NHYDY - FAANGs No! CCLANGs Yes! Norsk Hydro First Among Equals

Summary

• I created the acronym CCLANG for the most important materials essential to battery storage systems and EV development.
• They are: Cobalt, Copper, Lithium, Aluminum, Nickel and Graphite.
• I place aluminum first among equals in my CCLANG series of articles -and Norsk Hydro first among aluminum giants.

This is the first company I'm suggesting for your due diligence in my series of articles on the six most essential materials for grid-level battery storage, electric vehicles and other forms of transportation ("CCLANGs.") I created this acronym in order to provide a shorthand mnemonic that can keep interested investors laser focused on developments within this key investment domain. For the best overview of the dynamics of the all that follows, I suggest you also read the first article in this series: Bitten By The FAANGs? Try My CCLANGs Instead!

What's so special about aluminum?

We see it daily. We use it daily. We take it for granted daily.

Aluminum is, after all, the most abundant metallic element In the earth's crust. It's also the third most abundant of all elements (after only oxygen and silicon).

It's not quite that easy, however. The basic element is not found as “aluminum.” Almost all metallic aluminum is produced from bauxite, to which it is bound.

Bauxite is an ore that consists of a mixture of hydrated aluminum oxides, iron oxide, titanium oxide, and other minerals. To get at the aluminum, bauxite is crushed and ground into a very fine powder. This powder is then mixed with water and chemicals to create a slurry, and through something called the Bayer process, becomes “alumina.”

This alumina is dissolved in cryolite (a molten solvent.) An electrolytic process then transforms alumina into aluminum and carbon dioxide. The result is a metal that's an excellent conductor of electricity, has high thermal conductivity, is lightweight and is corrosion resistant.

The end product is used as a replacement for heavier steel or other metals that rust easily. Some of these products we see every day as consumers: Aluminum cans, aluminum foil, kitchen utensils, window frames, doors and doorknobs, railings, ladders, shutters, skylights, grills, curtain bars, indoor and outdoor furniture, rain gutters and much more.

But it's also used to make body parts for cars, heat exchangers in engines, specialized alloys for the commercial airline and military aircraft, and other uses. About one-fifth of the world's consumption of aluminum is used by the construction industry to make bridges, commercial and residential roofing, and the much larger roofs of stadiums, markets and sport complexes. Aluminum’s light weight, strength and structural malleability makes it ideal for such applications.

To my point of it being one of the key metals for battery storage and electric transportation opportunities, according to A2mac1 Automotive Benchmarking, the Tesla Model S contains 1454 pounds of aluminum . From the body to the battery and the engine.

I think more automotive companies will follow Tesla’s lead. In researching an earlier article I came across this quote from Chris Staunton, the chief engineer of body structures for the firm that developed the taxi for the London Electric Vehicle Company: “We chose aluminum as a material as it is nearly three times lighter than steel in its raw form, and it absorbs twice as much energy in a crash.”

Lighter. Lighter is critical for all cars, but especially for BEVs if you plan to travel any distance at all. That crash profile is excellent, as well. It seems that, while steel uses its weight to bounce away a crash, aluminum absorbs and spreads out the impact.

A caveat when you see images like the one above. Always try to find at least one other. There's disagreement among various scientists, and therefore among most reported news, and therefore among different visualizations! I try to find those that most accurately reflect the consensus - at least at the time of publication!

The bottom line is that I believe we will need to produce considerably more aluminum than we do now for automobiles, trucks, railway cars, airplanes, ships, cans, foil, building and construction, roofing, wire, conductors, motors, cooking utensils, pipes, machinery, tools and more than I can list here.

What's the Aluminum-Air Battery?

The wild card I mentioned in my first CCLANG article is quite interesting. The current collector on the cathode side within today’s Li-ion batteries is usually a special type of aluminum foil. (No, not the crinkly kind we wrap leftovers in!) But it may be that a much greater use of aluminum “could” one day compete with or even surpass the Lithium-ion battery in use today.

"In the laboratory," researchers have created an “aluminum-air” battery. I stress “in the laboratory” because many great ideas work in theory. Some even work as prototypes. But in the real world, cost of production, insurance, environmental planning, and a host of other issues arise. Still, it's an intriguing idea.

