure of my bullish thesis.

Something has to be done with the lithium batteries when they become end-of-life. It is unlikely that any government will allow these batteries just to be piled up somewhere or go into a landfill site. Someone will have to pay for the disposal or recycling of these things, but who? Governments could intervene and provide subsidies or force the EV manufacturers to pay for recycling; I believe the recycling process will be profitable without support, even with the almost exponential growth in Lithium mining worldwide.

Cirba Solutions , owned by the private company The Heritage Group, has received significant institutional backing and government grants for its Lithium Battery recycling business. The company has been profitably recycling lithium for many years and uses a process similar to that of ABAT and LICY. Cirba has proven the business's profitability, and demand for this service will escalate in the coming years. I described it as a Tsunami of demand in my first article on ABAT and expect the demand to accelerate from 2028 onwards, following the growth in EVs with a time lag of about ten years.

The Mining Operation

It will likely be another 3-5 years before ABAT can generate revenue from its Tonopah Flats mining claims. However, it may only be a few months before the identified resources make a material difference to the value of ABAT stock.

Lithium carbonate prices are currently around $29,000 per tonne, and new supply has come online in 2023 due to these elevated prices; however, lithium is forecast to run into shortages as early as 2025—the last deficit in 2022 caused Lithium prices to spike to $82,000 per tonne.

The first drilling results at Tonopah flats (spring 2023) estimated the total reserves at the ABAT site to be 15.8 million tonnes, suggesting a value somewhere between $458 million and $1.3 billion. The second report suggests that the resources might be significantly larger than first thought and much cheaper to recover than expected.

Mining Assay tests follow a strict format when releasing results; they give the resource an increasing degree of confidence. A mineral resource is in the ground; a mineral reserve is a resource that can be profitably recovered.

It is not up to ABAT to decide the nature of these resources; an "authorized" person must perform it. ABAT has hired KB Drilling of Nevada to complete the drilling, analysis and classification of the resource is performed by Paragon Chemical Nevada. ABAT has no involvement in this process, which is covered in detail at the end of the press release .

The first mining results from spring 2023 classified the resource as "Inferred," the October 2023 report suggests that the resource could be upgraded to the "Measured" category. The critical points of the new findings are

1. High concentrations of lithium, up to 1,700 parts per million, and more than 90% of samples above 300 ppm
2. High concentrations in all test wells dug, and large amounts of lithium were found only 20 ft below the surface, implying low-cost stripping techniques could be used to retrieve it.
3. KB drilled to a depth of 1,430 feet and found lithium at all depths, implying that the resource is more extensive than first reported. Previously, they had only drilled to 800 feet.

Next steps

ABAT will prepare a second SK-1300 compliant report (industry standard) when the results of the final two deep wells are received (current information is from 6 of the 8 drilled). The large concentrations found and infill drilling results suggest that it is possible to classify the resource as measured rather than indicated.

The modifying factors will be devised before the resource can be classified as a reserve.

If ABAT proves it has extensive lithium reserves, its value will jump enormously. The treatment of resources/reserves on the balance sheet is not straightforward. If you want to read the details, this article covers it all . It is most likely that ABAT will begin to add its resources to its intangible assets if they are classified as Measured and move them to tangible assets when they are classified as reserves.

American Battery's Cash Situation Plus Changes Since FY2023 10-K

ABAT presented its full year 2023 10-K on September 27, 2023. It was not pretty reading and may have led to a significant selloff in the days following the release.

The 10K revealed an increase in debt from zero to $6 million, and cash reserves had shrunk to $2.3 million, suggesting that ABAT only had one month of cash left. The short-term financing looks pretty dire.

However, the long term is healthy, leading to a positive equity situation for shareholders. The long-term assets break down as follows.

An investigation into the long-term assets is warranted and interesting.

The first line is Other Deposits for $27 million.

Note 5 in the accounts explains that ABAT has agreed to an Asset Purchase Agreement with Linico Corporation for tangible property and equipment priced at $6 million and that ABAT would acquire 100% of the membership interest in Aqua Metals Transfer LLC. ABAT made cash payments of $21 million and over 500,000 shares.

