And this one from Jon Hykawy - it goes into the reasons that it takes so long to get qualification of a high purity product - like graphite
Those Last Few Decimal Places – They Matter More Than You Think
Posted on May 4, 2014 by Jon Hykawy
One of the more common conclusions when the topic of a new critical materials company signing new clients comes up, especially when the company plans to produce an especially high purity version of a commodity material, is that the process of winning new customers will be easy. Not only will winning those customers be easy, the thinking often goes, it can be done so simply that in many cases off-take agreements will be signed even before construction of the processing plant is complete. Customers will sign the agreements to purchase material on the basis of samples produced during pilot plant studies alone.
My discussions with end-users don’t give me the same impression. In particular, those discussions have highlighted a few key areas of concern that the end-users have about new suppliers. Those concerns aren’t particularly earth-shattering, but they have some very profound implications about how long it takes to convert a potential client to one that is taking deliveries and issuing cheques.
The main concern of any end-user that is purchasing an engineered material or even a high-purity feedstock is that the supplier meet their specification. We toss around specifications like “99.9% neodymium oxide” like this is easy to achieve. I know one high purity materials supplier that told me that to reach required purity only took them a few months, but being able to do it CONSISTENTLY took them slightly more than a year.
But here is the real downer. The end-user’s specification usually doesn’t end at a purity requirement for the material. It will also typically include a large number of other fun things. It might be “silica content less than 200 ppm” or “elemental chlorine no greater than 35 ppm” and who knows what else. The same company that told me it took them months to hit the required specification on their high-purity product and 13 months to do it consistently also told me that it took them ANOTHER year before they managed to understand how to control their contaminant profile and consistently produce what amounted to EXACTLY the same output, day in and day out. That learning curve included evaluating dozens of suppliers, and establishing which ones could provide product that didn’t alter the profile of the final product.
This materials company is the world leader in supplying a high-purity product that sells for tens of thousands of dollars a tonne, and is used worldwide in at least two large industries. They were making the product before this using another process, and that line continued to run, so they had the luxury of time to be able to develop their new process. Still, it was over two years before they were comfortable in sending evaluation samples to new clients. Old customers, though, received product from the new process that met the specification as soon as the supplier’s quality control told them it was good enough, consistently enough.
And even then, there were problems. Some customers not only had a specification, but they had tailored their own process to the specific (and consistent) contaminant profile in the supplier’s OLD product. The NEW product came from a NEW process using a NEW feedstock, and had a different contaminant profile. The contaminant profile in the new product met the entire written specification of each existing customer, but some of those customers were calling and were very confused about why the behavior of the stuff they had been receiving for years had suddenly changed. Good suppliers, and this company is definitely one of those, help their customers adjust to changes like this, and don’t surprise them with the change in the first place.
So what does this tell us about rules-of-thumb for new public companies that are trying to push a new technology for making a high purity product into the market? Well, first is that the temptation to claim that product will sell in no time has to be avoided. If there is a new process involved, the company has to ramp their new line, make certain that product is being consistently produced and maybe that even the contaminant content, those last few decimal places, is consistent from day to day and even hour to hour. No one wants a company to undergo unnecessary dilution, but the key word in that sentence was “unnecessary”. There is a great temptation when institutional investors are sitting on their wallets and capital is tough to source, especially when a company has no other source of necessary capital, to claim that miracles will happen while they are entering their chosen market. Second, winning a new customer without having a reputation to fall back on will take time, because the customers need to know that the product is consistent. Shipping a prospective customer samples from a pilot plant might get their interest, but the real qualification process doesn’t start until the actual commercial facility is in operation. Finally, an investor should be careful to evaluate just how big a cushion the new company will need in terms of capital to accomplish all the above. If the company tells you, the investor, that they can get everything done in six months and will be swimming in cash only one year out, when you can look around the industry and see that the current market leader took three years to do the same thing, you need to make sure that your new portfolio entrant can weather the likely storm. That means that a new producer of critical materials might need more cash in the bank than even they think. If you don’t check on the length of the likely process ramp and adoption phase in the particular market being entered by a new company, and especially the issue of whether the company has the capital to sustain itself through this period, then you deserve what you get.
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