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 HIGHLIGHTS</h3>
<ul>
<li>WTR-CMI last week.&nbsp;Reversing some of the gains from previous weeks, both the S&amp;P 500 and Russell 2000 posted W/W returns of (0.7%) and (1.8%), respectively. Our WTR-CMI index declined 3.2% for the week, driven by double-digit declines in lithium stocks on&nbsp;concerns of slowing demand. EAF was also among the laggards in our index, declining 12.3% despite&nbsp;announcing the restart&nbsp;of its Mexican plant. LAC modestly outperformed its lithium peers by declining 11.6% versus 13-15% declines posted by its peers in the index, as the company announced its&nbsp;exercise of warrants&nbsp;of Arena Minerals.</li>
<li>Ag-chem innovations continue.&nbsp;The Brazilian government approved registration of 46 new ag products for use as pesticides in the country, including seven low-impact ingredients approved for organic agriculture. A bio-based insecticide using a novel organism stands out in the new crop of approvals. The country has registered 552 low-impact biologic ingredients since 2000 and 43 such products in 2022 alone. We believe the region provides a great environment for growth of bio-based inputs and other ag-technology, benefiting companies with a strong share in the region, such as BIOX.</li>
<li>Better October auto registrations.&nbsp;The European ACEA reported&nbsp;October and YTD&nbsp;new vehicle registrations in Europe, which showed a 12.2% Y/Y improvement, but an 8.1% decline YTD. With tougher November and December comps, the three months of positive Y/Y comps may be coming to an end, and with&nbsp;2023 GDP growth in the region&nbsp;forecasted at 0.3%, next year may be a tough one for the industry as well.</li>
<li>ECVT’s secondary oversubscribed.&nbsp;The secondary offering&nbsp;by funds affiliated with CCMP Capital Advisors, LP was upsized from 16 million to 17.5 million shares at $8.25 per share. All proceeds will go to the selling shareholders, with ECVT purchasing 8 million of the shares.</li>
</ul>
<h3>WTR-CMI WEEKLY PERFORMANCE</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/311/469/original/image_40928737021669159231798.png?1669159233" class="editor-image img-responsive" data-smartkarma-image-id="311469"></figure>
<div class="content-remarks">
<p>Source: Y-Charts as of November 18 close</p>
</div>
<h2>Ag-Tech and Bio-Ag</h2>
<p>Dealing with the impact of climate change.&nbsp;As the drought that has been afflicting Western United States for the past several years is&nbsp;apparently moving further east, US farmers will have to find ways of dealing with the spreading climate change. Drier conditions typically mean less use of fungicides and higher usage of herbicides, as dry conditions promote growth and seeding of invasive plants, robbing planted acres of yield. This may be a mild negative for FMC, which is particularly strong in insecticides and fungicides, but is under-represented in herbicides. The implied greater demand for herbicides may be an issue as well. We already saw tight supply conditions and significant price increases for herbicides in the last crop season. It doesn’t look like logistics, fuel costs, or&nbsp;herbicide availability&nbsp;is going to improve significantly in the near term, suggesting continued risk of farmers not being able to procure sufficient herbicide volumes. It may also require more farmers to adopt drought-resistant seed hybrids, such as the drought-resistant HB4 wheat and soybeans produced and marketed by BIOX. As we mentioned last week, controlled environment agriculture (CEA) may play an increasing role in meeting global food demand, given its lesser space requirements and the ability&nbsp;to better utilize limited resources such as water, fertilizers, and pesticides—a definite advantage in the current climate.</p>
<h2>Energy &amp; Battery Technology</h2>
<p>Lithium-ion workhorse battery growth to continue.&nbsp;Demand for lithium-ion batteries, whether the cathode is the higher-performing nickel-cobalt-manganese (NCM) or the less expensive Lithium Iron Phosphate (LFP), is expected to increase at an 18-20% CAGR over the next decade to reach $430 billion market size by 2033, according to a&nbsp;report&nbsp;published by IDTechEx. Such high growth is understandably driving outsized demand for battery materials, especially metals such as lithium, nickel, graphite, and cobalt, among others. Lithium in particular has experienced phenomenal price inflation as global EV builds accelerated over the last two years, despite an overall slump in auto production, and metal supply concerns grew. Despite the recent easing in lithium prices, one of the metal’s top producers, Chilean SQM, is signaling that&nbsp;high prices of lithium are likely to continue&nbsp;to be a market feature in 2023 and possibly beyond, as new lithium mining capacity has been slow to come on versus expectations.</p>
<p>Higher costs translate into higher prices and may translate into slower adoption rates.&nbsp;As a consequence of rapid increases in metal prices, particularly those of lithium, high-grade nickel and cobalt, EVs are experiencing a&nbsp;higher level of price inflation&nbsp;in 2022 than ICE vehicles, sending the price curves between the two in the wrong direction and leading to delayed realization of the long-awaited price parity between the two power systems. While working on cheaper battery chemistries may be one solution, it looks to be more promise than reality at this point, although&nbsp;new battery chemistries&nbsp;that would circumvent Chinese dominance of traditional EV battery production would be a welcome development.</p>
