Aqua Metals (AQMS) reported results on Thursday and investors didn’t care for the results.
As this was originally a recommendation of Tyler Laundon of Cabot Small-Cap Confidential; I’ve copied Tyler’s response here.
“The stock’s reaction means I’m moving the position to SELL. It is trading lower after reporting, and I suspect that there could be more weakness in the weeks ahead. The bottom line is that this was an opportunity for management to establish greater credibility with the investment community as it moves its first plant through the de-bottlenecking process and toward meaningful revenue generation. I don’t think they did so. Here’s why.
“Results included EPS of -$0.26 ($0.08 shy of expectations) and no reported revenue. Consensus was for around $100K in Q1 (which is basically nothing), and roughly $5 million in Q2. Management said on the conference call that they’re not giving forward revenue guidance during plant ramp up. They said production began in Q1 (January–March) and that sales to a strategic partner began in Q2 (April–June). I think avoiding details around revenue on the call was incredibly stupid. That’s what investors care about at this stage, even if the long-term plan is industry domination! This major communications error leaves us guessing how significant revenue could be, even though the company is already halfway through the quarter. I can understand not wanting to be overly specific, but the management team seems to want to get credit for having the plant at “revenue generating stage,” but not adding any color around that. Unfortunately, this has given fuel to the bears.
“The plan remains to ramp production throughout the rest of 2017 to exit the year with production at 120 metric tons per day. There are 16 AquaRefining Modules at the plant, and Module 1 is going, Modules 2-4 are starting up, and Modules 5-16 are undergoing process updating. Ingot production is being commissioned, so at the moment, the company is just selling metallic lead that’s not in ingot form. It plans to have four shifts, and A and B are currently staffed, with C and D recruiting.
“The company put together the following slide that shows how operations are currently going while they de-bottleneck the plant and move material byproducts out the door, until they are up to full capacity. As you can see, trucks from the three strategic supply partners come in (Battery Systems, Interstate Batteries and Johnson Controls) and drop off batteries to go into “Breaking and Separation.” From this process, the roughly 50% of lead that doesn’t need to go through AquaRefining is sold, as are the plastics. The remaining materials go into the “AquaRefining Prep Process,” and out of that, some lead compounds are sold. The remaining material is now being fed into Module 1 (and soon Modules 2-4), and the resulting high value metallic lead is being sold. Management said this isn’t the most efficient process, but in start-up mode, it allows them to refine operations throughout the commissioning process, and start generating revenue sooner (although, again, it wouldn’t say how much).
“Management says plans for AquaRefineries 2-5 are in the works, with around 160 metric tons of daily capacity per facility. They seem to think financing is no problem, even if plant 1 isn’t up to full capacity. They also said the Ebonex acquisition could help them develop an additional high-value lead product, though they were clear to point out that this would be new to the market and not something that would come in the near-term. There was no additional detail on when a JCI plant would be retrofitted, or where that plant would be. One question that I have is this: with respect to all the process improvements at TRIC, how far out might this push the first JCI facility?
“The bottom line here is that there is now even greater pressure on Aqua Metals’ management team to show that they are on the right track and that investors should put money into the stock. In my opinion, this conference call was a great opportunity to move past questions about the company’s potential, both in the short and the long term. Management failed, and we’re seeing that play out in the stock’s action today. There are plenty of opportunities out there where we don’t need to row against the tide, so let’s step aside from this one today. SELL.”
That was Tyler; this is Tim.
When I recommended this stock last week, I noted that it was for risk-tolerant investors, and that you should use appropriate position sizing. If you didn’t buy then, you could buy soon and try to make a profitable short-term trade as it bounces. But if you did, I hope you kept your position size modest. As I write, our loss is 23%, and the stock is approaching its 200-day moving average at 12.70, where it is likely to find some support. It’s possible the stock will fall further, but I’m guessing it will be higher tomorrow, so officially we’ll record our sale, as usual, as the average of the high and low tomorrow. SELL.