HPQ Silicon (OTCQX:HPQFF) (TSXV:HPQ:CA ) is collaborating with PyroGenesis (PYR) (PYR:CA) to develop an innovative silicon manufacturing process, PUREVAP, that they believe will disrupt the industry. This article will look at HPQ’s fundamentals, and unique manufacturing process, to determine if it is worth an investment.
By and large, the PUREVAP process is pretty similar to the standard silicon manufacturing process (quartz reduction), save one significant alteration. HPQ seeks to operate its furnace in a vacuum, combining the carbothermic and impurity removal processes, which then invites a number of production efficiencies. The first of these is with feedstock.
The improvements to the required feedstock are twofold, the first of which relating to the quality of material and the second relating to its quantity. While silicon production typically requires high-grade feedstock material, in order to limit the number of side reactions and actually produce silicon, the PUREVAP process is able to utilize low-quality feedstock. With this lower quality feedstock, the integration of a purifying step still allows HPQ to produce a higher-quality silicon product.
What this also enables HPQ to do, is use a far more reactive carbon source than other producers are able to use. This higher reactivity means HPQ can use less material to get the same result, bringing the size of its feedstock (quartz and coal) to just 4.5 MT per 1 MT of silicon. For reference, standard processes require 6 MT of feedstock (quartz, coal, and woodchips) to produce 1 MT of silicon. Not only will this improve project economics, but it will improve Scope 3 emissions as well by limiting the number of trucks required to deliver feedstock material.
Through its reduction in quality and quantity of feedstock materials, HPQ expects to reduce raw material costs by 50%, directly contributing to 20% lower operating costs. Overall, HPQ expects to be one of the cheapest producers of solar-grade silicon products, with a production cost of ~$5 - $6 per kg. For reference, silicon costs, on average, $15/kg to produce. By reducing initial CAPEX as well, HPQ aims to undercut other producers on all metrics.
While I already mentioned that HPQ expects to produce a higher-quality product than its peers, I think this is worth diving deeper into. The company estimates that standard arc furnaces are limited to 40% production of 2N+ silicon, while HPQ expects its furnaces to produce 17.9% 2N+ silicon and 90.0% 4N+ silicon. For reference, 2N+ is anything at least 99.5% pure, while 4N+ is anything at least 99.99% pure. In order to meet the SoG standards, silicon must be at least 99.9999% pure.
One thing that remains constant between both processes, the traditional and HPQ’s, is the fairly massive energy consumption (between 12 and 13 kWh per kg of silicon). This massive energy requirement dwarfs the CO2 produced by the process itself. But, as HPQ doesn’t claim to use any less energy, it’s not immediately obvious where the claimed reduction in carbon emissions come from until we examine the source of this energy.
Québec’s low-carbon energy grid, which is nearly 99% powered by hydropower, is the single greatest contributor to HPQ’s expected emissions reductions. The region’s incredible reliance on renewables makes its carbon footprint negligible. Unfortunately, the same cannot be said of China.
China produces close to 80% of the world’s solar grade silicon (“SoG”), making this comparison fairly important. While power in Québec has a negligible carbon output, China produces 541g of CO2 per kWh. Because of this, the country’s carbon output, per kilogram of SoG, is 141kg CO2. HPQ estimates its own carbon intensity to be 5.4 kg CO2/kg SoG.
But what about a country that has a similar, low-carbon grid, as Québec? This is where the impact of the company’s process efficiencies can help expand its carbon advantage even further. Norway is the world’s third-largest producer of silicon and, much like Québec, gets a significant portion of its power, 98%, from renewables.
Recently, REC Solar, a high-grade silicon manufacturer in Norway, claimed to have the lowest carbon footprint of all silicon producers in the country. Its carbon intensity was estimated to be 11.2kg CO2/kg SoG. That’s just over double what HPQ hopes to achieve.
As great as the process sounds, it’s only impactful if HPQ can utilize it to manufacture high-quality silicon at scale. High-temperature manufacturing and vacuum manufacturing are both incredibly difficult processes to implement on their own. To combine the two is an incredible feat of engineering.
Because of this, HPQ has quite a high burden of proof to convince investors that its process is legit. A major component of this validation process has been the completion of pilot furnaces to demonstrate the viability of the process. The first of the facilities, which utilized the first generation PUREVAP Quartz Reduction Reactor (“QRR”), began operations in 2016.
In 2017, the company was able to confirm the possibility of producing 99.984% (3N) pure silicon at scale with low-quality feedstock. In 2019, the company demonstrated the capability to produce 4N silicon at scale, also using low-quality feedstock.
