FREY - Update On FREYR: A Deflating Battery Saga

2023-11-13 10:28:36 ET

Summary

• FREYR Battery's stock has lost over 40% of its value since I issued a STRONG SELL rating in August.
• The company has faced challenges in securing funding, resolving battery manufacturing issues, and managing cash burn.
• Updates on manufacturing capabilities, the business model, and financial forecasts suggest ongoing difficulties and uncertainty for the company.

In September, I analyzed FREYR Battery's ( FREY ) stock for the first time, assigning a STRONG SELL rating. Since then, the stock has lost over 40% of its value. A few months later, I believe it's important to update my analysis, especially considering the Q3 2023 financial report from the morning of November 9th.

All the sources of skepticism I indicated have proven accurate thus far:

• The company failed to secure the funding it anticipated from the Norwegian government and the European Union. Quoting from the earnings call : "While we also have been grateful for the support and indications of interest expressed by all our expert credit agencies, including ECA and the Nordic Investment Bank, the European Investment Bank, and the EUIF Innovation Fund is important to note that FREYR has not received any cash from these entities so far and all progress on Giga Arctic and the CQP to date has been made without yet having received funding from any of these entities" ;
• The challenges related to the battery manufacturing that FREYR has been working on since its inception are proving very difficult to resolve, delaying the expected start of production. Management stated, "The timeline to achieve automated production of inspect cells has pushed beyond our previous goal of the fourth quarter 2023" ;
• The cash burn has become a serious problem, forcing management to implement a cost-cutting plan for the coming years "Looking ahead to 2024, we have initiated a significant cost cutting and resource prioritization program focusing on the CQP and Giga America, which will significantly reduce our annual cash burn rate as we seek to extend our liquidity runway more than two years" .

Given all this, I can only reaffirm my previous rating.

A summary of the previous analysis

FREYR Battery is a company founded in Norway with the goal of producing batteries for energy storage on a large scale. To succeed, the company signed a licensing agreement with 24M, a small company that does not produce batteries but sells the right to use its technology based on a semi-solid electrolyte.

FREYR planned to produce batteries in three facilities:

1. In the Customer Qualification Plant ((CQP)), on a small scale, to showcase the technology and product to potential clients and investors;
2. In the Giga Arctic plant in Norway, taking advantage of the low local energy costs and the lack of competition in the European market;
3. In the Giga America plant, announced later, to take advantage of Section 45X of the IRA and due to financing issues with the Giga Arctic project that have slowed work in Europe. Management declared a potential production capacity of 2.5 GW annually.

The company expected to demonstrate the fully automated production of its 24M SemiSolid batteries at the CQP during the fourth quarter of 2023. The next step would have been to leverage this success to secure additional funding and move to large-scale production by mid-2025.

Q3 2023 updates

FREYR Battery presented its Q3 2023 results on November 9th. I also attended the earnings call live, where, in my opinion, some very important questions were asked.

The important updates concern 3 points:

1. Updates on the demonstration of manufacturing capabilities at the CQP;
2. Update of the business model;
3. Updates on financial projections for the coming years.

During the past quarter, the company also filed an S-4 registration to redomicile the business from Luxembourg to the United States. An extraordinary shareholder meeting will be held on December 15 to proceed with this project.

1. Updates on manufacturing capabilities

FREYR has never hidden the fact that the company needs more financing to scale up the production of its batteries. And to obtain this financing, an essential step is to be able to demonstrate on a small scale the production processes that would then be employed in the Giga Arctic and Giga America plants.

Last quarter brought one piece of good news : FREYR has achieved electrode casting with solvent slurry. This was one of the three key points that the company had indicated as essential to demonstrate the possibility of scaling 24M technology commercially. However, the other two points have not yet been achieved.

In its latest earnings call, FREYR admitted that "the highly complex commissioning of the Casting and Unit Cell Assembly equipment at the Customer Qualification Plant has moved beyond 4Q 2023".

This delay means not only will the company also postpone securing funding and the start of large-scale production, but it also indicates that it was unable to accurately assess the complexity of producing batteries based on the 24M SemiSolid technology on a large scale. I wonder if there will be further delays and additional problems that could exacerbate an already less than positive situation.

2. Updates on the business model

Given the uncertainties related to the ability to produce the 24M SemiSolid batteries on which the company has invested all these years, FREYR is trying to focus on at least one concrete opportunity that will allow the company to secure financing and start production.

The capital expenditure related to Giga Arctic will, for now, be halted. During the earnings call, it was reiterated that this project was where FREYR allocated most liquidity in 2023, and it will now remain on hold pending movement on the financing front.

