PureCycle’s (PCT) Failure To Launch
November 3, 2023 | Bleecker Street Research
Introduction
The original management team and backers of PureCycle Technologies (PCT) have been obliterating shareholder capital since the early 2000s. They have taken six companies public, and shareholders have lost six times. Such a track record should preclude a seventh try, but a SPAC co-sponsored by Roth and Craig-Hallum infused PureCycle with $308 million in equity, in addition to the $730 million it had raised the year before. PureCycle then emerged in the public markets at a $2.8 billion valuation in 2021.
PureCycle’s mission is to commercialize a polypropylene recycling process developed by Proctor and Gamble and licensed to PureCycle for $2.5 million. The recycling problem is a hard problem to solve, what to do with the plastic that makes up Tic Tac and Starbucks cup lids, among many other things. PureCycle claims to have solved it.
Roughly speaking, this process involves taking recyclable plastic, melting it at high pressure and temperature, mixing it with butane (itself a very unstable gas and not exactly environmentally friendly), running it through a process, and then spitting out plastic pellets, which will work just as good as virgin plastic. PureCycle has signed 20 year run-off agreements for these pellets already. After $500 million in CAPEX and numerous delays, PCT finally declared it had begun commercial scale production at its Ironton, Ohio plant this June. However, the plant has been plagued with issues since.
Conversations with former employees revealed that they weren’t surprised, with one claiming that the plant was built “by a bunch of guys that build shopping malls and have no idea how to build a chemical processing plant,” and describing the state of the place when they showed up as “having backwards valves” and “pipes to nowhere.”
Its “closed-loop” process involves high levels of waste, the addition of virgin materials to a “100% recycled” product, and more toxic water and smog-forming air emissions than the production of “dirty” virgin pellets. The company’s own data even indicates that the Greenhouse Gas footprint of their product is essentially at par with traditional polypropylene production.
PureCycle didn’t tell anyone about the power outage for six weeks, during which insiders sold $13 million worth of stock and raised a $250 million convertible bond, while investors remained in the dark.
After a months long investigation, backed by interviews, regulatory filings, and visual evidence reveals that the facility has yet to start commercial scale production four months later. We have spoken with Ohio regulators that have contradicted company claims, and former employees that have exposed numerous issues. We believe PureCycle has mislead investors about the launch of its facility, or at the very least, will not come anywhere close to meeting production targets.
Even if PureCycle does succeed at achieving completion, it's a pyhrric victory, as the completion and operation triggers the final third of the locked-up shares to be released, making them available for sale.
We have shorted shares of PureCycle Technologies (PCT), please see our full disclosure at the bottom of this report.
Key Points:
Interviews with former employees describe the building of the plant as a “total shitshow” run by a construction company with little experience completing a major chemical plant. This former employee described “pipes to nowhere” and “valves installed backwards.” This was despite $550m in CAPEX, or roughly double what PureCycle predicted when it went public.
In September, PureCycle blamed a power outage from a month earlier for its inability to meet bond milestones, citing the loan’s Force Majeure provisions. The Loan Trustee contested this assessment, and our research shows that the “mechanical failures” cited in their Force Majeure claim were likely just the same process seal failures that had been present since April, according to former employees.
While PureCycle was dealing with startup issues, insiders sold over $13 million in shares, $250 million in convertible notes were priced and placed, and the company renegotiated loan terms with bondholders.
The Ironton Facility, which was “mechanically complete” in April, has yet to operate at commercial scale production at all, as confirmed by regulatory documents, interviews with state regulators, and permitting engineers. Yet, the Company regularly releases PR material showing the operation of equipment that is actually only run for the video or photo before being shut back down.
PureCycle’s proprietary process is neither unique or high tech, it merely involves using butane, a dangerous heavy natural gas at high pressures and temperatures to remove contaminants. Proctor & Gamble licenced this technology to PureCycle for a trivial amount.
The Contractor who constructed the facility currently has a $17 million mechanics lien against PureCycle, with the company only disclosing it in the 10-Q.
The environmental impact of PureCycle’s process is roughly equal to that of virgin Polyproplyene production, with a similar CO2 footprint and a higher footprint for wastewater cyanide and zinc discharges. Local smog precursor emissions for the process are higher than those for traditional Polypropylene production.
The full study is available here to view.
