Summary
- FREYR's CQP will be starting up in 1Q23 and the Giga Arctic project remains on schedule.
- FREYR is currently working with these other licensee partners of 24M's SemiSolid platform and are deepening relationships with these partners.
- Giga America will be accelerated as a result of IRA incentives and huge ESS demand in the United States.
- The company's cash burn in 2022 was offset by the equity offering made in late 2022.
- There is strong interest for strategic, commercial and financial partners to provide FREYR with capital to support its growth.
This article was first posted in Outperforming the Market on 28 February 2023.
Investment thesis
I continue to like FREYR's ( FREY ) opportunity set and strong growth runway. It has more than 130 gigawatts of conditional and firm off-take agreements, largely with ESS customers. The company is able to use 24M Technologies SemiSolid platform, which has strong benefits and edge over current lithium-ion batteries. Furthermore, the need for energy resilience and the Inflation Reduction Act in the United States has resulted in an acceleration in the timeline for Giga America.
I have written previous articles on FREYR, including how the company is an undiscovered battery player with strong growth profile.
Operations progress on track
The Chief Operating Officer of FREYR commented that the company remains to be on schedule with the progress on its plants despite covid-19 restrictions and semiconductor shortages.
Management expects that the CQP will start operations in 1Q23, with the formal opening happening on 28 March . The final acceptance tests are being completed for the CQP before the operations team will proceed with the final commissioning and ramping up of the CQP.
With the start-up and subsequent ramp up of the CQP, this will be a core strategic asset for FREYR. The CQP will help provide customers with the opportunity to validate performance, enabling the conversion of conditional off-take agreements ("COAs") to firm off-take agreements. Furthermore, the successful ramp up of production of the CQP is essential to show investors FREYR's ability to perform at the GWh scale.
All the raw materials needed for the CQP has been obtained, with the first deliveries having already arrived at Mo i Rana. Most of the raw materials needed for Giga Arctic has also already been secured. Given the acceleration of Giga America, the sourcing team has reached out to about 20 suppliers to secure the necessary materials needed.
Management provided an update on Giga Arctic, which have been heavily elevated from the ground and the progress on the plant continues to be on track. Given the ongoing work for Giga Arctic, the operations team is mindful about capturing synergies and using the experience from Giga Arctic to improve the process for Giga America. This close collaboration of teams for Giga Arctic and Giga America will enable the accelerated delivery of Giga America.
Deepening technical and commercial collaboration with 24M licensees
Management continues to be confident in 24M's SemiSolid platform as it is a platform in commercial production today, with global companies from different industries.
FREYR is currently working with these other licensee partners of 24M's SemiSolid platform and are deepening relationships with these partners. Some of these players include Volkswagen ( OTCPK:VWAGY ), ITOCHU ( OTCPK:ITOCF ), and Fujifilm ( OTCPK:FUJIY ).
Recent conditional off-take agreement with Impact Clean Power Technology expands FREYR's SemiSolid commercial opportunity to the electric mobility and EV space.
Superior performance for ESS applications at the gigawatts scale
FREYR's SemiSolid platform is expected to bring superior performance for ESS applications at the gigawatts scale.
Based on FREYR's own internal analysis, they see that when it produces batteries at the gigawatt scale, this will enable it to be 50% more cost effective than other battery producers.
This is a result of the 24M technology platform design which fits ESS applications than what is currently available in the market. The platform also allows FREYR to use less space, capital expenditures, energy and labor.
The first products sent to customers and analyzed by third party researchers have provided strong results as well.
Accelerated pace of Giga America
The Inflation Reduction Act ("IRA") provides incentives that are improving the cost structure for a battery producer like FREYR in the United States. As a result of huge incentives from the IRA, management expects to see $37 million incentives for each gigawatt hour of capacity installed each year until 2030. This will exceed the total capital expenditures required for the installation of this capacity in the United States.
Because the Section 45X production tax credits will start declining in 2031 and be phased out by end of 2032, FREYR needs to act as quickly as it can to get its products out in the market to get the most out of the US IRA.
Due to the incentives from the IRA, FREYR will be accelerating its Giga America capacity in the United States to take advantage of the strong economics these incentives provide.
FREYR Giga America IRA economics (FREYR IR)
As a result, FREYR will be developing both Giga Arctic and Giga America simultaneously.
