Analysis and comment: Li-Cycle halts construction of its material recovery plant in Rochester

The Canadian recycling company Li-Cycle announced on Monday the 23rd of October that it is pausing construction work on its material recovery plant in Rochester in the state of New York, pending completion of a comprehensive review of the go-forward strategy for the project.

The company says:

"As previously disclosed, engineering and procurement for the project are largely complete, with the current focus being on construction activities on site. Li-Cycle has recently experienced escalating construction costs. Accordingly, the Company expects the aggregate cost for the current scope of the project to exceed its previously disclosed guidance. In light of these developments, the Board of Directors has decided to pause construction work on the Rochester Hub, pending a review of the project, including an evaluation of the go-forward phasing of its scope and budget, including construction strategy. Li-Cycle continues to work closely with the U.S. Department of Energy (“DOE”) with respect to the previously announced $375 million loan commitment through the Advanced Technology Vehicles Manufacturing (“ATVM”) program for the project, in conjunction with the project review."

The investment in the plant which is supposed to process up to 35,000 tonnes of black mass per year has increased several times since project was first announced in 2020, then with an estimated investment of $175M and later north of $200M. In 2021, as LG Chem and LG Energy Solutions agreed to invest $50M in the company the projected investment was estimated to $485M due to an increased capacity from 25,000 tonnes to 35,000 tonnes of black mass in-feed. This was motivated by higher projected supply of materials to recycle with a reference saying that the Rochester plant would still only be able to process half of all available black mass in 2023 and 30% in 2025.

In Li-Cycle's last financial report the company stated:

"Focus is on actively managing the construction labor as part of the Rochester Hub

construction budget of $560 million"

From November 2020 to the end 2022 Li-Cycle invested an estimated $240M in its plants and had $518M in cash. During the first six months in 2023 the company invested an additional $164M, taking the total investment to over $400M. This does however not only include the plant in Rochester but also all pre-processing plants in North America and Europe. By the end of June the company had $289M in cash.

If the statement of $560M would still be valid it would probably mean that at least another $200M is required to finish the plant and, given the review, most probably more than that. At the same time the operations have an accelerating negative cash flow with $40M needed in Q2, almost double the amount compared to Q1 ($21M). The company’s revenues are far from a level where they can substantially contribute to take the investment activity forward with $7.2M in the first six months 2023, which was less than in the same period in 2022. It’s therefore clear that Li-Cycle is relying on the $375M loan from DOE to be able to finish the project. A loan which is more than twice the investment the company initially announced and 77% of the planned investment since the increased capacity.

The Li-Cycle stock which is listed on the New York stock exchange is at the time of writing down 45% following a decline over several weeks. Since the company was listed on NYSE it has dropped 86%.

Consequences for Li-Cycle

While it is not known how far Li-Cycle is from finishing the project it might be it’s market capitalisation of $228M that becomes the immediate problem as a capital injection will mean a real washout of current owners. This include several strategic investors such as LG Chem, LG Energy Solutions, Koch Strategic Platforms and Glencore, the two latter with convertible loans which convert at $13.33 and $9.95 per share respectively (compared to current price of $1.23).

On the other hand it might become an opportunity for investors which already have an interest in the company to gain significant control. Glencore is currently Li-Cycle’s most important downstream processor, a joint venture partner for the similar plant in Italy and has invested $200M in the company. The company does however have a 5 years stand off agreement with Li-Cycle limiting it to acquire any more voting rights or to acquire the company. In a situation where there are no other solutions this might of course be lifted.

A solution could of course also be that some parts of the plant are postponed while other segments start in order to generate more revenues and obtain a real proof of concept. It does however appear that the plant is built in reverse with leaching and solvent extraction, the two first steps in the process, are yet to be built (we might be wrong here).

Consequences for the industry

This is a big setback for the US-based recycling industry and its customers. Li-Cycle is together with Redwood Materials in the absolute lead in the race to establish large scale hydrometallurgical processing of lithium-ion batteries in North America. A delay in the project is now inevitable and given the uncertainty, together with the market’s valuation of the company, we cannot rule out that the plant will not be finished at all.

