by Debra Fiakas CFA
A bit of history…
|Schematic of a Lithium Ion Battery by Materialsgrp, via Wikimedia Commons|
Lithium ion batteries are a relatively recent innovation. Scientists and engineers first began working with lithium applications in the 1970s. A number of companies and laboratories worked through the next decade to perfect lithium ion batteries, using various materials for the business ends of a battery – the anode and the cathode. It was not until the mid 1980s that developers settled on cobalt as an electrode material, which ultimately enabled industrial-scale production of lithium ion rechargeable batteries. In 1996, Sony introduced the first commercial battery to the market. Fifteen years later lithium ion batteries accounted for 66% of all portable battery sales worldwide.
Cobalt is not the last word on lithium ion batteries. Known as LiCoO2 or LCO for short, lithium cobalt oxide is now only one of several solutions for battery cathodes. Cobalt offers high capacity for its cost. Manganese (LiMN2O4 or LMO) is used on its own or in combination with nickel and cobalt (LiNiMnCoO2 or NMC). These materials afford the safest battery application as well as long life, but have lower capacity than cobalt alone.
Some battery producers have tried combining cobalt with nickel and aluminum (LiNiCoAlO2 or NCA). High specific energy and power densities and long life span have the attention of electric vehicle producers for powertrain applications. However, high cost and safety issues still need to be addressed.
A few developers have taken an entirely different approach, using lithium titanate (Li4Ti5O12 or LTO) to replace the graphite in the battery anode. LTOs offer excellent low-temperature discharge, high capacity and lengthy lifespan.
The perfect paring…
Cobalt wins the capacity contest, but when it comes to thermal stability and power or load characteristics lithium iron phosphate chemistry (LiFePO4 or LFP) is heads above cobalt. For powertrain and electric grid applications, safety and cycle life are more important than capacity. Thus electric car manufacturers cozied up to LFP developers and the race to build the perfect automotive battery began.
A123 Systems, Inc.(NASD:AONE) tried to commercialize LFP and ended up in bankruptcy court. I estimate A123 spent more than $300.0 million on research, development and engineering activities since the company was founded in 2001. A123 did not begin spending heavily on production capacity until after the company’s first product launch in 2006. At the end of June 2012, A123 reported just over $145 million in property, plant and equipment net of accumulated depreciation and government grant off-sets. Gross property, plant and equipment on the balance sheet at the end of June 2012, was $425 million, matching closely the $419 million reported capital spending in the last six and a half years. The company claimed manufacturing capacity to produce 645 megawatts annually.
To its credit, A123 Systems had landed customers before filing for bankruptcy protection in September 2012 and agreeing to a buyout by Johnson Controls, Inc. (JCI: NYSE). In the transportation market A123 supplied batteries for Fisker Automotive’s Karma, BMW’s ActiveHybrid, General Motor’s (GM: NYSE) Chevrolet Spark and SAIC Motor’s Roewe 750, among others. AES Corporation (AES: NYSE) and Vestas Wind Systems (VWS: DE, VWDRY:OTC) had also purchased A123 System battery packs for grid applications.
In early 2012, production problems with A123 Systems’ prismatic battery innovation resulted in a recall and replacement of some batteries packs produced at the company’s Livonia, Michigan facility. The prismatic battery was being shipped to Fisker Automotive and four other undisclosed automotive producers. The company claims the problem was not related to its LFP battery technology, but was instead traced to sloppy work on battery cell packs.
Innovation on a budget…
The demise of A123 Systems, does not appear to have cast too dark a shadow on other LFP battery applications. However, that does not mean others pursuing phosphate chemistries for lithium ion batteries have had smooth sailing. Valence Technology, Inc. (VLNCQ: OTC/BB) has been at the development bench since 1989, several years longer than A123 Systems. Valence began with lithium iron phosphate and later added a vanadium wrinkle (LiVPO4F or LVPF).
Vanadium-enhanced batteries have greater charge capacity. Futhermore, LVPFs can recharged in less than an hour, compared to five to 10 hours for conventional lithium ion batteries. Vanadium is relatively cheap and abundant, but it is not as inexpensive as iron or magnesium. BYD Company in China and Subaru in Japan are also using vanadium in their EV battery applications.
Since inception, Valence has reported a total research and development spend of $96 million. Having spent far less on research and development than one of its nearest competitors, investors might think Valence would have no product on the market and no presence in the market. However, Valence launched its first battery in 2002 and has growing customer list. In fiscal year 2012, Segway was Valence’s largest customer, accounting for 21% of total sales. Smith Electric Vehicles, Rubbermaid Medical Solutions, Howard Technology Solutions and truck manufacturer PVI each contributed 12% of revenue.
What is more Valence has managed to turn out products with a significantly lower investment in plant and equipment. Instead of building to own, Valence leases approximately 173,000 square feet in production space in China. I estimate the company put a grand total of $148 million in capital investments since the get-go in 1989, to outfit production facilities with equipment and otherwise go into commercial operation.
Unfortunately, even a frugal budget has not spared Valence. The Company filed for bankruptcy protection in July 2012 and is now operating as a debtor-in-possession. In September 2012, Valence was able to arrange a $10 million credit facility for working capital.
Valence shares are trading at a penny a share. Some might consid
er this an option on management’s success in bringing the company back from the brink. As enticing as a cheap stock might seem, this one seems to carry a bit more risk than is palatable.
I would like to see management assume bit of that risk themselves with greater personal stakes in Valence. Valence reports that insiders own a total of 86.5 million or 51% of the company’s 170 million shares outstanding. After stripping away the options and convertible preferred stock from the calculation, insiders are found to own 42% of the common stock. Nearly all those shares are owned by Chairman of the Board Berg and his employer, West Coast Ventures. Less than 1% is owned by the other directors and senior officers.
When insiders buy VLNCQ, it will be a clear signal the stock offers return for the risk. Of course, given the present circumstances the window on insider transactions might be closed. A handy alternative is for Valence to use direct shares as a means of compensation rather than piling on more options.
Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.