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Li-Cycle’s third-quarter financial report released Monday painted a bleak picture of a company with paltry revenues compared to disproportionate expenses and high debt.
Sales were $4.7 million from July 1 to September. On 30, the company suffered a net loss of $130.5 million and debt increased to $337.2 million compared to $115.48 million just 20 months earlier.
What wasn’t made clear in the results report: the probability of failure is very high.
“If they’re not bankrupt in six months, I’ll be surprised,” said financial analyst George Conboy, chairman of Brighton Securities.
That means Li-Cycle’s sprawling Rochester Hub, built as of Oct. 23 on more than six acres of land south of Eastman Business Park in the city of Greece, may never be completed. When fully operational, the facility was expected to create 269 jobs.
But three and a half weeks ago, Li-Cycle paused construction on a project initially expected to cost $485 million (with a maximum cost of $560 million). The facility would handle various recycling operations for lithium-ion batteries.
The Canada-based company blamed rising construction costs for the work stoppage and forecast in Monday’s conference call that the project price would be between $850 and $1 billion when construction resumes.
“Are you bad managers, were you weak in your planning or did you rely on consultants who got it wrong?” Conboy said. “I don’t know, but if you tell me that a year ago it was half a billion and today it is a billion, then there is something strange.”
Li-Cycle officials said they had not abandoned plans for Rochester but needed additional financing and more time to secure a $375 million conditional loan through the Energy Department’s Advanced Technology Vehicles Manufacturing Loan Program.
“Nobody in their right mind would lend them money,” Conboy said.
There are two other reasons why Conboy is pessimistic about the company’s future:
♦ Li-Cycle said Monday that it has hired Moelis & Co. LLC, a global investment banking firm, to “assist in evaluating financing and strategic alternatives,” the company said, adding that “there are no “Can provide assurance that this evaluation process will result in the Company pursuing or completing a particular transaction or other strategic outcome.”
Conboy Translation:
“Strategic alternatives is a term of art and generally means, ‘We’re not sure we can stay in business. Is there an alternative to filing for bankruptcy?’ ” he said.
He provided a historical local example of the same event. In September 2011, after drawing down its entire $165 million credit facility, Eastman Kodak Co. hired an investment bank to “explore its alternatives.”
“Kodak filed for bankruptcy in January 2012,” Conboy said. “It’s the same situation.”
♦ A note in the financial statement detailing an impairment assessment of the Rochester Hub of $96.5 million.
“Here’s the key sentence: Driven primarily by the non-cash impairment of the Rochester Hub,” Conboy said. “That means they’ve written down the value of this project, worth $96.5 million.” You write down the value of an asset by deducting what’s called depreciation from your earnings if you think that there is no value there.
“That tells me they believe this hub is worth $100 million less than they have previously spent on it. You don’t take impairment charges on a project that’s not even finished yet if you really believe you’re going to finish it.”
That means Li-Cycle’s future in Rochester is bleak, Conboy said.
“This is going between the lines,” he said. “They just throw their hands in the air and say, ‘We can’t do it.’ The idea of them coming back in three months or even three years? Does not happen.”
Li-Cycle’s mission is to be a leader in resource recovery and recycling of lithium-ion batteries, extracting at least 95 percent of the minerals in these batteries and redistributing them back into the supply chain.
During Monday’s earnings call and financial report, company executives said the slowdown in construction in Rochester could provide an opportunity to better position the hub as the battery recycling and electric vehicle markets develop.
“Their idea may not be bad, but my sense is that they may be out of their depth in terms of the market,” Conboy said. “These people borrowed and spent a lot of money before there was a market that would provide them with enough income to service the debt.”
Li-Cycle shares closed at 1.46 on Monday and were down to 0.66 at market close today.
On November 8, a class action lawsuit was filed in the U.S. District Court for the Southern District of New York on behalf of individuals and entities that purchased Li-Cycle securities between June 14, 2022 and October 23 of this year.
The lawsuit accuses Li-Cycle’s executives of “making materially false and/or misleading statements and failing to disclose material adverse facts about the Company’s business, operations and prospects.”
The complaint alleges that Li-Cycle’s executives made “positive statements about the Company’s business, operations and prospects that were materially misleading and/or lacked a reasonable basis.”
But Conboy didn’t just question strategic decisions made by Li-Cycle executives. He wonders why the federal government thought a conditional loan of $375 million made sense. The loan was announced in January but no money was disbursed, federal officials say.
“It’s unbelievable that they would think about lending that much money,” Conboy said. “Aren’t our elected officials engaging the services of a disinterested party with a background in finance?
“I don’t expect Chuck Schumer to be a CPA in addition to being Senate Majority Leader. I don’t expect that from any of these guys. But they should hire better financial people to help them crunch the numbers. It seems like people are happy to hand out money to anyone with a good story.”
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