The “range anxiety” that keeps buyers from buying an electric vehicle and the fact that they must be recharged so frequently, taking precious time, might be overcome if there were vehicles with batteries that were considerably lighter than today's lithium-ion batteries that did not need to be charged.

“Al-air” batteries are made of an aluminum alloy plate as the anode. The cathode is literally air. The electrolyte is a non-toxic, unlike many of the materials used today in lithium-ion batteries. (You will recall these have two electrodes, one cathode and one anode made of different materials, with an electrolyte in between them.)

Al-air batteries work more like a fuel cell. They use aluminum at the anode - and oxygen at the cathode. The result is a much higher energy density, some eight or so times higher than lithium-ion batteries. It works as the anode releases electrons when aluminum oxidizes, while the cathode sends oxygen to release electrons, generating electrical energy in the process.

Lighter weight, greater range, and no need to recharge sound great (again, in the laboratory.) Al-air batteries also would be more stable, less expensive, have a lower carbon footprint (in mining and refining) and be highly recyclable.

However, it not only does not need recharging, it "cannot" be recharged. After every 5,000 miles or so you would have to exchange it for another. Since this battery is about one-seventh the size of Li-ion batteries, it would be easily swapped out in 10-15 minutes – every 5,000 or so miles. The only replaceable part is the aluminum plates (which, extra bonus, can be 100% recycled.)

The reaction of other scientists to the Al-air batteries now being tested, range from “This is an amazing game-changer!” to “This is a complete scam.”

I have the curiosity to follow these developments, but not as yet the knowledge to be able to assess which of these it is. From our standpoint as investors, it doesn’t matter. It would be icing on the cake.

But without any success in this endeavor whatsoever, just using today’s battery technology, here's Bloomberg’s analysis, via Statista, for the expected rate of increase needed to just supply the world’s current and projected need for our CCLANGs:

I have highlighted with red boxes four of my six CCLANGs, with special emphasis on aluminum for batteries and its many other uses. I have not done so for graphite. You will see why when I do that article. For now, let’s identify the aluminum company I believe to be the best buy today.

God Jul (Merry Christmas) From Norway

Norsk Hydro ASA ( OTCQX:NHYDY ) - often referred to by competitors and analysts as simply Hydro - is a global aluminum and renewable energy company, headquartered in Oslo, Norway. It's one of the largest aluminum companies worldwide, with operations in more than 50 countries. NHYDY supplies low-carbon aluminum to customers worldwide and offer renewable energy solutions to industries that want to power their manufacturing in a greener way.

Norway itself owns about 34% of the company, while Norway’s sovereign wealth fund (the world’s largest; bigger than China’s and double the size of the next highest, in the Middle East) holds another 6%-7%.

A Little History

Hydro was founded in 1905 as a company that produced nitrogen plant fertilizer by fixing nitrogen from air, a technology developed by a Norwegian scientist. This process needed lots of electric energy, so a company-owned power plant was built at a very large waterfall, using hydro (of course!) as its power generation source. Many more such plants would be built.

By the 1920s, Norsk Hydro's technology for manufacturing artificial fertilizer was superseded by a follow-on process from Germany, so in 1927 the company formed a partnership with Germany’s IG Farben. Six years later Hitler came to power and 13 years later, in April 1940, Germany attacked Norway. (Historical note for those who appreciate either trivia or irony: the first American soldier killed in WWII was Captain Robert Losey, a US military attaché to Norway. He was evacuating the US diplomatic legation when killed by the Nazi bombardment.)

With the Nazi takeover, IG Farben commandeered the company and all its plants. This led to a somewhat better-known chapter in Norsk Hydro’s history.

Hydro’s Rjukan plant was the only place in Europe which could then produce heavy water, an essential component of the Germans’ atomic bomb project. This led to a number of commando raids and air raids on this important facility by the allied forces. It ultimately resulted in the plant’s destruction. There's a movie you may have seen called The Heroes of Telemark that tells the story. For more factual information, you can read elsewhere the even more thrilling tale of what really happened during Operation Gunnerside.

