As many know, value investing is knowing what you own and its value compared to the current market cap it commands. This is even more relevant to investing in microcaps.
A rule of thumb is that the best money is made when one invests during the discovery stage, described as when early adopters do the heavy lifting to ideally bring forth a diamond in the rough. This typically follows a scene where smaller institutions could step into the name and validate one’s investment thesis around the 60 to 100M cap. As a result, valuations start increasing, given the increased demand for the company’s shares. It is possible for companies to double or triple once an institution or two issues coverage.
The next phase begins when such a company gets more eyeballs and validation from a broader base of institutions and more prominent retail investors that typically step into increasingly larger financings (15M+ dollars) followed by open market buying, which generally takes place between $150M and $500M. The cycle’s next phase happens when a microcap becomes a darling for institutions and more prominent retail investors, which can take the share price on a euphoric move, leading to progressively larger financings and, in some cases, a unicorn is born (billion dollar+ in valuation). Of course, all these stages are predicated on management continuing to execute their business plan and ensuring that market participants are aware of such execution.
Based on this general framework, here we will consider the valuation of Aduro Clean Technologies (CSE: ACT) (OTCQB: ACTHF) (Frankfurt: 9D50). Aduro has developed a patented, water-based chemical processing platform called Hydrochemolytic™ technology, or HCT. HCT is capable of recycling plastics and transforming heavy crude and renewable oils into feedstocks and higher-value fuels.
Our focus today is on the plastic recycling vertical, but keep in mind Aduro is also moving forward in the oil vertical. When considering Aduro it is vitally important to understand the current problem with global plastic recycling efforts, and the solution the company offers.
Problem: Aduro is solving a significant problem: plastic waste. Plastic is everywhere. The world is swimming in it. Unfortunately, only about 5 percent of plastic is recycled. The current technologies are only technically capable of recycling 20 percent of plastic, even if every consumer wanted to recycle. For the other 80 percent, no one can recycle due to the limitations of current methods. Mandates such as The U.S. Plastics Pact are creating incentives for advancement by 2025, calling on manufacturers to use at least 30% recycled plastic in their new production. This places the onus on producers to adopt more efficient plastic recycling strategies, which in turn requires technologies like Aduro.
Solution: Aduro can chemically recycle all the plastic types, including the 80 percent that no one else can. Aduro can do this with less energy, CAPEX, OPEX, and at a higher yield than current technologies, but again these current technologies can only process 20 percent of the plastic types being produced. Due to these efficiencies, Aduro’s technology makes economic sense in countries where other technologies need subsidies. As a result, Aduro is getting so much inbound interest that they can only handle some of the requests. This tells us that they have something special.
How Aduro will make money: There are currently 8 billion tonnes of accumulated plastic waste worldwide. Additionally, over 380 million tons of plastic are produced every year. With one client, Aduro’s revenue potential can be $100 million with a licensing model. Licensing models generate huge margins (in the case of Aduro, an EBITDA margin north of 70%). They are among the best business models on the planet as they represent an annuity or royalty. Aduro’s market cap is less than $50M USD.
Let us bring it back to potential valuation at the current stage:
1) IP method: In March 2022, CEO Ofer Vicus and the team talked about over $50M in IP value if the company were to sell the technology at that point. This was before being selected by the Shell GameChanger Program; signing the LOI with Prospera Energy to build a pilot plant for crude oil processing; completion of its R2 Bitumen reactor designed for customer engagement in the oil vertical; assembly of its R2 Plastic reactor designed for customer engagement; and the grant by NSERC. All of these developments have certainly added value should the company decide to sell the IP at this point, while the market cap remains in the $50M range.
2) Comparable approach: While there is nothing like Aduro’s technology, we can look at the plastic vertical as a benchmark and build from there. PureCycle, Mura, and Licella are all USD1Bn+ companies (public or private). Although none of these three have the same solution as Aduro, they are about 12 to 24 months ahead of Aduro in their commercial journey, with PureCycle planning to have its first commercial facility up and running this year. If PureCycle’s licensed technology (licensed from Procter & Gamble) works, it will be limited to polypropylene, or plastic #5. Polypropylene accounts for about 16% of global plastic production. For argument’s sake, let us assign a 35% discount from PureCycle’s valuation for the two year head start the company has on Aduro. This would give Aduro an approximately $630M valuation for just solving polypropylene.
We know that Licella is at a semi-commercial stage with a plan to build a pilot on Amcor’s dime for 20,000 tonnes by 2024. For argument’s sake, let us assume that Licella, which has better technology than PureCycle although it still requires significantly more heat (operating energy) than Aduro’s HCT, is 12 months ahead of Aduro. Licella’s marketing material suggests a valuation of $1Bn+ Australian dollars. Applying a 1-year discount to Licella’s valuation, we get a value of AUD $650M or USD $460M today for Aduro (using a 35% discount rate).
Now, what would be the value of the heavy oil upgrade? What about renewable oils, rubber tires, and foam mattresses? We won’t be diving into those waters today, but their value is surely more than zero. Still, as described above, the ultra-conservative $300 to $500M USD valuation range seems to make sense considering Aduro’s stage of development in the plastic vertical alone.
Risks:
- Scaling-up: This is a common critique of Aduro as to whether it can scale up the HCT technology. This is due to a lack of understanding that the secret sauce is in its chemistry rather than some exotic reactor or machinery. Still, Aduro needs to go through the stages of commissioning R2 and running testing, then moving to the semi-commercial scale (R3), followed by the 25 Tonnes per day commercial stage. Overall, scaling up seems reasonable from R2 to semi-commercial to commercial (120 kg/day to 1 to 3 tons/day to 25 tons/day).
- Financing risk: The reality is that when you have a unique solution to a world-class problem, such as plastic waste or heavy oil upgrading, you can always find funding. The only caveat is when and how much will be needed. Based on Aduro’s careful and incremental history of financing, there is no need to raise all the capital at once. The company has many good options to utilize, including warrants, money from partnerships like the Shell GameChanger Program, and non-dilutive funding like the research grants from NSERC. It’s also worth noting that insiders, and prominently CEO Ofer Vicus, own about 33.5% of the company so their interests are directly aligned with those of the shareholders.
Sources:
PureCycle: https://ca.finance.yahoo.com/quote/PCT?p=PCT&.tsrc=fin-srch
