kool99/iStock via Getty Images
This article was originally published to The EV Supply Chain on 11/17/2021.
For those of you invested in Nano One (OTCPK:NNOMF), it would’ve been hard not to notice the company’s recent 27% slide. You may even be aware of why this was, as Johnson Matthey (OTCPK:JMPLF) announced its intentions to leave the battery materials space. Just two days before this, Nano One announced that it had terminated its joint development work with Chinese cathode producer, Pulead. The market reacted minimally to this news but, when Nano One lost Johnson Matthey as well, there was a bit of a panic. This article will explain why this panic has created an incredible buy opportunity. It will also include a summary of a conversation I had with Nano One’s Head of Corporate Development, Paul Guedes. I’d recommend reading my previous articles on the company to get a clearer picture of Nano One, and why I like it, if you’re unfamiliar with the company.
Johnson Matthey
Johnson Matthey’s decision to pull out of the battery materials market really was a shocking one. In May, the company put aside $812 million to invest in its battery materials segment for the year. Even more recently, during the COP26 Summit late last month, Johnson Matthey unveiledplans for an all-electric race car. The company also said that its eLNO cathode would begin commercial sales in 2024. Less than two weeks after this, Johnson Matthey would announce its intentions to leave the battery materials business.
Johnson Matthey was essentially posturing that everything was normal up until the very end. It’s easy to see why this might’ve caught Nano One by surprise. Though, Nano One, and Johnson Matthey’s other partners, weren’t the only ones surprised by the announcement. According to Mr. Guedes, decisions like these traditionally stay at the board and c-suite level and are not generally known by employees within the company until the decision is made public.
Another critical consideration is that the European chemicals company focuses on high-margin, niche, applications. It seems that when they first began their foray into the battery materials space, back in 2013, they didn’t anticipate that high-nickel cathodes would become the highly competitive market that it's now become. At the time, high nickel cathodes were a specialty product and the market was dominated by the less-complex chemistries that were relatively low in nickel. Now, all of that’s changed and high-nickel dominates the market outside of China. This greater level of competition has also necessitated far greater investments from Johnson Matthey, which it believes could be more impactful if invested elsewhere.
Another thing to consider, beyond that the business had evolved to no longer fit Johnson Matthey’s business philosophy, is the recency of the Nano One’s partnership with Johnson Matthey. The partnership between the two companies was announced in June where the two companies would complete a detailed study for pre-pilot, pilot, and scaled production. The two companies were also supposed to work together to refine the production process and material development of Nano One’s cathodes. According to Mr. Guedes, the two companies were at the beginning of this process by the time Johnson Matthey decided to leave the battery materials space. The agreement between the two firms was a multi-year deal, meaning that four months of work was, relatively, no time at all. My purpose of including this is to demonstrate that Johnson Matthey’s decision to leave the cathode space had nothing to do with any loss of faith in Nano One.
Finally, it should also be noted that Johnson Matthey isn’t simply shutting the doors on the operation. The company will instead be selling off the business to a willing party or parties. While they do not expect to come close to the $450 million that they believe their battery materials business is worth, Johnson Matthey does seem confident that their battery materials businesses will all be acquired in some form. For Nano One, this means that there is a possibility that this development work actually continues, just under a new name. Mr. Guedes explained that the JDA that was originally signed with Johnson Matthey is still intact and Nano One is still more than willing to assist in developing the eLNO cathode. Anyone that buys Johnson Matthey’s battery division will also most likely continue the development of the eLNO cathode and Nano One believes that it is a valuable component of that development work. Of course, this isn’t a certainty and we won’t know anything until the dust has settled -- which could be quite a while.
So, the only reason that the extreme pullback recently could be justified, is if there was evidence that Johnson Matthey had lost confidence in Nano One. As I believe is now clear, this was not the case. So then the only value loss we should see as a result of this news is the inverse of whatever was added when Nano One announced the partnership. On the day of the announcement, this created ~11.5% growth for the company. Yet, in less than two weeks, this growth had completely eroded. Even still, it appears that this partnership work will continue in some form, just under a new name. Therefore, understanding that uncertainty is bound to create some negative momentum, the material loss here should have been fairly minimal and only limited to this level of uncertainty.
LFP Plans and Pulead
LFP, or lithium iron phosphate, offers a tremendous opportunity for Nano One. Well, let me clarify, LFP cathodes offer a tremendous opportunity for Nano One outside of China. In China, LFP cathodes represent 51.1% of the EV battery market so far in 2021. This is up from 42.6% last year. Globally, LFP has captured only ~12.5% of the market share. Almost 100% of LFP EVs are sold in China. Currently, iron phosphate is almost exclusively manufactured in China, as the economics of manufacturing iron phosphate are incredibly unattractive. This is where Nano One’s opportunity lies.
