On the 21st of December 2022, NVX announced the signing of its first significant off-take agreement with energy storage company KORE Power inc (“KORE”). Under the terms of the deal, NVX will be the exclusive supplier of synthetic graphite anode material to KORE.
To support the off-take agreement, Novonix will continue to expand production at the company’s Riverside facility in Chattanooga, Tennessee. Here they will begin production at a rate of approximately 3,000 tones per annum (tpa) in 2024 before ramping up to 12,000 tpa in 2028 to match KORE’s requirements.
How did the market react?
At first glance, an announcement like this for a pre-profit, growth-focused company like Novonix would seem overwhelmingly positive. However, this was actually a thinly veiled production guidance downgrade, with the share price plunging by 6.8% on the day of the announcement as a result.
Previous guidance disseminated in all ASX materials as late as November touted NVX’s forecast production guidance of 10,000 metric tons of synthetic graphic per annum by 2023, 40,000 by 2025, and 150,000 by 2030.
Novonix now plans to shift this previous guidance to match the KORE supply agreement volumes and any subsequent supply agreements the company may enter. Consequently, this means no production in 2023 and only 4,000 tpa in 2024, which will delay the expected cash flows received by the business and lengthen its path toward profitability.
On track for a new production facility that will support higher output
In addition to the production guidance news, Chris Burns (CEO and Co-Founder) stated that Novonix “plan[s] to begin construction of our next production facility in the first half of 2023 to bring an additional 30,000 tonnes of annual production.”
The CAPEX requirement to get this synthetic graphic manufacturing facility off the ground will be supported by the company’s recent selection for the award of a US$150 million grant from the US Department of Energy (DOE).
Questions remain over whether Novonix will have to raise additional capital
In light of prevailing macroeconomic headwinds and the increasing funding constraints that pre-profit companies such as Novonix are facing, a large government grant can ultimately be considered a blessing. The trouble is that under the terms of the grant agreement with the DOE, NVX is required to match their investment in the new production facility.
According to the company’s September quarterly cash flow report, they had approximately $181 million of cash on the balance sheet. With the company spending approximately $26 million a quarter throughout 2022, Novonix may need to raise additional capital via debt or equity markets to stump up the $150 million necessary. Without further off-take agreements, the delayed production volume will exacerbate this short-term need for capital. This has contributed to some of the share price weakness seen in the wake of the grant news.
Our take on the announcement and the business
In light of this recent news, it’s important to emphasise that there are positive implications underlying this news for its future prospects. This includes its ability to secure off-take agreements, which shows the trust other businesses put in Novonix’s technology, not to mention that the US Government find the company’s technology promising enough to give them a significant grant.
Whilst it's unfortunate that NVX’s production timeline has been shifted further into the future, the rhetoric in the announcement reinforced the importance of off-take agreements to the business’s near-to-medium-term fortunes. NVX is ultimately willing to match any volumes from additional supply agreements the company may enter into. Should any future supply agreements call for production that fits more in line with the previous production guidance, there is every chance it may still be reached. This would augur well for earnings and provide NVX shareholders with a welcome boost.
Key to our unique investment philosophy is identifying high-quality companies with sustainable competitive advantages. We believe NVX fits this bill, being a pioneer and leader in the development and production of synthetic graphite technology for battery anodes that are superior in terms of efficiency and capacity retention. It is also the dominant US supplier, which is crucial given that China produces around 80% of the world’s artificial graphite used in battery anodes. In light of recent geopolitical tensions, there has been a concerted push by many companies to diversify their battery materials supply chain away from China. Novonix is therefore well placed to capitalise on this trend.
We believe these advantages place the business in a strong position to face the challenges of continuing to secure off-take agreements whilst also expanding its production capacity. Thus, rather than focusing on the production guidance aspects of the announcement, we think NVX’s first significant off-take agreement should instead be viewed as a major vote of confidence in their technology by a growing player within the green energy sector (KORE).