Nano One (OTCPK:NNOMF) is a small Canadian technology company that has developed a new process for manufacturing lithium battery cathode active material. Certain provisions of the upcoming IRA (Inflation Reduction Act of 2022) are about to drive the value of Nano One shares to spectacular new highs. Investors wanting to ride need to get aboard now because this train is leaving the station.
I believe Nano One will see its shares appreciate significantly in coming months and am about to tell you why. But first 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.
Provisions of the IRA aim to, among other things, quickly create a North America centered supply chain for lithium batteries that extends from mines to vehicles. This report by David E. Bond and Brian Picone of law firm White & Chase describes details of the IRA that affect electric cars and the battery supply chain. The IRA removes the 200,000 vehicles per manufacturer cap on the $7,500 EV customer tax credit but ties the credit to very strict minerals and component content requirements. Electric vehicle manufacturers must implement new battery supply chains entirely outside of China, Russia, North Korea, and Iran or lose the tax credit for their cars, trucks, vans, and SUVs. And manufacturers must rewire their supply chains very, very quickly.
Vehicles placed in service after December 31, 2023 will be ineligible for half of the tax credit if the battery contains any component made or assembled by an entity owned by, controlled by, or subject to the jurisdiction or direction of the Governments of China, Russia, Iran or North Korea.
Vehicles placed in service after December 31, 2024 will be ineligible for the other half of the tax credit if the battery contains any critical minerals extracted, processed, or recycled by an entity owned by, controlled by, or subject to the jurisdiction or direction of the Governments of China, Russia, Iran or North Korea.
The deadline for getting battery manufacturing out of China is just sixteen months from now! Critical battery minerals extraction and processing (i.e. feedstocks) must be out of China just twenty-eight months from now.
Fortunately, the IRA also includes billions in grants and loan guarantees that will help companies build out a new, North America centered battery supply chain.
The IRA's battery content restrictions effectively disrupt the battery cathode feedstock supply chain. Key battery minerals are to be mined and refined in North America or countries with which the United States has free trade agreements. Batteries and key battery components must be made and assembled in the US, Canada, and Mexico. Say goodbye to Chinese batteries. Say goodbye to Chinese source battery cathode material. Say goodbye even to Chinese battery cathode feedstock.
Large North American carmakers like General Motors (GM), Ford (F), Stellantis (STLA), Tesla (TSLA) are building or planning to build (often with battery company partners) huge battery factories in North America to supply cells to their vehicle plants. These battery factories will have nearby or co-located cathode material plants which are currently in the early planning stage. But, what cathode feedstocks will these new cathode plants use?
China currently makes most (nearly all in some cases) of the world's battery cathode feedstocks of nickel, manganese and cobalt sulphates, iron phosphate and lithium hydroxide. If the new cathode material plants use Chinese supplied feedstocks, cars, trucks, vans, and SUVs containing batteries with that cathode material will be ineligible for $3,750 of tax credit per vehicle. Ouch!
If the new cathode plants use current cathode manufacturing processes, new feedstock plants making metal sulphates, iron phosphate and lithium hydroxide will need to be built in North America if carmakers want customers to fully access the tax credit.
Alternatively, if the new cathode plants use Nano One's process that does not require metal sulphates, iron phosphate or lithium hydroxide, the entire China based feedstock supply chain can be circumvented without building additional sulphate, phosphate, and hydroxide plants.
For more than a decade Nano One has been developing a better process for making cathode materials at scale. Nano One's M2CAM process offers the following features and advantages compared to conventional cathode active material processes:
Back in January I wrote an article looking at Nano One's prospects and how M2CAM could form the lynchpin of China independent battery supply chains for North America and Europe. The sticking point - and the basis for the compelling Nano One opportunity - was that M2CAM disrupts the cathode feedstock supply chain. Adopting M2CAM, with all of its cost, environmental and performance advantages, requires rewiring the supply chain short-circuiting the sulphate and hydroxide processors in China. It only works if most of the industry switches creating a new, large scale, robust supply of metal powder feedstock. So, nobody really wanted to go first with M2CAM.
Nano One's recent deal with Rio Tinto shows that serious supply of metal feedstock will be available. Years of collaborative evaluation of Nano One cathode by Volkswagen (OTCPK:VWAGY) and at least two other large automakers have demonstrated M2CAM cathode performance and durability.
The IRA's requirement to eliminate China source sulphate feedstock forces all planned North America cathode plants to re-think feedstock supply chains and process choice. Using traditional cathode processes will require creation of a metal sulphate supply chain, at scale and outside of China which does not currently exist. Choosing M2CAM works with metal powder already available, at scale for sintered metal gears and other parts for automotive, appliance and other applications. And, with all automotive cathode suppliers in North America having to choose a cathode process, obtain new feedstock, build and ramp new plant and get this done in less than 28 months Nano One's M2CAM is a good bet.
