US has delayed a ban on Chinese graphite and anode in batteries, with automakers given a two-year extension to 2027. This impacts Novonix and other US-based entities looking to establish supply in North America.

Under the US Inflation Reduction Act, an EV may be eligible to up to $7,500 of tax credits for locally-sourced critical battery minerals and battery components. The law also prohibits manufacturers from sourcing battery components and critical minerals from Foreign Entities of Concern (FEOC) starting in 2024 and 2025, respectively. FEOCs include China, Russia, Iran and North Korea.

Given a lack of available supply, and consistent supply still being at least 12 months away, the decision makes sense. The one thing I do think is disappointing is OEMs have been investing significantly in other areas of the supply chain, but graphite has remained at the bottom of the pile in terms of priority, presumably due to China overwhelming the market with supply, crippling the graphite price as a result. It is clear China is trying to control the supply of anode and other material, but the trend is clear – the west will not allow this to occur due to significant supply and national security risks.

While this delay is disappointing, OEMs will be required to prove they are inking agreements to source non FEOC graphite for post-2027. This will likely result in offtakes and further investment into the sector by OEMs to ensure they can establish supply by 2027, but also to ensure they can obtain the exemption allowing them to use Chinese graphite in the meantime.

All eyes turn to the upcoming tariff ruling, with leaks suggesting the US will re-introduce tariffs on a range of Chinese goods, including EVs, semiconductors, solar equipment and critical minerals. This is likely to include anode, which will have positive implications on companies like Novonix trying to establish onshore operations and scale.  

It has been an eventful few weeks for Novonix. To recap:

• VP Emerging Energy from Phillips 66 was appointed to the BOD, replacing outgoing board member. Phillips maintains the right to nominate a member to the board as a result of their investment in NVX in 2021. Any commentary around this would be speculation, so it is difficult to add too much, other than to say this relationship is absolutely critical for Novonix due to synthetic graphite (SG) requiring feedstock.  
• An engineering report conducted on Novonix’s cathode synthesis process highlighted potential improvements over conventional cathode synthesis. In summary, capital expense intensity was nearly 30% lower, processing cost reductions was nearly 50% lower, estimated power consumption improvements of around 25% while removing the need for water and other key waste byproducts in the material processing steps. This is a big deal for Novonix and will sit entirely separate from their work in the anode space. For the purpose of being conservative, I have actually excluded their cathode division entirely in my valuation, but this division could exceed the value of their anode division so it is one to watch.
• We got some much-needed insight into their anode division's progress. Things are tracking along nicely re: specifications and design throughput targets. The company also indicated they were updating engineering for their Riverside facility with an increased production target of up to 20,000 tpa, compared with the initial 10,000 tpa target. Lastly, we also got some insight into their economics, with the company expecting capital and operating costs for future facilities projected to be lower than the company’s initial estimates. The company is targeting operating margins ranging from 23-28% based on estimated sales prices ranging from $7/kg to $10/kg, depending on customer product specs.
• Process economics for SG relate to three drivers – raw input costs (needle coke); energy costs; and operating costs (labour and depreciation, among other items).
• 3 x BOD staff bought shares on market in September – 380k shares, 360k shares and 117k shares respectively – so not church change by any means.

Novonix continues to track along nicely, but there are some clear risks here, namely cheap and dirty production of battery-grade anode in China, who dominates this space. This industry isn’t dissimilar to the solar industry in that, it isn’t sustainable for the west to fish in these waters without significant support from government. This remains key to the investment thesis. If there is any wavering of support from the gov (re: both funds and legislation) the investment thesis is broken. But as most who follow this space know, this has been declared a national security issue and rightly so – the west needs to be able to produce key battery materials themselves, hence govt support. Luckily for Novonix, this continues to be well supported by the gov – legislation will support businesses like Novonix developing critical materials onshore and elsewhere, and much more sustainably/environmentally friendly than the Chinese, and US tariffs should be in place within six months to incentivise/support local onshore producers. The US DOE loan application also appears to be tracking along nicely; this is expected to cover the overwhelming majority of Novonix’s next facility which will expand anode production, in addition to a $U150m grant provided by DOE.

