Arq, Inc. (ARQ): The Science, Setbacks, and Path Forward at Red River

In this episode of the WTR Small Cap Spotlight podcast, Eric Robinson, Senior Vice President of Operations, and Joe Wong, Chief Technology Officer of Arq, Inc. (Nasdaq: ARQ), join Tim Gerdeman (Vice Chair, Co-Founder & CMO, Water Tower Research) and Peter Gastreich (Managing Director, Water Tower Research).

In a technical deep-dive into operations, Eric and Joe shared views on the science and commercial applications of activated carbon, the engineering challenges Arq encountered in scaling granular activated carbon (GAC) production at its Red River facility, the surging demand for GAC in PFAS drinking water treatment, the competitive dynamics and supply-side barriers in the activated carbon market, Arq's path forward on GAC capacity decisions, and the strategic optionality remaining at the idled Corbin facility.

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Transcript

SPEAKER_01 0:00

Welcome to the WTR Small Cap Spotlight Podcast. I'm your host, Tim Gerdeman, Vice Chair and Co-Founder and Chief Marketing Officer of Water Tower Research. In today's podcast episode, I'm being joined by Eric Robinson, Senior Vice President of Operations, and Joe Wong, Chief Technology Officer at ARK, Inc. Nasdaq Ticker Symbol ARQ. ARC is an environmental tech company that produces activated carbon products that reduce or reverse such environmental liabilities as mercury emissions from coal-fired plants and so-called forever chemicals from public drinking water systems. Also joining is my WTR equity research colleague, Peter Gastrike. Gentlemen, good morning and thank you for joining today's podcast. Good morning.

SPEAKER_00 0:47

Good morning, Tim.

SPEAKER_01 0:48

Morning, Tim. Eric, let me kick things off with you. Could you please tell listeners about your background and what brought you back to the company at this particular moment in time?

SPEAKER_03 0:59

Yeah, so thanks, Tim. I've uh I've been working in industry for 42 years and uh I've run plants all over the world, including the Red River facility. I was here for six and a half, seven years previously, uh late-stage startup at that point. Uh I built some great relationships here, including with my friend Joe Wong, uh, and a number of other people here. When I retired, I uh started consulting and uh ARC reached out to me and asked for some help. Um and I began consulting here uh with the team, and that then led to me uh coming back as an employee to help uh get this product back on track.

SPEAKER_01 1:42

Great. Thank you for that color. And then Joe, moving on to you for a moment, as ARC's chief technology officer, can you please walk listeners through your background and what your team's role is within the company?

SPEAKER_00 1:52

Sure, Tim. Thank you for having me. Uh yes, I'm I'm a chemical engineer by Academician. I've been in the activated carbon industry for 39 years uh and counting. And uh yes, I I am in a very fortunate place. Uh technology is a driver for us, turning ideas, uh, technical ideas, product ideas into cash. So I sit at the intersection of both technology operations and commercial introductions to customers. My team is involved in a myriad of activities, getting new products uh from the development stages all the way into uh the customers' hands. So we basically solve customer issues and uh create products that uh uh clean up the environment. So that's what my team does.

SPEAKER_01 2:48

And then uh finally, before I turn it over to Peter to ask a few questions, for listeners new to the space, Joe, what exactly is activated carbon? How is it made? And I think more importantly, why is it so effective at removing pollutants from air and water?

SPEAKER_00 3:03

Sure. You can think of activated carbon as a super sponge, uh, but it's quite different. Uh so for example, if you could think of a sponge where you absorb the water and you squeeze a sponge and the water doesn't come out, so that's what it does. We an activated carbon is like a sponge, captures contaminants and hose onto the contaminants and concentrates the contaminants so that you can remove it from the water, remove it from the air. And what makes activated carbon so effective is that it has what we call high surface area and high pores, holes that these contaminants can reside in and don't come out.

SPEAKER_01 3:43

Great. That's a wonderful analogy, actually. So uh Peter, I'll turn it over to you.

