Li-Cycle: A Different, Yet Powerful EV Pure Play

Li-Cycle (NYSE: LICY) isn’t your ordinary electric vehicle play. It’s not an auto manufacturer or a charging station company. It’s not even a lithium miner or an EV battery maker. We’re getting closer though.

With the world speeding toward the electrification of transportation, much of the focus has been on reducing carbon emissions and improving the environment. These are indeed important missions but there’s another part of the story.

As consumer and commercial EVs become more prevalent, there will be an increasing need to recycle lithium-ion batteries. That’s where Li-Cycle comes in. And with little attention on the waste management aspect of the EV theme, investors have a chance to hitch an early ride on this lesser-known growth engine.

What Does Li-Cycle Do?

Li-Cycle is a Canadian waste management company that specializes in lithium-ion battery recycling. When a lithium-ion battery reaches the end of its life it needs to be safely recycled. Li-Cycle has developed a sustainable process that recovers critical materials from a range of lithium-ion batteries. This allows them to be reused. Once a battery has run its course, the company’s logistic network transports the battery to a Li-Cycle plant where it can be destroyed and/or recycled.

Li-Cycle has developed a technology called Spoke & Hub which forms a closed-loop resource recovery process. The Spoke part of the process safely and efficiently transforms the battery from a charged state to a non-charged state. The Hub component involves hydrometallurgical processing that extracts materials that can be converted into battery-grade products for reuse in lithium-ion battery production or other industrial applications.

In addition to its recycling services, Li-Cycle sells the end products that result from its Spoke and Hub processes. These include black mass battery materials, mixed copper and aluminum, lithium carbonate, and a few other chemical compounds. This allows the materials to be reintroduced back into the lithium-ion battery supply chain and makes for an environmentally friendly solution.

What are Li-Cycle’s Growth Prospects?

By the end of this decade, an estimated 15 million tons of lithium-ion batteries will have reached the end of their life. This means there will be a growing need for the secure destruction of lithium-ion batteries as the global transportation sector shifts to electric and hybrid vehicles.

Battery manufacturing facilities are popping up everywhere lately. This is great news for Li-Cycle because the more batteries that are eventually placed into service, the greater need for recycling services. In addition, since around 5% to 10% of lithium-ion battery manufacturing volumes are rejected for commercial use, this gives Li-Cycle an additional revenue stream that isn’t dependent on battery usage.

As the leading lithium-ion battery recycler in North America, Li-Cyle’s operations can presently handle 10,000 tons of batteries annually. In the future, it hopes to increase that amount tenfold as it builds out a global network of recycling plants. Last year it opened it’s first U.S. facility in Rochester, NY and by mid-2022 plans to have plants in Arizona and Alabama up and running.

Another major tailwind is the increased focus worldwide on battery recycling regulation. China has led the way in this regard having established a requirement for battery recovery rates above 80% back in 2018. Starting next year, California will require battery recovery rates of near 100%. The following year, the Canadian province of Ontario will require recovery rates of at least 70%.

Li-Cycle has contracts in place with several blue-chip lithium-ion battery suppliers. Some of its agreements extend through 2030. As growth in the electric vehicle market accelerates over the next 10 years, so too will the market for lithium-ion battery recycling. This could lead to more, attractive long-term contracts with some of the biggest battery factories in the world.

Is Li-Cycle Stock a Buy?

Li-Cycle’s financials for the current fiscal year aren’t great. It is forecast to post a net loss of $1.75 per share. However, things are expected to get dramatically better next year when analysts are predicting a $0.15 per share loss. Some are saying the company could potentially reach breakeven if not eke out a small profit.

In the past month, four sell-side firms have started coverage of Li-Cycle. All four have assigned a ‘buy’ rating and the price targets range from $13 to $15. If management can show it is further along the road to profitability than anticipated, these targets are likely to extend into the $20’s.

In recent days, Li-Cycle’s trading volume has picked up. On Wednesday, the company held its first-ever Battery Recycling Day involving industry experts and government officials. The event seems to have electrified interest in the stock which is nearing resistance at $11.58. If it can break through that level in a convincing fashion, we could see it trend towards a new record high above $16.

There is no shortage of institutional interest and social media buzz around the EV space these days. Very little is related to the battery recycling aspect of the growth story. Li-Cycle has a proprietary technology that makes it a leader in the space which along with some rapidly improving financials, makes it a powerful long-term buy.