Tyler Laundon has another big “double” promise for his Cabot Small-Cap Confidential, and it’s about a battery company… but, unlike most of the battery pitches we’ve seen over the past year (almost all of which have really been about lithium), this is a lead-acid battery company.

And, really, not actually a battery company at all… but a battery recycling company. Laundon says the double the shares have already seen in the past year is “All thanks to its breakthrough recycling technology.”

So who is it? Let’s dig in and sift through the clues, shall we? Cabot Small-Cap Confidential is a pretty pricey letter at $950, not something you want to commit to just so you can learn a “secret.”

Particularly not when the Thinkolator is on the job, he says modestly.

I probably won’t follow this stock arduously, unless I happen to buy it someday, nor will we tell you when to buy and sell, and I won’t sift through every detail in its financials in the hour or two I’ve got to finish this article… but, well, we ain’t gonna charge you $950 either. We can feed the clues they use to tantalize you into the Thinkolator, ID the stock, and I’ll give you my quick thoughts on the stock… then you can discuss its merits amongst yourselves, we often have plenty of readers willing to chime in who know the science or the specifics of any given company better than I do (and yes, if you’re a paid member of Stock Gumshoe, one of our valued Irregulars, then you’ve already seen the quick take up at the top of the page).

Right… so, on to the clues?

“The $300 million lead battery recycler I’m about to name will soon be a $34 stock that you must snap up today for $17.

“The stock jumped 113% in the last 12 months and is set to double again in 2017.”

This company has apparently invented a new recycling process for lead acid batteries (that’s what’s almost certainly in your car, and in almost every heavy-duty battery application). These batteries are already being recycled — 95% of the lead in your current lead-acid battery is probably recycled — but current recycling technology uses smelting, which is apparently very dirty and emissions-heavy (and not so welcome in the US, which means the batteries have to be shipped overseas for recycling — and these batteries are big and heavy, so that’s expensive).

In Laundon’s words…

“the company’s water-based/hydrometallurgical lead-recycling process creates 99.9% pure lead without the emissions, poisonous dust or toxic waste that injures workers and pollutes communities.”

And they have some partnerships in place with big battery companies:

“Johnson Controls, which produces over 150 million batteries per year, has struck a five-year lead production deal with the company. This is also why Interstate Battery teamed up with this company as well, agreeing to recycle one million lead acid batteries with them in 2017.”

And a few financial clues:

“… the company’s six month 113% rise is just the beginning of a bold new profit run.

“With analysts following this company now projecting 282% earnings growth for next year.”

So who is it? Well, the Thinkolator works on a hand crank starter, not one of them fancy batteries, but it still fired up pretty quick… and it was a matter of a moment’s work to shovel those clues in and wait for the answer to come oozing out the other end. This is a little company called Aqua Metals (AQMS).

They are priced right around $17, with a market cap of $325 million today… and this is a fairly rare thing in today’s market, a company that came up with a better model for an industrial process, raised money from startup funders, and then came public with an IPO to raise the capital needed to build their first facility. Kind of old fashioned, really.

They also just really got their first facility going, after the first phase of construction was finished about a year ago, and they are just about to announce their quarterly earnings (in a week, on May 9 after the market close), so the story could change quite quickly… but right now, there’s something pretty appealing about this one — the combination of the Johnson Controls partnership which could lead to licensed operations at JCI recycling facilities, and the initial “roughly as expected” performance of their first facility are both encouraging, and give some hope that the technology is genuinely scalable.

And that’s what you really need, of course — their numbers indicate that each of their installations requires about $50 million in capital for a 160 Ton/day facility, and that each facility should have an internal rate of return of better than 30%. The first facility is done and at 120 T/day so far, with a likely annual revenue stream of about $100 million and probably EBITDA of a little less than $20 million. So that’s a decent industrial company, with a reasonable level of profitability…

But $20 million in EBITDA is probably not enough to justify being valued at $300 million, not without some substantial growth prospects. They need to expand, and they’re trying to expand in two ways: First, by building four more AquaRefineries to quintuple their capacity, which they’re already ready for because Johnson Controls and Interstate Batteries are supplying enough feedstock (old batteries) to get up to that throughput, and because they say they have “met most of the pre-requisites to secure $150-250 million” to finance the next four AquaRefineries without dilution. That provides the potential for, they say, $100 million in EBITDA… which, depending on what kind of interest they have to pay on that debt, could easily justify a $500 million market cap even if there’s not a lot of growth beyond that.