SPEAKER_02 3:48

Uh thanks very much, uh, Tim. So, Joe, yeah, let's uh we'll continue with you on uh activated carbon here. So um, you know, art produces different types of activated carbon. Could you explain for our listeners uh you know the differences between them, you know, what each is used for and why the you know feedstock selection is important?

SPEAKER_00 4:06

Sure. Yeah, we make predominantly two types of uh forms of activated carbon. We make a powdered activated carbon, uh, which is typically almost not quite the size of the diameter of your hair, powdered, fine, fine granular, uh powdered carbons. And then we also make a uh a granular activated carbon, which is a larger size uh uh particulate of carbon that usually is uh used in uh vessels and columns where you're passing water through uh the vessel and the granular activated carbon. In the powdered carbon uh application, you're actually spraying the carbon into the water or the gas to remove the can to capture the contaminant, whereas in the granular, you're passing the water or the air through a column of the activated carbon. So size is the difference between the different forms that we make.

SPEAKER_02 5:08

And uh, you know, I think it's important for our listeners to understand that activated carbon is not a commodity, it's really more of a specialty product. Um, what is it that makes it uh you know technically differentiated and how does your team uh work with customers to tailor uh you know your products to those specific applications?

SPEAKER_00 5:26

Yeah, that's a good question. You know, uh different customers, whether they're in the water space or the co-fi power plant, uh food gas uh uh uh markets, uh, their contaminants are different. And um even different sites that burn different types of coal or different drinking waters have different contaminants at different contamination levels. And so we have to design the carbon to match those contaminants and the contaminant size, a type of polarity in the contaminants. And and so that gives us an opportunity to customize the activated carbon to really have a strong affinity to remove the contaminants. So that's where the opportunity comes, is that different contaminants require different chemistries, different physical forms of our carbon uh to be effective. And so we're able to custom make the carbon by changing the surface area, the chemistry on the surface of the carbon, and the pore size, uh, the size of the holes that we we make in the activated carbon.

SPEAKER_02 6:36

So we're gonna get to uh Eric on the next question, but just one more here for you, Joe, um uh on this. So could you walk us through kind of practically, you know, how does um you know activated carbon actually work at a water utility, you know, from detecting PPAS problem to selecting treatment technology? You know, what does the process kind of look like?

SPEAKER_00 6:58

Okay. Well, you could think of a um a water treatment facility as a mini chemical plant. Um you take the dirty water comes in, whether it comes from groundwater or surface water, lakes, rivers, it's dirty water. When it comes into the municipal uh water site, it gets treated. Uh, whether the first thing may happen is you remove the particulates, the particles, uh, maybe by a filtration step. Uh, then you may add chemical additives to what we call uh coagulate the uh particulates and have them drop out. You may add disinfectants. Uh you may treat uh the dirty water with uh activated carbon uh uh vessel uh to remove EFAS, taste and odor components. You may spray that uh powdered activated carbon into a a uh a water basin or a vessel uh to remove the contaminants. So there's just a sequence of different steps that occur in a particular water site to go from dirty water to clean water. Okay, so that's the way you got to look at it. And so different sites use different steps or in different sequences. So we got to understand what the customer sites require and what their contaminants are.

SPEAKER_02 8:23

Okay, thanks for that, Joe. That's that's a great overview. And I'd just like to turn to uh Eric here. Um, so if we look, you know, a couple of years ago, you know, the the uh PAC business was really dominated by mercury control at plants, but we see sort of you know, quarter by quarter for some time here that customer mix has really been been shifting, right? So, you know, from an operational standpoint, what levers are it, you know, are you pulling to kind of optimize that Red River uh facility for this uh broader and more diverse set of markets?

