Original article published in Barron’s
February 16, 2021 – Al Root and Nicolas Jasinski
Investors have become convinced electric vehicles are the future of transportation. EV stocks are on fire, many with triple-digit gains over the past year. Wall Street is on board the EV train too, projecting tens of millions of new EV units sold between now and 2025.
Millions of EVs means millions of batteries, and the foreseen demand is prompting some concern about shortages of cobalt, lithium, and other raw materials. That makes recovering all the content possible from existing batteries all the more important.
Li-Cycle is working on just that: Lithium-ion battery recycling. On Tuesday, it announced an agreement to merge with Peridot Acquisition (ticker: PDAC), a special-purpose acquisition company. or SPAC. When the merger closes, Li-Cycle will be the surviving public company and the “PDAC” stock symbol will become “LICY.”
Founded in 2016 and based in Toronto, Li-Cycle calls itself the largest lithium-ion battery recycler in North American. The company has relationships with 14 auto makers to take end-of-life EV batteries. Recycling those will be an important part of meeting the need for battery materials in coming years.
Morgan Stanley analyst Adam Jonas covers car companies including Tesla (TSLA). He is bullish on EVs and has a Buy rating on Tesla stock and a $880 price target. “From a battery perspective I’ll borrow the quote from a client who recently told me: Every battery made will be sold,” Jonas wrote in a recent research report. A shortage might happen if the demand for EVs outstrips the production of lithium, nickel, and cobalt miners, as well as the ability for battery makers to ramp up capacity.
“The cost for [Li-Cycle] to produce any one of those [battery] metals from recycling…is cheaper than mining any of those materials around the world,” cofounder and Executive Chairman Tim Johnson says in an interview.
“The [recycling] industry traditionally relied on dumping fees,” adds Johnson. That means getting paid to take the waste away, and makes the company’s cost of good sold very low.
But Li-Cycle doesn’t want to rely on that in the long run: their business plan is predicated on making money on end product sales. Its recycling process produces materials including cobalt sulphate, lithium carbonate, and nickel sulphate. Those are ready to put back into the battery supply chain. Li-Cycle has a contract with metals-trading firm Traxys to buy 100% of its production through 2030. Prices are based on the metals spot market, which tend to be well above Li-Cycle’s costs of production, co-founder, President, and CEO Ajay Kochhar says in an interview.
Li-Cycle currently sources lithium-ion batteries from EVs, smartphones, and beyond. EVs are an attractive option given how large their battery packs are, but most are relatively new and aren’t being scrapped yet. But Kochhar says that Li-Cycle doesn’t need to wait a decade to see more business from the unfolding EV boom.
That’s because, typically, some 5% to 10% of battery production is rejected for quality control reasons or other waste. That’s most of Li-Cycle’s EV-related batteries today, which should grow linearly with greater EV-battery production. About half the battery waste today comes from consumer electronics, followed by 29% from manufacturing scrap and 16% from auto makers. In 2025, Li-Cycle expects 68% of the volume to come from manufacturing scrap and another 25% from auto makers.
Li-Cycle organizes its capacity in a hub and spoke system. The spokes aggregate batteries from local sources and break them down into intermediate products, which go to hubs. That makes them easier to pick up and transport, and then takes advantage of economies of scale in chemical post-processing at Li-Cycle’s hubs.
Johnson says “80% of the [hub] plant is pumps, tanks, and agitators.” Eventually the company plans to have 20 spokes and four hubs in North America, Europe, and Asia. One spoke can do the equivalent of about 15,000 EVs a year.
But it’s still early days. The market for lithium-battery recycling is about 465,000 tons annually today, or $2.7 billion worth, growing to 1.3 million tons by 2027, worth $7.5 billion. Li-Cycle sees its sales growing from $12 million this year to roughly $75 million in 2022, and close to $1 billion by 2025. Projected 2025 Ebitda—short for earnings before interest, taxes, depreciation, and amortization—amounts to $541 million. Kochhar says those estimates use conservative projections of metals prices that are subject to upside.
The deal with Peridot values Li-Cycle stock at about $1.7 billion including proceeds of nearly $600 million after expenses. That comes from the $300 million in the SPAC’s trust, plus a $315 million private investment in public equity, or PIPE, from investors including Neuberger Berman, Franklin Templeton, and Mubadala Capital, the UAE’s sovereign wealth fund.
Peridot stock is about 4% higher in Tuesday trading to $14.40. Investors are still figuring out how they feel about the deal. Other EV-SPAC mergers have performed better recently: stock in Climate Change Crisis Real Impact I Acquisition (CLII), for example, rose from roughly $13 to $22 the day it announced it was merging with EV-charging-infrastructure operator EVgo in late January.
Peridot stock was already up about 40% in 2021, as investors have piled into EV and renewable energy-related SPACs. Everybody wants a chance at the next QuantumScape (QS) or ChargePoint. It implies a market value for Li-Cycle of about $2.3 billion based on current levels of Peridot shares and the 167 million shares of the new company that will be outstanding after the merger closes.