NVX - NOVONIX: Opportunity In The North American Battery Supply Chain

2023-12-04 17:02:11 ET

Summary

• NOVONIX has experienced a significant decline in stock price despite deals and investments, with a drop of over 80% in 2022 and a poor YTD performance in 2023.
• Recent restrictions on China's graphite exports present challenges to the global graphite supply chain but also present opportunities for NOVONIX in the growing North American market.
• The company aims to aggressively scale synthetic graphite production to capture a significant market share by 2030.

Introduction

NOVONIX (NASDAQ: NVX ), the battery materials and tech company, has seen poor stock price performance since the listing of its ADRs on the Nasdaq about 21 months ago. The stock price fell over 80% from the yearly open in 2022 and has seen an over 50% decline YTD in 2023. This decline occurred despite copious amounts of deals and investments like Philip 66's ( PSX ) $150 million strategic investment in 2021, and the recent $100 million grant from the US Energy Department. This article delves into recent company developments, market opportunities for the company, the company's current and future projected synthetic graphite production capacity, and revenue projections based on graphite production capacity.

The Synthetic Graphite Market Opportunity

NOVONIX operates in two divisions: NOVONIX Battery Technology Solutions division (BTS) and NOVONIX Anode Materials division (NAM). The BTS division focuses on providing lithium-ion battery cell testing technology and R&D services. The NAM division focuses on the development of synthetic graphite anode materials. The NAM division started in 2017, and the company has been working to become a key player in the North American battery anode materials supply chain. There is a huge market opportunity for NOVONIX here because of North American EV manufacturers relying heavily on Chinese graphite anode materials for EV batteries. China controls about 75% of worldwide natural graphite production, about 74% of synthetic graphite production, and handles over 90% of the worldwide graphite refinement process into anode-ready materials.

China's dominance poses challenges to Western countries and EV companies. The recurring Sino-Western trade tensions disrupt the graphite supply chains. In a recent development, China started restricting graphite exports, putting in place an export permit requirement for graphite exports, which took effect on December 1, 2023 - a move seen as a response to the US administration's recent restrictions on AI chip exports to China. Western governments aim to curb overreliance on China's graphite by focusing on the development of alternative battery anode materials. On November 15, the US Department of Energy announced an allotment of $3.5 billion to boost domestic battery manufacturing and the supply chain.

Positioning the United States front and center to meet the growing demand for advanced batteries is how we boost our global competitiveness, maintain and create good-paying jobs, and strengthen our clean energy economy."

- U.S. Secretary of Energy Jennifer M. Granholm

About a month ago, the government of Canada announced a C$1.5 billion infrastructure fund that will support the development of the country's critical minerals sector. This move stands to boost the North American battery feedstock market.

Though natural graphite production and market price are cheaper than synthetic graphite, EV manufacturers prefer synthetic graphite anode materials to natural graphite materials because of the superior fast charge turnaround, better energy storage capacity over time, and the longer operational life that synthetic graphite anodes possess. The long-term efficacy of synthetic graphite anode materials has been substantiated through comprehensive experimentation and documentation. A study conducted in 2017, led by Stephen L. Glazier , entailed tests employing precise electrical measurements, heat monitoring, pressure analysis, and gas measurements on both natural and synthetic graphite anodes. The findings reveal that synthetic graphite has a better long-term charge-holding capacity than natural graphite.

NOVONIX is in a prime position to thrive in the North American battery feedstock market with its synthetic graphite anode material. The company has been planning production for years and things have started to take off. I like the fact that from the get-go, NOVONIX is paying attention to key areas of production that have raised environmental concerns regarding the production of synthetic graphite. Graphitization, which is the process of converting hydrocarbon feedstocks into synthetic graphite, involves thermal processing at very extreme temperatures; hence, it is energy-intensive.

Synthetic graphite producers in China and Inner Mongolia make use of mainly fossil-based energy, leading to high carbon emissions. A life cycle assessment ((LCA)) study by London-based sustainability and life cycle assessment consultancy firm, Minviro, reveals that the production process of battery-grade synthetic graphite in China results in the emission of roughly 17 Kg of CO2 per Kg of graphite produced. Benchmark Mineral Intelligence Limited put this value at about 15 Kg of CO2 per Kg of synthetic graphite produced in China, and about 25 Kg of carbon emissions for a kilogram of synthetic graphite produced in inner Mongolia.

Minviro did an LCA on NOVONIX's GX-23 synthetic anode graphite product and results show the GX-23 to exhibit a roughly 60% reduction in global warming potential (GWP) compared to synthetic graphite anodes produced in Inner Mongolia and China, and an approximate 30% decrease in GWP when compared to anode-grade natural graphite produced in Heilongjiang Province, China. The Minviro LCA results have been peer-reviewed and confirmed by independent experts and found to be compliant with ISO-14040:2006 and ISO-14044:2006 standards.

