Best Investments: Axion power and BMW report impressive performance test results

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Axion Power and BMW Report Impressive Performance Test Results | Alternative Energy Stocks

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Axion Power and BMW Report Impressive Performance Test Results John Petersen

After seven years of cautious disclosures about the development status,performance and market potential of its serially patented PbC®battery technology, Axion PowerInternational (AXPW.OB),in conjunction with BMW (BAMXY.PK), hasfinally releasedimpressive performance test results that show why the PbC battery is a superior choice forautomotive stop-start applications. Concurrently, Axion released a white paperthat discusses stop-start battery requirements in detail and offerssome hints about the PbC battery's potential for use in other emergingenergy storage markets.

The presentation and the white paper do not show small, incrementalgains like you would normally expect from new developments in a150-year old technology like lead-acid battery chemistry. Instead, theyshow that compared to a top quality AGM battery the PbC batteryprovides:
10 times the dynamic charge acceptance;5 times the cycle life;Stable round trip energy efficiencies in the 85% range; and30% less weight.The details of the presentation and white paper are complex, but theresults can be quickly summarized with two simple graphs. The graph onthe left tracks the dynamic charge acceptance of an AGM battery overtwo years of simulated use in a vehicle equipped with a stop-start idleelimination system while the graph on the right tracks the dynamiccharge acceptance of the PbC battery over four years of simulated use.Where the AGM battery graph shows that the charging rate plummets andthe time needed to recharge the battery soars within months after thebattery is placed in service, both values remain stable for the entireduration of the PbC battery test.

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In a recentreport on the battery market for micro-hybrid vehicle applications,Lux Research stated that most automakers believe flooded lead acidbatteries are "inadequate" for stop-start applications. It alsoobserved that AGM batteries are "barely suitable" for high performancestop-start systems. In light of early European experience with stop-start systemsand the new test data from Axion and BMW, it looks like the PbC will bethe best battery choice for automakers that want to optimize theperformance of their stop-start systems and minimize exposure tobattery-related warranty claims. After all, it's senseless to upgrademechanical systems in an effort to conserve fuel and slash CO2emissions, and then handicap the new systems by using batteries thatcan't handle the load.

For more information on the market forces that will drive rapid globalimplementation of stop-start idle elimination technologies, my blogarchive at Seeking Alpha is a great resource. You may also want tovisit EV Insights forthe recorded version of a recent conversation I had with Jack Liftonand Gareth Hatch.

Axion began development work on the PbC battery in late 2003 and in early2006 it bought the manufacturing equipment of an old-line batteryproducer in a foreclosure sale. While Axion paid $700,000, replacementcost estimates were an order of magnitude higher. For the last fouryears, Axion has primarily used the plant as a prototyping facility forPbC batteries. Nevertheless, its permitted capacity is 3,000 batteriesper day and the installed equipment includes two flooded batteryproduction lines and one AGM battery production line.

The principal research and development work on the PbC battery isfinished, but the device is not yet available as a commercial product.Axion built a first generation fabrication line for the carbonelectrode assemblies that are the heart of the PbC battery in 2008 and2009. Based on lessons learned from the first generation line, Axionhas upgraded or replaced several workstations on the first generationline and designed a second generation line that should be operationalin the first quarter of 2011. With two electrode fabrication lines,Axion should be able to produce electrode assemblies for about 250 PbCbatteries per shift, or 150,000 PbC batteries a year with a three shiftoperation. Its existing AGM battery line has enough idle capacity tofully absorb electrode production from the first two electrodefabrication lines.

Axion has no debt and enough cash to support its planned demonstrationactivities in automotive, stationary and rail transportationapplications through 2011. It does not, however, have sufficient financing orproduction capacity to support a full-scale commercial rollout of thePbC battery. Such a rollout would require about $75 million in fundingfrom grants, loans or stock sales to increase electrode fabricationcapacity to a million units per year and cover associated workingcapital requirements.

