The HPQ Angle – bigger picture (long post)A few thoughts about the potential impact of the HPQ portion of Pyrogenesis’ business, and the role HPQ/HPQ NANO may play for PYR long term. Apologies to any of the longs and/or engineers on this forum if I get some of this wrong or don’t quite use the correct vernacular at times.
Background
For those who aren’t also invested in HPQ Silicon Resources (HPQ.V), or for those new to investing in PYR, a quick backgrounder on PYR’s relationship with HPQ.
HPQ is a Canadian producer of silicon-based solutions, with silicon metal, extracted from quartz via what’s traditionally a capital and energy intensive process, being a key material in many electronics – especially those that are trying to be more environmentally friendly. Like PYR, HPQ is based in Montreal.
In 2016, it was announced that HPQ, utilizing plasma technology and process from PYR, had figured out a way to make silicon powders faster, cheaper, and with less steps. Silicon powders, usually difficult and prohibitively expensive to produce, have a number of applications, most importantly for potential use in electric vehicle batteries to increase power and charge-length. The process to create this material is patented by HPQ and PYR as the PUREVAP Nano Silicon Reactor. That process can be used to create silicon and metal powders for other uses in addition to the batter powders.
The two companies subsequently worked on other projects, and in 2020 a separate entity was set up – called HPQ NANO – to specifically produce and market the battery powder, known as silicon nano powder and silicon nanowires.
While HPQ owns the intellectual property and wholly owns HPQ NANO, PYR has a 10% royalty agreement for all sales. More importantly, that agreement allows for PYR to, at any time, convert that 10% royalty into a 50% ownership share of HPQ NANO (which to reinforce, is just the battery powders division; other uses from the PUREVAP reactor are not part of HPQ NANO). This type of agreement is known in the investing world as a poison pill agreement, because it effectively blocks any outside entity from a takeover of HPQ Nano without negotiating also with PYR. (It also semi- blocks a takeover of HPQ itself, as any potential buyers would be hesitant to consider buying a company where the key product is half-owned by yet another firm).
Yesterday, October 22, HPQ announced the first purchase order for nano silicon powders via the HPQ Nano entity. This order is to an unnamed “major automaker.” All of this affects PYR very positively. Here’s a opinion how.
PYR’s Future Challenges
For PYR, as with any new company (despite being thirty years old it is new, as it's really just commercializing its primary product on a major level in 2020), the biggest concern is the most common concern: Is this just a one-off success, with a big contract or two out of the gate, but then nothing to follow up? Or does it have legs?
This is standard fear around both early stage commercialization AND industrial products on the whole. The market wants to know whether PYR has a chance to be a continuously growing company, or just a niche product supplier in an inflated cottage industry.
So what are the barriers for PYR to succeed on a grand scale long term?
Well, the challenges with industrial product companies traditionally are threefold:
1/ the inability to grow beyond their roots – not expanding into new clients and new markets, which prevents economies of scale from occurring, making long-term price competitiveness difficult
2/ warding off disruptors – the “good enough” lower-end entries that arrive to the game, eat the bottom low-hanging-fruit portion of the market quietly, and over time (as their tech and processes improve) they move up the value chain to capture more and more of the market from the incumbent leaders. DVDs wiping out vinyl, MP3s wiping out DVDs, streaming wiping out MP3 downloads. (Read The Innovators Dilemma by Clayton Christensen for more on that theory.)
3/ the markets altering, often suddenly, making participation in the industry no longer attractive or feasible, due to:
a/ changes in economics -- for instance when the price floor rises or drops out on a key resource: the Alberta oil sands as an example; or the bottoming of the silver price a few years ago, closing many highly-productive silver mines, is another
b/ changes in policy -- as with the movement to green and away from carbon, and from gasoline to electric cars; or the sundowning of previously important technologies and approaches now considered toxic, like asbestos, BPA, and single use plastics
So again, the market wants to know whether PYR, like any company, has a chance to be:
1/ a continuously growing company, or just a one-off, with a couple of big early contracts
2/ a company that has less risk of having the rug pulled out due to changing economics or policies
This is where HPQ fits in well, and perhaps in bigger and different ways than first thought.
Diversification and Expansion for Protection and Support
Obviously having more than one line of business is important to protect revenues and provide confidence to the market of long-term prospects. And currently PYR presents several business offerings:
- plasma torches systems for the pelletizing of iron ore
- waste destruction and waste-to-energy systems (PAWDS, SPARC, PACWADS, PRRS, PAGV, waste gasification)
- systems for the recovery of aluminum and other metal from dross (DROSRITE)
- production of high purity spherical metal powders, in the additive manufacturing industries and 3D printing industry
- installation, commissioning and start-up services
- research and development, internal and external funded projects by customers
I’m not an engineer and haven’t delved too much into the age, sales success, and competition of each of their units, but if you ascribe each of PYR’s offerings against the product lifecycle (commonly accepted as introduction > growth > maturity > decline) most are considered still to be in growth phase, with maybe only their more general purpose plasma torches (Mini-gun and RPT for instance) and the Pyrogenesis Additives / 3D powders in maturity phase (there’s a fair bit of worldwide competition in additive powder production, and broad competition represents a maturing market).
