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creakyhottie   Monday, 10/05/20 03:16:02 PM
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From Seeking Alpha:
Novonix Is Set For Explosive Growth With Or Without Tesla

Oct. 5, 2020 2:47 PM ET|3 comments | About: Novonix Limited (NVNXF)
Sergio Heiber
Sergio Heiber
Long-term horizon, micro-cap, nano-cap

(1,651 followers)
Summary
Novonix is the only company that offers synthetic graphite lithium-ion battery materials that aren't supplied from Asia.

The company has begun commercializing synthetic graphite with the two largest lithium-ion battery producers in the world.

Revenue projections over the next two years call for exponential growth.

Stock price appreciation should follow market acceptance for a very unknown and underfollowed name.

New products and new customers will push the stock price higher than my estimates.

Novonix (OTCQX:NVNXF) is a manufacturer of synthetic graphite and other lithium-ion battery materials and testing equipment. The company has been rumored to have the interest of Tesla (NASDAQ:TSLA) either as a customer or as an acquirer. I don't think that matters as this company doesn't need Tesla. Please note that although the company reports in Australian dollars, all figures in this article are in US dollars.

The EV industry is demanding cheaper, safer and longer lasting batteries and seeking to safeguard their supply chains with manufacturers outside of China. Novonix is the only North American based competitor to China's dominance in the battery material industry. China recorded 79% of global synthetic graphite sales in 2018. Management has plans to scale the company into a tier 1 lithium-ion battery supplier by offering a full range of products that will be used to create cheaper, safer and longer lasting batteries.

Product Shift

The company's roots are in Australia where they own The Mount Dromedary Graphite project which they are not currently mining due to the current oversupply of natural graphite and because management is eyeing larger opportunities. The flake graphite mined at Mount Dromedary commands a much lower market price than synthetic graphite.

The main business has been the production and sale of battery testing equipment from Canadian based Novonix Battery Technology Solutions ("BTS") acquired in 2017. BTS customers include two of the largest battery manufacturers in the world, Panasonic and CATL. Novonix added a research and development lab at BTS which developed Dry Particle Microgranulation ("DPMG") and Single Crystal Cathode ("SCC") battery technologies. These technologies allow Novonix to enter into the anode markets now and later into the cathode markets.

DPMG was developed through Canadian government sponsored research and is widely available, but Novonix has patents for the use of DPMG for the process of making graphite anode and cathode particles. DPMG has 100% yield. No waste means lower cost. Novonix is also experimenting with using lower cost level 2 nickel which other manufacturers' technology does not allow. Level 2 nickel is 30% cheaper than level 1.

Single Crystal Cathodes are made by Novonix using the DPMG process and are longer lasting than traditional cathodes. Tesla, the EV industry leader, patented their single crystal cathode for their million dollar battery earlier this year.

Samsung, after six months of testing, became Novonix's first customer for graphite anode product with an initial purchase of 500 tons to be shipped starting late 2020 and into next year with contracts of increasing size anticipated in subsequent years. Samsung is the world's largest lithium-ion battery manufacturer. Sanyo, which is owned by Panasonic, is currently undergoing testing and is expected to sign on when testing is completed in the second half of fiscal 2021. Panasonic is the world's second largest lithium-ion battery manufacturer.

Revenue Ramp Up

Novonix will continue selling battery testing equipment for which it reported sales of $2.5 million for fiscal 2019 out of a forecasted $3.6 million. The shortfall was due to plant closings due to COVID-19, but was nevertheless 40% higher than for the prior fiscal year. Initial production of graphite anode is planned to be 250 tons for this year and incrementally increase by 1 million tons every six months next fiscal year according to the Corporate Activities Report as the company ramps up production at its plant in Tennessee.

There was no disclosure on the financial terms of the Samsung deal, so I made my own calculations. The cost of synthetic graphite can run as high as $15 a ton resulting in targeted revenue for fiscal 2021 of over $30 million from graphite anode. Adding in $4 million for battery testing equipment sales results in over $34 million is fiscal 2021 sales. I'll peg the gross profit margin will be at least 50%, resulting in a gross profit of $17 million.

Management plans to incrementally increase graphite anode production to 20 million tons by 2025 and to 100 million tons by 2030 which if all goes according to plan will result in revenues of over a billion dollars when you add in Samsung as a customer with more new customers to follow, not to mention the development of DPMG for cathode commercialization. Additionally, the company plans to expand with a physical presence in Europe sometime in 2025.

Share Count and Valuation

Novonix completed a $63 million capital raise in June and used a portion of the funds to eliminate debt. The remaining reported $38.8 million as of the end of June will be used to fund production and development costs.

The stock traded in the U.S. as a pink sheet until late September when it was accepted for trading in the OTC, so it is relatively new to US investors and therefore underfollowed.

There are almost 352 million shares. At the recent share price of US $0.73, the market cap is $257 million and the EV is $218 million. Using my $34 million revenue forecast results in an EV/S ratio of 6X for this fiscal year which is a low valuation for a company growing at this pace but fair enough considering that it hasn't yet proven that it can scale.

It does look like the stock price has much room for stock price appreciation when looking beyond this fiscal year. It's not possible to forecast if or how fast new customers will be acquired but it looks very possible for Novonix to bring in revenue between $40 and $50 million for fiscal 2022 just from its first two initial anode customers and its battery testing business, resulting in an EV/S ratio of 4X-5X. I am not counting any new customer additions which would make this stock a screaming buy. Disruptive technologies companies are prone to receive double digit EV/S ratios once they have established initial commercial success.

Competition and Addressable Market

The share price of Novonix has experienced volatility due to Tesla related rumors and that is unfortunate because there's plenty of market opportunity without Tesla. The EV industry is just beginning to scale, which results in increased demand for EV batteries and in turn for increased demand for materials that will make batteries more efficient, just where Novonix has positioned themselves.

China has dominated the market and there has been some competition arising from Japanese companies but Novonix has positioned itself to capitalize on solving supply chain concerns while offering a lower cost and higher quality solution.

Risk

There is no guarantee that Novonix will be successful with commercialization of its new products and there's extra volatility in the market until that is determined. Other companies are exploiting the increased demand for battery materials but lack the infrastructure, advanced product qualities and sales results that Novonix has established such as EcoGraf, an Australian graphite miner who has seen its share price go ballistic.

Conclusion

Novonix is disrupting the lithium-ion battery industry by offering competition to Chinese producers and by providing a lower cost, more durable alternative. The company has signed on the two largest lithium-ion battery producers in the world and is set to scale sales with additional product offerings in the near future.

Disclosure: I am/we are long NVNXF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article

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