Nano One: Breakfast Time

Summary

• The time has come for Nano One to deliver. Lots of partnering and evaluation deals are good, but we need to see Nano One's technology put to commercial use.
• Insiders are buying stock on the open market. Nano One leadership appears committed and optimistic about the company.
• Before someone commits to a several hundred million dollar Nano One cathode plant, material supply, battery, and vehicle and/or grid storage application need to be there.
• Nano One needs to solve the "business problem" in addition to the "cathode problem" if it is going to succeed.
• We have firm indication from the company of an announcement of commitment - in some form - this coming quarter.

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Bacon & eggs: Chicken is interested. Pig is committed.

Nano One (OTCPK:NNOMF) has developed a particularly cleaver, innovative, broadly applicable and patented process for manufacturing lithium battery cathode material. The company continues to improve its process, add functionalities and generate interest across the lithium battery and electric vehicle industries. But interest in Nano One's "one pot process", LNMO high voltage spinel or "metal to cathode active material" (M2CAM) innovations does not amount to success and will not alone make shareholders rich. Success for Nano One and its shareholders will happen when, and only when some company commits to using Nano One's process at scale.

This is the goal. Turning interest into commitment is Nano One's "problem at hand". And, getting commitment to use Nano One's process at scale is more a business problem than a technical one. Mr. Austin Craig has recently posted an excellent article discussing several of the deals and partnerships Nano One is working on and the current state of play.

In another recent Seeking Alpha article, Mr. Craig notes that Nano One senior management have been buying company stock on the open market. There can hardly be a better endorsement of Nano One's future prospects. This commitment by senior Nano One management is a particularly significant and useful sign for investors because these insiders will be aware of details of Nano One's ongoing partnering arrangements that have been and continue to be masked in almost all cases behind NDAs.

Before we proceed further, please consider the following:

Disclaimer: Nano One is a small essentially pre-revenue company. Investors should seek professional advice, perform thoughtful due diligence, and limit any investment in this company to funds they are prepared to put fully at risk. I am long NNOMF. That alone does not mean you should be too.

Getting to Commitment

A new cathode plant costs several hundred million dollars. No company is going to commit to that kind of investment without knowing what batteries will use the cathode powder produced, and in turn what vehicle or grid storage application will use those batteries. Let's take a look at why this is and what Nano One has done and is doing to make commitment to its cathode process happen.

Scope of Cathode Production: Really, Really Big

To get our arms around both the degree of commitment Nano One needs to evoke from one or more of its interested partners and the scale of the opportunity awaiting the company and shareholders we must appreciate how much cathode material will be needed for electric vehicles and grid storage.

Current nickel based lithium batteries (e.g. NCM, NCA) deliver specific energy of 250 Wh/kg. One kilowatt hour of energy storage requires roughly 4 kg of battery cells. Cathode active material constitutes 40% or so of cell weight so 1.6 kg of cathode material is required for each kWh of batteries produced.

Advanced solid state and lithium metal batteries have higher Wh/kg because they eliminate the anode active material (graphite), but these advanced cells require the same cathode material per kWh as today's cells. (Modest improvements in cathode material are being made but this matters only at the margin for our purposes.)

A middling size battery giga-factory of the sort being planned by VW (OTCPK:VWAGY) Ford (F) and others will make ~40 GWh of cells per year. VW plans six such factories in Europe alone. Tesla is planning battery factories much larger still. These factories of course represent huge investment.

Forty GWh is 40,000,000 kWh. Just one of these 'middling size' battery factories will require 64,000,000 kg or 64,000 metric tonnes of cathode material per year. That is an amount of cathode powder equal to the weight of a WWII Japanese super battleship. A cathode plant costing a hundred million dollars or more will be required to feed such a battery factory.

A company isn't going to build one of these battery plants without having a good idea of where the batteries will go and where the materials, including the cathode powder will come from and that these materials will result in a battery with the performance and life required by the application.

The cathode plant won't get built without knowing what batteries will be made using the cathode material produced and that feedstock will be available and useable by the cathode plant's process. That's a lot of ducks to get into a row.

Nano One has been lining up partners ranging from automakers evaluating Nano One cathode powder, cathode producers evaluating Nano One's process to miners looking to supply metal powder rather than metal sulphate feed stock. This has taken a long time - perhaps quite a bit longer a time than anxious investors would prefer. On the other hand the scope of the cathode production that makes the business problem slow to work also portends some astonishingly attractive returns to Nano One and its shareholders.

Licensing Revenue Impact on Nano One Shares

A direct licensing deal for Nano One's cathode process would reasonably fall in the one dollar per kilogram area and shared profits from a joint venture arrangement considerably more than that. Sixty million dollars of high margin revenue is a realistic estimate for licensing a cathode plant using Nano One's process to supply just a single 40 GWh per year battery factory.

With fewer than 100 million shares outstanding, seeing Nano One's process supplying cathode to just a single 40 GWh battery factory would mean 60+ cents a share gross revenue and thirty cents or so a share net after operating expense and taxes. In such a circumstance a PE of 20 would be conservative considering the remaining cathode market available to be addressed and a stock price around six dollars a share. Not bad for getting just a single battery plant committed to using Nano One process cathode material. And, the opportunity extends far beyond supplying cathode for just one battery plant...

Nano One's cathode material process can make any of the commonly used cathode materials (LFP, NCA, NMC) as well as advanced cathode such as LNMO. As a result, the addressable cathode material market that could use Nano One's process is very large.

