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Carbonxt Group
Investor Insight
In an increasingly eco-conscious global market, Carbonxt makes a compelling investment case leveraging a current, approximate US$900 million addressable market, driven by a strategic joint venture that presents strong revenue and growth potential. This addressable market is anticipated to grow three to five fold to more than US$2 billion following the introduction of new rules to capture forever chemicals.
Overview
Activated carbon is typically derived from sources such as coconut husks and coal, and is among the most common ways to filter contaminants from both water and air.
Activated carbon is so named because the process by which it's produced oxidizes the carbon, 'activating’ a series of small, low-volume pores that considerably increase its surface area. There are a few different methods for producing the material, including carbonization, gas treatment and chemical treatment. It is also invaluable for a wide range of use cases across multiple industries, including healthcare, chemistry, agriculture, oil & gas and even food preparation.
For large-scale industrial use cases, activated carbon typically comes in one of three forms: powdered, pellet and granular. Depending on how the material is treated post-oxidation, activated carbon can be tailored to a multitude of individual use cases. For large-scale use, material cost can range from US$2,000 per tonne to as high as US$6,000 per tonne, presenting a considerable opportunity in activated carbon.
Carbonxt Group (ASX:CG1) is positioned to take full advantage of that opportunity. An innovative manufacturer of custom activated carbon, Carbonxt has locked in a joint venture with US-based partner Kentucky Carbon Processing, forming the joint venture NewCarbon, and effectively expanding Carbonxt’s addressable market and gross margin.
Much of this growth will be courtesy of a new Kentucky facility focused primarily on water treatment. This facility will leverage two pieces of legislation recently announced in the United States — the Environmental Protection Agency's (EPA’s) Clean Water Act and the Bipartisan Infrastructure Deal. The former aims to reduce pollution caused by polyfluoroalkyl substances (PFAS), while the latter provides a total of $10 billion in funding to help companies reduce PFAS contamination.
PFAS are a set of widely-used chemicals that take an incredibly long time to break down. Found in soil, water, air, fish and humans, multiple studies have linked PFAS to severe health problems, which include birth defects, developmental delays, thyroid disease, high blood pressure and increased risk of several types of cancer.
It’s why the EPA is cracking down hard on these chemicals, with additional regulations being proposed to further protect communities from the serious effects of PFAS. These regulations, which are set to begin enforcement between 2024 and 2028, will require the majority of companies in the water industry to upgrade their filtration systems.
Carbonxt provides products specifically targeting PFAS removal. Through the NewCarbon joint venture, the company intends to convert a waste-to-energy plant into an activated carbon plant, considerably increasing its production capacity and allowing it to directly serve the roughly 50,000 water utilities in the United States, which together account for roughly 50 percent of the granular activated carbon market.
If all goes as planned for Carbonxt, it will fully disrupt that market, unseating the current leader.
Company Highlights
- Carbonxt Group is a manufacturer of patented activated carbon products designed to treat toxic pollutants in both air and water. For example, Carbonxt Group has been awarded a US$159,000 (AU$240,000) research grant by the Florida state government to advance a groundbreaking water remediation study to combat the negative impacts of algae growth on coastal communities.
- Carbonxt currently has an addressable US market of US$290 million with a 5 percent market share. Its joint partnership with Kentucky Carbon Processing has the potential to increase this addressable market to more than $900 million.
- Together, Kentucky Carbon Processing and Carbonxt will form the joint venture company NewCarbon, affording Carbonxt several advantages:
- Increased US-based production capacity to over 20,000 tons per annum with the potential for further expansion.
- Control over input costs, considerably improving base margins.
- High-quality raw materials.
- In the near future, much of Carbonxt's growth will be driven by the United States Environmental Protection Agency's increasing regulation of PFAS.
- There are currently 50,000 water utility companies in the United States, 4,000 of which serve 10,000 or more customers. Collectively, they account for roughly 50 percent of the granular activated carbon market with annual expenditures of over US$300 million.
- Carbonxt is well-positioned to serve these companies, providing activated carbon pellets that offer improved filtration with a lower pressure drop as a replacement for granular activated carbon.
- In addition to a highly experienced leadership team, Carbonxt’s strong revenue and earnings growth potential from NewCarbon make the company an attractive investment prospect.
