Arq, Inc. (ARQ)

Executive Summary / Key Takeaways

• ARQ has completed a remarkable turnaround of its foundational Powdered Activated Carbon (PAC) business, achieving 100% profitable contracts in 2025 versus 24% loss-making volumes in December 2022, with trailing twelve-month adjusted EBITDA improving by over $25 million to $16.7 million as of Q3 2025.
• The Granular Activated Carbon (GAC) growth initiative faces material execution challenges, with design flaws and feedstock variability pushing full nameplate capacity to mid-2026, creating a critical test of management's operational capabilities and capital efficiency.
• Market fundamentals for GAC are exceptionally strong, with supply shortages persisting through at least 2027-2028, PFAS regulations potentially driving 3-5x demand growth, and renewable natural gas applications adding 45-400 million pounds of incremental demand by 2030.
• The company's asset base provides significant downside protection, with management conservatively estimating replacement value at over $500 million, supporting the investment case while the GAC ramp matures.
• The central investment tension lies between the PAC business's proven cash generation and the GAC ramp's execution risk; success hinges on resolving feedstock processing issues and achieving nameplate capacity, while failure could strain liquidity despite the asset-backed foundation.

Setting the Scene: From Coal Waste to Activated Carbon Cash Flow

Arq, Inc., originally founded in 1997 as Advanced Emissions Solutions in Greenwood Village, Colorado, has evolved from a niche environmental technology firm into a dual-stage investment story. The company manufactures consumable air, water, and soil treatment solutions based on activated carbon, operating primarily in one reportable segment: Advanced Purification Technologies (APT). Within this segment, ARQ runs a mature Powdered Activated Carbon (PAC) business that has recently achieved sustainable profitability, while simultaneously developing a Granular Activated Carbon (GAC) facility at its Red River Plant that represents the primary growth engine.

The activated carbon industry sits at the intersection of environmental regulation and industrial necessity. Demand drivers include coal-fired power generation (mercury emissions control), municipal water treatment (PFAS contamination removal), industrial purification, and emerging applications in renewable natural gas (RNG) production. The GAC market specifically faces persistent supply shortages with minimal new capacity entering the market, as typical development timelines span three to four years. This supply-demand imbalance creates favorable pricing dynamics, with ARQ management noting that spot purchase requests arrive at pricing above existing contract rates.

ARQ's competitive positioning differs materially from established players like Cabot Corporation (CBT), Ingevity Corporation (NGVT), and Kuraray (KURRY)'s Calgon Carbon subsidiary. While these competitors operate at global scale with diversified feedstock sources (coal, coconut shells, wood), ARQ has carved a niche around proprietary waste-derived technology. The company owns the Five Forks lignite coal mine and controls bituminous coal waste reserves, using its Corbin, Kentucky facility to convert waste into Arq Powder feedstock. This vertical integration provides cost advantages and a domestic supply chain that insulates ARQ from import tariffs and global logistics disruptions, a meaningful differentiator in today's trade environment.

Technology, Products, and Strategic Differentiation

ARQ's core technological advantage centers on its ability to transform coal waste into high-quality activated carbon products with lower ash content than traditional alternatives. This matters because lower ash reduces disposal costs for customers and improves adsorption efficiency in water treatment applications. The process is patent-protected, creating a defensible moat around the waste-to-value conversion methodology. For investors, this translates into structurally lower raw material costs compared to competitors who must purchase virgin feedstock, providing a gross margin advantage that becomes more pronounced as production scales.

The PAC business exemplifies successful strategic repositioning. Historically dependent on coal-fired power generation for mercury control, ARQ has diversified into water treatment, cement production, and industrial applications, reducing power generation exposure to under 40% of volumes by mid-2025. This shift is significant as water and industrial markets command higher average selling prices, driving eight consecutive quarters of double-digit year-over-year ASP growth. In Q3 2025, ASP increased 7% year-over-year and 6% quarter-over-quarter, demonstrating pricing power in a market where ARQ's low-ash product commands a premium.

The GAC facility at Red River represents a more complex technological challenge. Commissioned in August 2025, the first production line targets 25 million pounds of annual nameplate capacity. However, the ramp-up has exposed design flaws in material handling systems, particularly around shaping and binding product before kiln activation. The feedstock variability from Corbin's bituminous coal waste exceeds initial expectations, causing granules to lose structural integrity during processing. Management's response—exploring blending with drier coal to reduce moisture content—reveals a pragmatic approach to overcoming engineering constraints without complete facility redesign, which would cost significantly more.