As we have many times pointed out this is not necessarily a big problem in coming years as there is significant volume in the pipeline, far exceeding our projected volumes of scrap to recycle. But Li-Cycle was indeed the company that would be able to take a lead in material recovery and add that necessary capacity in the coming years.

Another aspect is also the very reasons why the construction costs have increased. Several sources show that building costs in the US increased YoY at 6% for non-residential construction. With a massive push through the US Inflation Reduction Act there is now also strong demand for exactly the specific construction expertise and resources required for plants like Li-Cycle’s Rochester plant. This might of course have a negative impact also on Li-Cycle’s competitors as well as its partners and future upstream and downstream customers such as large battery cell manufacturing plants and battery material plants.

The importance of scale – and the risks

Recycling in a competitive landscape is all about efficiency. Li-Cycle’s ambitious plans to get an early-mover advantage and to implement a model based on distributed pre-processing and centralised large-scale processing have therefore theoretically had the potential to address both of these challenges (competition and efficiency). To accomplish this scale was important.

Scale is also what the stock market rewards. And at a market cap of $1.6Bn Li-Cycle has needed to show that there is a credible path towards revenues and earnings that can back that valuation.

The problem is that a specialised recycling company can only make as much money as there are material to process in the market and what the market is prepared to pay for its end-products. In the case of Li-Cycle they have entered a market where the payables, the components which the prices are based on, at least in a mature market such as China are basically the same upstream and downstream. Upstream the company acquires battery packs and cells usually based on the value of nickel and cobalt. Downstream the company aims to sell nickel and cobalt sulphate and lithium carbonate which also are indirectly priced based on the materials contained: nickel and cobalt and in the case of lithium on lithium carbonate. There are also revenues from aluminium, copper and manganese sulphate.

At current market values that means that Li-Cycle would be able to make more than $400M in revenues if the Rochester plant would be operating at full capacity. With Li-Cycle’s strategy to also be a pre-processor close to where the market is, it had the opportunity to acquire batteries and battery scrap for far less than that. By getting to a situation close to a monopoly the company could also have a chance to keep prices down which for instance is not the case in a competitive market like China where scrap NMC cells currently can be traded at over $4,000/tonne, equal to over $350M to fill Li-Cycle’s capacity. The massive investment in Rochester could this way become a barrier to entry for other players, which means the size has been a strategic asset in itself.

How it will affect the market

During several years the recycling market has been very hot, especially in the US. From attracting investments in single to double digits of millions around 2020 investments are now made in billions dollars. However as we have shown recently the supply is not growing in the same pace, hence there is a risk to get disconnected from the real economics of recycling.

Li-Cycle’s target for 2023 is to produce 8,000 tonnes of black mass. CES estimate is that about 35,000 tonnes of black mass will be available in the US market in 2023, growing to 47,000 tonnes in 2025. That means that Li-Cycle, despite its early entry in the market has been able to only capture 25% of the market. And yet the market continues to expand with more capacity being added every year. This will inevitably contribute to compressed margins and eventually every single player’s volume. Economies of scale don’t primarily come from capacity but from throughput. There is there fore an obvious risk that this will affect other companies which now are building out capacity.

An alternative approach

The whole situation for Li-Cycle can be compared with players like Sungeel in South Korea which has grown with the market, setting up pre-processing plants where they have been needed (for instance for recalls and production scrap) and growing the hydrometallurgical capacity with the gradual increase in volumes from its own operations. The level of investments have also been significantly lower.

This is also the case for Fortum in Finland, Huayou Cobalt, Gangfeng Lithium and at least in its early years, GEM in China. All these operations are based less on a leap of faith but instead gradual, incremental growth through which the companies gain experiences and build customer relationships. Li-Cycle was in their early years not far from this.

For the industry it would be great if Li-cycle succeed and can turn the situation around. More processing capacity is needed both in the US and in Europe.