Li-Cycle – It Could Work, Right Structural Idea

Summary

• I’ve been rather scathing about a number of lithium and battery recycling stocks.
• Li-Cycle looks very different to me as they’re concentrating on what I consider to be the important part.
• The base structure of the plan looks right that is.

March 17, 2022

Original article published in Seeking Alpha

The basic technological structure

I’ve mentioned several times around here (here and here for example) that I have a useful little aide memoir to evaluate people who claim to be about to recycle something. Which is if that’s the plan, then the attention has to be paid to how what is to be recycled will be collected. For that’s what the problem is, gaining the material to recycle.

Sure, new chemistries, better technologies, shiny new plants and factories, they all have their place in the recycling world. But they’re not the base problem of the business. Having something to recycle is.

Think on it for a moment. Traditional business, you make something, somewhere, then you distribute it. It comes out of the factory in units of 10,000 (say) and then eventually becomes just the one unit of whatever in the hands of the actual consumer.

Recycling works exactly the opposite way around. There’s one unit in the hands of that final consumer – who has just consumed it – and you’ve not got to get it back into that pile of 10,000 pieces which is the economic size to run back through the recycling plant.

We all know that retail and distribution margins are high – Ford doesn’t get paid $30,000 for a car, Coca-Cola isn’t getting $5.89 (or whatever those retail prices are these days) for a six pack. Recycling works the same way but in reverse.

So, whenever anyone starts talking about recycling I want to see the attention they’re paying to the collection of what is to be recycled. Because that’s where so much of the economics of the business is.

Yep, sure, a new whizzy tech, a shiny plant, better chemistry, they all help. But that attention has to be paid to where the material to be recycled is going to come from.

Li-Cycle Holdings (NYSE: NYSE:LICY)

This is what impresses me about Li-Cycle, the obvious attention they’ve paid to exactly this part of the process. You can see their presentation here. Unpicking it all for you.

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.

Consumer recycling

Once there is a system like this it becomes much easier to plug that consumer scrap feed into the system. We’ve got most of the costs paid for already, the overheads and so on. Our Capex of the plant and so on – recycling manufacturing scrap can often be low margin business because the manufacturers know exactly what is in what they’re giving you. But it’s also reliable and in volume, the margins are less important.

As I say, now we’ve the system it’s possible to add that consumer scrap to it. We’ve also made sure that the complex part, the metallurgy, is at our hubs. We can have other spokes which process old batteries – say – down into the black mass. At which point we’re removing much of the low value weight from what we’ve got to ship to the processing plant, another bonus.

This isn’t perfect, of course it isn’t.

I’m not saying that I think that this process Li-Cycle is perfect. Rather, they’re thinking properly about the real basics of the business.

There is still one considerable hurdle to overcome, which is turning consumer battery scrap into black mass. No one’s really come up with a grand solution there as yet. Folks are trying robot disassembly, something crunching and grinding will work better, there are even hand disassembly ideas but those will be too grossly expensive in volume. The very fact that there are these different suggested plans tells us that opinion hasn’t coalesced around and agreed to be optimal process as yet.

Li-Cycle’s value

On the other hand it is true that Li-Cycle has a $1.4 billion valuation. Which for a business doing under $10 million a quarter in revenue is possibly expensive. We can also note, on that third and gripping hand, that they’ve near $600 million in cash to underpin that valuation.

My view

This is not a recommendation, per see, for Li-Cycle. Rather, it’s an observation that they’re going about this problem in the right way. OK, the right way according to me. They’re paying attention to what is important about recycling, which is the economics of recycling itself. How to gain access to volumes of material that make processing plants of economic size?

The investor view

The end of this is not a full on recommendation for Li-Cycle. Rather, it’s not a negative. In several other recycling and battery corporate examinations here I’ve pointed out what I think are the errors in the plans. Here I don’t actually see those errors – or, in fact, any errors.

It’s still entirely possible to have the right plans and still not execute and all that. My point here is that Li-Cycle does seem to me to be paying attention to the right things and have plans to deal with them. Which is a recommendation in this space as all too many don’t.