Cathode process dictates the feedstock supply chain. If traditional cathode processes are adopted in North America, a whole, new metal sulphates and iron phosphate supply chain must be built, at scale outside of China.
If M2CAM is adopted metal powder feedstock will be required. Fortunately, an at scale, mine-to-iron-powder supply chain already exists in North America serving the sintered metal parts industry and can be easily expanded. This is particularly significant. It means the M2CAM feedstock supply for LFP batteries is ready and waiting. LFP has become the low-cost battery choice for entry level BEVs which is a good fit as BEV production grows exponentially. (Phosphoric acid, another critical LFP input is available, produced largely in Morocco, a nation on the "free trade list".)
Nickel, manganese, cobalt, and other metal powders are currently produced but will require more scaling than iron powder. Since nickel-based cells are mostly used in high end vehicles which are excluded from the revised tax credit (cars >$55k; trucks, vans, SUVs >$80k) this won't matter much initially.
As M2CAM is adopted, the buildout of a metal sulphates / iron phosphate supply chain and adoption of conventional cathode processes becomes less and less attractive. This will result in a "winner takes most" result. And, there's more.
Europe is faced with a similar dilemma with respect to electric vehicle battery supply being dependent on Chinese supply chains. As North America moves to M2CAM and a powdered metal feedstock supply the same approach becomes more and more attractive to Europeans. And major companies in Europe are already working with Nano One - VW, BASF, Rio Tinto...
With the impetus (kick-in-the-behind) to switch battery supply chains given by the IRA tax credit provisions we are about to see wide adoption of Nano One's M2CAM cathode process in North America and in Europe. Bottom line: Nano One will win big(ly) from the IRA...
My January article describes likely Nano One licensing revenue amounting to $1.60 per kWh of cathode powder, this being roughly a quarter of the overall cost savings of the Nano One process compared to conventional cathode processing. On this basis, M2CAM making cathode for a single 40GWh/year battery factory would give a share price of $6 at a PE of 20 and 100 million shares outstanding.
By 2030 M2CAM could be supplying cathode for most North America and Europe battery manufacturing - as much as 5TWh/year. As we are talking licensing which has minimum capital requirements and hence little need for stock dilution. Five terawatt hours per year of M2CAM cathode production would bring Nano One around $7.5 billion in licensing revenue, $5 billion in profit and with a 20 PE, a $100 billion market cap and ~$1,000 share price. Wow!
Nano One's business model is however more complicated than just licensing. The company has committed to purchase an up-and-running 2,400TPA LFP plant that it will convert to M2CAM. This will put Nano One squarely in the cathode manufacturing business.
The company also contemplates joint venture arrangements wherein Nano One supplies the process technology while a partner provides capital and operates the resulting cathode plant. This sort of arrangement might well suit the case of a dedicated cathode plant co-located with a large battery factory.
Both the cathode manufacturing and JV approaches are difficult to analyze without knowing particulars and the proportions of each that will eventually comprise Nano One's business and the capital requirements and potential stock dilution. Considering the additional risk that direct manufacturing and joint ventures entail compared with simple licensing one would assume such deals will not be done without fair prospect of returns greater than those expected from simple licensing.
Whichever way Nano One's business evolves the company appears to have a tiger by the tail. The company is very small compared to the main players in batteries, grid storage and electric vehicles. Despite its small size, Nano One looks to have the lynchpin process technology for the coming shift of battery manufacturing and supply chains to North America and Europe. The situation reminds me of that little software company that provided the operating system for IBMs original PC... you remember... Microsoft.
For Nano One shareholders the problem has always been the company's small "audience" compared to the large industrial impact its technology will have. The company is doing something pretty arcane. Nano One isn't a trick lithium battery startup, or even a trick cathode material company. They are solving the problem of making millions of tons to other folk's cathode materials at low cost, low environmental footprint and with high quality. Too few investors seem to be paying attention or to appreciate the fundamental importance of Nano One and the investment opportunity this company offers long term.
We haven't heard much about the impact the IRA will have on battery manufacturing and supply chains for North America and eventually Europe. But we will... The impact of forcing the battery supply chain out of China makes Nancy Pelosi's trip to Taiwan a trivial matter and we are going to hear about that. We will also be hearing in coming days and weeks about the impact the revised clean vehicle tax credit will have on carmakers and jobs. All of this will raise awareness of batteries and the battery supply chain... and of Nano One.
I continue to think we will see a double-digit Nano One share price before year end and a lot more as soon as cathode plants start committing to M2CAM.
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Disclosure: I/we have a beneficial long position in the shares of TSLA, NNOMF 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.
Additional disclosure: Disclaimer: These writings about the technical aspects of batteries, electric cars, components, supply chain and the like are intended to stimulate awareness and discussion of these issues. Investors should view my work in this light and seek other competent technical advice on the subject issues before making investment decisions.