Pyrum Innovations — New tyres from old

Pyrum Innovations has developed a patented pyrolysis process that it is currently using at industrial scale to recycle used vehicle tyres. The process outputs pyrolysis oil, carbon black, steel and textile material, all of which may be sold and returned to the material cycle, as well as pyrolysis gas. The gas is converted to electric power and heat, so the pyrolysis reactor requires no energy from external sources. Operators of Pyrum’s pyrolysis plants receive revenues from sale of the pyrolysis oil, carbon black and other outputs from the recycling process, as well as a fee from the suppliers of the used tyres for disposing of what is for them a waste material. In addition to being economically viable, the process is environmentally friendly. Pyrum estimates that the process reduces CO2 emissions by up to 98% compared to using old tyres as a cheap fuel in cement kilns.

Pyrum has been operating an industrial-scale pyrolysis recycling facility with a yearly recycling capacity of 5,000 tonnes since May 2020 and has delivered over 900 tonnes of pyrolysis oil to chemical giant BASF and to Michelin. It already has agreements in place with BASF to purchase pyrolysis oil, with international tyre manufacturer Continental and bicycle tyre specialist Schwalbe to purchase carbon black and with Continental, Michelin and Schwalbe to supply the company with tyre waste. BASF and Continental are strategic shareholders, holding respectively an 8% and a 1% stake. The company has two basic business models: (1) the development, construction and operation of pyrolysis recycling plants and (2) the sale of pyrolysis recycling plants. It is already in discussions with partners regarding the construction of another six plants scheduled to commence operation by mid-2025 and intends to build a total of over 20 plants in the longer term.

Pyrum is based in Dillingen, Germany, where its first pyrolysis recycling plant is located. It currently employs over 70 people. It listed on the Euronext Growth index on 30 September 2021, prior to which it raised €39.4m (net), which is primarily allocated to finance the expansion of the existing plant in Dillingen and future pyrolysis plants. It listed on the Frankfurt Stock Exchange on 30 March 2022 to facilitate trading for shareholders. No additional finance was raised at this time.

Pyrum’s patented pyrolysis recycling process heats material, typically tyre crumb though it could be used for other materials, to temperatures of 700–750°C in the absence of oxygen, so that instead of burning, a chemical and physical decomposition occurs. The process has multiple stages:

Pyrum’s preferred business model is the development, construction and operation of pyrolysis recycling plants deploying its patented process as it provides predictable and recurring revenues, but it is more capital intensive compared to the sale of plants.

In addition, Pyrum intends to sell recycling plants to third parties, primarily in regions outside Europe as it does not intend to operate its own plants there, to finance the investment in its own plants. In this situation, Pyrum would act to undertake the engineering, procurement and construction (EPC) of the ‘Pyrum Technology part’, which is the tower housing the pyrolysis reactor, the cooling system and power generators, and would engage subcontractors for other parts of the plant, such as the shredder, pelletizer and carbon treatment. The manufacturing of crucial plant parts such as the pyrolysis reactor, engines and the automation system is also outsourced to partner companies.

Pyrum has also adopted combination of these two business models in which Pyrum sells a plant to a third-party in a special purpose vehicle (SPV), while holding an equity share of 15–30% in the SPV. This capital-light model allows Pyrum to roll-out plants relatively rapidly while receiving recurring revenues in the longer term in the form of dividends from the SPV (see Exhibit 3).

Pyrum will also generate revenues from maintenance and remote monitoring support fees for customer plants, commissions from the sale of shredding units from ELDAN Recycling for customer plants, fees for carrying out lab analyses and tests on potential feedstocks and royalties for granting distribution licences to third parties for various countries. Management intends to establish a distribution company that would pool the materials output from individual pyrolysis plants, so they can be sold in bulk, thus achieving better prices. The sales agreement with ELDAN Recycling works both ways. ELDAN is able to sell Pyrum’s pyrolysis plants to customers that are currently using ELDAN equipment to shred end-of-life tyres and need a market for the tyre crumb.

