Plasma: making money from lightning PyroGenesis Canada Inc

PyroGenesis Canada Inc.
TSX: PYR
Plasma: making money from lightning
PyroGenesis sits on cusp of rolling out plasma tech into fields of 3D printing, oil sands, and more.
PyroGenesis is an off-the-beaten path tech
story with an attractive asset base, a deep
moat around these assets, and an expanse of
markets into which these assets can be levered . After twenty years of R&D and
~$30mm of sunk investment, the Company
appears set to pivot into the realm of real business. The
capital structure is tight. Cross the price of the proposition with the potential for the technology and the proposition becomes interesting.
The asset base in question is know-how and IP relating to
a plasma torch and its effective use in a variety of industrial processes. A plasma torch is a device that heats material up to the point where the material separates into its
constituent components. This is useful across a wide variety of applications. Solid waste, for example, after having
undergone "plasma pyrolysis" (as it is known), is no
longer solid waste; rather, it is "clean gas" and inert slag.
Applying a similar process can efficiently extract valuable
components from waste streams or convert toxic off-gases
into useable energy. Plasma torches can also break wire
feedstock into extremely fine metal powders, a product
geared to 3D printing. We are not saying that this is the
second coming of fire, but insofar as combustion is useful
in ways that are diverse and numerous, so too is plasma.
Figure 1: One of PyroGenesis’ processes, the Plasma Arc Waste
Destruction System (PAWDS), as designed for a US Navy aircraft
carrier. In this process, solid waste is shredded and milled into a
combustible lint-type material that is combusted and gasified using
a plasma torch. This confers benefits over traditional incinerators
including process simplicity, a smaller footprint, and the ability to
process almost all types of waste in a single process with minimal
segregation. Processes can also extract energy from the gases, but
this was not required for the Navy’s nuclear-powered ship.
At right: a cutaway of the
plasma torch and educator,
where organic waste is converted to CO2, H20, and an
inert ash.
And, like fire, plasma is nothing new. What distinguishes
PyroGenisis as compared to other entrants is the Company’s know-how related to novel areas of application.
We refer, as does the Company, to “niche markets.” This
may sound like the prospects are limited or uninteresting
but this does not do the Company’s game plan justice.
The incumbent players have mostly focused on bulk processing municipal waste, a well understood input stream.
Perhaps a good analogy here is the heyday of mainframe
computers back in the 1960’s and 1970’s. Here the focus
was plain-jane transaction processing. That’s what computers were for. These people never saw the PC coming.
to lead the way. The tech holds the potential to have a
disruptive impact on existing methods and the business
that flows as a result will, in this way, be high margin
business. We can’t predict sales several years out (and,
frankly, nor can the Company), but we do note that a
business development office was recently staffed and
that the order book is up about 100% year on year and
now stands at $22mm. Additional contracts are in the
works and we think this business will materialize in
early 2015. Much of the interest is in the 3D printing
space. Valuation at this stage of development is always
difficult, but by several metrics the stock now appears
quite cheap. We consider these metrics below.
We think plasma will find a home in a much broader array
of applications and we feel PyroGenesis is well positioned
0.90
Share Price ($CAD)
0.80
0.70
Market Capitalization (mm)
0.60
Enterprise Value (mm)
0.50
0.40
Shares Oustanding (mm)
0.40
32
33
80.5
0.30
0.20
0.10
Revenue, 2013 (mm $CAD)
5.8
0.00
Oct 2013
Oct 2014
Please see back page for disclaimers
EBITDA, 2013 (mm $CAD)
(1.5)
Jim Rand ([email protected])
Toronto, Ontario
October 23, 2014
Pollitt & Co. has not initiated formal continuous research
coverage of this stock and maintains no ratings, earnings
forecasts, or target price for this company. Forwardlooking statements and analysis in this publication may be
based on information that is incomplete or speculative.
PyroGenesis Canada Inc.
October 23, 2014
What is plasma?
