Leveraging Li-ion anode advances
Novonix (NASDAQ:NVX) is an Australian battery technology company. The main goal of this emerging company is to develop high-quality graphite anodes that are competitive with unsustainable, inferior Asian products. The platform is based on Li-Ion Battery pioneer Jeff Dahn’s research, now conducted by an entire lab at Dalhousie University in Canada.
The team is currently developing a US-focused operating base to target the fast-growing electric vehicle battery industry and already has several partnerships to enable offtake when production ramps up. In fact, much of the available cash is thanks to a $150 million investment by none other than Phillips 66 (PSX), who now own 16% of NVX. This article summarizes the company’s current production status and highlights the risks and opportunities from a financial perspective.
NO battery manufacturer
The first thing investors need to consider about NVX is that the company doesn’t make entire battery packs. Instead, the company offers customers testing and R&D advice to increase the efficiency of the anodes for the full batteries. All current revenue comes from the Battery Technology Solutions (BTS) segment and this includes small scale performance testing and prototyping and the sale of coulometric cyclers for battery life testing. After finding optimal solutions, the company wants to expand the production of its products for a few customers.
While the BTS segment is seeing high growth, the revenue is negligible at less than $6 million per year. However, the company recently acquired manufacturing facilities in Tennessee to begin large-scale production of its anode materials. These materials are then sent to battery OEMs for final construction. Being on the material supply side offers investors unique exposure and can be an important way to reduce risk when investing in speculative battery companies. For NVX, first mass product sales should start in 2023, with a steep increase until the end of the decade.
Aside from the secular lithium-ion battery market growth, there are several positive catalysts that Novonix can capitalize on. First, the raw performance advantages are reflected in Coulombic efficiency and capacity retention compared to Tesla (TSLA) Model S, natural graphite, and synthetic anode materials. NVX in particular appears to have the greatest benefit in capacity retention, an important property for EV longevity.
Other data points also suggest that NVX anodes offer a significant advantage in terms of total available mileage from a single battery cell. If EV manufacturers are to compete with traditional internal combustion engines, using Novonix anodes appears to be an important first step.
An additional consideration is that current graphite anode technologies are not very sustainable. With a primary manufacturing base in China that includes extensive supply chain demand and utilizing lignite, NVX’s US-based supply and manufacturing base is far less influential. This represents an approximate 30-60% reduction in global warming potential compared to older products. When considering performance benefits, supply chain and manufacturing costs, and sustainability, Novonix appears poised to lead the anode materials segment.
Teamwork makes the dream come true
Novonix offers investors what many other battery companies cannot: strong cross-industry relationships. These relationships have come about thanks to the BTS segment, which provides testing services to the industry. In fact, NVX has worked with a variety of industry participants including: 3M (MMM), Honda (HMC), Murata (OTCPK:MRAAY) and more. As a result, NVX knows the issues that need to be addressed and the potential customers who can outsource production at a fair price.
Currently, Novonix is working with three main manufacturers as the first customers of the anode materials when production starts in 2023: Samsung SDI (OTCPK:SSNLF), Sanyo and KorePower. These three companies are high quality battery manufacturers that are already well established and will reduce the risk of one going under by the time NVX is ready to ship. The partnerships also underscore the agnostic nature of NVX’s solutions, as each manufacturer is able to serve energy storage, electric vehicles and other diverse applications rather than relying on a single industry.
This is similar to the expanded relationship NVX has had with utility Emera since 2019 working on energy storage solutions, although details on the exact financial implications remain limited. However, two recent big deals underscore the significant opportunities available when working as a team.
First, we have an update on the partnership with private company KORE Power. Novonix began a battery testing relationship and is now ready to ship over 12,000 tons of graphite material to KORE’s new KOREplex, a 12 GWh production center in Arizona. The large facility, set to open in 2024, will be a major player in grid-based battery storage applications. In addition to the production offtake, NVX has the additional benefit of a recent $25 million investment in the private company (~5% stake), which could prove fruitful as both companies grow.
We can also see that Novonix has also been working on developing relationships for their own supply chain. Most importantly, NVX is now working with Phillips 66 and Harper International to obtain the petroleum coke needed to manufacture the graphite anodes. The partnership also includes a US$5.6 million DOE financing to advance sales of more sustainable production technologies and form the first synthetic graphite supplier in the United States.
“This strategic investment allows Phillips 66 to directly support the development of the US battery supply chain,” said Greg Garland, Phillips 66 Chairman and CEO of the specialty coke market, supporting NOVONIX’s emerging position in US anode production.’
With the deal, Phillips 66 invested over $150 million in NVX and is now the majority shareholder. As fossil fuel companies try to move toward more sustainable endeavors, PSX could be viewed as a potential buyer down the road.
While Novonix appears strong from a qualitative perspective, it’s also important to consider its current financials. Most importantly, cash on hand is over $140 million while quarterly losses have peaked at $40 million. However, the costly acquisitions of land/factories and initial infrastructure are now over and future losses should be less than recent peaks.
While not as capitalized as, say, a Freyr (FREY), the current market cap of just $550-$600 million is also well below Freyr’s valuation of $1.6 billion. Considering Freyr’s battery technology provider 24M is a Novonix customer, I’d say NVX offers a more compelling valuation at the moment.
From multiple angles, Novonix looks like a leader in the burgeoning speculative battery technology segment. With a focus on delivering and developing high-quality material solutions, NVX will also face less risk than consumer-centric manufacturers. However, the risk/reward profile is more conservative, so don’t expect breakthrough performance. For now, I believe it will be important to watch the start of production and then assess the growth rate from there.
If the partners Samsung, Sanyo or KORE Power provide more investment capital, I would be more positive about NVX’s long-term likelihood of success. Even before production has started, NVX offers one of the better investment profiles in the industry. But as always, there is plenty of time to evaluate the company and watch for any issues as they arise, but maybe I’ll slowly build a position soon.