CA - NanoXplore Is Poised For Exponential And Profitable Growth As EV Sales Expand

2023-05-30 17:00:21 ET

Summary

• NanoXplore appears to be disrupting multiple industry verticals as it strives to establish itself as a dominant player in the graphene market.
• It went largely unnoticed that NanoXplore has reached an inflection point, poised for a period of explosive and profitable growth if it successfully executes its planned capital investment.
• Securing a shareholder-friendly financing package, expected in the next few months, could drive the stock upward. Therefore, it's an opportune time for long-term investors to consider investing in the stock.

In a previous article , I made the following statement about NanoXplore Inc. (GRA:CA)( NNXPF ), a Montreal-based company and a leading manufacturer of the wonder material, graphene:

"...large-scale graphene production has been achieved, with the price having been driven down to a level that seems to make sense for industrial applications...

NanoXplore is the industry leader in the emerging field of graphene; better yet, I believe it won't stay on the bleeding edge for long... NanoXplore has largely de-risked its graphene production business. NanoXplore made a number of downstream acquisitions for market access to... drive the demand for its graphene product. Meanwhile, NanoXplore continues to make progress in the development of graphene-enhanced anode...

As a pre-FCF, speculative growth play, NanoXplore appears to offer an extremely attractive upside despite all risk factors. The sales of graphene for use in composite products alone seem to justify an entry; further upside may be found in the commercialization of graphene-enhanced batteries. The next few quarters are thought to be news flow rich as the company nears the inflection point on the hockey stick..."

Two years have passed since the publication of that piece, during which time we have closely observed NanoXplore's management as they executed their business strategy. Now, it is time to share our thoughts on the company, provide an update on the investment thesis, and assess the available investment options for long-term investors.

Overview of the business

NanoXplore's long-term goal is to establish a dominant franchise in graphene niche. This franchise would involve manufacturing graphene at the upstream level and leading the way in introducing graphene into various downstream industry verticals, such as transportation, concrete, plastics, polyurethane foam, geotextiles, and drilling fluid, among others. Additionally, NanoXplore aims to produce - in commercial scale - graphene-enhanced lithium-ion batteries for electric vehicles, as shown in Figure 1.

The total addressable market (or TAM) for the aforementioned graphene applications is projected to exceed 7,700 ktpa of graphene consumption. In comparison, NanoXplore currently accounts for 40% of global graphene production by operating its 4,000 tpa plant in Montreal. It appears that NanoXplore only needs to capture a small fraction of the graphene TAM to achieve significant growth.

In August 2021, NanoXplore achieved a significant milestone by obtaining regulatory approval to supply the U.S. market with GrapheneBlack?? in industrial volumes. This was made possible through a consent order with the U.S. EPA , allowing for the commercial use of GrapheneBlack?? as an additive for thermoplastics, thermosets, and rubbers, without any annual volume limitations.

Since the third quarter of 2021, NanoXplore has made significant progress in all three of its focus markets as discussed below.

Specialty compounds

In the specialty compounds market, NanoXplore continued to penetrate downstream markets through mergers and acquisitions. In December 2021, the company acquired Canuck Compounders Inc. , a plastic recycling compounder, for $9.3 million. This acquisition contributed approximately $20 million in annual revenue, along with nearly $2 million in EBITDA, as depicted in Figures 2 and 3.

In May 2022, NanoXplore finalized a blanket purchase order with Solmax Group Inc. , a leading manufacturer of geomembranes and geosynthetic solutions for environmental containment applications like landfill liners, mining, and water storage. This transaction comes after five years of collaborative research and development aimed at creating a next-generation product using graphene technology, which not only addresses customer sustainability challenges but also enhances the performance of the product. The significance of this transaction cannot be overstated. It not only represents a major accomplishment for GrapheneBlack in replacing carbon black in the 75,000 tpa black masterbatch market, but also highlights that NanoXplore's research and development in collaboration with downstream customers begin to yield commercial results.

Lightweighting composites

In May 2022, NanoXplore entered into a long-term supply agreement with Molding Products LLC (a subsidiary of IP Corporation).

