Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

Equity Research Firm

Thematic (Sector/Industry)

Multiple Countries / Thematic (Sector/Industry)

<h3>KEY POINTS</h3>
<ul>
<li>WTR-CMI last week.&nbsp;The market ended last week in positive territory, with the S&amp;P 500 and the Russell 2000 posting returns of 1.2% and 1.5%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks nearly kept pace, improving 1.1% for the week. PLL led the way with an 18.5% jump, as the company announced a renegotiated&nbsp;supply contract with TSLA&nbsp;that now includes selling prices linked to Li-OH market prices at the time of delivery. At the other end, RMP’s guidance of slowing growth and stubbornly high raw material costs led to an 11.8% decline in its stock, which also dragged down the shares of SHW.</li>
<li>LAC matriculates the ball down the field.&nbsp;The hearing at the&nbsp;US District Court on January 5&nbsp;appears to be the last step in Lithium Americas’ efforts to meet the conditions that would allow it to begin construction work at its Thacker Pass, NV lithium site. The judge’s decision is expected in the next couple months.</li>
<li>Not a good way to start the year.&nbsp;March delivery&nbsp;prices of all three grain commodities—corn, soybeans, and wheat—took a step down as 2023 got underway, partly due to a lack of export sales and partly in anticipation of the USDA’s first report due out later this week. With interest rates and input costs significantly higher Y/Y compared with the start of 2022, high grain prices will be required for farmers to decide what and how much to plant, which will determine their demand for ag inputs in the upcoming season.</li>
<li>Another step toward circular economy.&nbsp;FUL recently partnered&nbsp;with HSMG to provide its water-based adhesives together with HSMG’s&nbsp;biodegradable and recyclable coating&nbsp;for disposable water cups, estimated to reduce the carbon footprint of these disposables by 40%.</li>
<li>Stumble at the gate.&nbsp;VW plans to&nbsp;reduce production at its Wolfsburg plant&nbsp;in January on continued supply chain disruptions.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/319/753/original/image_149213497121673571040448.png?1673571044" class="editor-image img-responsive" data-smartkarma-image-id="319753"></figure>
<div class="content-remarks">
<p>Source: Y-Charts as of January 6 close</p>
</div>
<h2>Ag-Tech &amp; Bio-Ag</h2>
<p>Are soybeans the next lithium?&nbsp;The short answer is probably not. However, an emerging market is driving demand for soybeans and that market is biofuels, specifically biodiesel, which can be produced from soybean oil. There are currently 18 new soybean processing facilities in the works in the US and many more are on the drawing board. As demand for renewable diesel and eventually jet fuel increases, partially in response to government regulations regarding the use of renewable fuels, partially due to the high cost of diesel and other market forces, demand for soy oil is expected to increase significantly as renewable diesel capacity goes&nbsp;from 1.5-1.6 billion gallons in the US currently to 6 billion gallons by 2030, with experts suggesting market size for renewable diesel and sustainable aviation fuel to be 25 billion gallons/year in the US alone and 100 billion globally. Resulting increases in soy oil prices should improve processors’ margins and can result in market support for higher soybean prices that farmers can capture to help offset increasing crop input costs.</p>
<p>Bio-based ag-tech industry continues to gain.&nbsp;Results of a recently completed 40-year farm-level testing and analysis&nbsp;published by Rodale Institute&nbsp;concluded that organic farming produces yields of cash crops that are at least equal to conventional systems and outperform the latter in areas/periods of high stress, such as drought. Furthermore, it does so by continuously improving soil conditions, such as beneficial microorganism variety and water retention. A growing part of organic farming is the use of bio-based ag inputs, such as pesticides, fertilizers, and soil conditioners. Higher prices of conventional chemical-based crop inputs seen in the last two years (and that may stick for a while) have made bio-based alternatives more competitive from a cost/acre perspective, while continuous R&amp;D in the bio-ag industry is closing the gap on efficacy. Even in Europe, where&nbsp;country-specific regulations and registration requirements&nbsp;add to product launch costs, regulatory development costs for a biopesticide are €285K on average, compared with €0.5-1M for a conventional pesticide, while taking 1-1.5 years to complete versus three to five years for a conventional product. The importance of organic agriculture and particularly bio-based crop protection solutions is&nbsp;gaining increased recognition as a major factor in solving regional food security issues, reducing land use and lowering farming’s environmental impact.</p>