Giga America, on the other hand, will be divided into two production lines: the first will continue to wait to produce the 24M SemiSolid batteries. For the second, the company has started looking for a partner to license a conventional and easier-to-manufacture technology. The goal is to focus on what management called "concrete opportunities" in the last earnings call, essentially implying that currently, the large-scale production of 24M SemiSolid batteries is not a concrete opportunity.

Management was asked to elaborate on the forecasts for the actual start of production at Giga America. The answer was that if there are no further delays in the CQP and if financing arrives by 2024, then the production of 24M batteries could begin at the end of 2026 - 18 months after the initial projections. Clear indications were not provided on when production of batteries with conventional technologies might begin, but it was indicated that it should take less time. The management expects to be able to provide more precise indications after choosing the partner for the technology licensing, confirming that even in this case, they will look at battery manufacturers for the ESS market.

Even for the production of batteries with conventional technology, however, the company indicated the need for more financing. Moreover, management stated they are no longer sure that Giga America will be able to produce 2.5 GW of batteries per year.

3. Updates on financial forecasts

FREYR closed Q3 2023 with a loss of $9.8 million and cash reserves of $327.9 million. Management expects to end the year with $250 million in liquidity.

In my previous analysis, I had expressed serious doubts about the possibility of the European Union or the Norwegian government actually granting FREYR the funding to complete the commissioning of the machinery for Giga Arctic, and the prediction turned out to be correct. At the moment, the company has not received $1 from either institution.

As a result, work on Giga Arctic will stop. The company believes it is better not to sell the plant in the hope that the situation may improve in the future, expecting a cash burn of $4 million per year to keep it in the portfolio.

The most significant new development is that a strong cost-cutting program will be introduced. FREYR now intends to burn no more than $30 million per quarter, starting from Q1 2024. This should provide the company with a cash runway of 2 years, and the cuts will mainly affect Giga Arctic unless something moves on the financing front; however, layoffs will also occur in other areas of the business.

I note that the 2-year cash runway is a favorable estimate. Doing the math:

• Q4 2023 should close with $250 million in cash;
• $30 million in cash burn would lead the company to deplete funds in 8 quarters;
• Unless the cash burn is reduced sooner, by Q1 2026, it will be necessary to dilute the shareholders' stakes or the company will run out of liquidity.

This means that it will take less than 2 years before the cash burn forces FREYR to issue new shares, barring major developments.

Considerations on the valuation

FREYR's stocks have plummeted following the release of the quarterly data, but even so, the company maintains a market cap of $487 million. The valuation remains significantly higher than that of other emerging companies like Fluence Energy ( FLNC ) and Solid Power ( SLDP ), which actually possess disruptive technologies for their batteries and are demonstrating execution of their plans on schedule. FREYR definitely has more cash than these two peers, but FLNC and SLDP believe that their cash reserves will be enough to cover the expenses until they can self-finance their operations. FREYR has more than $300 million in cash and equivalents, but it is expected to burn through these reserves in the next two years.

I genuinely cannot find justification in FREYR Battery's valuation. It can't be supported by manufacturing capabilities, as we're seeing the management struggle with challenges and delays at the CQP; it shouldn't be based on the value of the 24M technology, since it's licensed without an exclusive agreement; and finally, I don't think future prospects support it, given the current great uncertainty about if and when the company will actually start producing batteries - not necessarily the 24M.

It can be noted that the total assets are still over $700 million and that the company is debt-free, but this also leaves me skeptical:

• Half of these assets are liquidity that will be burned in the coming quarters;
• The other half are plants to which, in my view, a generous valuation has been assigned, since they lack the machinery necessary for large-scale production.

To all this, there is now also the prospect of share dilution in the second half of 2025.

Conclusions and final thoughts

After the announcement of the latest quarterly data, I can only reinforce my SHORT SELL rating. All the issues that I had highlighted in my previous analysis have turned into concrete problems openly admitted by management. I also believe that the decision to start evaluating the production of traditional batteries indicates the management's awareness that the 24M technology will continue to face scale-production problems.

In any case, I have decided to close half of my Short position to begin reaping the investment's rewards and shift liquidity towards long positions in other companies. The other half of my Short position will remain open, as I believe there is still potential downside for FREYR's stocks.

Upside risks

Like all analyses, this one also has its risks:

• The company could manage to solve the technological challenges for the production of the 24M batteries;
• FREYR could strike a very favorable deal for the production of traditional batteries and quickly obtain the necessary financing to start manufacturing operations;
• The EU or the Norwegian government could decide to allocate the funds that FREYR continues actively to request for the development of Giga Arctic.

Nevertheless, I consider it highly unlikely that these scenarios will materialize. Therefore, these risks do not change my rating.

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