Lightning is plasma. So is much of the sun and so are
the northern lights. Considered the fourth state of matter, plasma is most simply defined as an ionized gas that
conducts electricity. The temperature of thermal plasma,
as found in a plasma torch, can exceed 10,000°C. The
high temperatures and thermal capacities of plasma can
dissociate virtually all materials, including waste and
metals, into their constituent elements in order to produce clean energy and harmless by-products. Advanced
materials and metallurgical applications are among other
non-waste applications in which plasma can be utilized.
Figure 2: Pyrogenesis’ APT torch (there are several torch
varieties). This model ranges from about 4” to 12” in diameter,
and 16” to 16 feet in length. Power varies from 50kW to 1MW,
depending on application. Typical applications are waste treatment, gas heating, R&D, and advanced materials production.
The PyroGenesis implementation
PyroGenesis is not the only company developing plasma
technologies. Some global competitors that we have
identified include Alter NRG (Westinghouse Plasma),
Tetronics, Europlasma, ScanArc, Phoenix Solutions, and
Ottawa-based Plasco (a potential partner more than a
competitor). Generally speaking, competitors are focused on singular markets. For example, some companies use plasma to target municipal waste destruction or
to process other large waste streams. PyroGenesis, on
the other hand, addresses high margin (~45%), niche
markets in which it is often the lone player. These niche
markets often rely upon small scale plasma processes in
which PyroGenesis has developed an expertise through
its 20 years of R&D experience.
Part of PyroGenesis' competitive advantage in small
scale plasma applications derives from the unique way in
which it creates the plasma vortex responsible for transforming input streams into more desirable products.
Here is a simplified description: a plasma torch, anywhere from a few inches to a few feet in scale, creates an
electrical arc from a cathode to an anode, much like a
welding machine but with a lot more power. A gas is
blown through the arc (picture a blow-dryer) and so becomes ionized (i.e. turns into plasma). To do this effectively requires that the electrical arc rotates in order to a)
avoid destroying the anode and b) ionize more gas. PyroGenesis' technology creates the circular motion in a
unique way (a trade secret) that is particularly beneficial
for efficient, smaller scale applications. Other plasma
torches use electromagnetic fields to guide the electrical
arc, whereas PyroGenesis' torches control the arc with
the gases. This confers two important benefits:
1)
The life of the torch is improved. The anode
will last on the order of 700hrs while the cathodes will last over 1000hrs vs. 200-300 hour
electrode lives for competitor models.
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2)
The size of the surrounding apparatus is
reduced and makes it easier to maintain.
Electromagnetic systems require electricity,
and are heavy (i.e. require a chain block to
move). This is key when working in close
quarters like, say, an aircraft carrier.
Of equal, if not greater, importance is the experience
PyroGenesis has gained with plasma processes. That
is, the torches are one component of otherwise very
complex skids of equipment. The nature of this ancillary equipment depends on the application, but may
involve waste pre-treatment, gas stream processing
and cooling, power generation, and the electromechanical equipment required to control the rate at
which the integrated systems operate, among other
things. The engineering know-how behind making
this equipment operate in concert comes only with
years of experience. Furthermore, a lot of PyroGenesis' intellectual property is related to the processes
rather than the torches. They have about 17 innovations protected by 45 patents (issued, provisional or
pending), primarily targeting processes. While PyroGenesis is working to use common equipment across
different processes to scale more cheaply, customized
equipment will normally be tailored to the application
and hence process expertise is necessary.
PyroGenesis has gained this expertise with a variety of
input streams and for a variety of processes. For example, in waste to energy applications, the gas used is
typically 90% dried air & 10% nitrogen, with appropriate supporting equipment. When destroying refrigerants, steam works best, and that requires different
equipment. Metallurgical applications may require the
use of argon, and again more specific expertise and
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PyroGenesis Canada Inc.
