ABML - American Battery Technology: Pilot Plant Is Behind Schedule Cash Is Running Low

2023-03-08 03:17:14 ET

Summary

• American Battery Technology’s $35 million pilot plant for the recycling of lithium-ion battery metals was supposed to be complete in 2022 but it’s still under construction.
• In my view, the completion of the recycling facility is at least several months away.
• With the focus shifting to the Tonopah Flats Lithium Project, cash is running low, and significant stock dilution seems likely soon.
• Yet, the market valuation of ABML has doubled over the past few weeks, and I think this could be due to strong retail investor interest.
• Short selling seems viable as the short borrow fee rate is below 9% but it could be best for risk-averse investors to avoid this stock.

Introduction

I've written several bearish articles on SA about US lithium-ion battery recycling company American Battery Technology (ABML). The latest of them was in April 2022 and in it I said that I doubted that the company's $35 million pilot plant for the recycling of lithium-ion battery metals in Fernley would be operational by the end of 2022.

Well, the Fernley facility still seems to be under construction and ABML hasn't secured any major off-take agreements yet. In addition, the company appears to be shifting a lot of its focus to a lithium claystone project and its cash position is depleting rapidly. However, the market valuation has doubled since late February, and I think this development creates a good short selling opportunity. Let's review.

Overview of the recent developments

In case you haven't read my previous articles on ABML, here's a brief description of the business. The company was previously known as American Battery Metals Corp and in January 2020 it announced plans build a pilot plant in Nevada for the recycling of lithium-ion battery metals, such as lithium, cobalt, and nickel. The facility was supposed to be fully operational by the second half of 2020, which seemed optimistic considering the lack of funding. You see, this pilot plant is expected to cost about $35 million and ABML secured the funding it needs only in September 2021 when it announced the issue of 25,389,611 shares at $1.54 per share. Looking at the key figures revealed for the recycling facility, I think that they sound too optimistic. The plant was designed to manage 20,000 metric tons of scrap materials and end-of-life batteries per year, which ABML estimated would generate annual revenues of around $160 million. This sum is larger than the commercial plants of several local competitors. In addition, the company claimed that the EBITDA margin of its Fernley facility would be above 80%. This is an even larger red flag as the figure is much higher than the estimates of all major players in the industry, including Li-Cycle (LICY), which I've covered here . The latter forecast a 2024 EBITDA margin of below 50% during its listing in 2021.

The construction of the Fernley facility started shortly after ABML secured funding for the project and the aim was for it to become operational in 2022. Unfortunately, the latest pictures from the corporate website are from August.

According to ABML's corporate website , the company currently employs only 44 people, and the pilot plant is still under construction. Yet, there is no information about when construction is expected to be completed or when the facility will enter the production phase. Looking at the Q4 2022 financial report of ABML, I find it concerning that construction in process increased by just $2.08 million in the second half of the year. In addition, property and equipment stood at just $21.7 million as of December, which leads me to think that the completion of the recycling facility is at least several months away.

With cash declining to $11.4 million at the end of 2022 , the company doesn't have the funds to complete the facility if we assume that it will still cost $35 million. Another red flag here is that ABML still hasn't announced even a single major supply deal with an automaker or a battery manufacturer.

Yet, despite the funding issues surrounding the construction of the Fernley facility, ABML spent $8.2 million in the second half of 2022 to buy 517 unpatented lode mining claims covering around 10,340 acres of land near Tonopah. This property is known as the Tonopah Flats Lithium Project and this is one of the largest lithium projects in the USA with inferred resources of 15.8 million tons of lithium carbonate equivalent. The issue here is that this project is in an early stage of and is likely to require hundreds of millions of dollars to reach the production stage. It's unclear at this point whether the project is feasible from a financial point of view and completing reaching the pre-feasibility study phase is expected to cost just shy of $5 million.

Overall, I think that the progress made on the construction of the Fernley facility is disappointing and I find it puzzling that ABML is diversifying into lithium mining considering its cash position is declining to alarming levels. Net cash used in operating activities stood at $3.3 million in Q4 2022 alone and considering the completion of the Fernley facility could require at least $13 million ($35 million minus the $21.7 million in property and equipment), I think that significant stock dilution in the coming months is likely. I think that the fundamentals of ABML have deteriorated since the last time I covered the company. Yet, the share price has doubled since late February.

In my view, the main reason behind this could be high retail investor interest. ABML is the most traded stock on the OTC market in terms of number of daily transactions as of the time of writing and there are currently a significant number of posts about the company on websites like StockTwits and Twitter every day, including links for large trading communities on Discord such as House of Traders. The latter alone has over 63,000 members. Note that the company isn't doing the promotion of its business or shares itself, but this is being done by a significant number of private investors and traders.

So, how do you play this? Well, short selling seems like a viable idea as data from Fintel shows that the short borrow fee rate is 8.8% as of the time of writing. However, it takes just over two days to cover and there are no call options available considering ABML is trading on the OTC market. In addition, the short shares availability has been volatile over the past few days. On March 6, there were 60,000 ABML shares available for short selling compared to just 52 as of the time of writing.

Looking at the risks for the bear case, I think that the major one is that the share prices of microcap companies can sometimes increase for spurious and unknown reasons. This has already happened several times with this stock over the past few years.

Investor takeaway

ABML still hasn't completed the construction of its pilot plant and it seems that it could take months before the facility enters into service. Cash is running out and it seems that significant stock dilution in the near future is likely. The short borrow fee rate seems low enough to make opening a small short position viable, but there are few shares available for borrowing and there are no call options here. In my view, it could be best for risk-averse investors to avoid this stock.

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