In the medium term, Pyrum intends to apply its pyrolysis technology to other markets such as recycling carbon-fibre-reinforced polymer (CFRP) and hydrogen production. It is also involved in the BlackCycle EU-funded project led by Michelin to create a process for recycling recovered materials from used tyres back into new tyre production.

Carbon-fibre-reinforced-polymer: CFRP is a light plastic that is reinforced with carbon fibres to give it strength, so it is used to make wind turbine blades as well as in the aerospace, automotive, sports and leisure and construction industries. Currently, there is no economic process for recycling CFRP. Pyrum is a member of the consortium working on the EU funded ‘Infinity’ project for recycling CFRP, extracting both recovered carbon fibre that is of sufficiently high quality to be used in the aerospace industry and pyrolysis oil. The project runs from October 2020 to September 2022 and is currently at the semi-industrial phase.

BlackCycle project: this EU-funded Horizon2020 project runs from May 2020 to August 2023 and is led by Michelin. During 2021 Orion Engineered Carbons, one of the world’s largest producers of carbon black, demonstrated that carbon black produced from Pyrum’s pyrolysis oil was qualitatively equivalent to carbon black produced from fossil fuels.

Hydrogen production: pilot-scale tests have shown that up to 40% of Pyrum’s pyrolysis gas consists of hydrogen, with one tonne of rubber generating up to 13kg of hydrogen. A single Pyrum pyrolysis line (5,000 tonnes of used tyres/year) could thus produce approximately 240kg of hydrogen per day, which is enough to power a fleet of eight fuel cell buses operating a commuter service. Pyrum intends to separate hydrogen from the pyrolysis gas and sell it. The remaining pyrolysis gas from which the hydrogen has been removed can still be converted into electricity, keeping the pyrolysis reactor self-sufficient with respect to energy. The technology for separating the gases has not yet been applied at commercial scale.

The key events in Pyrum’s evolution so far are summarised in Exhibit 2. The most significant next step for Pyrum is the expansion of capacity at the Dillingen site from 5,000 tonnes of end-of-life tyres/year to 20,000 tonnes/year by adding two more pyrolysis reactor towers. Pyrolysis gas from the two new reactors will be used to generate electricity using air-to-air turbines rather than CHP engines. As the gas will be heated up 1,200°C compared with 400°C in a CHP engine, any toxins will be decomposed, so management is confident that the exhaust will be significantly within the more stringent limits for toxins in exhaust gases that will come into force in 2025. Substituting the CHP engine with an air-to-air turbine will also substantially reduce downtime for maintenance. In addition, Pyrum has ordered a new, more powerful shredder from ELDAN Recycling, which will increase shredding capacity and also enable Pyrum to supply higher purity steel wire that can be processed directly into new steel. The total cost of this expansion, which is scheduled to complete by the end of 2022, is around €20m. Management expects the first of the two new reactors to start commercial production in Q422 and the second to start production in FY23.

Looking further forward, Pyrum expects to have around 11 plants in place within five to six years and more than 20 plants in the long term. These will be a mix of self-owned and operated plants, plants sold to third parties and plants operated under the SPV-model. In the medium term, management intends to adopt the roll-out plan shown in Exhibit 3, though we note the exact order of execution may be different from that shown. The potential revenues and profits from this roll-out are explored in the valuation section of this note.

Currently Pyrum addresses the end-of-life tyre market. According to a report published by the World Business Council for Sustainable Development in December 2019, the global end-of-life tyre market is around 30.9 million tonnes per annum. Around 56% of these tyres are incinerated or sent to landfill, rather than recovered. This proportion on its own represents a significant opportunity for Pyrum because since 2000 the EU has prohibited the disposal of tyres in landfill to prevent oil inside the tyres leaching into the water table landfill and will close down plants incinerating tyres if the level of toxic particulates emitted are too high. Incineration is also becoming a less viable option because of carbon emissions taxes. These vary from less than €1 per tonne of carbon emissions in Poland to more than €100/tonne in Sweden.