The Giga America project was supposed to be 10 to 12 months after the Giga Arctic project but the need to accelerate the United States project came about from as a result of a better cash flow profile as a result of incentives from the IRA, improved financing profile, and to take advantage of the strong demand and poor supply in the ESS market in the United States.
To that end, our US team is taking a look at various options which would provide us the ability to move up our startup production from what was estimated to be in 2026 into the year 2025. We have multiple options that we are evaluating that will get us into production faster, while providing a fit for purpose product that the market desires.
Management highlighted a land grant of $20 million from the Coweta Country and $7 million land grant from the State of Georgia that was approved. There are additional tax abatement incentives of $230 million and $140 million from Coweta County and State of Georgia respectively.
Solid commercial traction
FREYR saw traction in the electric vehicle market, as mentioned earlier, with its COA signed and announced in early 2023, which is the first for FREYR in the electric vehicle space. The company has several ongoing RFQs and partnership discussions, some from OEMs with an electric vehicle focus.
I think that the company continues to have very strong momentum in Norway and in the United States. With its strength in ESS, the first COA signed in the electric vehicle space is encouraging for FREYR's entry into the market.
Cash
FREYR spent $254 million in cash for 2022, while it ended the year with $563 million in cash on its balance sheet and no debt. The cash burn in 2022 was offset by the $251 million from its equity offering made in December. Cash proceeds from the offering will be used for construction of Giga Arctic and begin spending on Giga America.
The cash use in the fourth quarter was mainly on corporate overhead, capital expenditures and operating expenses, which are for the construction of CQP and Giga Arctic and purchase of the Georgia site on Giga America.
Management said that excluding capital expenditures, the expenses spent on research and development and SG&A was around $95 million each year, which they are exploring ways to lower that in the future.
As a result of the acceleration of Giga America, the incentives from the IRA and the near-term ramping up of the CQP, there are increasingly more financial and strategic partners looking to provide capital to FREYR. Management mentioned that these includes existing and potential commercial, strategic and industrial partners and financial institutions.
FREYR Battery Valuation
FREYR is currently trading at 3x 2024F EV/Sales and 0.6x 2025F EV/Sales. This is because of the expectation that production will ramp up significantly in 2025.
My valuation for FREYR is based on a blend of EV/Sales method and DCF method. I increase the discount rate used to 18% as a result of the rising rate environment. I apply a 2.5x revenue multiple to 2025 sales.
As a result, my price target for FREYR is $24.13, representing 155% upside from current levels. I think that the risk reward perspective for FREYR remains attractive as the company continues to execute well against its strategy and timeline.
Risks
Ability to convert to firm off-take agreements
At the end of the day, FREYR needs to show investors its ability to convert conditional off-take agreements to firm off-take agreements. This will be accelerated by the volumes coming out of the CQP, which will enable customers to validate and test FREYR's battery products. FREYR needs to convert its large amount of conditional off-take agreements to firm off-take agreements that will eventually generate substantial revenue for the company.
Cost pressures
I like that FREYR continues to execute well even in an environment where the supply chain was disrupted, and cost pressures were elevated. If cost and inflationary pressures were to remain high, this could result in higher costs needed for the build out and construction of Giga Arctic and Giga America.
Operational risks
FREYR needs to demonstrate its ability to ramp up and produce at large gigawatts scale. There are risks that there might be hiccups faced during the ramp up and operational phase of the company.
Policy and regulatory risks
While the IRA in the United States favors the acceleration of Giga America, there are risks that this favorable policy may be taken out or shortened. This will lead to less incentives and higher costs for the build out of the plant in the United States. This risk applies to any incentives or favorable policies out there right now given that a change in government and political leader may lead to changes in support for green policies.
Conclusion
I think that investors in FREYR will be pleased with the progress made by the company on multiple fronts. The announcement of acceleration of Giga America is a wise move to maximize the incentives from their business in the United States and will bring forward the initial timeline for the start-up of Giga America. The company remains well funded with cash on its balance sheet from the recent equity offering, and also with strong interest from existing and potential partners willing to support its future growth. I think that FREYR is well positioned to accelerate towards becoming a winner in the clean battery solutions space.
My price target for FREYR is $24.13, representing 155% upside from current levels. I think that the risk reward perspective for FREYR remains attractive as the company continues to execute well against its strategy and timeline.
For further details see:
FREYR Battery: Powering Up Into A Winner In The Clean Battery Space