There is a desire to bring LFP vehicles to North America and Europe, as Tesla (NASDAQ:TSLA), Volkswagen (OTCPK:VWAGY), and Ford (NYSE:F)have all announced plans to do so. The reason for this is simple, LFP is far cheaper than the higher-performing NMC and NCA cathodes. For entry-level vehicles, this makes LFP the ideal chemistry. However, neither company really wants to source their materials and cells from China, especially as national governments work to limit Chinese reliance across the EV supply chain. Nano One’s One-Pot process eliminates the need to be solely dependent on a dominant Chinese supply chain. Its clean, no waste, low carbon footprint and low-cost process allows a competitive product while using different feedstocks. The need to introduce dirty, old, entrenched manufacturing processes is the greatest barrier to entry for the European and American markets.
This is a unique opportunity, one that Mr. Guedes said only comes once in a generation. Nano One could’ve done well in China but, in Europe and North America, Nano One has the opportunity to effectively create the market. So, Nano One’s recent announcement saying that it is now exclusively targeting North America and Europe for its LFP development makes a lot of sense. As a small company, wanting to use its resources most effectively, it makes sense to cut out China and, as a result, their Chinese LFP partner, Pulead.
With Pulead, Nano One had completed a great deal of work that will be highly translatable to its new focus of North America and Europe. The primary goal of Nano One’s work with Pulead was to lower the cost of manufacturing LFP, which its One-Pot process aided rather substantially. Crucially, Nano One completed a detailed report on the design and costs of a manufacturing line that produced 4,800 tonnes of LFP cathode material per year. The results of this study will never be publicized, though Nano One will most likely utilize them as they enter discussions with potential partners in North America and Europe. For those concerned about the IP developed during that time, it all remains Nano One’s and there was no transfer of technology.
Looking at some of Nano One’s job postings also provides a bit of clarity on where the company looks to be heading in North America. A posting on LinkedIn for Project Manager, LFP Growth Initiatives in Quebec discusses what the role of this employee would be. One sentence in the position’s description stuck out to me in particular, “You will develop, define, and execute project plans for the pilot line, the first commercial line and the following ones.” Additionally, Quebec’s $6.7 billion incentive program for a “green economy” should also work in Nano One’s favor here.
Moving Forward
Moving past these two major updates, Nano One’s investment thesis is still as strong as ever. In my discussion with Nano One’s CEO, Dan Blondal, he had said that there was a possibility that Nano One would have a commercial agreement signed with their Asian cathode partner by the end of the year. Mr. Guedes said that it was now looking fairly likely that this wouldn’t be possible and the company would push that into the beginning of next year. This will act as a major catalyst for Nano One, as it would force a revelation of their partner’s identity and a commercial agreement provides a powerful source of market validation.
Working with their American OEM partner, Nano One is now focused on creating a similar engineering study as the one it made with Pulead. This work will be carried out by Hatch and the scale of production will be far greater than what was done with Pulead. Instead of a 4,800 tpa facility, Nano One is aiming to operate a facility with an output of 35,000 tpa - 50,000 tpa. The purpose of this demonstration is to meet the operating requirements to support a full-scale automotive plant. Just like with Pulead, the results of this test will be kept internal, but they will be rather valuable in commercially validating the company’s product. Nano One expects Hatch to conclude its work around the end of the year and, while no specifics will be shared, the company will indicate positive or negative outlooks.
These two partnerships look to be the most developed of Nano One’s current relationships, yet the company is still looking to grow its network. According to Mr. Guedes, the company has over 20 potential partners that it is currently engaged with. Now, not all of these will eventually become partners of Nano One, but Mr. Guedes explained that this is a place where Nano One is actually in the driver’s seat. While the company’s grown a lot recently, more than doubling its employees since last year, it’s still fairly small and doesn’t want to overextend. As such, Nano One will more often than not be the one rejecting a partnership offer, rather than the other way around. The important thing to note here isn’t that Nano One will soon have another 20+ partners, because they won’t, but that there isn’t any reason to be concerned about a lack of partner interest. On the contrary, it’s as high as ever. If the partnership with Johnson Matthey doesn’t end up getting carried over when its assets are sold, you can view this as Nano One having more than 20 potential replacements. Again, no material loss.
Investor Takeaway
As discussed above, the Johnson Matthey event should only have created a pullback of ~5% at most. Understanding that the market is emotional, I could see this being as much as a 10% pullback, though with a recovery to that 5% mark. The fact that the blowback from these announcements has been far greater than this, creates a very strong buying opportunity. As I see it, the investment thesis for Nano One is unchanged. This is a company that I happily would’ve bought more shares of two weeks ago so, at this price, it’s never looked better.
I’m incredibly bullish on Nano One. While I believe it will be best appreciated as a long-term hold, there is significant short-term upside with the company’s upcoming first commercial deal. However, before then, I’m not sure we’ll see much significant news. Mr. Guedes said that Nano One won’t comment on Johnson Matthey again until they know where that partnership is heading, meaning there isn’t much to halt the market’s emotional response. I would expect unrelated announcements to be made in the meantime, however, and given how attractive I view this buying opportunity to be, I’m willing to take on this elevated level of volatility.