SPEAKER_03 8:55

Yeah, one of the really exciting things about ARC. Um when I first came here in 2012, we made two different products, uh two at Red River. Today we make 24. And a lot of that is a strong collaboration between me and the operating team and Joe and the RD team. Uh Joe's team is really, really good at being able to come up with customized products to help uh our customers deal with their specific problems. Uh what we have to do here on the operating side is work with his team, work together to translate that into a production process that can make it at high volumes and good efficiencies and a cost that makes good sense. And so that's what we do. That's what we're organized around. That's how we uh respond to the marketplace. And that is what's necessary in a site like this to be wildly successful, is to be able to adapt, as opposed to just lock in on the two things you want to make. We have to have the ability to flex to make the 24 things our customers want and need.

SPEAKER_02 10:08

And Eric, when you uh you know arrived at the Red River uh facility and assessed the situation with GAC, uh, what exactly did you find? You know, could could you kind of walk us through uh the design flaw flaws that were inherited from the original engineering firm and why they proved uh you know so difficult to you know diagnose and fix?

SPEAKER_03 10:28

Yeah, the the fundamental issue that we ran into here was um a miss on what the off-gases were going to be from the process. Uh we're an environmental company, and so uh ensuring that we are absolutely minimizing our environmental footprint by what we do uh is important. And so what what we found, what one of the things that that we uncovered was um just a big miss by the design firm in what those off-gases were going to look like. Uh because the of that miss, the design just didn't accommodate that either both the gas flow and the conditions under which it had to be transported so we could treat it. And that caused us a number of operational issues that just were uh at the end of the day, just not something we could overcome.

SPEAKER_02 11:24

And uh something that has come up uh in in the earnings results calls with the management uh has been the discovery uh about the uh thermal oxidizer and how that led to the decision to pause the GAC you know production. Um could you share sort of uh you know what exactly does a thermal oxidizer do? Um what's the testing reveal? What is the testing revealed about the existing system's limitations and and what and why that finding made continued production unworkable?

SPEAKER_03 11:54

Yeah, so a thermal oxid, uh what a thermal oxidizer does is it basically destroys the organic compounds that are emitted from the production process. We're taking a coal-based material, uh, and then we are uh cooking it, basically, cooking it. And when you do that, you get a lot of volatile matter that comes off. Um that that volatile matter needs to be destroyed, and that's what a thermal oxidizer does. It oxidizes those under high temperature uh and makes CO2 and water. And so that's uh a key portion of our uh emission control um process and uh critically important to the way that the plant needs to operate. Well, what we found was that the the uh thermal oxidizer that we had in place that we were using just wasn't sized properly for the types of gases that we were going to be feeding it. And that just created a problem that said this isn't going to work at the scale that we want.

SPEAKER_02 12:59

So Joe, I'd like to kind of zoom out a little bit here to look at the competitive landscape. Uh and we know GAC demand is is strong and and and prices rising, uh, but why is it that the competitors that you know are not building more capacity? Like, could you just maybe please walk us through the supply side of this equation? Um, who are the main producers out there? Uh, what barriers exist for the new entrance? Uh, and where does ARC uh you know fit in there with its with its brownfield position?

SPEAKER_00 13:29

Yeah, the the two, uh as everyone knows, the two predominant uh activated carbon granular activated carbon producers in the US are North and Calgon uh carbon. Uh well, let's just take a step back. You know, designing, constructing, and operating a uh granular activated carbon plant from bituminous coal is very complex and very expensive. Uh it takes a lot of design and uh right equipment, right source of coal, as we found, uh, to make this happen. So it's not just let's jump into it and get something started up in months. You know, it takes years to construct a plant and get it done and get it started up and done right.

SPEAKER_02 14:19

And now just shifting over to uh to Eric in terms of the path forward for GAC. So, you know, you you're now overseeing uh a comprehensive engineering uh review uh with a new firm and equipment uh provider. Uh what are the key questions that review needs to answer? And why do the company need cost and timing estimates refined to a much tighter tolerance before um you know being ready to commit that capital?