Core Product
High-performance Activated Carbon
Carbonxt designs specialized activated carbon products for its customers, which consist primarily of industrial sector organizations and power utilities. Available in pellet and powder form, the company's oxidizing, non-brominated activated carbons are non-corrosive and designed to remain efficient throughout their entire lifecycle. Although Carbonxt’s origin and listing is in Australia, its products are manufactured and distributed exclusively within the United States.
Carbonxt is currently focused on developing an activated carbon manufacturing facility in Kentucky, the result of a joint partnership with Kentucky Carbon Processing. Once this facility is operational, water utility companies are expected to form a much larger part of its customer base. The facility is also expected to re-invigorate the company's industrial pellet market sales.
Highlights:
- Strong Market Outlook: Industry demand for powdered and pelletized activated carbon remains strong. Prices have trended considerably upwards over the past year and will likely continue to do so for the foreseeable future.
- Pricing Trends: Carbonxt's primary competitors in the activated carbon market have both announced price increases ranging from 15 to 40 percent. The company's activated carbon products have the potential to offer better filtration at a considerably lower price point.
- Looking Up: Carbonxt has also recently improved its existing carbon manufacturing facilities. This has translated to a more than 20 percent increase in gross margins in the last financial year, with further double digit percentage gains expected in FY24.
- Making a Good First Impression: Carbonxt's high-specification sample products have been well-received by end customers. Management is currently in talks with numerous water utilities to purchase capacity from the company's new facility once it comes online.
- Use Cases: Carbonxt currently manufactures activated carbon products for the following:
- Powdered activated carbons for mercury and flue gas component removal. Customers for this use case include coal-fired power plants, cement plants and industrial boilers & incinerators. Carbonxt manufactures a specialized activated carbon for each type of customer.
- Pelletized activated carbon for the removal of VOCs and hydrogen sulphide from gas streams.
- High-quality pelletized activated carbons designed to remove drinking water contaminants as well as taste and odor compounds.
- Contract Agreements: Carbonxt has secured a $4.3 million purchase order for activated carbon (AC) products from US utility Wisconsin Public Service. The company also secured a four-year contract extension to supply premium PAC products to Reworld, a global leader in sustainable waste solutions. The deal will generate group revenues of approximately $6 million per annum for the duration of the contract.
Management Team
David Mazyck – President, NewCarbon (the Kentucky JV) and Director of Technology
Dr. David Mazyck is a world-leading expert on activated carbon (AC) and its applications including mercury capture. He has developed AC products for major multinational AC manufacturers and has regularly consulted them on technical issues. Mazyck is the former chairman of the Activated Carbon Standards Committee for the American Waterworks Association and has developed products for NASA.
He received his PhD in environmental engineering from Penn State University, where he also earned a PhD minor in fuel science.
Matthew Driscoll - Chairman
Matthew Driscoll has significant experience across several industries, including online technologies, financial services, fintech, cleantech, property and resources. He has more than 30 years’ experience in capital markets and the financial services industry and is an accomplished company director in roles across listed and private companies.
He has significant experience in international business growth, mergers and acquisitions, equity and debt raisings and building strategic alliances. His current directorships include NED Energy Technologies, NED Blina Minerals, NED Eco Systems, and NED Smoke Alarms Holdings.
Warren Murphy - Managing Director
Warren Murphy has led a large number of acquisitions and financings across the energy, resources and infrastructure sectors. This includes the development of over 2,000 MW of Greenfields power stations and the acquisition of over 3,000 MW of generation assets.
He was co-head of the Australian Infrastructure & Project Finance Group and Head of Energy at Babcock & Brown based in the Sydney office and led the development of Babcock & Brown’s energy sector capability in Australia and New Zealand, including the founding of Infigen Energy and its unlisted predecessor, Global Wind Partner, where he served as a director from inception until June 2009.
Murphy was also a director of the ASX-listed Alinta and Sydney Gas, as well as the unlisted Coogee Resources.
Dr. Regina Rodriguez - Senior Executive
Dr. Regina Rodriguez has a PhD from the University of Florida, where she received the prestigious National Science Foundation Graduate Student Fellowship. She was the chairperson of the Activated Carbon Standards Committee for the American Waterworks Association.
Rodriguez holds nine patents. Her leadership has resulted in one-of-a-kind sorbents and systems for power stations and water treatment.
