PureCycle: Where There’s Muck There’s Brass (NASDAQ:PCT)

Thesis

Regulation towards plastic waste is increasing, as is the general awareness that plastic in the environment is a problem. Regardless of your view of global warming or green energy, polluting the environment with billions of tonnes of plastic, allowing it into every ocean and water source, contaminating every ecosystem, and the risk caused to human and animal life cannot be seen as a good thing.

The catalyst for researching this area was simple. There must be money to be made in recycling plastic; governments want change, people want change, and some companies will be rewarded by enabling that change. “Where there’s muck, there’s brass,” a 19th-century saying, meaning when things get messy, there is money to be made.

PureCycle

PureCycle Technologies (NASDAQ:PCT) has a patent-protected technology, initially invented by Procter & Gamble (PG), that it hopes to use to recycle polypropylene. Polypropylene is currently recycled in minimal quantities, and the PCT technology can turn used polypropylene into virgin-quality polymers. Initial shipments have been made and accepted by customers.

PCT still has a lot to do; the first facility is not yet operating at full scale or coping with the variety of feedstocks available; however, they are making real progress. Many operational problems have been resolved, and the plant is again operational. Several more plants are planned, and the first plant could increase its output eightfold.

It is a speculative bet, but has a good chance of significant rewards for anyone brave enough to buy this before the technology and the business model are fully proven.

Market size

Since plastic production began in the 1950s, it is estimated that over 6 billion tonnes of plastic waste have been generated. Around 9% has been recycled and 12% incinerated, leaving almost 80%, or 4.8 billion tonnes, in landfills or dumped in the environment. An additional 9 million tonnes are thought to be dumped into the environment every year.

Plastic production continues to grow and is forecast to reach 1.6 billion tons annually by 2050, a 400% increase from current levels.

Recycling rates and the different types of polymers used differ across countries. For example, the most recycled polymer is PET, with a recycling rate of 19% in the US but 85% in Japan. One of the least recycled polymers is polypropylene, 0.8% recycled in the US and 15% recycled in Japan.

There is some evidence that producing plastic from scrap is far less energy-intensive than making it from fossil fuels. Source: OECD

The Value Chain

The value creation chain begins when a plastic container is used, or a plastic product comes to the end of its useful life. The chain could be as simple as municipalities dumping the waste in landfills or as technologically challenging as recycling the product back into its original polymers using advanced chemical methods.

The value chain can be simplified into three steps: Collect, Sort, and Process.

Collection and Sorting

Sorting is crucial to any plastic recycling scheme and presents an excellent opportunity for companies and technology. Smart bins with sensors can detect many types of waste and provide an initial sort. AI powers large-scale sorting machines at collection depots; they can detect and sort different types of waste with reasonable accuracy. Even recognizing colors, brand names, and shapes ensures that items are correctly identified.

Once sorted, plastic is put into bails, those bails are sent for processing. There are two key types of processing: Mechanical and Chemical.

Mechanical

Mechanical recycling is currently the largest and most economically successful method. It involves shredding the plastic into small pieces and melting the pieces. It works well when the feedstock has been sorted into the correct types and is particularly useful for PET bottles, one of the most prominent plastic recycling use cases. Mechanical recycling has disadvantages; it only works on some plastics and the plastic recovered in this way degrades and cannot be used as a replacement for the original virgin polymer

Chemical or Advanced recycling, as proponents call it

Chemical recycling covers a large and growing number of technologies that attempt to take plastics unsuitable for mechanical processing or to try to improve the output of the process being achieved by mechanical methods.

Chemical recycling offers the possibility of recycling all plastics, but not in the way we generally understand; some effectively burn the plastic to produce energy. The plastic is given a second use but is not really recycled, however, it is preferable to dumping it in the ocean.

State of the US industry at present

I prefer to invest in technologies that have proven to work at scale rather than those that are still a story. I reviewed the current US chemical recycling market to help get an idea of what is currently proven. I do not think my research is necessarily exhaustive; I could have missed plants and technologies, but I did put significant time into this research.

I found 12 active next-generation plastic recycling plants currently in operation in the US, with many more being planned and built. Concentrating on the active sites, hoping to find technical validation, is illuminating, and it was this that first highlighted PureCycle as a potential investment.

A quick analysis of the recycling process, what it entails, what is produced, and the companies’ operating sites is shown below.

PureCycle Technologies stands out on this list; it is the only technology that can produce pure polymers ready for plastic production without requiring further treatment.

PureCycle Technology

PureCycle has a patent-protected technology initially developed by Procter & Gamble; PCT has a global license from P&G to commercialize the tech.

