PyroGenesis Inc T.PYR

LodeRock Research coverage on PYR

[jwillis9]

Valuation Assumptions:

• Discounted cash flow analysis using present value in years 1 to 9 and 10x to 15x multiple on terminal value EBITDA (year 10)

• 10% to 11% weighted average cost of capital

• 5% to 6% terminal growth rate

• Implied share price of $12/sh to $18/sh (midpoint of $15/sh)

Revenue and Gross Margin Assumptions:

• Projects PyroGenesis to achieve run-rate revenue of ~$1 billion by the year 2030

• Projects PyroGenesis to achieve run-rate gross margin of ~$600 million by the year 2030

• Projects PyroGenesis earnings-per-share from operations (EPS: diluted) of $1.71/sh by the year 2030

• Estimates 10-year revenue compound annual growth rate (CAGR) of 48%

• Estimates 10-year gross margin CAGR of 50%

• Estimates 10-year EPS CAGR of 60%

Key Summary Points:

• Views PyroGenesis (“the company”) as an environmental pure-play with commercial solutions that can make it a “market leader” in four industry verticals

  • Believes success in any of these key verticals should justify the stock price

  • Sees near term catalysts in aluminum dross and pelletization

  • Views metal powders as longer-term upside within the company due to importance moving forward in additive manufacturing

• Believes the company can take meaningful share of addressable markets collectively worth +$13 billion

• Sees patented solutions as strong potential market leaders in:

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1. Dross recovery and waste measures reaping improvements of +20% for addressable market of US$2 billion;

• 2) Reducing iron ore pelletization GHG emissions by +35% for addressable market of US$13 billion;

• 3) 3D printing high purity and dense titanium powder for addressable market of US$2.5 billion within 10 years (titanium only); and

• 4) Municipal waste management solutions for addressable market of US+$1 trillion

• Views DROSRITE and NexGen as market leading, with first mover advantage and the potential to be “number one” market share solutions

• Concludes that industrial companies are incentivized to lower carbon footprint and PyroGenesis has multiple solutions that can address environmental challenges in an economically attractive manner

• Believes the company has focused its capital on solutions with most optimal near term and positive ROI impacts on customers, while being more selective in verticals with significant regulatory and economic hurdles (e.g. waste management)

Additional Summary Points (by Division):

1) DROSRITE

• Believes significant value is created with DROSRITE, as it not only eliminates hazardous waste residues, but improves operating costs by 50%

• Projects leading market share of 35% to 50% (aluminum only) and net margin of 30% to 35%

• Considers most recent 7 system order in 2019 for higher unit price to be indicative of “growing demand” for the solution

• Believes tolling could be economic “game changer” if fully implemented (incl. the residue conversion process PyroGenesis is focused on integrating into their offering)

  • Forecasts tolling fee of US$350 to US$500/tonne

  • Forecasts residue conversion rates of +US$500/tonne, which compares favourably to landfill costs of ~US$300/tonne

• Expects cross selling could take place with regards to plasma torches, but does not reflect that in valuation analysis

2) Iron Ore Pelletization

• Estimates total addressable market of PyroGenesis torches in the iron ore pelletization industry to be in the range of 10,000 torches, with market share assumption of 20% to 30% in the near-to-medium term (~2,000 torches to 3,000 torches)

  • Estimates NPV of torch of US$3 million and gross margin in the 65%+ range (net margin of 30% to 35%)

3) Additive Manufacturing (3D Printing)

• Considers this to be highest potential growth opportunity long-term, as NexGen process could make the company a leader in market share, alongside burgeoning growth in industry

• Forecasts market share of 20% to 30% with net margin of 30% on powder sales

• Estimates addressable market of US$2.5 billion in ten years for titanium powder only

4) Waste Management

• Forecasts a US+$1 trillion market opportunity

• Believes the market opportunity for plasma technology in waste management is more proportional to government subsidization in the near term, as yield economics will play a lesser role until such time they become more favourable