HPQ is now on its Gen 3 pilot facility, which it now believes will begin operations in less than a month. Development work on the Gen 3 machinery has been a multi-year process that will usher in a new set of technical milestones. Over a twelve-month period, HPQ seeks to operate the PUREVAP QRR furnace on a semi-continuous basis. Should testing prove successful, the company will begin evaluation work and, eventually construction, on a Gen 4 facility and reactor.
Before moving towards commercial applications, it’s worth introducing the PUREVAP Silicon Nano Reactor (“SiNR”). The SiNR utilizes silicon as a feedstock to produce spherical nanosilicon powders and nanowires for lithium-ion batteries. Work on the PUREVAP SiNR reactor really didn’t start until late 2020, at which point the company felt that market conditions warranted the development. The goal of the SiNR process is to add value to HPQ’s high-quality silicon and, potentially, feedstock from other producers if the demand is there.
The company began operation of its first SiNR pilot facility late in 2020, reporting the production of sub 100 nm spherical silicon in January 2021. This was better than what was originally expected of the pilot facility, as simulations had identified the target range to be between 100 nm and 200 nm. In its next update, in April, 2020, HPQ shared that the SiNR was operating at a greater throughput than initially expected.
While the first generation pilot facility was designed to produce 30 kg of material per month, the company had achieved a rate of 50 kg per month. With this improved production rate, the company is now targeting 500kg/month for its second generation pilot facility, instead of the 300kg/month originally planned. However, while the company had outperformed on these two critical metrics, it had underperformed on another.
Ideally, the product should be the same purity as the feedstock used to manufacture it. This wasn’t the case for the early batches produced with the PUREVAP SiNR. Fortunately, the technical team at PyroGenesis has identified, and corrected, the issue.
As a result of using a modified furnace from the first generation QRR pilot plant for the Gen 1 SiNR plant, the silicon was becoming contaminated with oxygen. PyroGenesis traced this to the heat-resistant liner used in the Gen 1 QRR furnace and has made the necessary adjustments to eliminate the issue. These adjustments were finalized in Q4 of last year, though no further updates have been made public since the announcement in January.
I asked Mr. Tourillon about the lack of updates for the SiNR program, which he attributed to skyrocketing prices of high-quality silicon. When the company first started the program, silicon was quite cheap, therefore keeping the cost of development fairly reasonable. Current prices simply no longer allow this. As a result, the company doesn’t plan to continue testing of the SiNR until it can supply its own material.
Traditionally, silicon has three primary sources of demand: solar cells and electronics, aluminum alloys, and silicones. It’s the first two that interest HPQ, as they typically require a more pure base silicon and, therefore, command a market premium. Let’s look at aluminum first.
Aluminum is one of the most commonly used metals in the world, with demand ranging from applications in airplanes to kitchen foils. In 2021, the global aluminum market was valued at $148.1 billion and, according to Allied Market Research, it will grow by 5.82% through 2030 to reach a value of $258.3 billion. In 3003 aluminum, the most popular commercial aluminum product, silicon comprises .6% of the total alloy. However, for more silicon-rich alloys, the metalloid can comprise up to 23% of the total mass.
But metallurgical silicon doesn’t take full advantage of the quality HPQ is able to achieve with the PUREVAP process. To manufacture solar cells and semiconductors, which utilize silicon’s properties as a semiconductor, the highest purity silicon is required. While aluminum alloys will take anything that’s at least 98% pure, electronics require at least 99.9% purity.
The market for silicon at this level of purity is far smaller than the market for metallurgical grade silicon, but growth is healthy. The market for solar panels is expected to grow at a CAGR of 7.8% through 2030, while the market for semiconductor materials is expected to grow at a CAGR of 4.6% through 2030. This growth is needed to support forecasts, such as those by McKinsey, that project a $1 trillion+ market value for semiconductors by 2030. But what’s growing even faster than demand, is price.
In China, the price of metallurgical grade silicon has rocketed from as little as $1,200/tonne last year, to as much as $9,624/tonne. This price spike is largely in response to production cuts of up to 90% from some of the world’s largest producers in response to limited energy. Solar grade silicon prices have risen even more, up over 400% since June 2020. While the shortage of metallurgical grade silicon is expected to be resolved somewhat soon, the more long-term supply deficit of solar grade silicon may keep prices elevated for some time.
But this is getting a bit ahead of ourselves. HPQ will be a niche supplier for quite some time (assuming it can produce commercially) so, even in a tight market, customer acquisition isn’t a given. Thus, programs led by organizations, such as the DOE, to develop a North American solar supply chain are critical in HPQ’s commercial success. The motivation for programs such as these is, much like in the EV supply chain, China dominates solar manufacturing.