<p>Governments continue to play an important role.&nbsp;We alluded to the possible need for EU countries to harmonize their ag-related rules and regulations, at least when it comes to crop protection product approvals. Governments have a critical role to play in ensuring food security does not become an issue in the near to mid-term. Brazil, LATAM’s largest ag producing nation, finally saw its senate finally approve a new&nbsp;Safer Food Law&nbsp;that codified, updated, harmonized, and modernized the country’s existing laws when it comes to food safety, pesticide approval, and registration process. As more clarity is better than less clarity, especially when it comes to government dealings, we see this as a positive for companies that are looking to Brazil as a major growth opportunity, such as FMC and BIOX. Speaking of governments,&nbsp;talks between the US and Mexico related to importing GMO corn&nbsp;and use of glyphosate in the country continue, with both sides looking for a workable compromise that would provide opportunities for US seed companies and improve North American food security, while preserving Mexico’s bicultural heritage and ability to remain self sufficient in corn for tortillas. Mexico is a large and important agricultural market, whose value goes way beyond corn. Its size and proximity are an important factor in ag-input companies’ efforts to grow their business in the region. The value of the ag sector to the Mexican economy and the direction the industry is heading have been discussed in a&nbsp;recent interview&nbsp;with Luis Eduardo González Cepeda, President of the Mexican Union of Manufacturers and Formulators of Agrochemicals A.C. (UMFFAAC).</p>
<h2>Automotive &amp; Transportation</h2>
<p>2023 may not be better than 2022.&nbsp;We noted previously continuing supply chain issues that are affecting automotive production as we begin the year. Semiconductor shortages have been a consistent theme in supple chain woes, with 2022 seeing 4.4 million units lost from production due to the issue, according to AutoForecast Solutions. The company expects a further 2.7 million units to be lost this year, suggesting production schedules will continue to suffer from chip shortages well into 2023. Meanwhile, 2022 is ending on a sour note when it come to new vehicle registrations, with&nbsp;US December sales&nbsp;declining 8% Y/Y, matching the&nbsp;declines seen in France. Meanwhile, Stellantis’&nbsp;CEO is raising the alarm&nbsp;Chinese automotive imports may pause to the European car industry, particularly in the entry level and budget segments of the market, which if left unaddressed by the EU, may necessitate significant logistical rearrangements as European OEMs potentially relocate more of their production out of the high-cost Western European jurisdictions.</p>
<p>With vehicle production globally remaining well below 2019 levels and Y/Y monthly comps likely to remain subdued, we see little opportunity for companies in our industry who rely on the automotive market for a significant part of their sales to exceed investor expectations when it comes to sales growth, an important consideration when it comes to stocks’ valuation multiples. We therefore remain cautious on PPG, AXTA, AVNT, FUL, RPM, and SHW and see better opportunity for investors in 2H23.</p>
<h2>Rating &amp; Price Target Changes</h2>
<p>AXTA –&nbsp;Barclays raised its price target (PT) to $30 from $28 and reiterated its Overweight rating.</p>
<p>RPM –&nbsp;CFRA maintained its Hold rating and $98 PT, while BMO lowered its PT to $112 from $120 but reiterated its Outperform rating.</p>
<h2>Recent Reports &amp; Future Events</h2>
<p>Westwater Resources, Inc. (WWR) – Taking a Major Step Forward with Ultra-PMG™ Letter of Intent</p>
<p>Westwater Resources, Inc. (WWR) – Fireside Chat: Chief Financial Officer Steven Cates January 19, 2023, at 2:00 pm ET</p>
<p>Westwater Resources, Inc. (WWR) – Management Series Report – Graphite Inflection Point is Here</p>
<p>Westwater Resources, Inc. (WWR) – Fireside Chat: VP of Sales &amp; Marketing Jay Wago, December 13, 2022, at 11:30 am EST</p>
<p>TMC the metals company (TMC) – Management Series Report – Collecting Nodules and Scientific Data as Regulation Timeline Nears</p>
<p>TMC the metals company, Inc. (TMC) – Initiation of Coverage – Tapping Untapped Resource to Address Unmet Need</p>
<p>Westwater Resources, Inc. (WWR) – Company Update Report – Steady Progress Deserves a Closer Look</p>
<h3>DISCLOSURES</h3>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Dmitry Silversteyn, who is the writer of this report, covers the BioEconomy and Chemicals &amp; Materials Technology sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>
</div>