At Tesla's (TSLA) Battery Day presentation Elon Musk posited that 20 TWh (20,000 GWh) of batteries would needed per year to support world transition to renewable energy and electric mobility. Should Nano One's process end up supplying cathode for just a quarter of those batteries - 5 TWh per year - licensing revenue as described above would amount to $7.5 Billion and shares could approach $1,000 absent significant dilution.

We happen to be at a point in time where circumstances are converging that strongly favor wide deployment of Nano One's process. Adoption of the company process for a quarter or more of worldwide cathode production is very much in the cards making the prospects for company and shareholders very exciting indeed.

Nano One Is Out to Change the World

This video from the Nano One website describes how the company's process differs from current cathode material processing used by the battery industry.

Nano One's process at once offers large cost savings, greatly reduced waste, lower carbon footprint, a simplified supply chain and superior quality product compared to the process currently used by the battery industry. Further, the Nano One process has been proven for LFP, NMC and LNMO cathode; piloted to demonstrate scalability, and of course patented.

The rub in all this is that the revolutionary Nano One cathode material process is disruptive to the existing cathode material supply chain. With the Nano One process, conversion of feedstock metal powder into metal sulphate and conversion of lithium carbonate to lithium hydroxide are eliminated - and with that the business of companies / plants performing those conversion steps.

A battery maker adopting the company's process will necessarily need to "re-wire" its feedstock supply chain, and that can be messy when companies are scrambling to get all the batteries (and feedstocks) they can to keep up in the race to electric mobility. But this "messiness" may be an advantage in the end.

Western companies (and countries) are becoming increasingly uncomfortable with reliance on supply chains running through China as the result of disruptions associated with COVID and political tensions and uncertainties that have come to relations with China. There currently is considerable impetus toward shortening battery supply chains and localizing sources of supply and processing within North America and Europe. This necessarily is also disruptive to battery supply chains.

Interestingly most of the metal to metal sulphate conversion and lithium carbonate to lithium hydroxide conversion takes place in China. Not only does the Nano One process provide a 'way around' the Chinese sulphate & hydroxide processors, it also provides economic justification for establishing a new and different cathode feedstock supply chain because it reduces cost precisely because these process steps are eliminated. The company's process looks like an ideal solution / roadmap for establishing North America and Europe cathode material supply chains. And, the Nano One process is 'ready to go' having been developed, proven, piloted and partnered.

If a significant part of North America and Europe cathode supply chains are developed around the Nano One process then that process will necessarily end up supplying cathode material at large scale. If perhaps a third of the worlds batteries end up being made in North America and Europe, the Nano One process may well end up supplying cathode for most of those batteries.

China is a bit of a different problem. Chinese supply chains and cathode production is structured on the current industry process including sulphate and hydroxide conversion. China has historically been less sensitive to environmental issues and maintaining existing manufacturing processes and the associated jobs is likely to command priority there. For this reason I believe China will be late in switching to the Nano One process to the degree that that happens at all and therefor do not include potential Chinese licensing in my thinking about Nano One's revenue prospects.

What Success Looks Like

As I pointed out at the beginning of this article Nano One success depends on someone committing to use the company's process to make cathode material at scale. The Nano One process is only worth something if it gets put to use. From the standpoint of investors looking to the stock price, it will be the announcement of a deal in some form that embodies commitment to put Nano One's process to work. This stock will take off well before the company process is actually delivering cathode powder at scale. A firm, realistic commitment from a reputable third party is all it will take.

We have indication from Nano One's CEO of a likely deal announcement 1Q22 (at 33:00 onward). This is the first time I can recall that the company has offered a definite timeframe for a deal announcement. The coming quarter may prove most interesting for shareholders.

There are at least three kinds of 'deal' we might see announced, and perhaps others:

1. A company, perhaps one of Nano One's existing partners commits to build a cathode plant under license or as a JV.
2. A government entity / industry consortium commits to a demonstration cathode plant and 'team' to validate the supply chain from mines to batteries / vehicles running through the Nano One process.
3. A third party offers to acquire Nano One.

Shareholders may want to pay close attention to announcements coming from the company over the next 90 days.

Caveats and Unknowns

This article describes what I believe will be, in one form or another the future prospects of Nano One. Since it deals with the future it is necessarily speculative compared to for instance a simple recalling of company past performance. Investors should keep that in mind.

In addition to the simple speculative nature of this discussion any number of undiscussed internal or external factors may bear on the state of play. One thing in particular I think deserves careful thought from investors.

Nano One's process is disruptive of the cathode feedstock supply chain. Conservative companies will to at least some degree be reluctant to 'rock the boat' with their existing supply chain relationships. And, auto makers, particularly legacy carmakers are nothing if not very conservative... Something for investors to think about.

Outlook for Nano One Stock Price

Nano One shares have been under selling pressure for most of 2021 and toward the end of last year one can infer some of this as caused by investors claiming the loss for tax purposes. Some recovery in the stock in the near term should be expected from this factor alone.

Beyond that, Nano One shares will in my view be driven by the degree to which the market sees North America and Europe battery supply chains coming into being and the degree Nano One's process looks to be a part of that scenario. If deals are announced and it begins to look like Nano One's process will be the cathode mid-stream lynchpin, the shares will take off and we will see double-digit share prices in 2022 with the prospect of even higher prices thereafter.

Disclosure: I/we have a beneficial long position in the shares of NNOMF, TSLA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.