This domination presents a great opportunity for companies like HPQ, which aim to provide a source of upstream materials without any Chinese control. As Mr. Tourillon joked, installing solar panels on your roof sourced from China, is just about as good for the environment as strapping a diesel generator to your roof. Now, clearly the two aren’t really equivalent, but you can see where he’s coming from. Moving production away from China would significantly reduce the carbon produced from solar panel manufacturing and, perhaps even more importantly, improve supply chain security.
Outside of the solar industry, HPQ has been looking to form connections directly with potential customers. The company received its first order from an automotive customer for its nanosilicon powder less than a month after it had initially expressed interest. This announcement was made in October, 2020, and HPQ has not yet been able to fulfill it. The updated SiNR Gen 1.5 design should allow the company to do so but, as discussed already, HPQ has had to put the SiNR program on hold for now. Regardless, a product order from a major automotive customer for sample evaluation is a fairly significant step for HPQ.
With this in mind, let’s go back to the discussion of silicon’s place in lithium batteries. HPQ likes to use a Roskill forecast, which projects that up to 30% of anode active material, by mass, will be silicon by 2030. But this may be a touch misleading as it seems most analysts, including Roskill itself, expect average utilization to be closer to 5% on average.
Roskill’s market estimate is that there will be demand for 200,000 tonnes of nanosilicon by 2030. With most forecasts for graphite anode demand in the realm of 4,000,000 tonnes by 2030, Roskill seems to agree that the average anode will contain ~5% silicon by mass. That’s a huge market, especially considering that it is practically non-existent today, and could represent a tremendous market opportunity for HPQ.
At the end of Q2, HPQ had $4.95 million in cash with another $379,000 in marketable securities. Beyond the $229,000 the company received for the sale of its remaining quartz exploration properties, the company hasn’t raised any funds in the past quarter. This isn’t a crazy amount of money but, considering the company’s current capital burn rate of $2.912 million per year and the $2.12 million budget for the Gen 3 reactor program, it should be just enough for the company to achieve some significant milestones.
However, shareholders should expect the company to raise significantly more capital to stand any chance of executing on its goals. Building its first commercial plant will cost upwards of $30 million, which Mr. Tourillon expects to raise within the next three to four years. While this may sound like quite the task, Mr. Tourillon feels that the greatest financing challenge has actually already passed.
Funding early R&D efforts, getting the project off the ground, was an extreme uphill battle that HPQ was able to finance via a retail investor base. The next round of funding HPQ does will target the institutional base, using data from the Gen 3 reactor to demonstrate what realized value could be. While this may sound a bit optimistic, the company has already demonstrated strong relationships with those in the position to assist.
The company has already seen some financial support from two Canadian agencies for a program to validate the commercial viability of its nanosilicon particles and the Government of Québec holds 9.9% of HPQ’s total equity. Among traditional financial institutions, Mr. Tourillon expects its next round of funding to contain further government interest, which may play a role in growing HPQ’s access to certain programs that prioritize North American supply chains. Regardless, investors should expect dilution in the future.
Another serious consideration for investors is whether or not HPQ can actually achieve its goals. The technical challenges that the PyroGenesis team faces should not be understated and, despite achieving success at reduced scales, there is no guarantee of commercial success. In fact, some may even argue that it can’t be done.
But the same was argued when the US Navy contracted PyroGenesis to develop the PAWDS waste management system. Yet, it is now specified into the construction of Gerald R. Ford Class supercarriers. While this, by no means , guarantees future success, it does speak towards the technical capability of the team behind the PUREVAP process.
Though, even assuming the company can achieve commercial production, there’s no guarantee it can meet its projected cost reductions. Sure, the reduced quality and quantity of required feedstock material is a fairly strong source of OPEX reductions, but how long will it take HPQ’s inexperienced team to optimize operations? The integration of purification to the quartz reduction step limits the amount of equipment needed, but the company doesn’t yet have equipment supply agreements in place. While undercutting competitors at these various levels isn’t integral to HPQ’s success, given the strength of the market and inherent CO2 reductions, it is something that is built into the value pitch and, therefore, something to be cognizant of.
Unfortunately, even success invites risk. Should HPQ successfully commercialize the PUREVAP process, it may be forced to compete with other firms that have more money to spend. While Mr. Tourillon believes that the company has secured a first-mover advantage, it’s worth looking at how well the company will be able to fight back.