October 23, 2014
Figure 3: An implementation of waste to energy conversion at the Hurlburt Field Air Force base. Using plasma arc gasification, the system
converts about 10 tons of garbage per day into ~350 kilowatts of electricity, enough to run the system. The extreme temperatures of the
plasma, followed by rapid cooling, inhibits formation of dioxins and furans, a major benefit over traditional incinerators.
equipment. Their experience has been gained in processes for industries ranging from oil and gas and mining
to defense and 3D printing (more below). A tour of the
factory provides an idea of the complex systems required
for these processes, however, we only make the point to
suggest that PyroGenesis is in a competitively advantageous position to address the niche markets that it is targeting.
chamber & destroyed. Offgases are quenched
(prevents dioxin & furan formation) and released to
atmosphere. This compact process was developed for
the US Navy to deal with shipboard sailor waste and
sludge oil. A land-based version is in development in
which the system would be containerized into roughly
5 containers (20ft or 40ft, depending on desired capacity). This could be used for wastes from remote communities, mining & military camps, solvents and
chemicals, and sludge oil from IC Engines.
Products and Markets
PyroGenesis' products serve many different markets,
offering diversification across customers and industries.
We find it useful to segment PyroGenesis' products in
two separate ways. The first is by process type and the
second is by end-market. The processes were largely
developed in response to contracts obtained with past
clients, including the US Navy, US Air Force, Northrop
Grumman, Anglo American, PPG Industries, Newalta,
Intl Military Consortium, a global oil & gas company,
and 3D printing companies. Relationships with previous
partners have resulted in part of the current backlog. In
addition, many of the technologies and much of the expertise utilized in past projects can be ported to plasma
processes in other markets. We first list some processes,
and then discuss some of the potential applications of
these technologies in various markets.
Processes: PyroGenesis has developed the following
processes:
Plasma Resource Recovery System (PRRS): This transforms waste into syngas (Carbon monoxide and hydrogen), a fuel that can be used for electricity, waste, and
liquid fuels. The inorganic fraction forms an inert, nontoxic, glassy slag. This process was developed for the
US Air Force, and can be used in other waste-to-energy
applications including municipal, hazardous, hospital,
and industrial wastes.
Plasma Arc Waste Destruction (PAWDS): Waste is
shredded, then milled, fed continuously into the plasma
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Tactical Plasma Arc Chemical Warfare Agents Destruction System (PACWADS): This is similar to
PAWDS, but even more compact for easy transportation. It was developed for the US Army to destroy
chemical warfare agents such as sulfer mustard, sarin,
and VX. A major benefit is in situ destruction, which
avoids costly, hazardous transportation of chemicals.
Steam Plasma Arc Refrigerant Cracking (SPARC):
This processes is similar to PAWDS but it uses a
steam plasma to break waste into CO2 and H2O. It
destroys ozone depleting refrigerants (R11, R12, R22),
halons, super greenhouse gas refrigerants (R134a,
R141), and fluorinated hydrocarbons (CFC, HCFC,
HFC, PFC). An existing customer is a refrigerator
recycling facility.
Plasma Arc Gasification and Vitrification (PAGV):
This is a larger system that was used to clear bottoms
and fly ash from municipal solid waste and hazardous
waste facilities, including asbestos. The University of
Athens and Natural Resource Canada Ash Melting
Plant are two customers.
DROSRITE: Hot dross introduced to a rotary furnace
where molten metal is separated. The non-metallic
residue is heated and cleaned and discharged as harmless by-products. It is energy efficient so no plasma or
external heat source is required. This is a non-plasma
process that PyroGenesis developed about 10 years
ago, but as the cost of processing aluminum dross has
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PyroGenesis Canada Inc.
October 23, 2014
Metal spool
Plasma torches
Fine powders with tightly
graded distribution (line is
100 microns).
Figure 4: Tailings streams are one potential application for Pyrogenesis’ technology in the oil and gas sector. Testing has been
carried out with a major international oil company . Positive
results were announced in October. The process is still classified,
but two confirmed benefits are a reduction in waste volumes and
recovery of valuable metals. A separate process is being tested in
conjunction with the SAGD production process. This process
significantly reduces the energy required to extract oil .
gone up, discussions are once again emerging.
