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Li-Cycle Holdings (NASDAQ: LICY) down 50% - they’ve not got enough money, see?

What appears to be an entirely sensible plan can still go wrong for financial reasons

Update : 24 Oct 2023, 12:59 PM

Li-Cycle Holdings (NASDAQ: LICY) stock is down 50% yesterday overall. The problem with LICY stock is that the company has had to pause construction of its main plant. This is obviously problematic - if you’ve not got a main plant then what are you going to produce and how?

The base idea at Li-Cycle is absolutely fine. Recycling lithium batteries is going to be a real business. Lithium’s worth money, cobalt’s worth money, so large piles of batteries containing lithium and cobalt are worth money. This is simply how the scrap trade works. The two things necessary are the ability to process the valuable metals out of the scrap and a supply of scrap to process. There are many companies out there with seemingly bright ideas about how to process the scrap from batteries and we rate very few of them. Li-Cycle had actually thought - and thought properly - about how to gain that supply of material to process.

As we said elsewhere about Li-Cycle: “ They're going for a hub and spoke model - they're trying to claim a patent on it but that's ridiculous but never mind - which is their solution to that gaining volume problem. One obvious place which produces a lot of waste is the plant that makes whatever it is in the first place. In this case, battery scrap, there will be a lot of this at battery plants. Actually, there always is "manufacturing scrap" at any metal using factory. That's just the way the world works. And there's long been a history of this being the source for recycling plants. It can get pretty weird - much of the world's vanadium comes from what spills out of the iron ore going into furnaces, rhenium comes from the flue (i.e., chimney) dust of the molybdenum byproduct from certain copper mines. Some estimates are that 50% of the worlds germanium and gallium supply annually are from that manufacturing scrap which is swept up and sent to the recyclers.

So, sourcing manufacturing scrap is a known process. It produces volume - which means that it's possible to build actual processing plants of economic size. Which solves part of the economic problem, as above. The spokes in the Li-Cycle model are those collections of manufacturing scrap from battery plants. This is processed down to "black mass" which is, well, it's a black powder but the important thing being that it contains all the fun metals that we want to recycle, the nickel, cobalt and lithium. Extracting those metals from the black mass is not a difficult process - not difficult in the sense that it's well known how to do it. Nickel and cobalt we separate from virgin ores anyway, so that's well known and separating lithium from either and both is trivial chemistry.

And yet, we still want to do this at volume. At a higher volume than any one battery manufacturing plant will provide us with - yes, even a gigafactory. So, that's the hub. The spokes act as collection centres, processing (largely a physical process) down to black mass, the hub then does the actual metallurgical separation into the constituent elements. Then refines them back up to commercial purity to send them back out to the battery plants of course.”

This does work as a plan. Conceptually it’s exactly right in fact. But plans that work conceptually do not necessarily work in real life.

Li-Cycle stock price from Google Finance

As we noted when we looked - again elsewhere - later at Li-Cycle: “I'm now less enamoured of the company simply because they don't seem to be making quite so good on that strategic plan. What we seem to have, in my view, is management not quite delivering what we might hope from them. Thus the decline in the stock price since a year ago. Thus also perhaps a certain wariness about where that stock price might go in the future.”

Which is where we are now. For they’ve had to halt the building of that hub part of the system: “Li-Cycle Holdings Corp. (NYSE: LICY) (“Li-Cycle” or the “Company”), a leading global lithium-ion battery resource recovery company, today announced that it is pausing construction work on its Rochester Hub project, pending completion of a comprehensive review of the go-forward strategy for the project.” There’s lots of mumbling about it but essentially their cost projections were wrong and so they’ve run out of construction money.

We’d put this down to bad management ourselves - something we worried about elsewhere as above. Yes, it’s true, rising interest rates make capital investment more expensive and so on but really, you should have your construction finance sorted out before starting construction. And the business model does depend upon having that hub to process the scrap from the spokes. So, no hub no business model.

As we’ve been saying for a couple of years now the basic plan was conceptually sound. Execution seems to be the thing lacking.

 

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