The Month Ahead: -
The most meaningful portfolio event this month will be the listing of Li-S Energy (ASX:LIS) on August 30th. The prospectus is available to read here, and I could not commend you more strongly to read and consider the document, this could end up one of the most import Initial Public Offerings in Australia in recent years. We view the most important page in the prospectus as page 39 which contains this graphic representation of the first serious testing conducted on a BNNT enabled Lithium Sulphur battery. The next most important part of the prospectus is page 48 which is the executive summary of the independent consulting firm engaged to test the efficacy of the current Lithium Sulphur prototype, whereby they arrive at this conclusion “deposition of the (BNNT) interlayer was beneficial to the performance of the cathode, leading to higher utilisation of the sulphur active material and no deleterious effects such as capacitive charge/self-discharge processes were evident” We have set out below a simple extrapolation of the current testing of the first serious prototypes of the Lithium Sulphur battery. This is of course “unscientific”, but we need to try to conceptualise the positioning of the Li-S Energy battery product in the market compared to currently available options: We estimate if the current rate of cyclic deterioration holds that the Li-S Energy prototype would take approximately 2750 cycles before the Li-S Energy fell to the same capacity as the “out of the box” performance of the best of the current range of commercially available Lithium-Ion batteries. The company have been very clear that they have no view on where the testing will end and will update investors update at appropriate intervals/stages of development. If one further factor the concomitant cyclic deterioration of the Li-Ion battery in side-by-side testing, it is likely the two lines graphed above never meet because the Li-Ion battery would likely deteriorate to the point of uselessness before the Li-S Energy battery deteriorated to meet the Li-Ion battery. The equivalent Li-Ion battery would have likely EGP Concentrated Value Fund – 31 July 2021 5 completed more ~7,000 cycles at the point the Li-S Energy battery got to 2,750 because the lower energy density means an equivalently sized battery would need to be charged much more regularly. Few commercially available Li-Ion batteries live past 3,000 cycles, so it is likely that the Li-Ion battery would be long dead before an equivalent Li-S Energy got anywhere near the same capacity. What needs to be further borne in mind is that this early prototype of Li-S Energy’s battery capability is a step-change better than anything else currently commercially available in the market but is still nothing like fully optimised. The “theoretical capacity” of a Lithium Sulphur battery is 2,510 Wh/kg, whereas the “theoretical capacity” of Lithium-Ion batteries is 360 Wh/kg. The best Li-Ion batteries are achieving ~2/3 of the theoretical capacity after decades of commercial production. The first serious prototype Li-S Energy battery has only commenced with ~30% of theoretical capacity and provided such batteries could produce at similar cost to their Li-Ion counterpart, they would already be a category killer. Any further progress toward the Li-S theoretical capacity would only further enhance the commercial case for Li-S batteries displacing Li-Ion as the dominant rechargeable battery architecture globally. PPK chairman Robin Levison has already commented in various interviews that once mass-production begins for Lithium Sulphur batteries, they should not cost more than their Li-Ion counterparts. Like all major technologies, once mass production commences, costs will only decline on something like Moore’s Law. There are a variety of other reasons Li-S batteries will be superior to Li-Ion. The most important one will be the removal of cobalt from the construction, along with a variety of other heavy metals in Li-Ion architecture that are largely impossible to recycle. The next most important consideration is the much-improved safety of Li-S batteries, meaning toxic fires such as this one are much less likely to happen. Think about the practical applications of a battery in a few fields. Most decent smart phones have 24-36 hours battery life at new under medium to heavy use. Most suggest that at 5-600 cycles the battery will still hold ~80% of original capacity. This would mean that it would take about 2 years (36 hours between charges initially to every 24 hours eventually). Given the equivalent Li-S Energy battery (under the first prototype capability) would get 3 to 4.5 days life under the same use case. This would mean that the Li-S smartphone would take roughly 1,850 days to get to 500 cycles (if its owner ran it nearly dead each time before recharging), and it would still last longer than the new version of its Li-Ion equivalent after 500 cycles. My smartphone is 1,657 days old at the time of writing, but my consumer behaviour is very different to average. The median smartphone replacement cycle is approaching 3 years in Australia and battery life is the main reason users replace their phone. If the smartphone lifecycle were extended to 5 years globally, a massive amount of electronic waste would be eliminated. Assume an EV equipped with a 500km battery. The same sized Li-S battery in the vehicle would result in ~1,500km range for the vehicle. Apply an aggressive use-case, taxis: Using the highest kilometre per taxi city in the above example, an EV taxi with an Li-Ion battery would need to be charged roughly once per day, if the vehicle was going to be replaced after 1,000 battery cycles, each EV tax would need to be replaced after about 3 years. The Li-S equipped equivalent would be closer to 9 years old before it required replacement. The median vehicle in NSW apparently travels only 13,272km annually. The median EV in NSW with a 1,500km range would only need to be charged about 9 times a year. Range anxiety eliminated. If the median driver of such a vehicle replaced their EV after 500 cycles, their car would be about 50 years old before it required replacing… In practical terms, with the additional capacity, what I expect EV manufacturers would do is offer a range of battery options, perhaps a 400km, 800km and 1,200km option. I met with CEO Dr Lee Finniear this month and I hope he proves to be the right man to execute on the incredible opportunity the Li-S Energy business straddles. Given the relatively advanced state of the technology, I would hope EGP Concentrated Value Fund – 31 July 2021 6 partnerships with Original Equipment Manufacturers (OEM’s) arrive quickly. Any OEM’s who position their products as highest quality and cutting edge would behove themselves to be among the first to have products with Li-S Energy batteries in the market. One would also expect Finniear will field enormous inbound inquiry from the world’s major battery manufacturers. These are the moments in an industry where incumbents get destroyed if they don’t act promptly and decisively. Ignoring this step-change in technology would be akin to Blockbuster ignoring up the opportunity to acquire Netflix before it went on to destroy the franchise. Li-S Energy has the prospect of being an incredible producer of cash under the right business model. Given the massive scale of manufacturing capacity that exists globally, the obvious path will almost certainly be a royalty/licensing revenue stream whereby the intellectual property (IP) is licensed to major battery manufacturers. There could be some discrete categories where they directly manufacture batteries themselves, but a capital light royalty stream will likely be the ideal outcome for Li-S Energy. The global battery market is forecast to be US$310b (AU$422b) in 2027. One need only capture a sliver of that massive pool of revenues to build a very substantial business. We see no reason why Li-S Energy shouldn’t capture much more than a sliver of that revenue stream, unless someone else develops a low-cost way to produce boron nitride nanotubes (BNNT) and synthesise them into competing Lithium Sulphur batteries, we see no reason why over the next decade that Li-S Energy batteries don’t become the predominant rechargeable battery technology globally. As a thought exercise, if by 2027, an Li-S Energy royalty represented 1% of the value of all Lithium-Sulphur batteries sold and Li-S batteries had grown to only 5% of the global battery market, that implies $211m of capital light revenue. I cannot fathom why this meaningfully superior technology would only capture 5% of the market in the next 6 years, we therefore think there a high potential for upside to this outcome.
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