This agreement enables NanoXplore to supply graphene to the latter company for the production of, and to market and sell, graphene-enhanced sheet molding compound (or SMC) under the trade name GrapheneBlack™ SMC. This premium-quality SMC is utilized in the production of lightweight composite exterior and battery enclosure components for cars and trucks, including hoods, bumpers, roofs, and battery packs. The product offers notable advantages, such as a weight reduction of up to 15% compared to typical composite parts, as well as improved surface finish, paintability, and crack resistance.

I anticipate that GrapheneBlack SMC will play a pivotal role in NanoXplore's future success in the transportation market. Lightweighting is extremely important for both passenger EVs and heavy commercial vehicles and buses.

EV battery materials

In August 2022, NanoXplore Inc. acquired XG Sciences Inc. , a former competitor, through a bankruptcy court process. Following this acquisition, NanoXplore proceeded to relocate the mechanical milling platform and the R&D lab from Lansing, Michigan, to Canada, as part of the initiative to establish a 100-200 tpa silicon-graphene anode material facility by late 2023.

By acquiring XG Sciences, NanoXplore gained access to a portfolio of issued and pending patents. These patents played an important role in expediting NanoXplore's own development of silicon-graphene battery anode technology. To that end, NanoXplore received patent approval for its silicon-graphene anode material solution, trademarked as SiGTM, in March 2023. This anode technology has demonstrated remarkable improvements in performance when compared to conventional anodes, including enhanced range, reduced charging time, and improved safety, as depicted in Figure 4.

VoltaXplore successfully commissioned a 1 MWh demonstration facility in Montreal, Quebec, in March 2022. This facility, designed for producing 18650 cells and completed on time and within budget, was a crucial step on the path towards achieving a greater goal; NanoXplore has decided to construct, by 2026, a 2GWh battery cell gigafactory capable of manufacturing 130 million larger-format 21700 cylindrical cells each year, a production capacity sufficient to power the equivalent of 50,000 electric vehicles annually.

VoltaXplore was a 50:50 joint venture between NanoXplore and Martinrea International Inc. ( OTCPK:MRETF ). However, in late March 2023, NanoXplore purchased Martinrea's 50% equity stake in VoltaXplore for $10 million by issuing 3,420,406 common shares to the latter. NanoXplore thus became the sole owner of VoltaXplore as it continues to seek financing for the gigafactory, while Martinrea increased its equity position in NanoXplore from 21.1% to 22.7%.

The federal government of Canada introduced a 30% refundable investment tax credit in its 2023 budget, designed to encourage investment in clean technology. Such a tax incentive program, along with Quebec provincial financial support, will greatly enhance the economics both of the gigafactory and of the anode material facility. VoltaXplore is in the final stage of securing financing for the 2 GWh gigafactory, anticipating to start construction in early 2024 and commission the plant in 2026.

Outlook

In my opinion, NanoXplore's management has effectively executed its business strategy from 2017 to 2022. They have successfully established the industry's leading graphene plant, boasting a production capacity of 4,000 tpa. Furthermore, they have reduced the unit operating cost to below $10 per pound, thus encouraging widespread adoption of graphene among downstream customers. Through collaborations with these customers and strategic M&A, NanoXplore has fostered a burgeoning, blue-ocean downstream market, with a total addressable market exceeding 7,700 ktpa. It currently boasts an impressive roster of customers that includes Ford ( F ), Toyota ( TTM ), Paccar ( PCAR ), Volvo ( OTCPK:VOLAF ), General Electric ( GE ), and Caterpillar ( CAT ).

For the fiscal year ending June 30, 2022, NanoXplore had initially projected an annual revenue of $85 million. However, the company exceeded expectations by generating $94.31 million in revenue, surpassing its guidance, as shown in Figure 3. Looking ahead to fiscal year 2023, NanoXplore has revised its revenue guidance to a range of $120-$125 million , up from the previous range of $115-$120 million. This revised top line guidance implies a projected revenue growth of 27-33%.

Over the past four years, NanoXplore has maintained a gross margin of approximately 16%, as depicted in Figure 5. This deliberate strategy, I believe, is aimed to induce the adoption of graphene among downstream customers. Meanwhile, the company experienced the benefits of economies of scale as its expanding operations allowed fixed costs to be spread over an expanding business operation. Consequently, there have been improvements in both EBITDA and net margins.