As I mentioned a few months ago, this investment isn’t for the faint hearted. The balance sheet will appear terrifying and investors without sufficient knowledge of this thematic might struggle to understand the investment thesis. But this is a business investing in its future, and their BOD and Chief Scientific Advisor are quite literally world leading. There is an economic/time moat developing here – if Novonix succeeds in establishing scalable supply of synthetic graphite onshore (something I think is highly likely), they will be one of a select few graphite/anode entities in the market. Battery-grade anode requires extensive testing by battery and OEM customers due to the importance of the product they are putting in their batteries (by weight, graphite is the largest component in lithium-ion batteries – containing 10-15 times more graphite than lithium).

In the next six months I am hoping for an update on 1) DOE loan finalisation b) key offtake agreements and c) site selection on their next facility in the US.

NVX and LGES enter into JDA and US$30M investment agreement

A good announcement from Novonix this week, who have entered into a joint research and development agreement (JDA) with LG Energy Solution (LGES) for synthetic graphite (SG) anode material. This is intended to lead to the option for LGES to purchase up to 50k tonnes of anode material from Novonix’s US-based facility over a 10-year period. In addition to the JDA, LGES will provide Novonix with an investment of US$30m – Novonix in return will issue this much worth of unsecured convertible notes, with a 4% coupon and a maturity date in 2028. The notes will be issued with a conversion price of AUD1.60 per ordinary share (noting this is essentially a 60% premium on the current share price).

My thoughts:

• This is as tier-1 as it comes for Novonix, with LGES currently investing significantly in US expansion in conjunction with automotive manufacturers (Hyundai, GM etc). They are almost top of the list in terms of ideal partners for Novonix.
• Novonix are taking the majority of risk, but LG are dangling them a carrot and have come to the table with a 30m investment/commitment. Chris Burns (Novonix CEO) has said publicly that LG obviously require far more anode than the 50k initially agreed and there is scope for the agreement to expand – my view is if Novonix are able to produce a custom product LG are happy with, LG will very quickly look to increase the supply arrangement. LG will also be incentivised to put their business through Novonix – LG could effectively own a good chunk of Novonix following issuing of notes/shares so it will make sense to support them if the product is right.
• Novonix are currently going through the loan process with US DOE but require supply agreements to progress. I am not sure if this deal will classify as a supply agreement and meet what the loan office want – my initial thoughts are no but I could be wrong.
• This validates Novonix’s base SG product somewhat and confirms that they are willing to custom-produce for the major tier-1 players.
• LG will get a 6-year exclusivity with any SG product developed as a result of the JDA. This favours LG enormously, but I don’t blame Novonix for compromising here. If LG are happy with the product developed from the JDA (noting they will require LOTS of anode), there is potential for their demands to basically wipe out all the supply Novonix has on offer and then some. Novonix might not have much bargaining power now (with LG, anyway) but they will if this product is up to scratch.
• The extra $US30m gives Novonix far more breathing room in terms of capital. They have well in excess of 12 months of capital and will likely have secured a DOE loan in this time. This de-risks the balance sheet and suggests further capital raises are highly unlikely.
• On the downside, Novonix will be guaranteeing supply of available graphite/anode for testing/development, receiving no payment in return (yet). This is supply that could otherwise be allocated to supply deals that will actually result in revenue. I am OK with this, Novonix are taking a long-term view to secure what in my view is the most attractive partner in the US at the moment.

The major things to watch for Novonix going forward are future supply deals/agreements, the DOE loan decision and selection of their Greenfield site (additional 30,000 tonnes).

The loan decision in particular is the key risk at the moment. I would suggest they will almost certainly be granted this, but should for whatever reason Novonix fail here it will delay their Greenfield expansion significantly and absolutely smash investor sentiment.

I remain extremely bullish – ‘build it and they will come’. This is a company making significant investment into its future, targeting a niche product expected to soon be in deficit. Short term, this investment will look crazy for some, and fair enough, but I think those that can tolerate the volatility and the horrific balance sheets will be handsomely rewarded in the next few years. 

Novonix has entered into a joint venture (JV) with TAQAT – a leading Saudi Arabian energy company – to produce battery materials in the Middle East and North Africa (MENA) region for use in EV and energy storage system applications.