<p>Market based solutions – sans government interference.&nbsp;A better way to increase supply and thereby lower the cost of metals would be to streamline and simplify the regulatory and permitting process for developing new metal resources and most importantly, encouraging construction of processing and refining facilities that can produce the materials required by battery manufacturers and the EV industry overall. The recent election in US Congress, which gave the Republican party a small majority in the House of Representatives, may&nbsp;lead to just such a development, if Republican politicians are to be believed and relied on. Unfortunately, not all governments, or political parties are on the same page when it comes to options and solutions that would enable those same governments to achieve their lofty environmental goals and specific time targets. Europe represents a good example of government entities working at cross purposes. While the EU is searching for ways to improve its domestic supply chain and reduce its EV industry’s dependence on China, going so far as to draft a&nbsp;Critical Raw Materials Act, the European Commission is considering the recommendation by the European Chemicals Agency to classify lithium compounds as dangerous for human health, which would all but preclude development of lithium mines and lithium hydroxide conversion plants in the region.</p>
<p>The problem with nickel.&nbsp;According to BHP Group Ltd., one of the largest global nickel producers, demand for the metal may increase&nbsp;fourfold over the next 30 years, driven by growth of EVs, as the company saw its own nickel production is now increasingly going into that market (85% of production currently, up from 10% just six years ago). Unfortunately for the industry, much of the current supply of the metal is coming from Russia and Indonesia and almost 60% of it is processed into battery-grade materials in China, which raises geopolitical concerns. Furthermore, virtually all the new supply expected to come online over the next decade to try to meet market demand will do so in Indonesia. The country, looking to replicate Chinese strategy, is already looking for ways to control the supply and therefore the price of the metal, with its government approaching that of Australia and Canada to ascertain the latter’s appetite for&nbsp;establishing an OPEC-like cartel&nbsp;to control nickel mining and production. While both Western governments rebuffed the idea, it is clear that a world reliant on Indonesia and Russia for its nickel supply is not an attractive eventuality.</p>
<p>Geopolitics aside, onshore mining is an inherently dirty business, prone to environmental problems. Developing new resources that lie below Indonesia’s rainforests carries a significant environmental price tag, from deforestation of one of the most biodiverse places on the planet, to the impact on indigenous communities, to the CO2&nbsp;emissions associated with mining, to the problem of mine tailings. The latter has been underscored recently by the announcement of a&nbsp;Goro nickel mine&nbsp;in New Caledonia having to reduce production as it deals with liquid leaks from its tailing dam.</p>
<p>There is a better alternative, however, involving the development of the largest global untapped nickel resource, which just happens to lie at the bottom of the Pacific Ocean, and which can meet the projected nickel needs by itself, once fully developed. One company, TMC the metals company, Inc., has spent years exploring and preparing to develop this resource.&nbsp;See below for a link to our recently held fireside chat with TMC management, discussing the opportunity, the regulatory environment, and the progress the company is making toward exploitation of this phenomenal resource.</p>
<h2>Rating and Price Target Changes</h2>
<p>CTVA –&nbsp;Loop Capital downgraded the stock to Hold from Buy and raised its price target (PT) to $71 from $70; UBS also downgraded the stock to Neutral from Buy and raised its PT to $73 from $70; Barclays raised its PT to $75 from $71 and reiterated its Overweight rating.</p>
<p>FMC –&nbsp;Loop Capital upgraded the stock to Buy from Hold and raised its PT to $149 from $132.</p>
<p>LAC –&nbsp;Evercore ISI initiated coverage of the stock with an Outperform rating and $35 PT.</p>
<p>VVV –&nbsp;CFRA maintained its Neutral rating and $34 PT following the company’s earnings release.</p>
<h2>Recent Reports and Future Events</h2>
<p>TMC the metals company (TMC) – Management Series Report – Collecting Nodules and Scientific Data as Regulation Timeline Nears</p>
<p>Fireside Chat: Chairman &amp; CEO Gerard Barron, CFO Craig Shesky, and Project Director for NORI Grant Lindner, November 16, 2022, at 10:00 am EST</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>
<div></div>
<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>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s 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, agents or affiliate 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>

KEY HIGHLIGHTS

WTR-CMI last week.&nbsp;Reversing some of the gains from previous weeks, both the S&amp;P 500 and Russell 2000 posted W/W returns of (0.7%) and (1.8%), respectively. Our WTR-CMI index declined 3.2% for the week, driven by double-digit declines in lithium stocks on&nbsp;concerns of slowing demand. EAF was also among the laggards in our index, declining 12.3% despite&nbsp;announcing the restart&nbsp;of its Mexican plant. LAC modestly outperformed its lithium peers by declining 11.6% versus 13-15% declines posted by its peers in the index, as the company announced its&nbsp;exercise of warrants&nbsp;of Arena Minerals.
