Hindenburg Research, a notable short seller fresh off their seemingly accurate (and extremely negative) report about Nikola, has now released a scathing report on Canadian polyethylene terephthalate (PET) depolymerization player Loop Industries. Here, we break down Hindenburg’s claims and see if they hold up:
CLAIM: Loop has a some questionable folks working for it.
This claim is the most clearly true, and the most concerning, as some key employees have been convicted of securities fraud in the past. Even setting aside allegations of past financial fraud, the background of its tech team doesn't have much expertise in polymer science: the CTO was a metallurgist for most of his career and the VP of R&D has a background in pharma product management. The background is a real cause for concern around the company as a whole.
CLAIM: Loop’s technology is “smoke and mirrors.”
This claim is where the story of Nikola and Loop begin to diverge. Loop seems to have made several claims that were likely embellished, but most of the claims of high purity and “infinite” recyclability are simply the result of its depolymerization approach to PET recycling. While there are several sensational quotes from former clients and pictures questioning the purity of Loops’ monoethylene glycol (MEG) product, these seem to be based on its former Gen 1 hydrolysis process (as the company suggests in its brief and otherwise not very informative rebuttal), which had several purity and wastewater issues. These former technology issues don't necessarily apply to its second-generation methanolysis process, developed in 2017. Though Loop may be unable to live up to some of its early technology claims, this is more likely a reflection of it being a start-up in a volatile technology space than a plot to defraud investors or partners. Overall, the claims that Loop makes are not that different from most of its competitors, and the fact that there’s still unsolved technology issues isn’t unique – though to be sure given the commercial novelty of PET depolymerization, there's certainly risk the tech won't pan out.
CLAIM: Loop’s partnerships are failing or otherwise not meaningful.
Again, there’s a qualitative difference here between Loop and Nikola – whereas Nikola seemed to be sourcing its tech from other players, Loop's partners are downstream PET makers and waste management firms, or brands like Coca-Cola. Hindenburg represents these partnerships in the direst terms, but it’s not clear that that’s warranted.
- Indorama Ventures (the second largest PET producer in the world) and Suez (one of the largest European waste management companies) have both formed partnerships with Loop. Indorama is also partnered with Ioniqa, and as such is arguably in a better position than any other company in the world to evaluate Loop’s process against competitors. It’s possible that Indorama formed the JV with Loop hastily just to evaluate its technology, but it’s true that Indorama Loop joint venture hasn't made nearly as much progress as hoped – it originally aimed to open a plant by the end of 2020, but Loop's recent quarterly filing acknowledge only around $3 million has been put into the JV for engineering design work. Still, such delays and disappointments aren't uncommon for a small start-up tackling an extremely complex problem and aren't a reflection of a totally worthless company.
- While Loop's partnership with Thyssenkrupp is on hold for unknown reasons, it was attempting to design a non-standard PET polymerization process. Most PET production today uses a terephthalic acid feedstock, so creation of a process based on Loop's dimethyl terephthalate (DMT) is a non-trivial matter and could go beyond purity and cost issues. Furthermore, Loop's partnership with Chemtex in September does seem to cover this technology gap.
- Those consumer beverage companies haven't received any material yet and the JV hasn't produced any revenue simply because the 20,000 ton per year facility hasn't been completed yet – it had not even been scheduled to come online for another couple of months, though it's clearly going to be far behind that timeline. While delays were probably likely in any case, the COVID-19 pandemic has dramatically impacted both construction and the consumer goods space, so the lack of revenues is not as dire an indicator as Hindenburg paints it (though perhaps is an indicator Loop would have been better advised not to hit public markets so soon).
So, what does all this mean? Loop is no Nikola, and Hindenburg is probably too harsh in its assessment of the company (and does have a vested interest in seeing Loop fail), but the report does raise some legit red flags. Loop will need to show solid progress to maintain its credibility, and may need to upgrade its team both to buttress its reputation and bring in skills to help it make that progress. We'll be watching carefully to see how key partners like Indorama and Suez respond, and those interested should have a more cautious view of Loop's prospects than they did before. But if there’s one solid takeaway, it’s that complex early stage tech development, complex markets like recycling, and going public are not a good mix.