Imtiaz Kathawalla – Independent Director
Imtiaz Kathawalla was a vice-president at NYSE-listed Cabot Corporation, a global specialty chemical company where he had a 27-year career. Kathawalla's most recent position with Cabot Corporation was as general manager of Cabot's purification solutions division. He ran the group's US$300-million global activated carbon business where he oversaw a material increase in EBITDA before managing the sale of the business to a large private equity group.
Nicholas Andrews – Independent Director
Nicholas Andrews has held the role of executive chairman and CEO at Magontec (ASX:MGL), an established business in the global magnesium sector. He is a member of the executive committee and serves on the board of the International Magnesium Association. Prior to his executive career, Andrews held several senior roles in the financial services sector across both investment management and investment banking.
Carbonxt Group Limited – September 2024 Quarterly Update
Highlights
- 4-year, $24m contract extension for the ongoing supply of premium PAC products to Reworld – an existing Carbonxt customer. Post quarter-end, Carbonxt commenced full-scale delivery of additional PAC volumes to Reworld from its Black Birch facility, in accordance with the contact terms.
- Quarterly revenue of $4.3m, with Powdered Activated Carbon (PAC) sales up 31% and Activated Carbon Pellets (ACP) sales up 27%, driven by increased demand from the power generation sector.
- Successful completion of a $3.02m capital raise, via the placement of 46.4m fully paid ordinary shares at $0.065 per share which was strongly supported by a network of sophisticated and high net-worth investors and family offices.
- Carbonxt made a further $0.625m investment in NewCarbon Processing, LLC (“NewCarbon”), the investment vehicle for the new state-of-the-art AC production facility in Kentucky jointly held with Kentucky Carbon Processing, LLC (“KCP”), with a further $0.625m to be completed in this quarter.
- Key construction works at the flagship Activated Carbon production facility in Kentucky were completed in the quarter; commissioning of the plant is now imminent with business development and operating processes being ramped-up.
Principal Activities
Carbonxt is a cleantech company that develops and manufactures environmental technologies to maintain compliance with air and water emission requirements and to remove harmful pollutants. The Company’s primary operations are in the US and include a significant R&D focus as well as manufacturing plants for activated carbon pellets and powder activated carbon. Carbonxt continues to expand its pellet product portfolio to address numerous industrial applications.
Managing Director Warren Murphy commented:
“The September quarter was highlighted by continued momentum across all our key growth drivers, with increased sales from existing operations complemented by the forthcoming commissioning of our state-of-the-art production facility in Kentucky.”
“With commissioning of the Kentucky facility now imminent, Carbonxt continues to execute on its strategy to deliver a step-change in growth and earnings, significantly scaling up its production capacity to meet the growing demand for premium Activated Carbon production in the US market.”
Overview
- Customer receipts for the quarter were $1.8m. As noted in the ASX announcement of 28 May 2024, Wisconsin Public Service (“WPS”) pre-paid for the volume delivered in this quarter. The pre-payment amount was received in the previous quarter and associated volumes have now been delivered in full. New business in the waste to energy market (see announcement of 17 October 2024) commenced on 1 October 2024 and these increased revenues will be seen the next quarter.
- Activated Carbon Pellet (ACP) primary sales during this period were higher by 27% for the quarter compared to last quarter as the WPS pre-paid volumes were delivered.
- Powdered Activated Carbon (PAC) revenue was 31% higher this quarter as compared to the prior quarter due to seasonally higher PAC usage in the summer by electricity utility customers.
Revenue and Operating Cash Flow
- Total revenue for the quarter was $4.3m with PAC sales contributing to 42% of this revenue. To mitigate the impact of seasonal fluctuations, which are a feature of the power generation sector, the Company continues to diversify its product offerings and expand into other markets, particularly in the water and wastewater sectors.
- As noted earlier, the Net Operating Cash for the quarter reflects the prepayment for 1,200 tons of ACP products from WPS in the prior quarter, with production and revenue recognition largely in this quarter.
- Revenue and cash receipts from the $6m p.a. contract extension with Reworld will be recognised in the December quarter, following the completion of first deliveries in October.
Figure 1 – Quarterly Net Operating Cashflows
Further Investment in NewCarbon
Carbonxt utilised part of its recent fundraising (see below) to meet the next instalment of its investment in NewCarbon. The total instalment is US$1.25m, with US$0.625m made in the quarter, with the remaining balance expected to be made by 15 November 2024. Carbonxt’s ownership stake in NewCarbon at the end of this September quarter is 38%.
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