The Purevap/HP NANO offering for silicon battery powders alone represents a further strategic step into diversification for additional revenue protection and market support. Here’s how:
- It’s just now rolling through introduction stage, so has a long life expectancy
- The patent wall offers a moat around the intellectual property
- It’s coming to fruition just as industry demand is coming to the fore at a potentially monumental level
- It offers a pure differentiator, in its creation from plasma
- It offers far fewer steps in its production, limiting opportunity for error and improving quality control
- The plasma process to creating powders is substantially more environmentally friendly. As is the overall nature of Beauce/HPQ/PYR. It's basically a one-stop shop, with less process and less transportation of materials, so less carbon footprint and a better green option
- The material is promised to reduce cost exponentially, with the lower price as much the appeal as the speed at which it seems it can be made (via far fewer steps).
- Future price competition can be mitigated by environmental and speed advantages
All of these will offer a high degree of de-risking for the investment community considering PYR.
Diversification and Expansion for Evolution and Transition
It’s one thing to show diverse revenue opportunities, it’s another to make innovation and growth your raison d’etre.
The industrial product market is a tough slog, with constant price pressures, and heavy competition from large multi-nationals with numerous and connected product lines and services.
As we saw through the TSX uplisting documentation, PYR has applied to the TSX under the Technology company category, rather than the more obvious “industrial products” (within the Diversified Companies category).
This indicates a push away for PYR from any specific associations with mining and related "dirty" areas, and a push toward more white-room and lab coat R&D, clean-tech, EV, innovation, and high tech. While certainly related to making the stock more attractive to young investors, tech-focused funds, and for a potential NASDAQ listing, this listing approach could also be indicative of something bigger that is helped along by the establishment of the HPQ NANO partnership.
To explain...
As mentioned above, the spectre of massive, highly diverse companies hangs over the industrial products industry. Johnson Matthey (established 1817), Umicore (dating back to 1906), Solvay (1863), even BASF (1908), these companies are very old, very large, and very influential – and many have the common thread of having started in mining or mining-related offshoot chemicals and technology.
Always evolving, recently there’s been a push among them to rebrand as “specialty catalyst, performance, and sustainable technologies companies” or some verbiage thereof. From Johnson Matthey’s web site: “Our vision is for a world that’s cleaner and healthier, today and for future generations”... and... “Johnson Matthey is a global leader in science that enables a cleaner and healthier world. With over 200 years of sustained commitment to innovation and technological breakthroughs, we improve the performance, function and safety of our customers’ products. “
While I’m not suggesting PYR could ever grow to match those titans, the example set by these firms is a good one, and one that PYR seems to be following. Collection of IP and patents, ownership stake in environmental tech, shifting away from old industry categorizations to “newer, cleaner, healthier, environmentally friendlier, technology” categories.
The path forward for PYR may well be to transition to more of a central technology innovation conglomerate, who partners and acquires to broaden their reach and compete better on the world stage, with HPQ NANO the first step in that direction.
Diversification for Attraction
To cut to the chase on this one, HPQ NANO makes PYR way more attractive as a potential takeover or merger target down the road.
The aforementioned poison pill that allows PYR to trigger a 50% ownership of HPQ NANO effectively forces anyone interested in that technology to negotiate with PYR. And once they start doing so they’d see that PYR itself has some pretty interesting things going on under the hood, including highly valuable patents and IP, taking an interest in PYR itself.
And to me, those multinationals mentioned above are the ones most likely to be interested.
Johnson Matthey has a few locations in Canada, including in Candiac, Quebec, just over the bridge from Montreal. And guess what they make in that plant? Battery material. In fact, up to now they’ve been a prime buyer of Quebec lithium.
Also from Johnson Matthey’s web site: "Our science has a global impact in areas such as low emission transport, pharmaceuticals, chemical processing and making the most efficient use of the planet’s natural resources."
It doesn’t take more than one read to see how JM is exactly the kind of company that would seek out the Pyrogenesis’ of the world.
Umicore would be another frontrunner. As massive firm with 15 R&D centres around the world, 50 production sites, gross profit of €1.8b on €17.5b of revenue. They also have two offices in Canada, one in Markham and one in Burlington.
From the Umicore web site: "We are a global materials technology and recycling group. We reduce harmful emissions, power the vehicles and technologies of the future, and give new life to used metals. Our sustainable value creation is based on an ambition to develop, produce and recycle materials in a way that fulfils our mission: materials for a better life."
Always acquiring and evolving, Umicore’s 2020 strategy sets out “goals for accelerated growth and performance, particularly in those businesses driven by the three megatrends of resource scarcity, emission control and electrification of transport.”
Right up PYR’s / HPQ NANO’s alley these days, I’d say.
Obviously it’s a big leap to a takeover, but the opinion provided here is to point out the many ways the partnership and relationship with HPQ and HPQ NANO is valuable to PYR’s future endeavours – be they helping to overcome challenging investment industry perceptions and suspicions; the expansion and transition of PYR to a centralized technology innovation company; or even for positioning as a takeover target.