Just_Super
I last covered Li-Cycle (NYSE:LICY) in 2022. I appreciated the corporate’s prospects at the moment given its publicity to Lithium recycling, the favorable authorities incentives from the U.S. and European nations for the trade, the corporate’s differentiated expertise which supplied larger yield and lesser waste, and the backing from robust strategic companions like LG, Glencore (OTCPK:GLCNF)(OTCPK:GLNCY), Traxys, and so on.
Whereas issues have been going okay for the corporate until 1H23 and the inventory was buying and selling sideways round mid-single digits, the scenario took a downturn within the again half of 2023 as the corporate introduced a major value escalation for its Rochester hub venture.
The corporate was initially anticipating Rochester hub to value ~$560 mn however that escalated to $850 mn to $1 bn vary (together with incremental $140 mn in value of course of buildings and warehouses). The corporate additionally noticed a delay in DOE’s $375 mn mortgage as a results of it. With a major escalation in value and financing not coming, the corporate introduced a pause in development work on the Rochester Hub venture, until it may well full a complete evaluation of the go-forward technique for this venture. The corporate had already spent ~$301 mn on this venture by then.
The traders have been nervous and the inventory corrected sharply consequently.
A positive development occurred on twelfth March with Glencore offering $75 mn in convertible bond financing to the corporate. This improved investor sentiment and the inventory jumped from 40 cents on March 11 to the present degree of over $1.13. The corporate had $35 mn of unrestricted money and money equivalents round mid-March and paired with this $75 mn, it now has $110 mn. So, this extra funding is predicted to offer a very good few quarters runway to the corporate and assist it purchase time to work with the U.S. Division of Vitality on the conditional dedication of the $375 mn venture mortgage.
Whereas the inventory has seen a pointy run-up, I’ve some issues.
The corporate’s estimated venture value for the Rochester hub continues to escalate and there’s a potential for additional upward revision in estimates. On its recent earnings call, administration talked about that the estimated venture value of the Rochester hub venture is $960 mn for the MHP (Combined Hydroxide Product) scope. The prior estimate of $850 mn to $1 bn included the anticipated manufacturing of nickel sulfate and cobalt sulfate as properly and this value is with out that. So, if we account for that the underlying prices have elevated.
The corporate is presently re-engaging subcontractors and because the venture restarts, there will be an escalation in costs as subcontractors may rebid on the larger worth given the elevated threat associated to the venture and the final upward inflationary development within the labor market.
As well as, the curiosity value on the convertible debt taken to finance the venture continues to pile up because the venture is delayed.
One other factor I’m nervous about is the administration’s execution observe file. After spending greater than half of the $560 mn of preliminary venture value, administration abruptly introduced a major enhance within the venture value and halted the venture work. I may have understood a rise by just a few million and even tens of hundreds of thousands however immediately saying lots of of hundreds of thousands will increase in a venture of half a billion {dollars} indicated an absence of correct monetary management.
I might have appreciated rather more transparency within the preliminary phases of the venture and extra frequent communication with the traders if administration was seeing any such points. So, the administration observe file by way of estimating venture value and executing just isn’t that nice. As an investor, I’m not very joyful about it and I’m certain lenders are nervous about it too as is underscored by the delay in DOE mortgage disbursement.
I’m additionally not thrilled in regards to the financing phrases.
Whereas the corporate was in dire want of money and one thing is best than nothing, Glencore’s 53 cents conversion worth on the $75 mn convertible bond introduced 10 days again is considerably dilutive to any shareholder planning to purchase on the present share worth of $1.13. The rate of interest on the convertible bond of SOFR + 5% on money cost and SOFR + 6% on cost in variety is not low-cost both however I doubt the corporate may have had a greater deal given its money scenario earlier than this deal. Administration solely had ~$35 mn in unrestricted money which may have solely supplied just a few months of runaway.
If we take a look at the corporate’s steadiness sheet, its shareholder fairness was $376.4 mn as of Dec 31, 2023. The inventory is already buying and selling above the 53 cents conversion worth of its new Glencore’s new $75 mn convertible bond. So, assuming its conversion, shareholder fairness will enhance to ~$451.4 mn. The corporate posted $138 mn in internet loss for FY23 and, within the final two months of 2023, its loss from operations was ~$20.3 mn. Assuming comparable ranges of losses (~$10 mn month-to-month, shareholder fairness will probably be $421.4 mn on the finish of Q1 2024. The corporate ended final quarter with a 178.3 mn fundamental share rely, add to that 9.9 mn in RSUs and three.7 mn in inventory choices, now we have a share rely of 191.9 mn. Additional, assuming Glencore’s new $75 mn convertible debt will get transformed at 53 cents per share, it can add 141.5 mn to the share rely leading to a complete of 333.4 mn.
So, now we have a diluted e book worth per share of ~$1.26 per share on the finish of Q1 2024 (obtained by dividing estimated shareholder fairness of $421.4 mn on the finish of Q1 2024 and a diluted share rely of 333.4mn, assuming conversion of Glencore’s new convertible debt. I’ve not taken under consideration the common conversion worth of inventory choices as the information just isn’t obtainable nevertheless it will not considerably change the outcomes given it’s a comparatively decrease quantity in comparison with different figures).
This provides an 11.5% upside in case the inventory trades close to its e book worth. Nevertheless, the e book worth is persistently decreasing as the corporate is posting losses and there are dangers related to additional value escalations, poor execution observe file, and financing on unfavorable phrases. I do not discover the risk-reward enticing sufficient to take an extended place on the present ranges and therefore have a impartial score on the inventory.
There are some upside catalysts for the inventory like the corporate securing a venture mortgage for the Rochester hub and finally finishing the venture and beginning manufacturing. However these occasions will set off the conversion of $225.3 mn Glencore’s current notes (apart from the brand new $75 mn convertible) at a 30-day VWAP +25% premium in response to the amended settlement situations. So, in my view, the upside in that case ought to be restricted as properly.
Frankly, whereas I do not discover vital points with the valuation, the excessive related dangers are adequately mirrored within the present inventory ranges. Therefore, I desire to stay on the sidelines.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a significant U.S. change. Please pay attention to the dangers related to these shares.