Ag-chem innovations continue.&nbsp;The Brazilian government approved registration of 46 new ag products for use as pesticides in the country, including seven low-impact ingredients approved for organic agriculture. A bio-based insecticide using a novel organism stands out in the new crop of approvals. The country has registered 552 low-impact biologic ingredients since 2000 and 43 such products in 2022 alone. We believe the region provides a great environment for growth of bio-based inputs and other ag-technology, benefiting companies with a strong share in the region, such as BIOX.
Better October auto registrations.&nbsp;The European ACEA reported&nbsp;October and YTD&nbsp;new vehicle registrations in Europe, which showed a 12.2% Y/Y improvement, but an 8.1% decline YTD. With tougher November and December comps, the three months of positive Y/Y comps may be coming to an end, and with&nbsp;2023 GDP growth in the region&nbsp;forecasted at 0.3%, next year may be a tough one for the industry as well.
ECVT’s secondary oversubscribed.&nbsp;The secondary offering&nbsp;by funds affiliated with CCMP Capital Advisors, LP was upsized from 16 million to 17.5 million shares at $8.25 per share. All proceeds will go to the selling shareholders, with ECVT purchasing 8 million of the shares.

WTR-CMI WEEKLY PERFORMANCE


Source: Y-Charts as of November 18 close

Ag-Tech and Bio-Ag
Dealing with the impact of climate change.&nbsp;As the drought that has been afflicting Western United States for the past several years is&nbsp;apparently moving further east, US farmers will have to find ways of dealing with the spreading climate change. Drier conditions typically mean less use of fungicides and higher usage of herbicides, as dry conditions promote growth and seeding of invasive plants, robbing planted acres of yield. This may be a mild negative for FMC, which is particularly strong in insecticides and fungicides, but is under-represented in herbicides. The implied greater demand for herbicides may be an issue as well. We already saw tight supply conditions and significant price increases for herbicides in the last crop season. It doesn’t look like logistics, fuel costs, or&nbsp;herbicide availability&nbsp;is going to improve significantly in the near term, suggesting continued risk of farmers not being able to procure sufficient herbicide volumes. It may also require more farmers to adopt drought-resistant seed hybrids, such as the drought-resistant HB4 wheat and soybeans produced and marketed by BIOX. As we mentioned last week, controlled environment agriculture (CEA) may play an increasing role in meeting global food demand, given its lesser space requirements and the ability&nbsp;to better utilize limited resources such as water, fertilizers, and pesticides—a definite advantage in the current climate.
Energy &amp; Battery Technology
Lithium-ion workhorse battery growth to continue.&nbsp;Demand for lithium-ion batteries, whether the cathode is the higher-performing nickel-cobalt-manganese (NCM) or the less expensive Lithium Iron Phosphate (LFP), is expected to increase at an 18-20% CAGR over the next decade to reach $430 billion market size by 2033, according to a&nbsp;report&nbsp;published by IDTechEx. Such high growth is understandably driving outsized demand for battery materials, especially metals such as lithium, nickel, graphite, and cobalt, among others. Lithium in particular has experienced phenomenal price inflation as global EV builds accelerated over the last two years, despite an overall slump in auto production, and metal supply concerns grew. Despite the recent easing in lithium prices, one of the metal’s top producers, Chilean SQM, is signaling that&nbsp;high prices of lithium are likely to continue&nbsp;to be a market feature in 2023 and possibly beyond, as new lithium mining capacity has been slow to come on versus expectations.