Key points:

• NVX, with its leading battery technology and capability, will develop a graphite anode materials facility with capacity of 30k tonnes per annum.
• JV is split 60% (TAQAT) and 40% (Novonix). Both will contribute their share of operating and capital costs for engineering and facility construction and operation. The JV has been in discussion since 2021, demonstrating the slow burn required in this industry.
• Novonix will contribute its IP on a royalty-free basis to produce high-grade graphite anode. The project is expected to provide Novonix with ready access to precursor material as feedstock for critical battery materials, in addition to access to developing end-use markets for the manufacture and sale of EVs and energy solutions.
• Target to begin construction in Saudi Arabia in 2024.

The JV will provide Novonix with financial support and relevant materials to operate in Saudi Arabia, who desperately need to secure anode supply themselves given their 2030 EV goal (30% of all vehicles to be electric).

This is significant for a number of reasons. It confirms Novonix is looking to expand beyond the US, and is happy to partner where appropriate to ensure it doesn’t bite off more than it can chew. This is appropriate in my opinion – Novonix as a priority needs to secure funding support, precursor materials and an end market to support any expansion it makes. This deal ticks all the boxes for expansion into Saudi Arabia and will likely provide the company with a platform to supply the broader area in the coming decades.

This deal has likely been spearheaded by Andrew Liveris, a prominent businessman and a member of Novonix’s BOD (his son, Nick, is also the CFO). Frankly, Novonix pay Andrew far too much money annually, but there is good reason for that. He is on the board of Saudi Aramo, the second biggest company (market cap) in the world. He is also the chairman of Lucid Motors, an EV manufacturing business in the US. I could go on and on re: Andrew, but my view is his connections to Saudi Arabia and the broader MENA have enabled this deal – with likely more to follow in the coming years.

To provide some very rough calculations of how this expansion/facility might impact future earnings. With estimated graphite anode prices (approx. $14k AUD per tonne), this facility could be spitting out annual revenue of around 420m within the next few years. Let’s halve that to provide conservative coverage of COGS/Capex costs, equaling 210m -- 85m of which Novonix will be entitled to.

Novonix for me fit the bill – impressive management and BOD team, world-leading IP and significant US government interest/support for Novonix to succeed. They have already been granted $US150m by the US government and will highly likely be provided with a favourable loan to assist with the construction of its US greenfield project. You can now add Saudi Arabia to the list, who have a powerful agenda of their own to secure a graphite partner to support its EV rollout.

I don’t want to sound too bullish here (my graphite obsession is like @Strawman's bitcoin one ????) but I believe we are witnessing the investment of a future cash cow in the making. It won't be pretty short term, and the economic environment is not currently favourable for a business like this, but for those members that can tolerate the volatility, I urge you to check out the opportunity at play here.

This article discusses recent Chinese investment in anode, creating what might be oversupply and potentially setting up the market for a slowdown on the back of overcapacity.

It is a risk and a bear case argument to be aware of, but as the author also points out, much of the potential oversupply will be poor quality anode.

The investment thesis for Novonix is high quality anode produced in the USA, reducing the current Chinese monopoly. Frankly, it is widely anticipated that Novonix-produced anode will be far superior to Chinese anode and produced in a much clearer, greener way.

Me thinks the market is being short-sighted. Me thinks I am being presented with an excellent opportunity. 

This is a business with one hell of a runway in front of it. A few years ago, I bought Novonix at current share price levels. It then had one hell of a ride, with the share price rising to $12.00 due to what I think was a combination of hype, FOMO and euphoria for the EV industry. This was a ridiculous valuation at the time. I packed my bags, tipped my hat, and said ‘see you later, hopefully soon’ (sold my shares) despite thinking this was a gem of a business with enormous potential.

The share price is now back to levels seen around two years ago. But here is the catch: the business has matured in this time, and I am of the opinion the risk/reward proposition has become far more favourable. I published a business overview and my thesis well over a year ago (on this site) and this hasn’t changed, although their prospects have. I won’t repeat these here so go and check this out if you are interested. My straw last week summarised their achievements/updates since Jan 2021. The business and the management team, up until this point, are executing as expected. But over this time, their tailwinds have strengthened significantly, for a number of reasons:

• First mover advantage in the US and the only domestic option in the US ready(ish) to scale. There is also an economical moat developing here – it is both expensive and time consuming to open up factories and start producing synthetic graphite, and that’s without even mentioning Novonix’s IP.
• The 'China is bad, US is good' view has intensified over the last 24 months. Novonix will only benefit from this, with China currently producing around 60%-80% of the world's graphite.
• The above point has resulted in significant US government support, which will result in a combination of grants, favourable loan terms, taxes, and tariffs -- to help the domestic supply chain of critical materials onshore. The Inflation Reduction Act 2022 refers.
• Phillips 66’s strategic investment in Novonix (acquiring 16% of the business), providing Novonix with access to petroleum needle coke – the key precursor material for synthetic graphite.
• Strategic investment in KORE Power, with an agreement to provide them with 10,000 tpa commencing 2024.
• Chattanooga, Tennessee – where Novonix has factories – is shaping up to be the next ‘Silicon Valley’ for all things US battery related.
• Chris Burns and the board are demonstrating an ability to walk the talk with government and rub shoulders with important stakeholders.

Battery production and all things batteries continues to shape up as one of the most important things society will produce over the next decade, fuelled by EVs and storage requirements. If Novonix can maintain their competitive advantage (something to watch) they will be your classic ‘pick-and-shovel’ play in the industry.

If they are producing 40,000 tpa by 2026, as anticipated, this will likely result in the business earning more than 400m from their anode business alone. I have intentionally disregarded the blue sky and opportunity associated with their cathode business to help balance out investment risk, but this could again also add enormous value to Novonix’s bottom line in the next decade.

The market is forgetting their future earning potential, for good or bad. I don't think the business is priced to succeed. And for many more, Novonix presents itself as a risky investment with a horrific balance sheet (and they aren’t wrong re: the latter). And true, there are risks: i.e., Novonix struggling to acquire cash (it will need lots), experiencing delays or major issues with bringing production online at key sites, or innovation rendering Novonix technology obsolete. But when you look under the bonnet you may be surprised – they have the potential to be an absolute behemoth in ten years’ time and my view is the chances of this occurring have improved significantly over the last 24 months.  

So what is the catch? You have to understand the business proposition, and then wait and be patient. Their balance sheet will remain appalling for the next 12 months, at a minimum. And there will likely be dilution here because the reality is Novonix will need lots of cash. The market won’t like this; many likely won’t understand why this silly business continues to spend millions without earning any significant revenue. Heck, the share price could again halve over the next year. But I think those that are willing to be patient and put up with the volatility are being provided with an opportunity here. I will post my rough valuation next week.

I tuned in to the recent virtual investor conference. I took some notes below for those interested:

Two new board members – a former CEO and Chairman of General Motors; the other a finance executive, currently serving as CAO at Dow. Trying to leverage off adjacent industries which they interact with.

Summary of notable announcements (2021 - present)

• Jan 2021: chief scientific advisor joins NVX
• Jan 2021: Anode materials division selected to receive US$5.57m from DOE for furnace technology 
• Feb 2021: five-year research sponsorship with Dalhousie University. 
• Feb 2021: NVX and Emera partner on residential energy storage technology
• Feb 2021: A$115m capital raise
• Aug 2021: Phillips 66 invests US$150m in NVX and becomes a major shareholder of the business
• Nov 2021: Riverside facility is opened 
• Jan 2022: Phillips 66 and NVX sign agreement to advance production and commercialisation of anode materials for lithium-ion batteries 
• Jan 2022: executed supply and investment agreements for 12,000 tonnes with US-based KOREPOWER. 
• Feb 2022: company lists on NASDAQ
• Jun 2022: life cycle assessment results; 60% decrease in global warming potential relative to conventional anode grades. 
• Oct 2022: selected for US$150 DOE grant to build-out NVX’s next 30,000 tonnes graphite manufacturing facility. 

Elaborates on Phillips 66 strategic investment:

• A global producer of needle coke, a key precursor material for synthetic graphite
• Investment will help support NVX towards 40,000 mt/year, expected to be completed by 2025
• Phillips 66 nominated a representative to NVX board

Head to head comparisons - shows benefit of synthetic graphite

The last year has consisted of several significant strategic investments in NVX, including significant tailwinds from the US government, who is really trying to drive the local battery manufacturing industry. This includes tariffs, the inflation reduction act, government funding and tax benefits for companies who source materials locally. In addition to funds injection, there will likely be an ability for NVX to acquire favourable loans with low interest rates.

