Aug 06, 2023

NOVONIX (ASX: NVX): Meeting the demand for US anode and cathode battery materials

December 1, 2022

By Finance News Network | More Articles by Finance News Network

NOVONIX Limited (ASX:NVX) CEO Dr Chris Burns and Corporate Connect Research analyst Di Brookman discuss the company's positioning and target price.

Tim McGowen: I’m Tim McGowen for the Finance News Network. On today's episode of Stock Watch, we’re going to take a look at NOVONIX (ASX:NVX). It's got a market cap of around $1.15 billion.

Now, Stock Watch highlights compelling market opportunities and provides a unique conversation with company CEOs and our research analysts. We want you to understand the upside of our research as well as the risks.

Now, NOVONIX is an integrated developer and supplier of high-performance materials, equipment and services for the global lithium-ion battery industry, with operations in the US and Canada and sales in more than 14 countries. We’re talking today to NOVONIX's CEO, Dr Chris Burns, and Corporate Connect's analyst Di Brookman, who has put a $5.76 price target on the company, implying around a 135 per cent upside from the current share price.

Chris, welcome to the network.

Dr Chris Burns: Great. Appreciate it, Tim.

Tim McGowen: Now, Chris, forecasts, of course, for auto gigafactories in the US is surging to 960 gigawatt hours by 2031, and this suggests that nearly one million tonnes of battery-grade anode material will be required to meet demand. Now, of course, some new chemistries may appear, but it's clear that graphite continues to be the primary input. With the task of building a US supply chain daunting, what role is NOVONIX playing, and how are you positioning yourself to lead in this space?

Dr Chris Burns: Tim, you’re absolutely right. The industry has a huge challenge in front of us in building out the supply chain that's needed. And, as you said, almost a million tonnes of anode-grade graphite needed by 2030, 2031, with the production today in the country being zero, essentially. And so this is a big task. But we see the private sector and the government working together to try to support the ability to build independence from an existing supply chain which is so controlled by China and the Asian markets.

And so, at NOVONIX, we think we’ve positioned ourselves very well over the past several years investing in a critical technology that was overlooked because of the hope that new technologies would come in and displace or disrupt the market. But it's becoming very clear that these new anode technologies have a much longer path to mainstream commercialisation and that graphite, as you said, will be the dominant anode material for this decade and beyond.

And so, as one of the few companies in the United States that is focused on that and are scaling our first mass production plant with an offtake with KORE Power, this is, I think, what had the government recognise the opportunity for NOVONIX and help us be selected for the US$150m of grant funding under the infrastructure law that we announced last month.

Tim McGowen: How will you deploy this money, and what are your key focuses for the next six months?

Dr Chris Burns: Over the next three to six months, the critical focus around the company is continuing to build out our Riverside facility that will be coming online for our first contract with KORE Power that begins deliveries in 2024. And then also focusing on the new site, which will house our 2025 startup production for our 30,000 tonne incremental expansion.

So, over the next three to six months, we hope to be announcing the site as well as breaking ground on that site for the new facility, and be working very closely with the cell manufacturers and the automotive partners that we’re working on to progress the qualification and sampling programs that we’re working for to look at the customer base that will be taking the materials from that facility, starting in 2025 and into 2026 and beyond.

Tim McGowen: Can you also talk about the additional funding opportunities that are open or available for NOVONIX? For instance, how would you fund the development of the cathode business while still scaling the anode business?

Dr Chris Burns: So, the Inflation Reduction Act has put significant new capital into, for example, the Department of Energy's Loan Program Office to support these types of critical materials projects. Last year, the infrastructure law, of course, was passed, which we’re a recipient of, we were selected for funding under. And there are other programs that the government is looking to use to support this industry.

But also equally important to consider is the impact of that policy on the end customers. In our space, for example, the automakers. The ability for them to qualify their vehicles for up to $7,500 of EV rebates for their consumers is really critical and therefore imperative for them to be sourcing Inflation Reduction Act or IRA-compliant material.

And, as such, you’re starting to see the cell manufacturers and the auto sector look upstream for how to partner and help financially support their partners in their supply chain. And so this means we have options around grant funding, which of course we’ve been successful in being selected for, federal debt through the government programs, as well as customers support to help finance this first large facility in the United States for our anode materials business.

And while our cathode materials business continues to progress, we’ve been successful in receiving grant funding and support from the Canadian Federal Government for the expansion of our pilot line facility, which we just opened a few weeks ago in Nova Scotia. And as we look at the partnership programs for that, as we move to commercialisation through either licensing or investing in production, we’ll look at similar leverage opportunities to support those funding investments through the public sector, private sector partners, as well as any requirements from our existing investors and shareholders in the market.

Tim McGowen: Thanks, Chris, for your time.

Tim McGowen: We’re joined today by Corporate Connect analyst Di Brookman, who's writing the research report. Di, nice to see you in person. Thanks for your time.

Di Brookman: Nice to be here, Tim. Nice to be here.

