Li-Cycle’s surprise struggles unsettle clean-tech sector

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Sudden news of turmoil at a leading battery-recycling company has rattled a Canadian cleantech sector that has hailed it as one of this country’s biggest recent success stories.

Li-Cycle Corp. LICY-N has grown from its roots in Kingston to open recycling facilities across the United States and in Europe, and seemingly positioned itself as a dominant force in the race to be ready for a flood of used lithium-ion batteries from electric vehicles.

But on Monday, citing escalating construction costs, Li-Cycle announced that it has paused work on a massive new plant in Rochester, N.Y., pending a “comprehensive review of the go-forward strategy for the project.”

The newly uncertain future of the Rochester facility – which Li-Cycle chief executive officer Ajay Kochhar has previously described as pivotal to proving its business model and had said was on track to be operational by the end of this year – had immediate repercussions.

Li-Cycle’s share price on the New York Stock Exchange dropped by more than 45 per cent on Monday, to US$1.23. On Tuesday it slid even further, closing at US$1.07.

Meanwhile, the situation was quickly seized upon by American media as a potential headache for President Joe Biden’s administration, which has committed a US$375-million loan through the Department of Energy for the Rochester project. (Capital costs for the project as a whole were initially projected to be approximately US$475-million.) That has raised concerns about the situation being invoked by critics of Mr. Biden’s broader programs to spend hundreds of billions of dollars to build low-carbon sectors.

A spokesperson for Li-Cycle declined to offer further explanation for the change in plans or what comes next, promising that the company will provide an update when it reports its second-quarter financial results on Nov. 13.

As industry insiders struggled to wrap their heads around the abrupt turn of events, a common initial take was that it broadly reflects supply chain challenges and a shifting financial landscape that have affected the viability of major low-carbon investments as the world has emerged from the COVID-19 pandemic.

“I was surprised by this news,” said Joanna Kyriazis, the director of public affairs for the think tank Clean Energy Canada. “But we’ve been hearing consistently from the clean-energy sector that this high-inflation, high-interest-rate environment is pushing projects off course.”

Li-Cycle may be particularly vulnerable to those circumstances, during a highly ambitious and aggressive scale-up.

The company went public in 2021 via a special purpose acquisition company (SPAC), a brief trend during a mid-pandemic investment boom for cleantech and other sectors. An SPAC is a sort of shell company set up for the sole purpose of taking an existing company public, through a process that has subsequently been widely criticized for involving less accountability than an initial public offering, and in this case Li-Cycle was able to raise more than US$600-million through a $1.7-billion valuation.

That funding was used to advance a unique strategy to gain a large share of the nascent battery-recycling market, which to this point has appeared to be successful.

Whereas most other companies in that space are attempting to open a small number of large facilities which perform all facets of their recycling operations, Li-Cycle has gone with what it calls a hub-and-spoke approach.

The premise is that a relatively large number of spokes – facilities that break down used batteries into black mass, a substance which contains key component minerals (lithium, nickel and cobalt) – are widely dispersed geographically. Those facilities are then supposed to send the black mass to a central hub, which would process it into battery-grade materials, which can be sold back into the battery supply chain.

That method is largely meant to give Li-Cycle a competitive advantage through convenient offtake arrangements with suppliers of used battery materials close to its many sites. And so far that has seemed to pan out, with the company having beaten many competitors to establish relationships with an array of automakers and battery makers.

However, while many spokes are already in place, the Rochester site is supposed to be the first hub.

That side of the equation is needed for the company to eventually turn a profit by selling the valuable battery-grade materials rather than the black mass at a relatively low price to overseas recyclers as it mostly does now.

And it’s supposed to be the model for other hubs, including one in Europe that Li-Cycle is jointly pursuing with the commodities giant Glencore PLC.

Now, the uncertainty around commissioning that first hub has some experts questioning the entire sector’s trajectory, given the way that Li-Cycle has thus far staked out its turf, with only the Nevada-based Redwood Materials generally seen as competing on the same level.

“Li-Cycle has chosen a high-stakes strategy where they have been aiming for what could be described as a monopoly in the market, using the combination of distributed preprocessing and their Rochester plant to build barriers to entry for other players,” said Hans Eric Melin, the managing director of the international consulting firm Circular Energy Storage.

“They have been extremely successful in attracting capital, which was unparalleled in the industry,” he added. “Whether this means that they have been flying too close to the sun is too early to tell, but escalating costs and a terrible performance for the share is obviously a bad combination.”