KEY POINTS

WTR-CMI last week.&nbsp;The market ended last week in positive territory, with the S&amp;P 500 and the Russell 2000 posting returns of 1.2% and 1.5%, respectively. Our WTR-CMI index of 30 chemicals and materials technology stocks nearly kept pace, improving 1.1% for the week. PLL led the way with an 18.5% jump, as the company announced a renegotiated&nbsp;supply contract with TSLA&nbsp;that now includes selling prices linked to Li-OH market prices at the time of delivery. At the other end, RMP’s guidance of slowing growth and stubbornly high raw material costs led to an 11.8% decline in its stock, which also dragged down the shares of SHW.
LAC matriculates the ball down the field.&nbsp;The hearing at the&nbsp;US District Court on January 5&nbsp;appears to be the last step in Lithium Americas’ efforts to meet the conditions that would allow it to begin construction work at its Thacker Pass, NV lithium site. The judge’s decision is expected in the next couple months.
Not a good way to start the year.&nbsp;March delivery&nbsp;prices of all three grain commodities—corn, soybeans, and wheat—took a step down as 2023 got underway, partly due to a lack of export sales and partly in anticipation of the USDA’s first report due out later this week. With interest rates and input costs significantly higher Y/Y compared with the start of 2022, high grain prices will be required for farmers to decide what and how much to plant, which will determine their demand for ag inputs in the upcoming season.
Another step toward circular economy.&nbsp;FUL recently partnered&nbsp;with HSMG to provide its water-based adhesives together with HSMG’s&nbsp;biodegradable and recyclable coating&nbsp;for disposable water cups, estimated to reduce the carbon footprint of these disposables by 40%.
Stumble at the gate.&nbsp;VW plans to&nbsp;reduce production at its Wolfsburg plant&nbsp;in January on continued supply chain disruptions.

