AQMS: My Clarifying Call With Clarke

There continually seems to be confusion surrounding Aqua Metals as regards to what they are producing, what they are selling, the prices they receive, etc. Investors seem to not quite understand what sales are occurring and the whole flow process of aquarefining. As much as the Company strives to clarify things on conference calls, the terminology seems to create more questions than answers at times.

Thus, this article is meant to provide some clarity into the questions that investors seem to bounce back and forth. Many thanks to Mr. Clarke for phoning me up on a Sunday morning to help me get a much better understanding of the process, as it deals with generating customer revenues. Hopefully this information is value added for investors; I know that, post my call, I feel like I have a greater grasp on the products and future revenue generation than I did beforehand.

What do they produce?

When Aqua Metals breaks apart a battery, they recapture plastic from the shell, grids and connects, and active material. We will walk through the various components of the battery and what Aqua Metals does with each part, starting with the plastic. This simply gets floated off in a slurry after the battery gets broken apart, is crushed and bagged for sale.

The grids and connects are solid metal that is made up primarily of lead. It also contains a trace of other metals, which gives it form; pure lead is very moldable, much like clay. This metal recaptured from grids and connects is referred to as “metallic lead” and is sent to the ingot line to be poured into molds which can then be sold.

The active material is also referred to as lead compounds. This comes out of the breaking and separating process as a powder. It is this material that seems to cause confusion. Lead compounds can be sold as a powder, which the Company intends to do at times.

It can also be put into the electrolyte bath and processed into ultra-pure lead through the aquarefining process, after which it gets compacted and then sent to the ingot line. It is ingotted similarly to metallic lead, but separately as it is a much higher-valued product.

Together plastic, metallic lead, lead compounds and aquarefined lead represent the four primary products that Aqua Metals intends to eventually produce.

Is this primary or secondary lead?

Clarke walked me through the definition of primary and secondary lead, which he says are terms the Company no longer uses. However, past presentations did use the term primary lead, so investor confusion around these terms is understandable. So, here’s what they are.

In the past, the lead that was mined was considered “primary lead’. After smelting, it was very high purity and was sold as such.

When lead was recycled, through a smelter, it was referred to as “secondary lead”. This lead was not as pure as primary lead and traded at a lower price.

Today, however, the market has moved away from these terms. There are two reasons for this. First, the lead that is being mined is no longer the highest purity lead; the best lead ore has already been taken. Simultaneously, the recycling process has improved to the point where recycled lead is just as high, or sometimes higher, in purity as newly refined lead. Therefore, primary and secondary lead trade at essentially the same price.

What Aqua Metals produces from metallic lead is essentially the same material as the lead smelting recyclers produce, and, therefore, trades at the same price. The aquarefined lead, however, is ultra-pure lead and will trade at a premium.

What have they sold so far?

To date, Aqua Metals has only had about $600K in revenues. This came from the sale of three products: plastic, metallic lead, and lead compounds. There has been a lot of confusion and questioning as to exactly what quantities they sold and at what prices. Aqua Metals is intentionally not giving detail on this as the mix of their production is a proprietary trade secret and revealing this would help competitors to better understand what they are doing.

That being said, here’s what we do know. They have sold plastic, crunched up in small chunks and loaded into sacks. This is not a high-priced item and sales here probably don’t amount to much.

They have sold metallic lead. As mentioned earlier, these sales will be done at approximately LME lead prices. That, however, is when they are in ingots. As of today, AQMS has yet to make ingots and, therefore, any sales of this lead is done simply as a sale of little lead chunks, put in sacks. Thus, these sales are at much lower prices than LME and have, therefore, led to confusion over the prices the Company receives. Suffice to say, they fully expect to sell this at or around LME prices…but only once it’s ingotted.

Finally, Aqua Metals has sold some lead compounds. These are the materials that will eventually be aquarefined, but there is a value to them. And, this is the tricky part of modeling AQMS’ earnings, because, the lead compound market is a very bizarre one. And one in which the Company intends to make strategic sales.

According to Clarke, the lead compound market is very volatile. Prices here are only available for spot trading, so there is not a deep, liquid market. The price of lead compounds varies widely over the course of a year, trading within a very broad range of 40% premium to LME Lead, to a 70% discount.

What this pricing variability does is allow AQMS to make strategic sales. If the market is at a premium, they can sale lead compounds directly into the spot market. If not, they simply aquarefine it all. This enable them to capture incremental margin at various times and makes it tricky to know what exactly they are producing and selling from an investors’ standpoint.

What will they sell in Q3 and beyond?

Looking out, it’s clear that Aqua Metals will be selling these four products: plastic, metallic lead, ultra-pure (aquarefined) lead and, on occasion, lead compounds. Clarke hinted to me that they may have a few more products, but I believe these to be the core products to generate revenues going forward.

In Q3, the Company guided to flat revenues versus Q2. I have stated, and continue to believe, that this is highly unlikely and they should book a decent revenue increase. This is because they are going to be making ingots very soon (if they haven’t already). This means that the production is going to be sold at a much higher price from the day they turn the ingot line on…which is happening with about 6 weeks left in the quarter.

Add to this the fact that they are running 4 aquarefining modules on 2 ten hour shifts 4 days each week. They will also be adding more modules and turning them on as the quarter progresses.

This means that, during the 3rd quarter, product sales should start to resemble the long-term model. The volumes should be higher but, more importantly, the prices received for their sales should be significantly higher. I’m not going to guess as to what the sales will look like, but I’m firmly convinced there will be a strong uptick in Q3 over Q2.

Well positioned for the future?

One of the major complaints by investors (including yours truly) after the last conference call was the focus by Clarke on the future of the lead acid battery industry. I’m convinced that the current shareholder base is less concerned about this, but the Company continues to speak to the opportunities.

Why is this? Two reasons that I can see. First off, the analysts on the call, according to Clarke, are asking for more information in this context. They are not short term focused and want to understand the future of the industry and how AQMS fits in. Frankly, I don’t believe the Company should be concerned with them to the point where they brush aside the little guys’ concerns. And, I think they may be misreading the larger investors’ interests as well. But, the Company believes that analysts want to hear about the future and that’s what they gave them. Let’s hope someone like an American Funds buys a million shares this week!

Secondly, I think that Aqua Metals is ecstatic about their product and how it fits into the future of this industry. The shift towards newer designs that incorporate ultra-pure lead plays into the hands of the only company (AQMS) that can produce this cheaply and in bulk. As such, they think investors should be equally excited. Which, if they were at full production, we would be…but for now, the market is saying, give us current production and cash flow, please.

I’m still relentlessly bullish…

I hope that this blog piece helps investors gain a better understanding of what is going on at Aqua Metals now and in the coming months/quarters. I know that, post my visit to the Company’s facility last week and my call with Clarke, I feel better than ever that I’ll make money here. In the meantime, I hope this piece helps investors, be they bullish or bearish, understand the Company’s model better and get a sense of why the last Q’s numbers looked like they did and what to expect going forward.


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