The most critical weapons in its arsenal are its patents. So far, HPQ has been granted a US patent for its PUREVAP quartz reduction reactor. The patent was granted earlier this year, with Mr. Tourillon commenting that it marks the only significant process innovation to silicon manufacturing since 1899. This patent protects HPQ’s right as the only company able to manufacture high purity silicon (from 99.5% to 99.99%) in a single step. It also prevents other companies from following the same basic design, a vacuum electric arc furnace.
Late in 2020, HPQ Silicon filed a provisional patent application for the SiNR design and product. These two patents, assuming the second is granted, offer HPQ significant protection against other companies trying to replicate its process. This includes all of the other benefits, besides just greater quality, that the processes enable.
All of this makes HPQ a potential acquisition target, something the company has planned for. Should a compelling offer be made, PyroGenesis gives up its 10% royalty on PUREVAP reactor revenue streams in exchange for an equal equity stake in HPQ. PyroGenesis currently holds a 12.5% stake in HPQ. This simplifies the acquisition process or, if HPQ decides it ultimately wants to license to larger producers, this also enables that.
With a burgeoning market, there is a great opportunity for HPQ if it is able to successfully commercialize the PUREVAP process. But it’s important to get an idea of how much of this opportunity HPQ could conceivably capitalize on. Again, assuming the process works, the greatest limiting factor is cash.
Utilizing a highly conservative cost estimate of $45 million (50% above Mr. Tourillon’s preliminary estimate) per 2,500 tonnes of capacity, an operating cost of $6/kg, and a sales price of $35/kg, we can begin to understand HPQ’s potential here. Under these parameters, each 2,500tpa facility would generate $72.5 million per year in gross profit. Factoring in PyroGenesis’ royalty, this drops to $63.75 million.
While many silicon executives, such as Mr. Tourillon, feel that $35/kg is a fair long-term price, I can also respect that some investors feel this is too aggressive an estimate to rely upon. But if we consider the $15/kg average production cost, it seems reasonable to put forth a $17/kg market bottom. Should prices drop much below that point, a number of producers would cut production, thus lowering overall supply and raising prices back to a profitable level. Under the assumption of $17/kg, keeping all else equal, the gross profit of a 2,500tpa facility would be $27.5 million. Factoring in PyroGenesis’ royalty, this drops to $23.25 million.
Even under this lower price assumption, with a highly conservative CAPEX estimate, the payback period would be just 1.64 years (not including royalties). However, a more robust market improves this even further. At a long-term price assumption of $35/kg, the payback period drops below a year at just .62 (not including royalties).
So what’s the point of discussing these payback periods? Ideally, by presenting creditors with attractive investment terms, HPQ can accelerate its early growth through more typical financing routes. But even without outside financing, these cash flows look to be robust enough to support fairly rapid growth.
As the company grows, it will expand its product suite from solar-grade silicon. In the medium-term, this means producing powderized silicon for use in anodes with the SiNR. Powderized, battery-grade, silicon commands an even greater premium than SoG, coming in at $60/kg.
Look, there are bound to be some issues over the next few years. I mean, when has R&D ever gone completely as expected? And I’m sure there will be a learning curve when it comes time to actually begin commercial production. But consider HPQ’s current valuation of $66.35 million. Should the company achieve its goals, I believe it’s a mid-cap within a decade.
But you’re paying for this upside by taking on risk. A lot of it. For those of you that are wary of PUREVAP being a dud, perhaps it’s worthwhile to wait for the Gen 3 pilot facility to begin operation first. While you’ll sacrifice some upside, perhaps that’s worth it for the peace of mind. Personally, I’ve begun averaging into the company. I’ve initiated a small position and will add in accordance to progress updates. Management comes across as business savvy and the technical team of PyroGenesis is strong.
What this comes down to for now is what your risk appetite is. Similar to Eco Wave Power (WAVE), I view HPQ Silicon to be in a “venture capital” phase, where potential upside is pretty strong, but there’s still much to prove. For investors that are okay with this risk, but may be waiting for a better entry point, don’t wait too long.
Operations at the Gen 3 facility will commence in less than a month, which will likely contribute to periodic progress updates and, perhaps, the resumption of the SiNR test program. Again, investing before the company achieves significant milestones at the Gen 3 facility is inherently riskier, I only include this for investors that are intrigued by the proposition but are waiting to time their entry.
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I tend to focus on long-term stock ideas, oftentimes rooted in tech or EVs. I have been a casual investor for years with solid returns and want to share what I have learned with others who may find value in my thoughts.
Disclosure: I/we have a beneficial long position in the shares of HPQFF, PYR, WAVE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.