FREY - FREYR Battery: Growth Story Unravels

2023-11-13 10:25:44 ET

Summary

• FREYR is set to delay its CQP facility as a response to European government subsidies remaining out of reach.
• The company is fully pivoting to the US to take advantage of 2022 Inflation Reduction Act subsidies.
• This pivot will see its Giga America factory produce conventional batteries for sale by 2025.

FREYR Battery's ( FREY ) more than year-long collapse accelerated last week Friday after its fiscal 2023 third quarter earnings saw the company push back the start of its customer qualification plant ("CQP") at its home base in Mo i Rana, Norway. FREYR will minimize spending on the plant in 2024 and was open during its third quarter earnings call that the project is not currently globally competitive without government subsidies. The company is in the execution phase of ambitious plans to build out three Giga factories with the progress of what was previously its flagship Norway Giga Arctic factory now waiting for subsidies from the European Union and Norway. Efforts will now solely be placed into the build out of Giga America in Georgia on the back of the 2022 Inflation Reduction Act subsidies.

While the company is likely to be laying off a significant amount of its 60 employees at Mo i Rana, around 15% of its total 400 employees in Norway, its entire European operating footprint, is likely to see a material pullback. It's important to note that the retrenchment of CQP is a strategic decision to pivot toward North America as the IRA will provide a subsidy of around $35 per kWh for the production of battery cells. The battery upstart will be able to manufacture its batteries in the US for $65 vs. $100 in Norway. The US also provides a large internal market which is currently experiencing a golden age of the construction of green energy infrastructure.

The US Pivot, Conserving Cash, And Free Cash Burn

FREYR's CEO Birger Steen further stated during the third quarter earnings call that there will essentially be no Giga Arctic or Giga Finland without the establishment of framework conditions that provide substantial government subsidies for EU-based battery factories. So three proposed giga factories are now down to one and the CQP is placed into cash conservation mode. The company has directly requested subsidies of €800 million from the relevant European government bodies in a letter sent in March but is yet to hear back. While it's not clear when or if ever the financial support package will be approved, a core part of FREYR's investment pitch has now been indefinitely mothballed and the pullback last week of the common shares reflects a downward resizing of global sales expectations.

FREYR also is redomiciling to the US with a roadmap that will see Giga America produce its first battery cells in 2025. The third quarter saw FREYR realize $19.26 million in cash burn from operations which when aggregated with capital expenditures of $40.5 million placed free cash burn for the quarter at roughly $60 million. The company is at least two years out from commercial operations, hence, its cash runway represents one of the most important metrics for an investment. There's zero debt on the balance sheet with cash and equivalents at $300 million at the end of the third quarter.

The company is guiding for a 50% reduction in total cash spending to expand its cash runway to over two years. This would be without taking on project level debt with FREYR also able to tap is common equity to raise more cash. Critically, the base case for a long position in the company is built around two years of cash burn at a reduced level, falling liquidity levels, and the specter of dilution against a stock price that's barely trading above the NYSE's minimum listing requirement.

Outlook As Risk-Off Sentiment Set For Some Recovery

2023 has been a brutal year, one where green energy dreams turned into nightmares. From Li-Cycle ( LICY ) to Plug Power ( PLUG ) and Enphase ( ENPH ), it's a bloodbath with tickers down more than 50% year-to-date being more commonplace than those that managed to eke out any positive return. However, the likelihood of further interest rate hikes is low with the market currently pricing in a 91% chance that the Fed yet again pauses rates at the upcoming December FOMC meeting. A fully dovish pivot would lift sentiment across the board and could deliver positive returns for shareholders from the current baseline.

FREYR has adapted Giga America plans around the CQP delay with full commercial operations now envisioned as operating on two tracks. Track 1 will be built around 24M's semi-solid technology with Track 2 set to be built around the production of conventional batteries. This would of course mean FREYR can get to market quicker but means it operates is a more commodified market with no clear product differentiation. It's hard to see this being an attractive investment in the long term with a business model highly dependent on government subsidies to be economical. FREYR is currently trading at a $210 million market cap, roughly 50% of the level of conventional US battery manufacturer Microvast ( MVST ) which has a trailing 12-month revenue of $267 million . FREYR is at zero revenue up until 2025 and is a sell against its growth plans.

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