The system has two distinct stages; firstly, the waste is sorted into different similar feedstocks requiring similar plant operating procedures.

Secondly, the newly sorted feedstock is processed using solvents, temperature, and pressure to return it to its original polymers for re-use.

The waste is put through a series of physical extraction processes using solvents to remove contaminants and colors without changing the bonds within the polymers, ensuring that the polymers can be reused the same way as newly produced ones. (I will not spend much time on the process if you would like to read about all 7 stages and processes it is covered here).

PureCycle the Progress

PCT is developing two sites in the US; the Ironton facility in Ohio is the most advanced and is approaching commercial-scale production. The second site in Augusta is under construction. A further site is planned in Europe, and joint ventures are progressing in both South Korea and Japan.

Ironton A Flagship with Problems

The Ironton site will be the first commercial-scale facility. The original design and plans were written over three years ago, and the facility has been dogged with issues. It is the first facility of its kind in the world, so some problems were inevitable, but they have resulted in several delays to the timeline and significantly increased costs.

In the Q4 2022 earnings call (March 2023) the CEO said, “Ironton is weeks away from final installation and producing pellets”. The original timeline was for operations in December 2022, and the delay caused PCT to miss the performance criteria from the original loan agreement to finance the facility. Bondholders agreed on a waiver on the understanding that the facility would be mechanically complete in April 2023. The CEO intended to produce over 55 million pounds of pellets in 2023.

In the Q1 2023 earnings call, the CEO announced that Ironton was mechanically complete on time, that solvent deliveries had begun, and re-iterated the production guidance already given.

In Q2, the CEO confirmed that the site was operational at the commercial scale and that the first two bondholder conditions had been met.

The CEO also began to discuss their technical problems, describing some technical glitches and an important piece of machinery that had to be redesigned. The company restarted the facility several times during the quarter, and the startup time dropped from 3 weeks to one day, showing the power of the learning curve they were on. Pellets were produced for the first time on a commercial scale in June, and the facility was operating on several different feedstock mixes.

The CEO stated 10 million pounds of feedstock was in inventory, they had no trouble sourcing, and that the end product in high demand.

By Q3, things were not quite as rosy; the technical scenario had become very challenging.

410,000 pounds of feedstock had been through the system, proving its capability to cope with high volumes, but the facility was unreliable.

Technical issues were still slowing production, “Absorbent bed leaks” the CEO said were the culprit, and several short-term solutions were tried, but they had all failed to remedy the situation.

A two-week stop was necessary to allow the chosen fix “an automated screen,” to be installed.

A press release on December 5th showed that the work had been completed, a delay had occurred waiting for components, but the facility had been restarted. Two weeks later, further mechanical problems were reported, and the facility was shut down again. PCT could no longer make the 4.45 million pounds of production it had promised in December, the third conditional milestone of their bonds; another extension was negotiated.

In January, the facility was operational and ramping up production; it had produced 183,000 pounds of pellets in two weeks, equivalent to the output for 2024. 24-hour production rates went from 10,000 to 72,000 pounds. PCT ran a variety of feedstocks, and another problem arrived: polyethylene (one of the by-products that must be removed) was causing an issue and not being removed quickly, causing a slowing of production. Polyethylene was being removed manually until a technical fix can be found, and as a result, feedstocks high in polyethylene are not being used.

With the change of feedstock, the facility ran at 5,000 pounds per hour and produced 4,700 pounds of pellets per hour.

One final issue was reported: the output color is not as expected because one process step is currently being bypassed. This is another area awaiting a fix.

Ironton has proven it can manufacture at scale and deliver a quality product, but it still has problems to iron out. Ironton is big enough for eight production lines at 130 million pounds per line.

The Other Sites

Augusta

(Q3 2023 earnings)pre-construction activities continue, and equipment is beginning to arrive. Loans have not yet been arranged to cover the installation. The CEO said when asked that the reliable operation of Ironton is the most important step for getting these loans approved.

International Sites

Pre-construction engineering work has started in Antwerp, a facility first mentioned in a press release from January 2022, it will be a 4 line facility, with the startup of the first line due in the first half of 2026. (fy 2022 transcript) However, in the most recent Q and A session, the prospect of Antwerp leapfrogging Augusta was brought up, and the CEO did not deny this was a possibility.

South Korean joint venture with SK Geocentric at the planning stage; the JV is scheduled to have the first line complete in 2025

Negotiations are continuing with Mitsui in Japan; the original agreement has 2026 in mind as a start date.

Commercial Progress

PCT has reported two commercial shipments of the end product to customers. The first in November was to Formerra, and the second to Milliken. Both companies are significant users of polypropylene and should be excellent long-term customers.