Higher costs translate into higher prices and may translate into slower adoption rates.&nbsp;As a consequence of rapid increases in metal prices, particularly those of lithium, high-grade nickel and cobalt, EVs are experiencing a&nbsp;higher level of price inflation&nbsp;in 2022 than ICE vehicles, sending the price curves between the two in the wrong direction and leading to delayed realization of the long-awaited price parity between the two power systems. While working on cheaper battery chemistries may be one solution, it looks to be more promise than reality at this point, although&nbsp;new battery chemistries&nbsp;that would circumvent Chinese dominance of traditional EV battery production would be a welcome development.
Market based solutions – sans government interference.&nbsp;A better way to increase supply and thereby lower the cost of metals would be to streamline and simplify the regulatory and permitting process for developing new metal resources and most importantly, encouraging construction of processing and refining facilities that can produce the materials required by battery manufacturers and the EV industry overall. The recent election in US Congress, which gave the Republican party a small majority in the House of Representatives, may&nbsp;lead to just such a development, if Republican politicians are to be believed and relied on. Unfortunately, not all governments, or political parties are on the same page when it comes to options and solutions that would enable those same governments to achieve their lofty environmental goals and specific time targets. Europe represents a good example of government entities working at cross purposes. While the EU is searching for ways to improve its domestic supply chain and reduce its EV industry’s dependence on China, going so far as to draft a&nbsp;Critical Raw Materials Act, the European Commission is considering the recommendation by the European Chemicals Agency to classify lithium compounds as dangerous for human health, which would all but preclude development of lithium mines and lithium hydroxide conversion plants in the region.
The problem with nickel.&nbsp;According to BHP Group Ltd., one of the largest global nickel producers, demand for the metal may increase&nbsp;fourfold over the next 30 years, driven by growth of EVs, as the company saw its own nickel production is now increasingly going into that market (85% of production currently, up from 10% just six years ago). Unfortunately for the industry, much of the current supply of the metal is coming from Russia and Indonesia and almost 60% of it is processed into battery-grade materials in China, which raises geopolitical concerns. Furthermore, virtually all the new supply expected to come online over the next decade to try to meet market demand will do so in Indonesia. The country, looking to replicate Chinese strategy, is already looking for ways to control the supply and therefore the price of the metal, with its government approaching that of Australia and Canada to ascertain the latter’s appetite for&nbsp;establishing an OPEC-like cartel&nbsp;to control nickel mining and production. While both Western governments rebuffed the idea, it is clear that a world reliant on Indonesia and Russia for its nickel supply is not an attractive eventuality.
Geopolitics aside, onshore mining is an inherently dirty business, prone to environmental problems. Developing new resources that lie below Indonesia’s rainforests carries a significant environmental price tag, from deforestation of one of the most biodiverse places on the planet, to the impact on indigenous communities, to the CO2&nbsp;emissions associated with mining, to the problem of mine tailings. The latter has been underscored recently by the announcement of a&nbsp;Goro nickel mine&nbsp;in New Caledonia having to reduce production as it deals with liquid leaks from its tailing dam.
There is a better alternative, however, involving the development of the largest global untapped nickel resource, which just happens to lie at the bottom of the Pacific Ocean, and which can meet the projected nickel needs by itself, once fully developed. One company, TMC the metals company, Inc., has spent years exploring and preparing to develop this resource.&nbsp;See below for a link to our recently held fireside chat with TMC management, discussing the opportunity, the regulatory environment, and the progress the company is making toward exploitation of this phenomenal resource.
Rating and Price Target Changes
CTVA –&nbsp;Loop Capital downgraded the stock to Hold from Buy and raised its price target (PT) to $71 from $70; UBS also downgraded the stock to Neutral from Buy and raised its PT to $73 from $70; Barclays raised its PT to $75 from $71 and reiterated its Overweight rating.
FMC –&nbsp;Loop Capital upgraded the stock to Buy from Hold and raised its PT to $149 from $132.
LAC –&nbsp;Evercore ISI initiated coverage of the stock with an Outperform rating and $35 PT.
VVV –&nbsp;CFRA maintained its Neutral rating and $34 PT following the company’s earnings release.
Recent Reports and Future Events
TMC the metals company (TMC) – Management Series Report – Collecting Nodules and Scientific Data as Regulation Timeline Nears
Fireside Chat: Chairman &amp; CEO Gerard Barron, CFO Craig Shesky, and Project Director for NORI Grant Lindner, November 16, 2022, at 10:00 am EST
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.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for 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 that WTR or an affiliate might offer to clients.  The manner of WTR’s 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, agents or affiliate 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.

Mat-Chem Notes For the Week Ended November 18, 2022