With management's guidance indicating continued revenue growth in the coming quarters, we can expect further expansion of margins and, ultimately, the achievement of profitability. In simpler terms, NanoXplore appears to be at a turning point, poised for a period of hockey stick-shaped growth. Pedro Azevedo, CFO of the company, stated on the occasion of reporting financial results for the quarter ended March 31, 2023:

"Another solid quarter is behind us and our momentum to profitability continues. A third quarter in the last four of positive adjusted EBITDA demonstrates how NanoXplore is improving and the first consistent signs that we will soon achieve profitability through the higher margins delivered by graphene. I am also pleased with the work done in recent quarters to optimize our working capital levels and keep as much cash in hand as possible to fuel our strategic initiatives."

The strategic plan: 2023-2026

To further build on the success of the past few years, NanoXplore has unveiled an multi-year strategic plan for 2023-2026. As part of this plan, the company will invest $100 million in the construction of a state-of-the-art plant capable of producing 12,000 tpa of graphene and battery materials. This plant will encompass a capacity of 7,000 tpa for battery materials and 5,000 tpa for graphene, with an expected commissioning date in 2026. Additionally, NanoXplore will allocate $50 million to enhance its GrapheneBlack SMC capacity, increasing it from the current 2.3 Mlb to 12.3 Mlb by 2025. Furthermore, an investment of $20 million will be made to double the capacity of the existing graphene plant by 2026, as depicted in Figure 6.

With a total investment of $170 million over the next 3-4 years, NanoXplore is poised to increase its production capacity by five times and nearly quadruple its annual revenue.

After the previous episode of an investment spree (2019-2021), as shown in Figure 6, NanoXplore has even managed to generate some modest free cash flow in the last couple of quarters, as depicted in Figure 5. Once the company completes its ongoing phase of capital spending by 2026, I anticipate that it will be capable of generating free cash flow in the hundreds of millions.

Risks

To finance the implementation of the strategic plan, NanoXplore intends to access various sources of funding, including cash on hand, federal and provincial grants, debt, and possibly equity. It is important to note that issuing equity will result in dilution of the interests of existing shareholders. NanoXplore has a relatively tight capital structure, primarily controlled by a select group of strategic investors, which includes Martinrea, Business Development Bank of Canada, Investissement Quebec, Caisse de depot et placement du Quebec, and notably, the founder and CEO Soroush Nazarpour. This supportive investor base positions NanoXplore favorably for raising equity capital if needed, as demonstrated in February 2022 . However, given that Dr. Nazarpour personally owns over 7% of the company, it is reasonable to assume that the management led by him is motivated to act in the best interests of shareholders by minimizing equity dilution.

Regardless of whether it becomes profitable in the future or not, the primary question that continues to linger regarding NanoXplore is whether it will merely evolve into another commodity producer or if it can establish a sustainable competitive advantage. It is still too early to determine, and a definitive answer to this question remains uncertain. However, considering its position as a first mover, NanoXplore possesses significant latitude to shape the emerging competitive landscape of the graphene industry. Personally, I maintain a cautiously optimistic outlook based on the speed of customer adoption of graphene and the precocious maturity displayed by management in navigating through uncertainties.

Investor takeaways

NanoXplore seems to be making waves across various industry verticals as it works towards building itself into a dominant franchise in the graphene market. It is thus extremely encouraging to observe that the company appears to have reached an inflection point, poised for a period of exponential and profitable growth.

Previously regarded as a market darling among investors, NanoXplore experienced a sharp decline in sympathy with the broader trend of technology stocks since late 2022. As we entered 2023, however, there was a resurgence in the tech sector, leaving NanoXplore somewhat behind. This may be attributed to the uncertainty generated by the announcement of an ambitious investment plan for the coming years, as depicted in Figure 7.

The company is expected to announce a financing package in the coming months, which is expected to include substantial government support. This event holds the potential to address the uncertainty surrounding the stock. Drawing from the previous investment spree, as illustrated in figures 6 and 7, it is likely that this new round of capital investment will be followed by significant appreciation in the share price. Therefore, I believe that now is an opportune moment for those with a 3-5 year investment horizon to consider investing in this stock.

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