At that, Aqua Metals would still be getting just 2% or so of the global lead acid recycling market — so it’s not a wildly irrational goal. And there is room beyond that in the potential for a much higher-margin revenue stream from licensing their technology to Johnson Controls and the major battery recyclers around the world. The facilities are smaller and not as environmentally sensitive as conventional lead battery recycling facilities, so they can be colocated with distribution centers or otherwise spread around the world.

Earning licensing from lots of non-owned AquaRefinery projects is probably the real gold ring that AquaMetals is hoping for in five or ten years, I would expect, that’s a nice high-margin revenue stream that doesn’t require lots of capital for construction and operation of facilities… but there is some reasonable basis for the estimates that they can become a profitable and larger company based just on their own AquaRefinery installations. Assuming that they can find four more sites, get that financing on good terms, and don’t find some critical flaw with their first AquaRefinery that hurts the long-term profitability.

That licensing is just beginning to get underway — they say that their first step is to retrofit an existing JCI recycling plant in China, where there’s otherwise not much hope that Aqua Metals could break into the market on its own, and then roll out through JCI’s network of facilities if it goes well. They also see, further out into the future, the possibility of selling higher-value lead products or recycling other metals… but I wouldn’t put much stock in that over the next few years, they are focused on lead and are probably better off keeping that focus as they build up their capacity.

There was a pretty good analysis of Aqua Metals’ IPO here back in 2015, which will give you some historical perspective (some of those expected performance numbers have been downgraded as the project became “real,” but not by all that much), and the company’s March investor presentation is here. The Johnson Controls initial license deal, and their deal to use their huge supply and recycling system to provide materials for (and buy lead from) Aqua Metals, also came along with a 5% investment in the company, so that corporate connection is fairly tight and meaningful — and it also brought Aqua Metals to the attention of a lot of investors, and drove the shares up from $10 to $16 or so back in February.

The prior “big deal” for Aqua Metals was the partnership with Interstate Batteries, which is the largest battery recycler in the US and invested $10 million in Aqua Metals through shares, warrants, and convertible debt — not sure what percentage of the company they currently own, but they report to the SEC as a 10%+ owner (and have been selling down their stake a bit recently). That deal also provided the first input stream for the first AquaRefinery, a million batteries to be fed into their system, and it certainly brought some attention to Aqua Metals, at least within the industry.

Over the past few months they’ve opened up their first AquaRefinery to visitors to show off the technology (there’s a video of the factory in operation on their home page right now), and, well, hopefully we’ll know a little more next week about what the real-world financials of the plant look like, or what the financing terms and timeline might be for their next phase of expansion. And, of course, if this really turns out to be compelling, and a unique and defensible technology that won’t be copied, and the first stages of operations cut down on the risk perception, well, there are lots of huge global players who could snap up little AQMS without blinking an eye.

(Johnson Controls, for example, certainly knows the company pretty well and could pay a 30% premium at, say, $500 million for the rest of AQMS shares it doesn’t own right now, and not break much of a sweat — that’s about what the EBIT is for JCI in one quarter. The flip side of that, of course, is “why hasn’t anyone big bought this yet?” … so for the dominant players like Interstate Batteries and JCI it could be that their investments in Aqua Metals represent a little bit of caution after seeing decades of other promises about “cleaner, faster, better” recycling technologies fail to pan out in the end.)

So… this one strikes me as pretty interesting. It’s still clearly a risk, since the stock has shot up to $300 million in anticipation of a pretty successful rollout of their technology, but the market is so large and their partnerships are strong enough that I’d be willing to consider a flier on Aqua Metals. For now, I’ll keep an eye on it — as earnings come around next week I’ll watch those and see if I can stomach another little small cap risk investment in my portfolio… and, of course, I’ll keep pondering on it and seeing what other weaknesses I can identify. I’ll let the Irregulars know if I do anything with this one in the future.

But my decisions don’t control your money, of course — that’s your job, so what matters is what you think. Do you find the business appealing? Think their prospects are worth the risk of a fairly high startup valuation? Let us know with a comment below.

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