NOVONIX recognizes that Environmental, Social, and Governance ((ESG)) considerations have a material impact on our business and stakeholders. We are committed to operating a profitable, ethical, and sustainable business and are actively articulating and developing an ESG program aligned with our values. As we develop our ESG program, we are committed to transparency with respect to our performance and progress.

- Company website

NOVONIX demonstrates a commitment to ESG goals through strategic choices in energy and material inputs. Employing proprietary graphitization furnace technology at the Anode Materials division in Chattanooga, Tennessee, NOVONIX leads the way as a sustainability innovator in graphite production. Their selection of low-emission thermal processing for hydrocarbon feedstocks underscores a dedication to environmental responsibility. NOVONIX prioritizes sourcing hydrocarbon materials (Phillips 66 is NOVONIX petcoke supplier) with minimal impurities, aligning with its goal of emission reduction in the production process. NOVONIX says the current furnace used for graphitization meets the throughput, cost, and sustainability targets set by the company.

The initial production guidance of about 10,000 tonnes per annum (tpa) in 2023 underwent a subsequent revision, with a downward adjustment to 3,000 tpa projected by 2H 2024. This adjustment has been cited as a contributing factor to the stock's underperformance over the past year. The anticipation is now focused on the smooth execution of the updated production and sales timeline for KORE Power, with hopes for scaling the tpa in the future. NOVONIX has set ambitious scaling targets, aiming for an annual production capacity of 50,000 tonnes by 2025 and 150,000 tonnes by 2030; this would potentially translate to ~8% of North American anode market share by 2025 and ~12% market share by 2030.

Hopefully, KORE Power's Arizona battery cell plant, known as KOREPlex, will begin battery cell production in 2024 and things will also go as planned on NOVONIX's end, and the supply of anode material will officially kick-off. Looking ahead, if NOVONIX can convert current MoUs with Panasonic and Samsung into supply partnerships, NOVONIX's tpa scaling goals can be reached.

How Does this Translate Into Financials

NOVONIX cash balance at the end of Q3 FY23 was $86.7 million and revenue from the BTS division was $1.7 million. The company's total sales currently come from the BTS division. On the sale of the synthetic anode, I expect revenue to jump significantly, but I don't expect improved gross margins immediately, because achieving economies of scale and operational efficiency in the production process may take time.

Despite the current $86.7 million cash balance, NOVONIX will likely take more loans and issue convertible notes to raise funds, leading to potential dilution. Scaling to the projected tpa will require expanding the current Chattanooga facility or building more facilities. According to NOVONIX, that facility can scale up to 20,000 tpa. NOVONIX has talked about plans to build greenfield facilities; therefore, I expect ongoing CapEx.

NOVONIX isn't profitable yet, and sales from the NAM division have not commenced yet, so I'd stick to the price-to-book ratio, considering the substantial physical assets the company owns. The current P/B ratio at 1.10x suggests a slight premium; however, the current P/B is much lower than the historical average. This stock was previously overvalued relative to sales and book value as investors were willing to pay a high premium because of the growth prospect the graphite anode material business gave the company. The 5-year average P/B ratio is 8.14x. Since nothing tangible took off in terms of graphite production and sales, the stock price performed poorly; hence, the lower valuation metric. Now that the new production and sales milestone is approaching coupled with China's disruptive regulations and the expanding US battery materials supply chain, I think NVX might be near the bottom and there should be a shift in sentiment towards NVX soon.

Takeaway

NOVONIX is worth holding because of the China graphite export regulation and the commitment of the U.S. government to establish a sustainable battery materials supply chain in North America. There is a huge market opportunity. NVX remains a high-risk, highly speculative investment because the production process is resource-intensive and there is the possibility of timelines not being met, as seen in the past.

In the ongoing discussion about whether synthetic graphite anodes will endure or be supplanted by more widely available alternatives like silicon, I believe, for now, the possibility of supplanting graphites is unlikely. Graphite will continue to be actively used in battery anodes for the long term. The development of silicon anodes isn't commercially viable yet, and I don't think it will be anytime soon. Engineers still face significant challenges with silicon anode. Silicon undergoes substantial changes in volume during charge-discharge cycles. The repeated changes in volume lead to the silicon material cracking over time. This cracking can cause the active part of the battery (where the energy is stored) to disconnect from the part that carries the electric current. Enovix ( ENVX ) is reportedly making strides with its 3D Silicon™ Lithium-ion Battery, featuring a 100% silicon anode. While companies like Enovix and Amprius Technologies ( AMPX ) are actively working on new battery architectures to tackle silicon anode challenges, these technologies are still in the early stages, and their widespread adoption remains uncertain.

NVX is suitable for investors who have a higher risk tolerance, are willing to hold their investments for the long term, and recognize the potential in the expanding North American battery supply chain. Investors who are down already on this stock could also take a DCA (dollar cost averaging) approach to the stock.

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