SPEAKER_03 14:47

Yeah, so we we talked about the importance of making sure that our environmental controls are robust. Uh, and that is the key here. There are a number of different design options, a number of different ways that you can go about uh uh destroying those organic materials. Um, engineering's the application of science to find the economic solution to the problem. They made me memorize that 50 years ago when I was a freshman in college. Um, so we've got to apply science uh to find the economic solution to the problem. Uh, there's a number of different options. We're we're we're whittling those down and getting to the design that we think is the gonna be the best for us. Um, in order to do that, uh, there's quite a bit of work that needs to be done. And uh the detailed engineering is what will give us an estimate that has a tolerance on it that we can live with. Uh, don't want to just have it be me going through and saying, here's the equipment cost, therefore it's gonna be about this amount to put it in. Uh, we want to know uh with some precision what's that really gonna cost. Important for us to get this right. Uh, you you don't want to get it wrong, and uh because the cost of getting it wrong can be high. And so we need to be measured. Uh, we need to apply good science, uh, and we need to be thoughtful around how we want to do this going forward. And that's what we're doing right now.

SPEAKER_02 16:16

And and Joe, I understand that uh, you know, ARC is looking at uh and your team is looking at some uh adjacent opportunities. We don't stop with uh you know uh PAC and GAC production. There's some other interesting things going on. Um uh for example, uh I understand you're evaluating um reactivation and acid washing as part of the strategy. Uh could you explain for our listeners um exactly what reactivation is? Uh why is this uh commercially attractive for the company and what does it mean for um you know PFAS destruction?

SPEAKER_00 16:49

Okay. Just those are two different things. So let's start with acid washing uh as a as the first opportunity. Um bituminous coal-based carbons uh contain trace amounts of uh metals, uh, just because coal, bituminous coal is from the ground and it contains these minerals, um, and in particular arsenic is one that uh the EPA really looks out for. Uh and so acid washing is a process where you take a granular activated carbon, even or even a powder, and you uh wash it with acid to remove the trace metals so that when you pass the dirty water through it, it won't uh extract. Uh there's no more trace metals to extract into the clean water. Okay, so that is uh something that a municipal water site does what we call backwashing. They could backwash the carbon to remove the arsenic, but if we had no arsenic and did acid washing, then they wouldn't have to do that. So some cases it's more effective for us to provide an acid wash carbon. In other cases, the municipal water site can backwash, okay? But then they would have to have the footprint and the equipment to do that. So if we remove it, acid wash ahead, they wouldn't need to do that. So that's a value add for a particular municipal water site, okay. Uh reactivation, let's talk a bit about reactivation. Um, when you use an activated carbon to remove a contaminant like BFAS, eventually the carbon is going to be filled with the contaminant and you cannot absorb anymore. So in the industry, we call that it's a spent carbon. Uh so instead of throwing it away, landfilling it, you we we do what we call reactivation, where we take the spent carbon and we heat it up uh to high temperatures, and the PFAS or the contaminant will come off. We use a bit of steam to help strip off the contaminant, but once you strip it off back into the gas phase, you got to do something with a contaminant. So in PFAS, typically you have to destroy it. So that's the destruction step. So you desorb it from the spent carbon into the back into a gas phase, and then you destroy it. And in most cases, activated carbon producers use uh incineration as a destruction technology. So therefore, as you uh uh strip off the spent carbon and refresh the spent carbon, you can reuse it. So you don't have to start with a virgin carbon. So recycling the carbon is very important to the economics of the industry and also will help in making sure that we can have extend the supply chain uh so that it doesn't just depend on virgin carbon. So those are two value-added steps that we can uh that we're investigating as possible add-ons to our standard virgin granular activated carbon production.

SPEAKER_02 19:58

And the Corbyn facility uh you know was recently announced to be you know idled, uh, but management has said it may it maintains uh you know retains some meaningful optionality. Uh could you walk us through, you know, what are the alternative product pathways that you're pursuing there and and what what are the realistic timelines uh for these?