WTR-CMI WEEKLY PERFORMANCE



Source: Y-Charts as of January 6 close

Ag-Tech &amp; Bio-Ag
Are soybeans the next lithium?&nbsp;The short answer is probably not. However, an emerging market is driving demand for soybeans and that market is biofuels, specifically biodiesel, which can be produced from soybean oil. There are currently 18 new soybean processing facilities in the works in the US and many more are on the drawing board. As demand for renewable diesel and eventually jet fuel increases, partially in response to government regulations regarding the use of renewable fuels, partially due to the high cost of diesel and other market forces, demand for soy oil is expected to increase significantly as renewable diesel capacity goes&nbsp;from 1.5-1.6 billion gallons in the US currently to 6 billion gallons by 2030, with experts suggesting market size for renewable diesel and sustainable aviation fuel to be 25 billion gallons/year in the US alone and 100 billion globally. Resulting increases in soy oil prices should improve processors’ margins and can result in market support for higher soybean prices that farmers can capture to help offset increasing crop input costs.
Bio-based ag-tech industry continues to gain.&nbsp;Results of a recently completed 40-year farm-level testing and analysis&nbsp;published by Rodale Institute&nbsp;concluded that organic farming produces yields of cash crops that are at least equal to conventional systems and outperform the latter in areas/periods of high stress, such as drought. Furthermore, it does so by continuously improving soil conditions, such as beneficial microorganism variety and water retention. A growing part of organic farming is the use of bio-based ag inputs, such as pesticides, fertilizers, and soil conditioners. Higher prices of conventional chemical-based crop inputs seen in the last two years (and that may stick for a while) have made bio-based alternatives more competitive from a cost/acre perspective, while continuous R&amp;D in the bio-ag industry is closing the gap on efficacy. Even in Europe, where&nbsp;country-specific regulations and registration requirements&nbsp;add to product launch costs, regulatory development costs for a biopesticide are €285K on average, compared with €0.5-1M for a conventional pesticide, while taking 1-1.5 years to complete versus three to five years for a conventional product. The importance of organic agriculture and particularly bio-based crop protection solutions is&nbsp;gaining increased recognition as a major factor in solving regional food security issues, reducing land use and lowering farming’s environmental impact.
Governments continue to play an important role.&nbsp;We alluded to the possible need for EU countries to harmonize their ag-related rules and regulations, at least when it comes to crop protection product approvals. Governments have a critical role to play in ensuring food security does not become an issue in the near to mid-term. Brazil, LATAM’s largest ag producing nation, finally saw its senate finally approve a new&nbsp;Safer Food Law&nbsp;that codified, updated, harmonized, and modernized the country’s existing laws when it comes to food safety, pesticide approval, and registration process. As more clarity is better than less clarity, especially when it comes to government dealings, we see this as a positive for companies that are looking to Brazil as a major growth opportunity, such as FMC and BIOX. Speaking of governments,&nbsp;talks between the US and Mexico related to importing GMO corn&nbsp;and use of glyphosate in the country continue, with both sides looking for a workable compromise that would provide opportunities for US seed companies and improve North American food security, while preserving Mexico’s bicultural heritage and ability to remain self sufficient in corn for tortillas. Mexico is a large and important agricultural market, whose value goes way beyond corn. Its size and proximity are an important factor in ag-input companies’ efforts to grow their business in the region. The value of the ag sector to the Mexican economy and the direction the industry is heading have been discussed in a&nbsp;recent interview&nbsp;with Luis Eduardo González Cepeda, President of the Mexican Union of Manufacturers and Formulators of Agrochemicals A.C. (UMFFAAC).
Automotive &amp; Transportation
2023 may not be better than 2022.&nbsp;We noted previously continuing supply chain issues that are affecting automotive production as we begin the year. Semiconductor shortages have been a consistent theme in supple chain woes, with 2022 seeing 4.4 million units lost from production due to the issue, according to AutoForecast Solutions. The company expects a further 2.7 million units to be lost this year, suggesting production schedules will continue to suffer from chip shortages well into 2023. Meanwhile, 2022 is ending on a sour note when it come to new vehicle registrations, with&nbsp;US December sales&nbsp;declining 8% Y/Y, matching the&nbsp;declines seen in France. Meanwhile, Stellantis’&nbsp;CEO is raising the alarm&nbsp;Chinese automotive imports may pause to the European car industry, particularly in the entry level and budget segments of the market, which if left unaddressed by the EU, may necessitate significant logistical rearrangements as European OEMs potentially relocate more of their production out of the high-cost Western European jurisdictions.
With vehicle production globally remaining well below 2019 levels and Y/Y monthly comps likely to remain subdued, we see little opportunity for companies in our industry who rely on the automotive market for a significant part of their sales to exceed investor expectations when it comes to sales growth, an important consideration when it comes to stocks’ valuation multiples. We therefore remain cautious on PPG, AXTA, AVNT, FUL, RPM, and SHW and see better opportunity for investors in 2H23.
Rating &amp; Price Target Changes
AXTA –&nbsp;Barclays raised its price target (PT) to $30 from $28 and reiterated its Overweight rating.
RPM –&nbsp;CFRA maintained its Hold rating and $98 PT, while BMO lowered its PT to $112 from $120 but reiterated its Outperform rating.
Recent Reports &amp; Future Events
Westwater Resources, Inc. (WWR) – Taking a Major Step Forward with Ultra-PMG™ Letter of Intent
Westwater Resources, Inc. (WWR) – Fireside Chat: Chief Financial Officer Steven Cates January 19, 2023, at 2:00 pm ET
Westwater Resources, Inc. (WWR) – Management Series Report – Graphite Inflection Point is Here
Westwater Resources, Inc. (WWR) – Fireside Chat: VP of Sales &amp; Marketing Jay Wago, December 13, 2022, at 11:30 am EST
TMC the metals company (TMC) – Management Series Report – Collecting Nodules and Scientific Data as Regulation Timeline Nears
TMC the metals company, Inc. (TMC) – Initiation of Coverage – Tapping Untapped Resource to Address Unmet Need
Westwater Resources, Inc. (WWR) – Company Update Report – Steady Progress Deserves a Closer Look
DISCLOSURES
Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Dmitry Silversteyn, who is the writer of this report, covers the BioEconomy and Chemicals &amp; Materials Technology sectors for WTR. Mr. Silversteyn and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.


Compass Minerals International, Inc (CMP US)

Mat-Chem Notes For the Week Ended January 6, 2023