Stock analysis: PureCycle Technologies — A revolution in plastic recycling

This one is going to be a zero or a multi-bagger

The PureCycle process produces a white plastic that’s as good as new. This has never been possible before

Here we have a speculative investment that’s either going to be a multi-bagger or a donut. I have put 1% of my AUM into PureCycle and I look at it as a call option. This article is not intended to be an inducement to invest your hard earned Rubles and Shekels into a speculative asset.

I’m writing about PureCycle because it’s a nifty bit of tech that’s going to make the world less plasticy, and unlike mining gold in space or Tesla’s full self-driving mode, this tech actually exists and it’s about to go live!

In the first half of this article I will play the role of promoter, then in section two I’ll present a glorious bear case. Yin and yang, balance achieved.

A brief history of plastic recycling

Traditional plastic recycling technologies can only churn out a product suitable for low grade applications, such as consumer goods packaging, door stops or Czechoslovakian pacemakers. Furthermore, plastic recycling as it stands today is a bit of a mess.

For many years the United States (and other countries) loaded their waste plastic into shipping containers and sent it across the ocean to China. The profit margins were razor thin and only possible due to there being a constant supply of empty shipping containers that have to go back to China anyways, China’s complete lack of environment controls and an abundance of slaves cheap labor.

Heartwarming, I know. However, in 2018 China banned the import of scrap plastic for recycling and the result is more “recycling” is getting sent to other Asian countries like Thailand and Vietnam, in addition to more plastic than ever going into landfills. Here’s a quote from PureCycle’s latest earnings call.

Back in 2018, China was taking 10 billion pounds a year of feedstock into China from the world. And about half of that was coming from the U.S. And let’s say, half of that was polypropylene. Okay. So, 2.5 billion to 3 billion of polypropylene was flowing to China. In 2018, they stopped it, it reversed and started going to landfills. So, there’s a lot of volume out there even when you just look at the United States.

Plastic recycling in China, previous to the import ban

How PureCycle fixes the recycling issue

A few years ago Proctor and Gamble developed a brand new way to recycle plastic. This protocol allows polypropylene plastic to be recycled in such a way that the end result is nearly indistinguishable from virgin plastic. The recycled plastic can be used to manufacture almost anything, which has never been possible before. Full stop. That’s where PureCycle comes in.

The elevator pitch: using proprietary technology licensed from P&G, PureCycle will profitably recycle plastic into a high quality product suitable for use in a wide variety of applications.

The first PureCycle recycling plant is coming online in Q1 of 2023, so just a few months from now. Located in Ironton, Ohio, the plant is expected to be running at full capacity by the end of 2023. A lot hinges on the facility’s success, and indeed the results will give us a clear picture of whether PureCycle is going to be a $50 or $0 stock.

If the Ironton plant can profitably produce a high quality recycled plastic, that’s going to attract a lot of attention. Charlie Munger said, “show me the incentive and I’ll show you the outcome.” I’m not going to share the profitability projections because I’m not concerning myself with exact figures.

The recycling process is projected to be quite profitable, but who cares about guesswork? The Ironton plant will be up and running in a few months and then we’ll know the rock solid numbers.

If PureCycle is profitable, there’s going to be an incentive to build more plants (ground has already been broken on a plant in Georgia, and another plant is in the works in South Korea).

Unlike EVs or solar panels, which have become popular in part because of tax breaks and government subsidies, PureCycle is green tech that can succeed based purely on good old fashioned capitalism. What a sight to behold.

Global macro themes

Apart from the possibility of a large recession, I think that PureCycle has a tremendous macro tailwind.

• ESG — While I have serious concerns about the ESG movement and how it’s being implemented, nobody gives a fuck what I think. ESG is a thing that exists and I would expect that the movement will embrace PureCycle. Profitably recycling plastic? Sounds great! Companies that buy their plastic from PureCycle can slap a big ol’ sticker on their bottles saying it’s 100% recycled and thus their products are sanctimonious and pure, while their rival’s non-recycled containers are single-handedly responsible for propping up Vladimir Putin’s war machine.
• Higher oil prices — As I’ve stated, I think oil prices are going to remain elevated for years to come. Plastic is basically just refined petroleum, so presumably plastic will be getting more expensive. Hence even more of an incentive to recycle.
• Deglobalization / Onshoring — Lot of talk about bringing back manufacturing to the United States. PureCycle could benefit from that overall trend, if in no other way than just good PR, faster permit approvals and glad-handing from politicians.
• Common sense — Broadly speaking, who the hell is going to protest against recycling plastic, especially if it can be done profitably? I say broadly speaking because as you’ll see in the next section, there may be community level protests against recycling.

Here’s how it could get ugly

Let’s balance this beast out by diving into the bear case.

• Profitability — The PureCycle management team has claimed that their recycling process is going to be profitable. I’m sure they’ve made that forecast to the best of their ability, but I don’t think we can say with 100% certainty that the company will actually be profitable until it’s up and running at capacity. In any analysis there is always that one factor that can immolate even the most carefully laid plans.
• The regulatory — The NIMBY movement (Not In My Back Yard) is alive and well, even with an objectively good thing like plastic recycling. PureCycle is having a rough go of it in Augusta, Georgia, where local residents are protesting the construction of a new plant. Could that be enough to force regulators to pull their approval? Don’t know, but it’s a concern.
• Cash reserves — PureCycle has $215 million in unrestricted cash with another $100 million in an escrow account to fund their new Georgia facility. There is a further $235 million in long term debt with quarterly operating expenses of roughly $28 million. So there’s a bit of runway, but as with most corporations right now PureCycle is in a tough spot for financing.
  The corporate bond market has gone to hell and if PureCycle needs to borrow they’re going to pay ridiculous interest on their loans (if they can even get a loan). They have enough cash now, but if the bond market remains unforgiving they may be in trouble in six months or a year.*
  *Although if revenues from the Ironton facility are good, the cash crunch could be mitigated somewhat.
• The license — As mentioned, PureCycle is licensing the plastic recycling technology from Proctor and Gamble. I assume (I don’t have enough expertise to read the contracts myself) that the agreement is fairly solid. However, PureCycle is not in a position of perfect strength. If they mismanage the operation, there is a chance P&G could void the contract. I can’t assess the likelihood of that happening, but it’s not 0%.
• The bear report — In the spring of 2021 the short selling group Hindenburg Research released a report on PureCycle in which they made a whole slew of nasty claims. I think plenty of these claims are misplaced, but probably a few of them aren’t.
• Feedstock — One of the most challenging aspects of running the plastic recycling business is getting good feedstock (the plastic coming into the plant for recycling). The PureCycle plants are going to have a large capacity, and getting thousands of tons of the correct plastic, delivered regularly, may be a challenge. In fact, recently one of PureCycle’s feedstock suppliers backed out of their agreement, and that’s not an especially bullish development.
• Higher energy prices — Although I speculated that higher oil prices will improve PureCycle’s prospects, higher local electricity prices will cut into their bottom line. Obviously America is better positioned in terms of energy prices than many other countries, but it’s not unreasonable to assume that prices will be going up in the States in the years to come.
• SPAC — PureCycle is a SPAC, which carries some negative baggage with it. Not sure how much weight to give this, but I don’t think it’s necessarily bullish.

Closing remarks

All monetary gains aside, I hope that PureCycle succeeds. If PureCycle can profitably live up to its claims, there will be an incentivize to build plants across the country. I would love to see the company take over the world, since the outcome will be less plastic in landfills and the ocean, reduced production of new plastic, and of course a nice return on my investment.

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