At the end of the war, the Norwegian government established an aluminum plant which was later acquired by Hydro, becoming the light metal division of the company, Hydro Aluminum. The company continued to acquire more and more aluminum facilities, including in the United States, Germany, Brazil and elsewhere.

Along the way, Hydro also became a major petroleum company when it partnered with a number of European and U.S. companies to search for oil and gas in the North Sea. The company ultimately sold all of its holdings in its oil and gas activities, leaving them with a strong shareholder position in what was then called Statoil, which is today, for those of us who own it, known as Equinor (EQNR).

This thumbnail sketch of Hydro brings us to today, when they have no petroleum or fertilizer operations but instead is one of the world's top aluminum companies, a pure play with operations and employees in Norway, the US, and around the world.

Norsk Hydro today

Hydro is able to produce the high energy required for aluminum fabrication by using mostly hydroelectric power. It's difficult to go more than a mile in most of western Norway, and a good bit of central and eastern Norway as well, without coming across major waterfalls. Harnessing these gives NYHDY a relatively low cost profile and a clean energy source for their production.

In producing aluminum with such a low carbon profile, Hydro has a leg up in selling to industrial companies who are seeking to reduce their CO2 footprint.

The demand for global aluminum has recently caught up to current supply, which gives us the opportunity to buy the shares at an attractive price. Profits have been weaker lately for all aluminum companies. Many have cut output. Even Hydro has done so at some of its less efficient plants on the European continent.

It's also building and operating solar and wind farms both to power its plants and to sell to customers. And the company on Thursday announced a deal with Mercedes Benz to supply the German carmaker with low-carbon aluminum from 2023 on.

Let’s take a look at how this company, which Bloomberg and others are forecasting leaps and bounds in growth through at least 2030, stacks up against its competitors. I begin with an overview of the biggest six aluminum companies and how they are rated by Seeking Alpha:

As you can see, the market cap of Hydro is double that of Alcoa - and dwarfs its European competition.

Hydro receives the highest SA quant score of any of its aluminum-industry competitors. It also gets a solid “5” from the institutional analyst that follows it.

Hydro has the highest dividend yield – currently. There's never anything sacrosanct about the dividend payout. If the company decides to conserve capital for expansion or acquisition, they would certainly consider it. This is true of most companies, but I always like to point it out. Also, like many global firms, NYHDY pays its dividend annually, in May.

Given that Hydro beats all competitors in most categories above, it's easier to point out the only factor in which a competitor looks stronger. In “Growth,” SA assesses Alcoa to be a bit stronger and much-smaller Constellium and Century to have a better growth profile.

I disagree. I see NHYDY taking market share from all of these. With the forced-by-reality retreat from the “immediate green/no compromise!” politics in Europe, politicians and companies will be looking everywhere they can to show they are still on the path to abolish fossil fuels. Low carbon is the name of the game. No one does that better than Hydro.

Looking a bit deeper we see that, even in this terrible bear market we are experiencing, NHYDY has trounced all major competitors in market performance as well:

In the final analysis of seeking the kind of company I want to invest my hard-earned money in, I look to profitability. Profitability is the end result of so many factors of revenue, expense, cash flow, capex, and so on that we could review individually, but why? Profitability is the proof of the pudding:

At its current price as of Friday’s close at $7.42, I consider Norsk Hydro to be a good holding for what I believe will be significant future growth. Being the low-cost producer, having a low carbon footprint, being at the forefront of recycling, and having the geographical diversification that gives Hydro plants on just about every continent puts them in the pole position for the demand I see coming for batteries and so much more.

Yet Norsk Hydro is uncovered by most brokerage firms. According to SA, there are "12" Wall Street analysts who cover Alcoa. Even tiny Century Aluminum (CENX) has coverage from three analysts. Hydro? Hydro has just one analyst following it on Wall Street.

Their folly I consider our gain.

I do expect volatility for the entire industry in 2023. NHYDY could well decline further, based not on the fundamentals but on investor fear. I'm not buying Hydro for next week or next quarter. Like all my CCLANGs, I'm positioning my and my clients’ portfolios for the tsunami of change I see coming for these critical materials.

I'm a buyer of Norsk Hydro.

Good investing,

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