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AQMS Aqua Metals Inc. - Initiation Note

Aqua Metals Inc.

BUY (AQMS, $16.95)

A Revolution In Lead Recycling–Initiating With A BUY Rating and $25 PT

February 15, 2017

Ilya Grozovsky

212.417.8219

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Investment Conclusion. We are initiating coverage of Aqua Metals with a BUY rating based on our belief that the company’s disruptive lead recycling process will change the way that lead acid batteries are recycled domestically and ultimately in many international countries. We believe that the environmentally friendly process will be championed by governments and will become a de facto standard as lead smelters continues to get shut down due to pollution issues. The stock currently trades at a 32% discount to what we believe is its fair market value based on our DCF analysis. As a result, we are establishing a 12 month price target of $25 per share, based on our belief that as Aqua Metals progresses and begins the commercial sale of its lead, the discount to fair value currently being applied will narrow. Lead acid batteries are a vital component in vehicles globally and are the oldest type of rechargeable battery. They are a vital component in the 1 billion vehicles existing worldwide and are also used in critical stationary applications, such as providing back-up power for telecommunication systems. Mined ore deposits (galena) are becoming worked-out, leading to the mining of less pure lead. As a result, lead acid batteries are recycled at a rate greater than 95% in Europe and the US according to the International Lead Association, since recycled lead retains its purity. Aqua Metals lead recycling process is also environmentally friendly. Aqua Metals uses a solvent to dissolve the lead and then the primary lead is stripped from the solvent using a patent pending and fully automated process. This allows the solvent to be reused continuously and indefinitely while avoiding any use of a smelter. Additionally, this process does not emit toxins into the atmosphere.

AQMS

Company Profile
Aqua Metals, Inc., headquartered in Alameda, CA, is engaged in the business of recycling lead acid batteries (LABs) and production of lead through a proprietary process named AquaRefining. AquaRefining is a water-based ambient temperature process. Its AquaRefining process generates over three outputs, such as lead; cleaned plastic chips, recovered from battery casings, and sulfuric acid. The Company has not generated revenues as of yet.

Lead acid batteries are a vital component in vehicles globally. Lead based batteries are the oldest type of rechargeable battery. They are a vital component in the 1 billion vehicles existing worldwide and are also used in critical stationary applications, such as providing back-up power for telecommunication systems.

Mining of lead is declining while recycling is growing. Mined ore deposits (galena) are becoming worked-out, leading to the mining of less pure lead. As a result, lead acid batteries are recycled at a rate greater than 95% in Europe and the US according to the International Lead Association, since recycled lead retains its purity.

Traditional recycling is done using a smelter and results in pollution. Lead battery recycling plants in the U.S. are sources of significant emissions which have resulted in the contamination of hundreds of sites around the country. In the U.S. lead battery recycling facilities are now subject to the strictest national emission standards of any country and have resulted in the shutdown of several facilities.

Aqua Metals lead recycling process is environmentally friendly. Aqua Metals uses a solvent to dissolve the lead and then the primary lead is stripped from the solvent using a patent pending and fully automated process allowing the solvent to be reused continuously and indefinitely and avoiding any use of a smelter. This process does not emit toxins into the atmosphere.

Aqua Metals first facility is located in McCarran Nevada. We believe that this facility has begun to produce lead for commercial sales as of January 2017. The facility has just been completed and has no operating history but we believe that the equipment has been successfully tested.

McCarran facility should begin to generate revenues in 2017. We are estimating that Aqua Metals will generate 2017 revenues and adjusted EBITDA or $46 million and $2 million, respectively. For 2018, we are estimating that Aqua Metals will generate revenues and adjusted EBITDA or $97 million and $21 million, respectively.

The risks associated with Aqua Metals are typical for disruptive technology. Vertically integrated LAB manufacturers could try to disrupt Aqua Metals supply, Electric vehicle proliferation could reduce the need for lead acid batteries, and finally, Aqua Metals has limited operating history and no sales record.

We are initiating coverage of Aqua Metals with a BUY rating. We are initiating coverage of Aqua Metals with a BUY rating based on our belief that the company’s disruptive lead recycling process will change the way that lead acid batteries are recycled domestically and ultimately in many international countries. We believe that the environmentally friendly process will be championed by government and will become a de facto standard as lead smelters continues to get shut down due to pollution issues.

We are establishing a 12 month price target of $25 based on our DCF analysis. The stock currently trades at a 32% discount what we believe is its fair market value based on our DCF analysis, as a result, we are establishing a 12 month price target of $25 per share based on our belief that as Aqua Metals progresses and begins the commercial sale of its lead the discount to fair value that is being applied will narrow.


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