The CEO reported in Q3 earnings that Energy usage at Ironton was lower than expected, feedstock prices were also lower than anticipated, and final product prices higher than expected. Feedstock suppliers have limited customers for polypropylene, making it easy to source.

PureCycle the Finances

PCT is not in great financial shape; it has more debt than equity, less than one year of cash runway, and has not yet booked any revenue.

Looking at revenue capacity, information gleaned from the quarterly reports regarding start dates of the facilities currently under construction with some estimation on when additional lines could be added, staying well within the maximum for each facility, gives this production capacity forecast. The figures are in $ millions and assume 2.5% inflation and a starting price of $1208 per tonne for the sale price of polypropylene.

PCT does not have the cash to finance this growth; however, we have heard that (q3 2023 Q and A) PCT is signing offtake agreements with its customers and is selling at a price premium. That will make financing expansion with debt and bonds much easier. An offtake agreement de-risks any investment and will likely be cheaper for the PCT management than dilutive measures.

PCT could have a production capacity above a billion dollars by 2030. It appears that production capacity will restrain revenue as there is a readily available and easily accessible feedstock plus a significant pent-up demand for the final product.

Q1 2023 $62 million in non-dilutive debt was arranged. PCT management has chosen to fund the growth of PCT by debt rather than diluting shareholders, who have suffered tiny dilution so far.

The make-up of the shareholders is interesting.

The chart from Simplywall shows virtually no general public ownership, which should ensure stability and suggest that the investment community strongly believes in this company.

We do not yet have any precise numbers to build a mathematical model of this company and calculate a fair value for its shares; I will prioritize it when the next set of results arrives, as we should get some good information about margins and fixed costs.

PureCycle the Risks

PureCycle is just beginning its commercial journey. They are short on cash and have yet to book their first revenue. The investment carries enormous risks, but two additional risks should be considered.

Technical Issues

Much of this article was devoted to the engineering problems faced with the startup of the Ironton facility. A great deal of learning will have gone on to reduce the possibility of problems in future lines and sites, but not all of the technical issues have been ironed out, and it has been less than a month since production began. We should receive an update on the reliability of the facility in the next earnings call.

Technology

This technology is unique; we do not yet have a complete breakdown of the costs involved and, as a result, have no idea if it can be profitable for the gross margin. We also have little information about the environmental impact of the solvents being used or the costs of removing contaminants and by-products. Is it green, or is it greenwashing? It will affect the long-term viability of the company.

What to Watch

The progress at Ironton is the main success criterion for this company; if Ironton can work reliably and meet all of its design parameters, then the outlook is very bullish; otherwise, the company will struggle.

PureCycle will report on February 29th; the key things I will be listening for are as follows.

1. Operational reliability: how long has Ironton been operating since the last update in mid-January? Minor issues are OK, but failure of any critical component will be a concern.
2. Has the polypropylene issue been resolved, co-product two, as PCT calls it. If not, the facility cannot cope with all of its feedstock and will be less attractive to feedstock suppliers.
3. The color issue: has the absorption stage been reintroduced to the facility, and is it solving the color problem? The color problem will depress outbound product sales and limit the value of any offtake agreements, reducing PCT’s ability to get favorable financing rates for future facilities.
4. What feedstocks are running, have more been tried, and are they all producing reliably?
5. The run rate of 5,000 pounds per hour had been hit in January; has this been maintained or surpassed?

We should also get an update on the progress of the other sites, but the viability of PCT depends on the success of Ironton. If it is going well, funding issues become easier, the path to profits is clear and PureCycle will become part of a worldwide move to improve plastic waste recycling.

Competitive developments

PureCycle is the first company to bring this type of technology to the market; it is patent protected, but if it is profitable, new technologies replicating its effect will be developed. PCT must move quickly to tie in feedstock and customers to ensure the longer-term viability of their business model.

Conclusion

The world is awash with waste plastic; billions of tonnes are being produced yearly, and much is being dumped or put into landfills. Governments and people want to end this current wasteful and environmentally damaging practice. PureCycle could be one of the companies to benefit from the move to a more circular plastic industry; the plastic industry is creating so much muck that a lot of brass is available.

PureCycle has the exclusive rights to the technology developed by Procter & Gamble. The first commercial-scale facility has been built and is working, but technical challenges remain.

Polypropylene is one of the most under-recycled plastics, and the PureCycle tech returns it to near-virgin state, delivering an actual circular recycling system.

If the first facility can run reliably, PureCycle has agreements to build in Augusta, Antwerp, South Korea, and Japan. If these sites are developed, turnover could be more than a billion dollars by the decade’s end.