The first use of future electrode capacity additions will be to bringAxion's AGM line up to full capacity. Excess electrode production willbe sold to Axion's manufacturing partners Exide Technologies (XIDE)and East Penn Manufacturing, two of the largest battery companies inNorth America. Over the long term, Axion intends to focus on electrodemanufacturing and sell its electrode assemblies to industry partnersthat own and operate existing AGM battery plants. The PbC electrodeassemblies have been designed to work as plug-and-play replacementcomponents in any AGM battery plant and Axion's business model has beendesigned to leverage existing global manufacturing capacity whilegiving its partners an opportunity to sell a premium co-branded productto their existing customers.

From late 2003 through early 2007 I was a director of Axion and I’vewatched the PbC technology progress from the laboratory prototype stageto a pre-commercial product that has drawn a surprising amount ofinterest from automakers, railroads and developers of wind and solarpower installations. While we originally expected to start at thebottom of the food chain and work our way up as the PbC technologymatured, it's hard to complain about too much attention from first tierenergy storage users. At this point the remaining challenges relateprimarily to industrial engineering refinements and completing therigorous validation and performance testing that first tier usersalways require before they write a purchase order. In light of the BMWtest results, I'm convinced the only open question is "When?"

Over the last year market forces that had nothing to do with Axion’sbusiness fundamentals or the PbC battery's performance havebrutalized its stock price. The stock currently trades within spittingdistance of the price paid by several highly regarded institutions lastDecember. As an understanding of the new performance data begins tospread, I think the upside potential is significant. For moreconservative investors, a solid alternative play on the PbC technologyis the stock of Exide Technologies, an Axion partner that I think isfundamentally undervalued.

Disclosure: Author is a formerdirector of Axion Power International (AXPW.OB)and holds a substantial longposition in its common stock.

Posted by John Petersen on November 24, 2010 07:44 AM | Axion Power and BMW Report Impressive Performance Test Results

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Comments

The graphs aren't really readable... can you provide them in higher resolution, perhaps one after the other?

Posted by: Tom Konrad

| November 24, 2010 09:16 PM

Not withstanding the fact that the battery itself could still fail the evaluations, that $75M is (has been) the most bothersome piece of the investment puzzle. With all this talk of austerity, this coming year will be hard on companies that have depended on public grants for any part of their growth and/or development.

1) Is it possible, or likely, that these grants be withdrawn?

2) With banks seemingly unwilling to lend to small business, is it possible, or likely, that a development partner like Ford Credit extend a loan? Almost an in-kind trade (plus interest)?

3) If stock is issued to cover capital expansion, would it wind up being even more dilutive to the now feeble stock price?

It seems Axion has reached a "chicken or egg" state of existance. Can't fill an OEM order with the facility that exists now and probably can't secure a loan without a visible account recievable in the near future. With one more year of cash to burn, would it be reasonable to figure that by June of 2011 an investor might need to decide to buy or bail?

I know I worry about the small details too much.

Posted by: DRich

| November 24, 2010 09:41 PM

Tom, I'd thought about making the graphs larger and decided against it because they're not really "information rich." My hope is that anybody who wants to study the graphs will download the presentation and white paper, which provide all the detail you could want.

DRich, at 150,000 batteries per year, Axion's revenue would be $30 to $40 million, which might not ensure profitability but would get darned close. There are also any number of high-end vehicle models that could be served with capacity of 150,000 batteries a year.

The breakdown on my $75 million figure is $50 million in PP&E and $25 million in working capital. Assuming it would all have to be financed in the capital markets is a little harsh, but I prefer harsh assumptions.

Tom Granville has already said that he won't build out electrode capacity without a solid order book. I can't imagine Axion getting to a point where it has to fill orders for one or more automakers but is stuck with a stock price in the current range. It's been easy for the market to ignore Axion during the silent running phase. Road testing with one or more automakers will be much harder to ignore, particularly if other demonstrations in railroads and stationary also get some traction.

Posted by: John Petersen

| November 25, 2010 12:08 AM

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