SPEAKER_00 20:18

Yeah, that's that's a good question. I mean, when you talk about coal, you could talk about a material that contains high levels of carbon, carbon. Uh, and that could be used for certain things. And it also contains what I what we talked about minerals, trace metal min uh minerals and metals. And all three of those things, the carbon, the metals, and the minerals, are very valuable. We take the carbon part and we may activated carbon, but there's other things that we can do with the cleaned uh washed coal. The metals can be recovered as critical mineral matter and uh uh uh rare earth elements. Uh, and we can also use um the carbon part as a purified uh coal for burning and creating energy. So we're looking at a portfolio of applications where the um the carbon or the mineral or the uh trace metals can be used as a value-added uh business. So we're looking at opportunities in uh mixing some of our carbon materials into asphalt. The asphalt industry is very interested in recycled carbon-rich materials, and so that could be a possibility. We have projects where we're looking at rare earth elements and critical mineral matter recovery. Um, and also we're also looking at the areas where we can take the pure carbon and work with a partner to convert it into synthetic graphite for energy storage applications. These are all. Require a lot of development, a lot of partnerships, and working with uh uh what I call lead adopters to help us pull pull ourselves into the marketplace. These things are in the development stages, uh, require a lot of what I call demonstration. And we're we're thinking they're somewhere between three to five years off.

SPEAKER_02 22:22

Okay, fantastic. Thanks for that, Joe. Uh, we're getting close to uh you know closing here. So for both of you, uh a question. So, you know, finally for investors who are uh weighing the risks and rewards here, like Eric, what gives you the you know personal confidence that the GAC problems are genuinely solvable? And and Joe, for you, uh when production does ramp at economic scale, how durable is ARC's competitive position and what will be an increasingly you know contested market?

SPEAKER_03 22:51

So maybe I'll go ahead and start. Yeah, the the what gives me confidence is that we're doing it the right way. We're we're stepping back, we're we're doing this in a thoughtful and rigorous way. Um, if we do the engineering right, uh, we're gonna get a good result. Uh, I think we have the a strong team here who can get this done. I think we're absolutely the right players to do this. We have the infrastructure at our Red River plant to support this process very well. We will be able to do it less expensively than anybody else. Uh, and I think we can do it in a very robust way. So uh I've been developing processes uh similar to this and like this for a very long period of time. This is very doable, uh, and we have the right to do it. And so uh I I feel very good about the way that we're going about this, uh, and that the result is going to yield us the product at the quantity, the quality, and the cost that we need.

SPEAKER_00 23:53

So let me add to add on to that. Uh, you know, although we have paused uh commercial production at the planned plant site, we haven't stopped interacting with customers and we're being cheered on. The products that we're making with the different co sources are performing very well in customer testing. Uh they're still, you know, we are able to make it at uh pilot scale, uh lab scale, and we're continuing the interactions with customers, engineering companies, consultants, and they're all saying that this is a product they want and they're cheering us on. So I feel just like Eric, very confident that uh uh we'll be able to make this product at the volume, at the performance that we need to solve our customers' problems.

SPEAKER_02 24:42

Okay, fantastic. So, Joe and Erica, this has been a great uh deep dive today, and we've covered a lot of ground. Uh I really appreciate how you're able to you know package what are very technical topics in a way that the non-technical people like myself can understand. And I think uh investors will really appreciate that uh you know as well. So so again, thank you uh so much. Uh, and I hope that uh both of you can can join us again for a future event.

SPEAKER_00 25:07

Thank you, Peter and Tim. Thanks for having us.

SPEAKER_01 25:10

Peter, thanks for the thoughtful questions and gentlemen. Thanks for joining us today to discuss ARC. That was really a very interesting uh deep dive, and I appreciate the technical angle as well. So have a great afternoon. Thank you for listening, and don't forget to subscribe, as well as visiting www.watertowerresearch.com to stay up to speed on the company's small cap written research reports, podcasts, fireside chats, industry specific symposiums, and conference schedules. We will see you next time for another edition of the WTR Small Cap Spotlight Podcast. Finally, a special thanks to the producer and editor of the podcast, Krista Fitzpatrick.