In addition, pyrolysis may be a better option for processing used tyres than other recovery techniques. Tyre crumb from used tyres is currently used in civil engineering projects to create water retention basins, to make aggregates used in road construction and as backfill in land rehabilitation projects and mining sites. The European Chemical Agency, which is an EU regulatory body, has proposed a ban on the use of shredded tyre granulate outdoors on artificial turf pitches to prevent the release of microplastics into the environment. Tyre crumb can also be used as a feedstock in waste-to-energy systems. The EU Waste Framework Directive recommends that extracting new raw materials from waste such as used tyres is preferable to recovering energy from the material, so is supportive of the adoption of pyrolysis.

Carbon black is one of the main outputs of Pyrum’s process. The other main output, pyrolysis oil, may be used to make carbon black. According to Mordor Intelligence, the global carbon black market was 13,000,000 tonnes in 2021 and is expected to grow at a CAGR of 2% between 2022 and 2027.

Pyrum’s pyrolysis process is highly unusual because the tyre crumb moves down a tall vertical reactor under gravity rather than being pushed along a horizontal reactor as happens in older rotary kiln and batch oven processes. The speed at which carbon is removed from the base of the reactor determines the speed at which tyre crumb passes through. Using gravity to move the crumb through the reactor has several advantages. It saves on energy, which means that the pyrolysis reactor itself is self-sufficient with regard to energy, with some left over for shredding tyres, resulting in operating costs that are around one-quarter of older technologies. Having an abundance of energy on-site means that it is economic to heat the tyre crumb to higher temperatures than the competition typically does, eliminating the issue of toxins in the pyrolysis products caused by incomplete decomposition. Adopting a gravity-fed process also means there are no moving parts, making the system more reliable. Unlike a rotary kiln, the pyrolysis tower is airtight, giving better control over the output. Unlike a batch oven, Pyrum’s pyrolysis technology is designed to operate as a continuous process, which means that the output is very consistent and that the reactor goes through far fewer heating/cooling cycles than a batch oven, further helping reliability. The reactor only needs to be shut down for maintenance, which takes place every three months and is guaranteed for 10 years.

Another key difference is that the reactor is divided into 150 tiny chambers, each with heating plates that are individually controlled and fitted with their own temperature sensors. This gives very precise control over the quality of the output, meaning that the pyrolysis oil can be used as a feedstock rather than just as an environmentally friendly fuel, as is the case for output from Bolder Industries and Scandinavian Enviro Systems or oil produced by Plastics Advanced Recycling’s equipment

Exhibit 5, which is not intended to be comprehensive, gives a list of other companies involved in pyrolysis. The exhibit shows that only a sub-set of these are able to process tyre crumb, which is inherently more difficult to decompose than other material because it is a very good heat insulator.

The composition of the executive board is as follows:

Pascal Klein: chairperson, CEO, CFO and COO. Mr Klein received a bachelor’s degree in international management at ISEG Strasbourg in 2006 and an MBA at ISM Paris and St. John’s University New York in 2008. The same year he became one of the founding members of Pyrum, holding the role of general director. He moved to his current role when Pyrum changed its legal status from GmbH to AG in 2018.

Michael Kapf: CIO and Head of HR. Mr Kapf received a degree as computer science expert at Deutsche Telekom AG/Saarbrücken in 2007. He had previously worked as a consultant in the European area for the company Hartech KG/Rehlingen-Siersburg. He is also one of Pyrum’s founding members.

Kai Winkelmann: head of business administration. Mr Winkelmann graduated from the Banking academy in Hamburg in 1997. From 1997 to 2003 he worked as an equity and bond trader. He became a member of the executive board and the general manager at equinet Bank in 2003. From 2018 to December 2019, he was head of trading Germany for Pareto Securities. He joined Pyrum in February 2021.