Tim McGowen: Now, one of the first questions I’d like to ask you in regards to your research is, what are some of the key drivers for graphite demand?

Di Brookman: Well, I guess I’ll probably start by referencing Benchmark Intelligence, which is a UK consultancy. They’ve recently come out with some new numbers for the US whereby they’re now looking for 960 gigawatt hours, up from only 56 gigawatts in 2021. So, that's almost a growth of a million tonnes of graphite. By the time you get out to 2031, it's very significant.

Now, they’re also looking within that context of the graphite, and you can have natural or you can have synthetic. And, of course, NOVONIX is all about synthetic. So, they’re looking at approximately 44 per cent of that million tonnes to be ascribed to synthetic graphite. So, that's 440,000 tonnes.

Well, we are looking at NOVONIX with approximately 150,000 tonnes by the time they get out to circa 2031. So, that would give them a market share of about 40 per cent, which intuitively sounds extraordinarily high, but actually we’re not sure where the rest of the graphite is going to come from if we’re looking at developing local supply chains in the USA.

Tim McGowen: And, Di, what's NOVONIX's key competitive advantage?

Di Brookman: Their probably main advantage is a first mover advantage. They’ll be the first producer in the USA of commercial premium-quality battery-grade synthetic graphite. It sounds like a mouthful, but it's important to get that right. And they’ll be located in an ecosystem which is growing rapidly in Tennessee. We’ve now got General Motors there, Ford, LG Chem as of the other day, LG Solutions, and Volkswagen, of course. So, there's quite a hub that's opening up, and that of course allows for cost efficiencies.

Tim McGowen: Now Di, of course, in your Corporate Connect research, you valued NOVONIX around $5.76, which implies about a 135 per cent upside at the moment. How did you value NOVONIX?

Di Brookman: We used a terminal discounted cash flow, using a discount rate of 8 per cent and a growth rate of 2 per cent. We then looked at the synthetic graphite project and divided it up into three phases. The first phase to 10,000 tonnes of capacity, the second phase up to 75,000 tonnes of capacity and the third phase would take you up to the 150. And then we’ve applied different risk factors to each one of those phases.

Now, obviously, the first one is now fully funded and virtually fully contracted and under construction. So we had an 80 per cent probability that that will go ahead as modelled. The second phase, we’ve applied 60 per cent and because funding still isn't that clear, albeit we’ve got some grants on the table and the expectation is we’ll get some low-cost loans from US government, and then also recycled equity from the first 10k too. That's very important. Surplus cash is generated. It’ll be reinvested into the business as equity. And the third phase we only applied a 20 per cent probability of going ahead. So, we’ve only used 0.2 times the NPV8 that we’ve calculated.

Now, there are obviously other aspects of the valuation that have been considered and one is the cathode business, which is quite exciting. It's due to commission before the end of this year. There's not much information out there at the moment. So, the best that we could do was in line with our initiation, which was to take the market cap of Nano One technologies, which we have done. So, we think that that's conservative because they’re clearly… they’ve got some proprietary technology, a dry synthesis technology, which should give them an additional competitive advantage in that space. And then the microgrid business we currently model as a free option.

Tim McGowen: So, Di, how do you bring together the execution risk of NOVONIX and the catalysts into your valuation?

Di Brookman: Thanks for asking that question. This is important for how our valuation methodology works. We attach the valuation to the execution of key catalysts. So, as a major announcement is made, the project would be derisked — very much like how it might be perceived in the real world with bankers and offtakers. It's all about trying to mitigate the risk. So, we’ve got a big catalyst coming up potentially before the end of the year, which is the securing of contracts for the 30,000 tonnes, which is looking for a new site and also the execution of a new site, like the location of that new site coming up before the end of the year. And then we’ve got a commissioning of the cathode line in Canada.

Tim McGowen: And Di, as part of your valuation, what are some of the funding catalysts that are ahead of NOVONIX?

Di Brookman: Well, actually, this is quite important because we’ve using quite conservative forecasts for synthetic price. We’re using $9 per kilo or $9,000 per tonne US going out to 2030 before we lower it. So, what is the upside? Well, there's some 301 tariffs which are up for review, expected by 1 January, which is… Currently there are some 25 per cent tariffs on product coming from China to the US, but graphite and synthetic graphite have been exempted from those tariffs. So, it’ll be interesting to see whether they’re reinstated within that tariff system. If so, then that's equal to a US$2.50 increase over the spot price at the moment, which is running at $10 per kilo.

There are also some tax credits which the US government has indicated are forthcoming to the industry. That's worth approximately US$6 a kilo. But that will be spread amongst the chain. So, it's not entirely clear how much will end up with NOVONIX at the moment. But what it does do is increase the probability that we’re probably going to be looking at something in the order of $12 per kilo or $12,000 per tonne. We’re currently using nine. So, we think we’re being conservative. There's upside to come. We’ll see how that unfolds.

Tim McGowen: Di Brookman, thanks for your time.

Di Brookman: Thanks Tim.

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