Mpac – FREYR Progress

In my previous article I detailed my research into Mpac’s battery cell manufacturing prospects, referring in my conclusion to “interim developments that could be announced at any time“.

On Wednesday (29/6/2022) FREYR announced that they had sanctioned construction of their first gigafactory. This will now be called “Giga Arctic”, a vast improvement on the old name of “Combined Gigafactories 1&2”.

Larger potential contract

The major surprise for me is that the factory will now have a capacity 2.5x larger than previously planned.

As I reported earlier, Mpac were awarded a $13.8m contract as sole supplier for the core “casting & unit cell assembly machinery” for FREYR’s customer qualification plant (CQP).

I now estimate the size of the equivalent Giga Arctic contract will be in the order of 20x that of the QCP, implying $276m. This takes into account scale advantages for what is a 77x larger plant (29GWh pa versus 0.375GWh pa).

At current exchange rates that is £226m compared to Mpac’s entire turnover last year of £105m.

As a sanity check, that would mean the machinery that actually makes the cells, and thus far sourced from the only named equipment supplier in FREYR’s S-1 would be 16% of the build cost now estimated at $1.7bn. This compares to the QCP contract being 20% of my estimate of $70m for the total build costs (a cost overrun of 100% on January 2021 plans). Other metrics can be found in my earlier article.

Deliverable by Mpac

The question arises whether such a large contract could possibly be delivered by Mpac or whether FREYR will need to look elsewhere.

One reference point is the incredible performance of various companies during COVID. For example Novacyt (NCYT) sold physical product of £312m in 2020 versus only £13m in 2019. They did this with the help of specialist consultants and some outsourcing, but they were a long established company just waiting for such an opportunity, and they rose to the challenge without any visible production issues.

The second point is that, although the Giga Arctic is now bigger than planned, Mpac had always been optioned for a massive ramp up in production to supply it, and with the start of production date pushed back they now have more time to do so. There are eight production lines which could be delivered incrementally.

Thirdly, capital is unlikely to prove an issue. The contract for the CQP involved a 40% payment on contract signing and a further 40% on commencement of equipment production.

The last point is that there are simply no other suppliers known to be in the frame. Mpac were sole supplier for the CQP and this is reported by both sides to be progressing well, albeit the building construction was delayed by COVID.

Initial funding in place

Another question investors should ask themselves is whether FREYR can actually afford to sign the contract with Mpac and start the construction.

Yesterday’s announcement included some excellent news on that front with letters of intent received for government loans and guarantees of up to €400, validating an advantage of being based in Norway I previously cited. This unlocks further debt financing giving a total of $1.6bn. Including the $523m of cash on their balance sheet that originated from SPAC investors brings resources to $2.1bn. This is clearly more than enough to order long lead-time items such as machinery from MPac.

They also announced (I believe for the first time), a further 25 GWh conditional offtake agreement (COA), bringing the total to 125GWh, further supporting project financing.

Conclusion

Returns for FREYR investors remain uncertain, especially to those caught up in the SPAC madness, but shareholders seem to have taken the news of a significant further increase in costs in their stride. But for Mpac a larger plant and higher budget can be nothing but positive. And I have already shown that the underlying technology is proven.

I do not believe FREYR could have made today’s statement without deep discussions with Mpac on ways to increase production within the same footprint and number of lines. Furthermore, a firm contract will need to be forthcoming, certainly within the next year, and probably quite soon in order for production to start in H1 of 2024. Therefore I believe an announcement from Mpac could be imminent.

I continue to believe that progress here is completely below the radar and that there is nothing in Mpac’s valuation for potential gamechanging sales and profits.

The best place to contact me, see my latest views and to discuss Mpac is Small Caps Live, although feel free to use the tools provided here also.

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