Titanium Production Pilot Plant: Developed in conjunction with Anglo American, this plant produces titanium
metal from titanium fluoride. When Anglo exited the
titanium business, PyroGenesis was able to reacquire the
pilot plant cheaply, and plans to generate future business
with other mining companies.
Plasma Atomization Process: This process produces
spherical metal powders from wire feedstock, primarily
for use in 3D printing.
Oil & Gas Market: PyroGenesis' current backlog in the
oil & gas sector is only $0.6mm, but testing of much
larger scale, lucrative processes is already wellunderway. Results from the completion of a fourth contract with a major international oil company were released on October 2nd, highlighting a 50:1 volume reduction in a certain waste stream, reducing disposal costs
by more than 90%. Most importantly, metals recovered
from the waste streams are worth more than twice the
current disposal costs. While details cannot yet be disclosed due to agreements with the customer, we understand that the market for this technology could be in the
hundreds of millions once fully commercialized. It is
applicable globally.
A separate process related to accelerating oil extraction
through Steam Assisted Gravity Drainage (SAGD) is
also being tested. Our understanding is that one unit
would serve about 6 wells, and could be utilized at most
SAGD wells in Canada. We can’t resist but speculate
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Powder collection —> to sieve
Figure 5: Pyrogenesis’ Plasma Atomization Process creates
high quality powders for 3D printing. 3 converging torches melt
incoming wire to create tiny molten droplets. Powders are
smaller, more pure, spherical, and contain fewer satellites
(pieces stuck together) than other processes can produce.
Plasma powders are the highest quality available.
here that the secret process relates to a novel approach
of cleaning waste water for use in the production of
steam. Waste water from SAGD is a major issue and
an area of intense research, to say nothing of intense
scrutiny from environmental agencies. Whatever the
process, PyroGenesis claims that “the patent pending
process costs less than 20% of that currently used and
is a clean, zero emissions technology utilizing electricity as its only heat source”. We think this sounds
promising and look forward to future disclosure in the
next several months. Additional niche applications in
the oil and gas industry include use of PAWDS and
PRRS systems for purposes including sludge oil destruction, camp waste, and the destruction and recovery of chemicals in tailings streams.
Defense Market: The defense market has a current
backlog of $1.9mm, but future business could include
additional shipboard systems (PAWDS), containerized
systems (Tactical PACWADS), waste-to-energy
(PRRS), and ash melting (PAGV).
Environmental Market: Environmental applications
account for $6.8mm of the current backlog. Many of
the processes described above have environmental
applications that are relevant to companies across all
industries. Wherever harmful pollutants are produced,
there are likely applications for PyroGenesis' technologies.
3D Printing Market: Based on the current order book
and industry growth rate, and, to be frank, the sex appeal of the sector, we think the 3D metals printing
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PyroGenesis Canada Inc.
market will provide the most traction to PyroGenesis in
the near term. We describe this market in detail below.
3D Printing
The highest profile application for the moment is 3D
metals printing. It is this market in which the order book
has grown the most, and that with the fastest sales cycle
(months vs. more than a year for most other applications). 3D metals printing is a quickly growing market
with a clear, outstanding problem: securing quality metal
powders to meet the rigorous specifications of a given
manufacturing process can be difficult and expensive.
Currently 3D printer providers such as Arcam and 3D
Systems make a lot of money from replacement material
cartridges in which they use RFID tags to prevent the use
of third party cartridges. (Anyone with an inkjet printer
can appreciate this.) This works well for plastic printers,
but not so much for metal 3D printers. Large end-users
such as General Electric are looking to source materials
more freely and more economically, and PyroGenesis'
Plasma Atomization Process (PAP) offers a solution.
