The 3D printing industry has experienced a phenomenal surge in interest in the past year and a half. As a result, many of the sector’s stocks have significantly outperformed the market but now have sky high valuations. In a gold rush like the one 3D printing is experiencing, investors should also look to those companies selling the picks and shovels that 3D printers will need in the years to come. I believe that PyroGenesis (PYRNF) in the U.S. and (PYR.V) on the Toronto Venture exchange is one such company.
PyroGenesis is an engineering and environmental solutions company based in Montreal, Canada. Their business focuses on the design, development, manufacture and commercialization of advanced plasma processes. The company focuses on four product and service lines: plasma waste processes, high temperature processing, engineering services, and plasma torches. Former and current clientele include: US Air Force, US Navy, Newport News Shipbuilding (formerly Northrop Grumman), Carnival Cruise Lines, and Advanced Powders and Coating (recently acquired by Arcam).
PyroGenesis sells their proprietary plasma torches as individual units. The company also offers complete systems they have developed to address specific needs, some of which are outlined below.
Nanoparticle production systems
- Converting titanium fluoride into titanium metal powder used in 3D printing (Titanium Production Pilot Plant).
- Converting titanium wire into finely atomized powder used in 3D printing (Plasma Atomization Reactor).
- Producing carbon nanotubes and fullerenes.
Plasma waste processes
- Inerting and compacting otherwise hazardous grate and fly ash byproducts from incinerators (PAGV system)
- Destroying and compacting municipal waste with minimal segregation of material types; while also generating usable excess heat (PAWDS Marine and Land based systems)
- Transforming virtually any organic waste into gaseous fuel which can be used to generate electricity or heat. Inorganic waste is transformed into an inert slag which can be used in construction (PRRS system).
- Destroying ozone depleting substances cleanly (SPARC system).
- Destroying chemical warfare agents such as mustard gas safely (PACWADS system).
Oil and Gas processes
- Clean processing of oil and gas production wastes through novel technologies currently under development.
This extensive product portfolio, under development for years, has begun to gain traction in the market. Revenues increased 170% year over year in Q3 2013, Q4 results are expected in late
April. Increases in orders have continued beyond Q3 as evidenced by the recent announcement that their 2014 backlog exceeds their 2013 revenues by 150%. It is important to emphasize that this is a backlog 150% of 2013 revenues in February for a company in the early stages of commercialization. PyroGenesis still has another ten months to fulfill current orders while continuing sales efforts. The 150% mark also came prior to the announcement of three additional contract wins in the oil and gas industry which they anticipate will lead to multi-million dollar orders in the coming quarters. The signing of one of these potential multi-million dollar deals would increase current back log to 350% or more of 2013 revenues based on PyroGenesis’ estimates of the contract values.
The plasma process industry is relatively young but growing quickly. PyroGenesis’ closest competitor is a company called Alter NRG (ANRGF). Alter NRG recently signed a $15M contract with a municipality in China. Given the disruptive applications of plasma technology, the early life stages of these two companies, current backlogs and pending contracts, this looks like a sector that is poised to grow extremely rapidly. This is an industry that may grow even more rapidly than 3D printing in my opinion. The table below shows recent revenues for both companies and clearly demonstrates the impact that a multi-million dollar contract would have on their valuations. With a price to sales ratio of 9.84, an impressive backlog, and more wins on the horizon, this is a high growth company at a significant discount compared to other technology sectors.
|Company||Q3 2013 Revenue||Q2 2013||Q1 2013||Q4 2012||EPS Q3||Price to Sales||Market Cap||Shares Outstanding|
|Alter NRG (ANRGF)||
High Grade Titanium Powder Production for 3D Printing Applications
One of the reasons I favor PyroGenesis between these two companies is its exposure to the 3D printing market. They recently acquired ownership rights to a titanium powder production pilot plant they had designed for a multinational metallurgic and mining company. The plant produces titanium metal powder from titanium trifluoride through the disproportionation reaction. The powder generated is aerospace quality which is important given the current focus of the 3D market on aerospace solutions for GE, Boeing and Airbus. PyroGenesis also built the plasma atomization reactor that the Advanced Powders and Coatings division of Raymor (AP&C) utilizes for titanium powder production. There is no mention of metal powder production technology on the Alter NRG website. Therefore the production of these 3D printing related technologies gives PyroGenesis exposure to an additional revenue line that is predicted to grow at a rapid pace.
PyroGenesis’ relationship with the US Military also provides an ongoing source of significant and secure revenue. Their product is specified into all future Ford-Class aircraft carriers. The system is cheaper than previous incinerators, reduces waste volume by up to 98%, is 50% lighter than an incinerator, and is more environmentally friendly. The company projects the potential market for retrofits into older classes of ships at $50M. Such advantages may also be attractive to countries such as China who are currently planning to build aircraft carriers.
PyroGenesis currently has a market cap of $49.1M which seems very cheap. One useful indicator that the company is trading at a discount is Arcam AB’s (AMAVF) recent acquisition of AP&C for approximately $32M US. AP&C’s company website seems to suggest that they utilize only the atomization unit that PyroGenesis sold to them in 2006. If this is the case, and given that PyroGenesis now has advanced their powder production technology, then the $32M figure provides some insight into the value of these plants.
It should be pointed out that PyroGenesis does not currently manufacture metal powder; they only build the units to produce the powder. Therefore, this is a bit of an apples to oranges comparison and clearly there is more than equipment included in the pricing of AP&C. However, the production unit is critical to AP&C’s value (especially if it is the sole unit) and PyroGenesis is capable of producing similar or even more advanced units if desired. As such, Arcam’s purchase can be considered instructive toward the value of the titanium powder production technology PyroGenesis possesses.
Developing their latest powder production system generated approximately $2M in revenue for PyroGenesis since July of 2012 based on a conversation with the company. This represents nearly 40% of revenues for this growing company in the trailing twelve months. A surge in demand for plants such as this one could yield significant revenue gains for this growing company. More companies may look to PyroGenesis’ technologies to meet increased powder demand as the 3D printing metal powder market is projected to grow faster than any other 3D material over the next ten years.
As outlined above, the value of the powder production technology is just one component of a suite of applications PyroGenesis offers. Because their plasma technology applies to many potentially high value sectors such as: carbon nanotubes, fullerenes, and clean waste destruction, the true value of the company and its technologies almost certainly exceeds the current market cap.
Potential Limiting Factor
Metalysis is a company that has recently made news in the 3D printing sector with their announcement that they are looking to build a titanium powder production plant at a cost of up to $500M. The plant would produce the powder using their patented electrowinning technique which may in some instances reduce costs by 75%. The company got a big endorsement when metals giant Iluka Resources (ILKAY) agreed to purchase an 18.3% stake in them. This cost saving technology could be an especially big deal for auto manufacturers who would love to use the lighter, stronger metal if the combined cost savings of 3D printing and electrowinning would make it feasible. However, Metalysis process does not currently produce titanium powder sufficient to meet aerospace standards. The company may or may not resolve that problem down the line but for now, companies like GE, Boeing and Airbus who are driving the demand for titanium powders are out of reach. They have also not yet agreed to terms on the financing of their production plant which indicates that actual production is still several years away. In the meantime, demand for aerospace grade titanium powder continues to grow and may lead to additional orders and revenue for PyroGenesis who can generate this grade of powder.
Q&A with Tom Whitton, Director of Business Development at PyroGenesis, on Supplying Metal Powders for 3D Printing
Nicholas Sheets: Thank you Mr. Whitton for speaking with 3DPrintingStocks.com about your company. A recent press release remarked on the strength of your 2014 backlog, do you currently have the capacity to fulfill those orders by the end of the year?
Tom Whitton: Definitely. There are no constraints in terms of labour, resources or facilities in order to meet our backlog. In fact, we do not see any constraints in the future.
Nicholas Sheets: What is PyroGenesis’ experience in developing metal powder production systems?
Tom Whitton: It is important to understand that metal powder production systems were a fundamental part of our business originally. We later ventured into waste management, but with the new demand for highly spherical and pure metallic powders, PyroGenesis is simply returning to its roots.
Our greatest compliment in this area was recently demonstrated in 2013 by Arcam’s acquisition of AP&C and its metal powder production. PyroGenesis’ patented plasma atomization technology is at the heart of AP&C’s spherical titanium and titanium alloy production capabilities. From our perspective, Arcam is securing a supply of high purity, high sphericity reactive metal powders to enhance their additive manufacturing technology business. With this marketplace ready to explode, PyroGenesis is actively marketing its Plasma Atomization Process for the emerging 3D printing industry.
Nicholas Sheets: What are the competitive advantages this pilot plant offers?
Tom Whitton: The pilot plant acquisition was designed to enhance PyroGenesis’ capabilities as THE partner of choice in developing innovative minerals, metallurgical and material processes and products from lab scale to full commercialization. The pilot plant acquired in our announcement from January 14, 2014 is versatile and will facilitate the promotion of novel processing solutions through the generation of a multitude of metals, advanced materials and nanomaterials for both customers and for PyroGenesis.
Nicholas Sheets: This system was designed to convert titanium fluoride into titanium metal powder. Are there other applications for this type of system and are you authorized to adapt the technology for new uses?
Tom Whitton: There is nothing that would prevent us from continuing the development of the original process or adapting it to other uses. It is important to note that the acquisition of the pilot plant opens up new opportunities for PyroGenesis to pursue the development of new products and processes. We expect that in the coming months, we will be in a position to talk more about this.
Nicholas Sheets: Is the metal produced by your system aerospace grade?
Tom Whitton: Yes, the titanium produced by our pilot plant demonstrated purity levels which can be used in making aerospace alloys.
Nicholas Sheets: Current cost estimates for titanium powder are between $200 and $400 per kg. Is this plant capable of being competitive with those prices?
Tom Whitton: Definitely.
Nicholas Sheets: Can you provide a brief description of PyroGenesis’ patent portfolio?
Tom Whitton: PyroGenesis has 18 innovations covered by 70 patents (issued or pending) from all over the world in both the plasma waste processing and in the metallurgical/materials fields.
PyroGenesis has a lot to offer not only to investors but to the world. Fresh Kills Landfill in New York can be seen from space. Imagine a technology that can reduce the size of the waste there by 80% while converting it into gas for energy and slag for construction. This same technology can produce titanium powder for 3D printers that can be transformed into a jet fuel nozzle or a turbocharger for your car. The best piece of investing advice I ever received was to try to picture how the world would change in the next ten or twenty years and buy the companies that could drive that change. PyroGenesis is capable of driving innovation in the next ten or twenty years and making a tidy profit in the process.
With 2014 revenue growth poised to exceed 2013 by over 50%; there is no reason that their price to sales ratio should not be comparable to the targets given to others in the 3D printing industry. Especially since the majority of the well-known 3D printing companies are forecasted to grow at slower rates than PyroGenesis this year. Ignoring the ludicrous price to sales ratio of 50 for Voxeljet (VJET), an average price to sales ratio for the well-known 3D companies is 16.95 as shown below. A comparable ratio for PyroGenesis would result in a PPS of $1.13 or a 72% increase over its current value. This comparison is even more striking given the recent pullback in the major 3D stocks’ valuation.
|Company||Price to Sales||Projected 2014 Revenue Growth Rate|
|3d Systems (DDD)||
|Consensus 2014 growth rates from Markets.ft.com as of 03/04/2014. Price to Sales based on Charles Schwab and Stockhouse.com values as of 03/04/2014.|
Disclosure: I am long shares of PyroGenesis. I have not been paid by PyroGenesis or any third party for this article.
Nicholas Sheets is an individual investor who focuses on companies with innovative technologies. He has been investing for six years across multiple industries. He currently lives in Delaware but was raised in Southern Oregon. Nicholas works full time as a senior economist for a private consulting firm and trades daily.