Update about Greenfield site selection, overview and rendering (facility to support 30,000 tpa by 2025).This will have potential to expand up to 75,000 tpa.

Brief update about Cathode division, which also has potential to grow as big or larger than the anode division. It is however slightly earlier in the process, moving to pilot scale now. 

• Cathode material represents about 30% of the cost of a battery cell
• TAM forecast to grow significantly over the next decade 
• Current process is complex
• NVX will use DPMG technology to deliver higher yields at lower cost, no waste and high nickel cathode materials

Spoke about the importance of BTS division - essentially the heart of the company. It sits at the forefront of product innovation and provides leading insight into the battery development and material technology ecosystem. With that, you also get valuable exposure to possible customers for other divisions (anode and cathode)

Summaries of Q&A session

• Riverside facility coming on line during 2023, in advance of KOREPOWER contract starting in 2024
• Production right now will be focused on contracts they already have and scaling into KP contract and anything else bought online 
• They see reaching Riverside output as being profitable for the company, noting the significant CapEx investment journey that lies ahead 
• Discussion about recycling graphite, challenging to do on the anode side 
• Chris expects to see more government-related incentives etc to ensure business is incentivised to buy local content
• Cathode commercialisation timeline – NVX could elect to scale similar to anode division, or could partner with existing suppliers to utilise NVX technology, but essentially wear the CapEx costs. NVX is still exploring the best commercialisation path for Cathode. In short, commercialisation is some way off.

• NVX commences process for Nasdaq listing
• The US listing is expected to take place after the SEC and Nasdaq have completed their review process and upon effectiveness of the registration statement.
• The establishment of the program by NOVONIX is not a public offering or issuance of new NOVONIX ordinary shares. Under the Level II program, the ADRs will be based on ordinary shares currently on issue.
• NOVONIX expects to begin trading on Nasdaq under the ticker symbol “NVX”.

This has been in the works for some time, so shouldn't surprise the market too much. That said, NVX volatility is commonplace these days - so the share price will probably be all over the place today.

On a personal note, I will be looking to trim this one soon. I am a huge fan of the company - I have owned since April/May 2021 for an average entry price of $2.00. There are obvious tax implications as I haven't owned for 12 months but I don't see the current price as sustainable. I won't sell my entire holding, NVX is one of my higher conviction stock picks so I couldn't bring myself to sell the lot. I also think the Nasdaq listing will only benefit the company, particularly pertaining to positive political implications - so I remain incredibly bullish for the future. In saying that, my plan is to DCA slowly into NVX in my super portfolio. I don't want to be too fussy so if I can get entry around $5-6 that would be ideal.

DISC: Held

Novonix develops and supplies lithium-ion battery materials and testing equipment for the North American market. The company, founded in 2012, was previously called Graphitecorp Limited, and spent its early years in graphite mining and exploration. In 2017 it purchased Canadian-based Novonix Battery Technology Solutions (BTS) and adopted its name. The company shifted its focus to exploit the growing interest in the EV and battery space. Shortly after, it developed Dry Particle Micro Granulation (DPMG) and Single Crystal Cathode battery technologies through R&D. 

DPMG

DPMG is the company’s breakthrough method to produce higher quality, low-cost synthetic graphite anode and cathode materials. It is more efficient and sustainable than the traditional Continuous Stirred Tank Reactor (CSTR) process, which in comparison produces a lot of waste and is not environmentally friendly. This is the reason why CSTR is commonly referred to as an ‘environmental minefield’. For those looking to expand their knowledge on DPMG, I recommend watching this video. 

Novonix structure

Following the development of DPMG, the company established three main business segments it would focus its innovation on:

• Novonix battery technology solutions (BTS)
  • As the name suggests, BTS focuses on battery technology solutions. 
• Novonix PUREgraphite
  • Focused on developing anode materials 
  • Developed a new environmentally friendly process to produce lower cost graphite anode material for lithium-ion batteries in the US. (DPMG method)
  • Most progressed of the three segments relating to commercialisation of products. 
  • First contracted supplier of US-made high-capacity long-life synthetic anode. 
  • Agreements with Samsung SDI and Sanyo. 
• Novonix Cathode materials 
  • Leveraging DPMG technology
  • Ground floor patents in for new tech
  • Single crystal and Polycrystalline cathodes
  • Installing pilot scale processing

Key facts 

• The average production cost of synthetic anode using the CSTR method is around $8000/ton, while DPMG is estimated to produce these materials at a cost of only $5000/ton along with being environmentally friendly.
• The performance of Novonix’s PUREgraphite synthetic anodes is impressive. Research using fuel cell data shows that PureGraphite synthetic anodes produce higher quality batteries with longer life, compared to the industry’s best products.  