PyroGenesis employs a Plasma Atomization Process unit
to produce metal powders from wire feedstock. The
Company’s specialty is in the use of highly reactive materials and alloys such as titanium, niobium, nitinol (an
Ni-Ti alloy), and aluminum, among others, materials
used for high tolerance parts in aerospace and biomedical assemblies. Most fine metal powders are currently
produced using gas atomization processes and even the
most exacting of these techniques — Electrode induced
gas atomization (EIGA) — is inferior to plasma in two
respects: a) the process is constrained as to the range and
type of feedstock materials and b) the process generally
produces inferior powders with respect to size distributions and particle sphericity. In a word, plasma atomization provides smaller, more spherical powders with
higher purity, and the process is more flexible when it
comes to making customized powders with specialty
alloys. It is also our understanding that the only competitor that can offer plasma atomized powders of similar
quality is AP&C, a company to whom PyroGenesis licensed its technology. All of which is to say that PyroGenisis has a deep moat on the fabrication of “high-end”
3D printing input material.
One of the attractions of 3D metals printing derives from
the fact that additive manufacturing processes can be
much more economical than subtractive processes. That
is, current manufacturing processes start with a block of
metal and manipulate it through many machining processes before arriving at the final complex shape. Apart
from requiring a lot of space, these processes also waste
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October 23, 2014
a lot of raw material as scrap. A representative buy-tofly ratio (weight of raw material used vs final product
weight) is on the order of 15-20 for many aerospace
components. 3D-printing machines are now capable of
printing extremely complex metal components (there
are several machine and process types), often layer by
layer, without wasting any raw material. Metals are
the fastest growing segment in 3D-printing, and simple economics underpin our expectation that there will
be continued growth in the market for metal powders.
Growth projections for the sector are in the range of
20-40% annually. We won’t vouch for the more aggressive of the outlooks, but we are comfortable in
saying that additive manufacturing (fancy term for 3D
printing) is on a roll, quickly displacing extant techniques such as stamping, cutting, milling, and other
fabrication methods. The shares of the makers of the
3D printers themselves have been on a tear. Of
course, one buys a 3D printer once, but must continually return to the store to buy the input material again
and again. If the makers of the razors have done well,
the makers of the blades will do that much better.
Valuation
Valuation is tricky. One cannot look at current finances and fairly slap a value on something like this.
Moreover, future cash flows are highly uncertain and
to make estimates here would be to throw darts. We
look at the current state of the Company’s finances
and determine “what it would take” to justify the today’s valuation and compare with where they are
now . We then throw up two (very!) rough comps —
not quite peers, but companies in the same general
hemisphere. Lastly, we compare to sunk investment.
1) Financial sketch: The market cap of PyroGenesis is
about $30mm. Last year (2013) they did $5.75mm in
revenue and the year before that about $3.3mm in
revenue. Revenue for this year is expected to be about
$7.5mm. For whatever this is worth, the implied
growth rate over these last three years has been about
40%. EBITDA margins have been running about 45%
and we understand this is the target margin going forward. Overhead (i.e. cash burn at zero revenue) is
estimated to be about $3.5mm. In this way, the Company should break even at about $8mm in revenue.
To justify the current market cap of $30mm in a
strictly financial sense — and we are using a p/e of 10
here — we would need to see about $15mm in revenue. From where we are now, $15mm in revenues is,
in our view, not a long way off at all. For example,
the hard order book now stands at $22mm. These
orders will take some time to work off, but again,
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PyroGenesis Canada Inc.
October 23, 2014
given the irons in the fire the Company now has, $15mm
seems a reasonable aspiration in the next few years. And
of course, if they hit $15mm, it won’t stop there.
blue sky here. We think the $35 million AP&C acquisition, in conjunction with the revenue potential illustrated here, is illustrative from a valuation perspective.
2) Peer comp #1: We point to the acquisition of AP&C
as a comparable within the 3D printing segment. AP&C
was a division of Raymor Industries until December
2013, when it was acquired by Arcam for $35mm CAD.