During H121 Pyrum focused on preparing for commercial roll-outs and series production of pyrolysis plants for self-operation and for customers. Total revenues increased by 21% year-on-year to €398k, with revenues from the operation of the recycling plant jumping by 45% to €392k. Revenue development was held back between May and July by a temporary fault in one of the two CHP systems, which has been remedied. Revenues reached €315k in Q321. Losses before tax widened by €1.6m to €3.2m, reflecting an increase in personnel expenses (by €0.7m to €1.5m) as Pyrum strengthened its workforce in all areas in preparation for the transition to serial production and in other operating expenses (by €1.7m to €2.2m). €0.7m of the other operating expenses related to the cost of the placing in Q321.

Net cash decreased by €2.9m during H121 to €5.8m at the period end. The main elements of this movement were the operating loss and €0.7m investment in capital equipment primarily on gas filtration, compared with €0.1m in H120. Other liabilities at the end of H121 included a €1.9m tranche of the €6.6m convertible loan agreed with BASF in September 2020. The loan bears interest at 3% per annum and is paid out in tranches when certain milestones are reached. Each tranche has a term of 10 years and repayment begins at the beginning of the third year after it is granted. It is not materially dilutive as BASF can only exercise the shares in the event of a default on the loan.

The are no consensus estimates available. In September 2021 management stated that it expected to increase sales to €1.3m in 2021, generating an EBITDA loss of €3m excluding the costs associated with the placing and admission to Euronext, and resulting in a free cash outflow of €18m. Significant items of capital expenditure during the year included the purchase of the building site next to its existing plant in Dillingen to support the planned capacity expansion (€0.8m excluding taxes) and a machine to turn powered recovered carbon black into pellets (€1.2m). In Q122 Pyrum purchased the property in Dillingen where the offices, laboratory and existing plant are located for c €2.8m. In October 2021 management noted that it expected revenues to increase in Q122 following the commissioning of the pelleting plant for recovered carbon black, which should enable the company to achieve better prices for its pyrolysis carbon. Based on the roll-out plan in Exhibit 3 and noting construction costs of €18–20m for each plant (see below), Pyrum plans to invest €12–40m in capex annually.

There are no consensus estimates, which precludes the use of peer-based multiples to conduct a formal valuation analysis. However, management has provided information on the potential revenues and profit from the operation and sales of pyrolysis plants, as well as its roll-out plans. Combining these gives a view of what potential revenues and profits could look like if Pyrum is successful in executing its strategy. This guidance is based on gate fees for used tyres of €105/tonne compared with the €116/tonne received at present, €250/tonne for pyrolysis oil, which is based on the 10-year average for low sulphur fuel oil, and €680/tonne for carbon black, based on existing off-take agreements. Guidance for each of the three business models is as follows:

Management’s mid-term target is to increase capacity to c 130,000 tonnes from SPVs and Pyrum's own operated plants (ie seven plants in total). If we assume that three of these are operated by Pyrum and four are operated by an SPV in which Pyrum has a 15% stake as per the road map in Exhibit 3, this gives annual revenues of €27m and EBITDA of €24m. If in addition Pyrum sells one plant to a customer, this would take total annual revenues to €53m and EBITDA to €30m. Pyrum would be reinvesting this cash back into new self-operated plants at this point, thus operating at around cash break-even.

Management’s long-term target for the company is to increase capacity to c 450,000 tonnes, or 23 plants, some of which would be owned by third parties. If we assume that 11 of these are operated by Pyrum, five on an SPV model and seven by third parties, this gives annual revenues of €99m and EBITDA of €80m. If in addition, Pyrum sells one plant to a customer, this would take total annual revenues to €125m and EBITDA to €86m. Depending on the rate at which management continues to roll-out new self-owned plants, this could represent free cash flow of €40–50m a year. This capacity would output 150,000 tonnes of recovered carbon black annually, which is c 1% of the global market.