Small Cap Slaughter - Origin Materials Descends On Delay, Lowered Guidance

It's taken me a few days to fully collect my thoughts on Origin Materials and their Q2 2023 earnings call which did not exactly go over well with investors and traders alike. Please see the below chart and try to guess exactly where the bad news came out:


Ouch! When all seemed steady and rangebound, the stock fell off a cliff in a serious way. It seems as though funding for the Origin 2 plant in Geismar, LA is a bit more uncertain than management has led on. While it was never exactly a foregone conclusion, there remain questions regarding where the funding will come from to build O2.

The Company is exploring multiple opportunities to finance Origin 2 including a combination of existing cash, previously indicated traditional project financing, federal and state government programs, licensing agreements, and strategic partnerships. The Company expects capital expenditures of up to $50 million for 2024, with the majority of Origin 2 capital spend to occur following final investment decision (FID) in 2025.

Specifically, the phrase "final investment decision" implies that the project really is hanging in the balance. What I initially thought would be the real money-maker for the company, who has dubbed it the "US Megasite," now seems like it could be a failure to launch. Again, the risk has always been there, but the uncertainty is really now revealing itself in the language used in the earnings call and updated plans. To illustrate:


The skinny here is that O2 is going have an operating capacity half the size as originally expected and ultimately generate almost $100M less revenue yearly, when both phases are complete, than originally expected. It doesn't sound like quite the "megasite" as originally expected, and it's going to take 2-3 years longer to complete than originally expected. The trim in revenue guidance coupled with the delay has many shaking their heads.

So what's the good news? Is there any good news? Well, maybe. The lower-margin PET production appears, by my best speculation, to be being moved to joint-venture agreements between partner companies. Origin will be producing the higher margin products -- oils & extractives, CMF/HTC, sooner than expected which will hopefully bring the company to profitability sooner. Licensing agreements will be another factor that will assist the company in its growth and achieving its goals.

In addition to execution risks, financing is the company's biggest woe as it stands. Still on the table are provisions from the IRA that may benefit Origin, the issuance of up to $1.5 billion of tax-exempt bonds in the state of Louisiana, and licensing agreements. It's not that the company is doomed for failure, but they've had to do a hard pivot to navigate the uncertainty around financing their second plant. Now that Origin 1 is up and operating, and supposedly will be producing product by August 19th, the focus has to be on securing financing and ensuring that the company can deliver on its now-current projections. Finding that new CFO to replace the outgoing Nate Whaley is pretty crucial too. Until the picture becomes more clear on production capacity/margins and the questions regarding funding are answered, the stock price is likely to suffer more in the near-term. Though there is a major gap to fill on the chart.

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