What I like

• Founder led, with around 20% insider ownership (will confirm this in the soon to be released annual report).  
• Demand for artificial (synthetic) graphite anode material continues to increase due to electrical vehicle and renewables growth. The anode and cathode markets are expected to reach $100 billion/year by the year 2030. Novonix is well positioned to be a major supplier of battery materials over the next decade. Current supply is mainly sourced from Asia – mostly China – due to it being the lowest-cost producer. But these methods aren’t environmentally friendly. This lies the opportunity for Novonix – battery manufacturers don’t want to be heavily reliant on Chinese graphite providers due to the political and environmental risks. 
• My investment thesis is focused on Novonix’s patented DPMG and the competitive advantage it provides the company. This is Novonix’s moat – it enables the company to produce higher quality synthetic graphite materials for lithium-ion batteries at a lower cost than traditional production methods. Further, the method allows them to do so in a more environmentally friendly way – another tailwind for the company with the increasing focus on ESG. DPMG has essentially enabled Novonix to achieve a level of production efficiency that allows battery manufacturers to diversify their materials supply chain out of Asia.
• In addition, BTS division are anticipated to support Novonix PUREgraphite, with their revenue expected to grow from 5 million (currently) to 10m in the next few years. 
• The company has agreements with Samsung and Sanyo – two of the biggest battery manufacturers in the world – to supply synthetic graphite anodes. This demonstrates demand and is endorsement for Novonix’s patented tech. Novonix is consequently ramping up production, with agreements to supply as much as 100,000 tons of synthetic graphite anodes a year by 2030. 

Monitor/risks

• The thesis is built around Novonix maintaining its competitive advantage in the space. Should another company find a more affordable or efficient way to produce graphite material the thesis is broken. 
• Production of 10,000 tonne/year estimated for 2022 once their Alstom plant is finished. This will be yet another significant milestone for the company. 
• P/S of x8 already priced in (thanks @CanadianAussie). There is a lot of expectation priced into their share price at the moment. For whatever reason, if Novonix aren’t able to commercialise their battery products sufficiently it will negatively impact the share price, and likely in a big way. 

Novonix has slowly grown to excite the market as it continues to achieve significant milestones. They are shaping up to be a serious contender in the battery manufacturing space. The company has an exciting future in store for it provided it can continue to tick the relevant boxes. I believe they can. They are well positioned to be an industry leader in a space that will continue to grow rapidly over the next decade. Consequently, this is a high conviction pick for me – but its not without its risks (as outlined above). 

DISC: Held in real life - personal and super portfolio. I didnt add Novonix to my Strawman portfolio, but will add a small position next week for transparency purposes. 

Ps - I am looking forward to hearing CanadianAussie's stock pitch on Novonix this Friday!

NOVONIX (NVX) is expanding its anode materials business in the US state of Tennessee. The company advised it will fulfil its contractual obligations in purchasing a new major plant. NVX has plans to retrofit the building, formerly held by Alstom, to become its second facility in Chattanooga.

The new plant will produce in excess of 8000 tonnes of anode materials per year, taking NVX's total annual production capacity to 10,000 tonnes. Unfortunately there are various reports as to when the new facility will come online - they vary between a year or two. 

The company is negotiating agreements to supply anode materials to international battery producers for use in electric vehicles and energy storage.

NVX highlighted that it was well-positioned to meet the growing needs of the battery supply chain in North America. This phase of growth will support the integration of anode materials in lithium-ion battery packs for over 100,000 electric vehicles.

The market reacted positively, up 6%.  

The company continues to progress agreements with lithium-ion battery producers Sanyo Electric Co in Japan and Samsung SDI in South Korea.

Brief company overview

The company develops and supplies materials, equipment and services to the global lithium-ion battery industry and has operations throughout the US and Canada, with sales in more than 14 countries.

DISC: I hold