Arcam is a supplier of 3D printers and the corresponding
materials, and AP&C had supplied titanium powders to
them since 2006. At the time of the acquisition, AP&C
had 29 employees, revenues of $6.5m, and EBITDA of
$1.5m. We think this is an important benchmark given
that PyroGenesis is larger, and, in our opinion, has much
more upside potential by way of its technologies outside
of 3D printing. It is also a good benchmark for the value
of powders to 3D printing companies. On this point, we
think it is important to make a distinction in terms of the
companies' strategic plans. PyroGenesis, at present, is
currently focused on selling plasma atomization machines, while producing and selling the powders is a
secondary potential revenue source. AP&C only provides the powders. According to our research, end users
are looking to secure their own powder supplies to reduce supply chain delays, and to reduce costs due to
markups and transportation (reactive metal powders are
hazardous and can be expensive to transport).
3) Peer comp #2: We point to another company building a solution that overlaps with PyroGenesis’ capabilities in the oil sector. Titanium Corporation spent
$60m developing technology, over 8 years, that processes Athabasca oil sands tailings streams to reduce
the environmental footprint of tailings ponds by recovering valuable bitumen, solvents, and minerals. It is
still in commercial deployment, and negotiations are
ongoing with major oil sands companies. While we
cannot yet verify that PyroGenesis’ technology offers
a similar value proposition to oil sands producers, we
do note that plasma technology is likely more flexible
in where it can be applied, and yet PyroGenesis trades
at a fraction of Titanium Corp’s $90mm market cap
($87mm enterprise value).
PyroGenesis' Plasma Atomization Process, including the
tower and ancillary equipment platform, sells for about
$1.5m, and could provide the Company with about
$150K per installed machine in annual recurring revenue
through the provision of consumable parts and technical
service. One unit can produce about 6kg per hour, which
would equate to about 25,000 kg/yr at 50% utilization. It
is too early to estimate the eventual capacity required,
but we can provide some rough context: a single Boeing
737 uses about 18,000kg of titanium and an Airbus A380
uses about 77,000kg. Even if a small fraction of these
parts are produced with 3D metal printers, one can see
that there could be a need for multiple plasma towers
going forward. High performance airframes, engines,
orthopedic implants, and other applications could represent a significant market for 3D printed metal parts, and
by extention, to PyroGenesis.
PyroGenesis has already sold 10 units in Asia for
$12.5m, and identified opportunities for a further 60
units in Asia, 5 in North America, and 1 in Europe. In
total, this would represent about $100m of initial revenue and potential for roughly $10m in annual revenue
thereafter, all at roughly 45% margins. With growth rates
of roughly 20% expected for the sector, there is plenty of
Jim Rand ([email protected])
Pollitt & Co. Inc.
4) “Replacement value”: PyroGenesis has now spent
about $30mm on research and development contracts.
That’s roughly on par with PyroGenesis’ market cap,
meaning the stock now trades at roughly the cost to
replace the expertise developed over the past 20 years.
This says nothing of the time required to develop this
expertise. Given that PyroGenesis is the first mover in
several significant markets, we think their competitive
advantage justifies a valuation in excess of the replacement cost.
Conclusion
Until a little more than a year ago, PyroGenesis was
almost wholly focused on engineering and funded by
development contracts. Since then the company has
grown from one business development professional to
six, and the order book is starting to show signs with
about $22mm contracted; visibility suggests another
$15mm in soft commitments from these same customers in 2015, and we understand that more promising
contracts are in the works. This is not a bad base to
work off.
The founders own about 68% of the stock; the float is
thus quite tight. We may be early, but the Company
has several irons in the fire and success in any one of
these areas can change the complexion in very short
order. For those with a penchant for some risk, you
might consider buying a few shares now and watching
to see how the story unfolds.
October 23, 2014
Toronto, ON
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PyroGenesis Canada Inc.
October 23, 2014
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