Linico is a subsidiary of Comstock Inc (LODE), and Comstock announced that Linico had sold its McCarran recycling facility for $27 million. Linico had leased the property with an option to purchase it for $12.5 million. Having made a significant cash gain on the transaction, Linico will focus its Lithium battery recycling plans at two other Nevada locations. Linico is a competitor to ABAT in this market and has built significant storage facilities for old Lithium batteries.

The other company mentioned, Aqua Metals Transfer LLC, is even more interesting. Aqua Metals Inc ( AQMS ) sells a patent-protected lithium-ion battery recycling technology. The technology “Aquarefining” converts blackmass directly into high-purity metals, removing the need for the extensive chemical use of LICY and, to a lesser extent, ABAT, plus the other Hydro recyclers ( page 7 company slide show) .

Aqua Metals has not engaged in commercial operations since 2019 ( page 15 10-Q ). It previously used its technology to recycle Lead Acid batteries, hence its ownership of the McCarren site. Lead recycling ended following a fire at the Mclaren site, and revenue dropped from $4.7 million to $108k ( FY2020) .

Aqua Metals seemed to have a great second quarter in 2023 (10Q). They raised $30 million, secured 3,000 tons of black mass supply, established partnerships with Yulho in Korea and 6K energy in the U.S. as well as initiating operations at its pilot facility and building a battery with Dragonfly Energy Holdings (DFLI), with a market cap of $78 million I will put on my watchlist. They are a micro cap, so any investment would be high risk have not been operational for 4 years but have a proven recycling technology that may be more environmentally friendly than ABAT and LICY.

It would appear ABAT paid $27 million for a property that Linico could buy from AQMS for $12.5 million. Linico and AQMS got a cash injection, and ABAT became commercially operational, so perhaps it was a win-win-win deal.

The other important long-term assets lines on the ABAT list are Mining properties and intangible assets.

Mining Properties are listed at $8 million, the price paid for the Tonopah Flats mining claims, and intangible assets at $4 million.

If the resources at Tonopah Flats are upgraded to "Measured," I expect a significant increase in these figures before mining commences. The value of the ore will move to inventory as soon as it is removed from the ground.

ABAT As A Going Concern

Wall Street seems to have little interest in this industry, with limited numbers of analysts following and, apart from LICY, very little investment. Short interest is low.

The FY 2022 10K raised the issue of ABAT continuing as a going concern. A flurry of activity followed, which apparently alleviated this problem for a time. Management now believes they have the funds for another 12 months due to crucial developments. (FY 2022 10K Subsequent events)

August 25: the sale and leaseback deal with Bow River was terminated.

August 29: sale of convertible notes realizing $25 million of cash for ABAT but raising the possibility of further significant dilution; they mature in September 2025

August 30: All debts and loans paid off in full.

September 1: DOE multi-year grant finalized to commercialize the Tonopah Flats Lithium deposits.

The CFO Issues

The finances at ABAT are changing quickly; they are becoming complex, with multiple planned revenue streams and financing options. I would have liked to see a long-serving CFO with experience in mining or recycling operations behind all this, but that is not the case.

Kimberley Eckert was hired as CFO in April 2022, and she was with the company for just over a year when the board dismissed her. In July 2023, she started a legal complaint claiming unlawful termination in retaliation for her alleging that certain company officers had withheld financial information from her (ABAT 2023 10K).

The replacement CFO, Jesse Deutsch, has been appointed to his fifth CFO job in the last five years, and none of his 13 positions have been in any industry related to the operations of ABAT. It is not an ideal situation. Hopefully, Mr. Deutsch can provide ABAT stability; he has worked in growth industries and emerging companies, so he will have some relevant experience even though it is not industry-specific.

Conclusion

The almost collapse of LICY and the significant fall in ABAT have raised questions about the economics of recycling lithium-ion batteries. It seems unlikely that this industry will not become large; lithium resources will run low despite the large growth of new mines, and the world cannot put huge numbers of these toxic waste batteries into landfills.

ABAT has just started commercial operations at the site bought from LODE and looks to have significant lithium mining reserves that will add value to its balance sheet and make it much easier to raise capital in the future, it also likely makes ABAT a takeover target.

The value of its lithium resources alone might give the company a value of more than a billion dollars without giving the recycling business a value as a going concern.

I will follow this story closely and update in the comments if I take a position and with any developments of interest.

For further details see: