An overlooked ASX small cap set to tackle toxic 'forever chemicals' in water

Wed 02 Aug 23, 9:51am (AEST)
Spring background Stream of water in the forest
Source: Shutterstock

Key Points

  • The US Geological Survey found toxic 'forever chemicals' in 45% of tap water samples
  • The Biden administration has allocated $10 billion to help water utilities meet new PFAS regulations
  • Carbonxt is well-positioned to capitalise on the growing demand for activated carbon to remove PFAS from drinking water.

Almost 50% of US tap water samples contain toxic “forever chemicals”, substances used in hundreds of household items from non-stick cookware to takeaway boxes, and exposure to them can lead to adverse health risks, according to a new study.

The US Geological Survey tested tap water samples from more than 700 locations across the United States for the presence of chemicals known as polyfluorinated alkyl substances, or PFAS – Which was first developed in the 1940s via the creation of Teflon, most commonly used to coat and create non-stick cookware. 

PFAS are water resistant and last in human bodies for decades. In March 2023, the US Environmental Protection Agency (EPA) proposed a first-ever federal drinking water rule for six PFAS.

The Biden Administration’s Bipartisan Infrastructure Law has allocated US$10 billion in funding to help water utilities meet the anticipated PFAS regulations. Final regulations are to be finalised by December 2023 and require compliance between 2024 and 2028.

By now, you’re probably thinking – When are you going to tell me about the ASX-listed company that has a solution to this water crisis?

Introducing Carbonnxt

Carbonxt (ASX: CG1) is a US-based cleantech company that manufactures specialised Activated Carbon products, used to filter contaminants from water and air.

Activated Carbon has a high degree of microporosity – In simple terms, one gram of activated carbon has a surface area in excess of 1,000 m2 for absorption.

In an interview with Managing Director Warren Murphy, we discussed the EPA PFAS opportunity as well as the company’s new state-of-the-art activated carbon plant in Kentucky, US. 

The proposed PFAS regulations sounds like a massive opportunity, what are its implications for Carbonxt?

“There’s approximately two-and-a-half thousand water processing plants in the US that have to take these chemicals out of the water system and the best available technology to do that is what we manufacture,” said Murphy.

“We’re incredibly well positioned and only one of two companies in the market that will be at the stage able to target that market.”

What’s the current size of the market and what does the next 1-3 years look like?

“The market size for existing water purification in utilities is around US$300 million, to be conservative. The regulations could increase the market size by approximately $600 million or more than double the existing market,” says Murphy. 

“The existing market has a supply and demand imbalance. So additional capacity is required to meet that demand. There isn’t enough capacity at this stage to service that growth, so we’re trying to get in, capture early market share, and then grow again.”

For context, Carbonxt currently produces powered and pellet activated carbon for industrial and air purification applications such as:

  • Trapping mercury emissions from coal-fired power stations

  • Air and gas purification to remove oil vapours, odours and other hydrocarbon emissions

The market has an addressable size of US$290 million and Carbonxt has a market share of approximately 5%.

The Kentucky plant is expected to be complete in the first quarter of 2024. What does this milestone mean for the company and what kind of growth opportunities does it unlock? 

Carbonxt is currently constructing a new state-of-the-art, 10,000 tpa activated carbon plant with its 50% joint venture partner – Kentucky Carbon Processing. 

The Kentucky plant produces higher quality activated carbons that have more surface area to capture more pollutants. This enables the company to move into groundwater remediation and removing contaminants from drinking water.

In terms key metrics, Murphy highlighted the following:  

  • Initial volume of 10,000 tonnes shared 50/50 with the JV partner

  • Anticipates moving to 20,000 with minimal incremental capex 

  • Market prices are around US$4,500 a tonne or US$45 million on a 50/50 basis

  • Net margins expected to be above 50%

“To put that into comparison, we’re currently around $16 million in turnover and about to add US$22-30 million. The 10,000 tonnes is a tripling of our business from both a revenue and gross margin perspective. As for profits, we should be looking at over $10 million per annum,” he said.

“We have a targeted strategy to achieve substantial growth. And that’s just 10,000 tonnes per annum.” 

What have things been like on the business development front? What have customer enquiries been like?

“We went to market about a year ago, raised some money and had about 3,750 tonnes per annum of contracts. Now they are distribution companies and prices can increase substantially in the marketplace so we may or may not take part in these contracts,” said Murphy.

“We’re currently getting about two inbound utility enquiries per week. We probably only need one utility and we’re sold out.”

Carbonxt had a $4.2 million cash position as at 31 March 2023 plus a $9.5 million debt facility – The JV requires numerous payments including an initial payment (US$5.0m), commissioning (US$0.5m) and four quarterly instalments (US$1.125m each). How will Carbonxt meet these funding requirements?

“We’ve got the next two payments in the bank and the rest can easily be paid out of the cash flows from the business. We only need to be producing two to three thousand tonnes and we’ll easily make those payments,” Murphy explained.

“But equally, if we demonstrate that several utilities have bought our product and our plants are up and running, my guess is the share price won’t be where it is and we might choose to tap the market and get on with the expansions.”

There’s a lot of hype around ESG but Activated Carbons might not fall into the conversation. What would you say to investors about how Carbonxt plays into this thematic? 

A lot of what ESG is about is purifying the air and water. And that’s what we do. We are leaders in the space and making technological breakthroughs in the sector,” said Murphy.

“We’re about to demonstrate a substantial change in cash flow in the business.”

Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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