LICY - Use The Recent Dip To Buy Li-Cycle Holdings

2023-05-16 12:47:06 ET

Summary

• We touch upon the attractive facets of Li-Cycle Holdings Corp., which could emerge as a pivotal player in the high-growth lithium-ion battery recycling industry.
• Given the exponential revenue growth potential on offer, Li-Cycle Holdings' valuations look reasonable.
• The risk-reward on the Li-Cycle Holdings Corp. charts looks attractive.

LICY - Investment Case

Within the broad lithium-ion battery value chain, activities linked to the recycling of these batteries may currently only account for a minuscule component of 3% or so. However, yet still, the growth prospects of this industry should not be underestimated. For context, as evidenced in the image below, the global lithium-ion battery recycling market could expand by over 4x , and cross levels of $11bn over the next 4 years!

The company in focus - Li-Cycle Holdings Corp. ( LICY ), a Canadian-based recycler (of lithium-ion batteries) - is likely to play an increasingly integral role in this industry and is currently in the process of building ample clout through its proprietary hub-and-spoke model.

Firstly, do consider that LICY's spoke units, which process battery manufacturing scrap, and end-of-life batteries, are strategically located near customers, so much so that handling and transportation costs are kept to a minimum, during the feedstock supply procurement phase.

Besides that, also note that LICY does not incorporate any smelting processes (which are typically not energy efficient, and are also harmful from an environmental perspective) but rather one based on hydrometallurgical technology, where these batteries are processed within a water-based solution, to recover almost 95% of the battery's resources. The output (recycled plastics and metals) is then sold to LICY's recycling partners.

During this process, the company also procures " black mass ," which is currently sold separately to other parties based on current metal prices. However, the real uplift will come when LICY can then divert its black mass as feedstock for its hub units (the first hub in North America will be based in Rochester and is due to begin operations shortly). These pivotal hubs can then leverage the black mass to produce battery-grade quantities of cobalt sulfate (6.5k-7.5k tonnes/year), lithium carbonate (7.5k-8.5k tonnes/year), and nickel sulfate (42k-48k tonnes/year) which can all be sold at a premium to metal prices. LICY will be perceived very well as its hubs' utilitarian qualities can also do a world of good in reducing dependence on mining, and bringing down the overall cost of battery production.

After the Rochester hub comes on board, the next major catalyst for LICY will be to see how quickly they can ramp up their European operations. Currently, the company is in the advanced development stage for three European spoke units (one each in Germany, Norway, and France) which could result in an aggregate annual production capacity of 50k tonnes per year.

Last week, we were also enthused to discover that Li-Cycle Holdings Corp. recently got into an agreement with Glencore to conduct a feasibility study of a European hub (based in Italy) which could end up being the largest source of recycled battery-grade materials. You're basically looking at a hub that could process 50K to 70K tonnes of black mass a year; put another way, this would be the equivalent of 600K electric vehicles.

To establish all these mammoth processing and production capacities across the globe, one is going to require ample capital, and LICY does not fall short here. Since March 2022, these investments have sucked out over $160m of LUCY's cash, but it has also done well to receive $245m of strategic investments, and could now even receive debt to the tune of $375m by mid-2023 from the DOE under the Advanced Technology Vehicles Manufacturing Program. This would put the group capital position in a solid place at close to $800m.

Forward Estimates & Valuations

Novice investors who are exploring Li-Cycle Holdings Corp. for the first time may be put off by the company's short-term revenue trends. On a trailing-twelve-month basis, group revenue has eased off post the March quarter event, but it's important to consider that this was primarily tilted by an unfavorable non-cash mark-to-market adjustment (driven by weaker nickel and cobalt prices versus a year ago) of -$4m (a year ago, the impact was favorable at +$4.4m. The more pertinent and less volatile gauge is the combined value of LICY's black mass product sales and recycling services, and here, in the March quarter, the metric surged by 118% YoY to hit $7.2m.

LICY's revenue base may not be too compelling at this juncture and will likely only close FY23 at the $34m mark. At the current market-cap of over $800m, the price-to-sales multiple (~23x) may appear to be too exorbitant to a fair few. However, I'd urge these investors to extend their horizons as group revenue is poised to explode in FY24 and FY25 when the Rochester hub starts playing a bigger role (to be commissioned by the end of this year ). For context, you're looking at revenue figures of $173m (FY24), and $501m (FY25), translating into a stunning 2-year CAGR of 282%.

In effect, based on the FY24 sales figure you're looking at a fairly reasonable price-to-sales multiple of 4.11x (for context, the stock's average forward price-to-sales multiple since listing has been 7.4x)

Closing Thoughts - Technical Considerations

Then LICY's weekly chart shows that since September last year, the stock has been chopping around within the range of $4.3-$6.66. In light of that range, an entry at the current price levels ($4.5 levels) would offer good risk-reward considering how far away the stock is from the upper boundary.

The prospect of a short squeeze shouldn't be ruled out, as the days-to-cover ratio has crossed 10 days once again, and recent history has shown us that it typically doesn't linger past that number for too long.

Finally, you could also say that Li-Cycle Holdings Corp. comes across as a decent enough prospect for mean-reversion within the global clean energy space. Relative to the Invesco Global Clean Energy ETF (PBD), the LICY stock currently looks enormously oversold, with the relative strength ratio trading at levels that are 32% lower than the mid-point of the range.

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