Alternative product development adds optionality. ARQ is testing its Arq Powder as an asphalt additive that could improve durability and freeze-thaw resistance, with early indications suggesting the entire Corbin output could be absorbed by this market alone. A non-binding MOU to test purified coal as a silicon wafer feedstock for semiconductors, DOE collaboration on rare earth mineral extraction, and evaluation of synthetic graphite production all leverage the same core processing technology. These opportunities are not mutually exclusive, meaning success in one area could generate byproducts for others, creating multiple paths to monetize the Corbin asset base.

Financial Performance & Segment Dynamics

The PAC business's financial transformation provides the foundation for ARQ's investment case. In Q3 2025, the segment delivered its eighth consecutive quarter of double-digit ASP growth while SG&A expenses declined 43% year-over-year. Gross margin compressed to 28.8% from 36.4% in Q1 2025, but this reflects GAC start-up costs rather than PAC weakness. Management explicitly stated that adjusted EBITDA included "several million dollars" of GAC inefficiencies, implying the underlying PAC business generated even stronger performance than consolidated results suggest.

The magnitude of the turnaround becomes clear when examining the trajectory. In December 2022, 24% of PAC volumes were loss-making; by 2025, 100% of contracts contributed positively. Crucially, this transformation converted a cash-consuming operation into a self-funding business that management believes can cover maintenance capital expenditures across the entire company. Trailing twelve-month adjusted EBITDA improved from negative $8.7 million in September 2023 to positive $16.7 million in Q3 2025—a $25 million swing that demonstrates operational leverage and pricing discipline.

GAC's financial impact has been predictably negative during commissioning. Q3 2025 saw approximately $3.6 million in increased costs from direct labor, utilities, and equipment rental as the Red River Plant began commercial operations. The $1.9 million of preproduction feedstock costs reclassified to R&D in Q2 2025 further obscures true operational performance. These expenses are non-recurring by nature but will persist until production reaches scale. Management expects margins to remain pressured through Q1 2026, after which fixed cost absorption should drive meaningful margin expansion.

Capital allocation reveals management's confidence and constraints. The December 2024 refinancing replaced a $10 million term loan with a $30 million revolving credit facility from Midcap Financial, materially reducing borrowing costs and expanding liquidity. Full-year 2024 CapEx of $80 million exceeded forecasts by $10 million, with management attributing overages to design issues that "should have been identified by former partners." This admission signals improved governance under CEO Robert Rasmus, who took responsibility for cost overruns while implementing more rigorous project controls. The 2025 CapEx forecast of $8-12 million suggests a dramatic reduction in investment intensity as the company shifts from construction to optimization.

Outlook, Management Guidance, and Execution Risk

Management's guidance embeds a deliberate level of conservatism following past commissioning delays. The revised timeline for reaching GAC nameplate capacity—mid-2026 versus previous expectations of Q4 2025 or early Q1 2026—reflects lessons learned from mechanical issues and feedstock variability. The critical path now depends on installing a purpose-built thermal oxidizer with an $8-10 million price tag, which requires a one-week production pause. This introduces a hard capacity ceiling of approximately 15 million pounds annually until installation completes, limiting revenue upside through the first half of 2026.

The final investment decision for a second GAC line has been pushed to coincide with Phase 1 capacity achievement, a prudent move that reduces concurrent execution risk. Phase 2 is already permitted and would cost an estimated $75 million at $3 per pound of annual production, but management prefers to fund expansion through internal cash flow rather than equity issuance. This capital discipline prevents dilution while forcing operational proof before committing additional resources.

Market assumptions underpinning the growth story appear robust. The EPA's PFAS National Primary Drinking Water Regulation, issued in April 2024, could drive 3-5x demand growth as compliance deadlines approach. Management notes that public awareness and major lawsuits against historical PFAS producers are accelerating industry response, with American Water (AWK) recently securing a nine-year GAC supply contract that removes capacity from the market. In the RNG segment, current consumption of 45 million pounds annually could grow to 90-450 million pounds by 2030 as biogas production expands. ARQ's strategy of holding back 40% of Phase 1 capacity for these higher-priced markets (20-40% premium to water treatment) could yield significant margin upside if execution delivers.

PAC guidance suggests sustainable double-digit millions in annual EBITDA, with management now believing the business can "do even more than" cover maintenance CapEx. This confidence stems from continued ASP improvements and identified cost reduction opportunities in both operational and corporate functions. Natural gas price expectations through 2025 remain stable, supporting demand from power generation customers who switched from gas to coal in 2025 due to relative cost advantages.

Risks and Asymmetries

The most material risk remains GAC commissioning execution. Design flaws in material handling, specifically 90-degree angles that catch moist, sticky feedstock, have required processing methodology adaptations. While blending with drier coal offers a lower-cost solution than facility redesign, it introduces new variables around feedstock sourcing and cost structure. If variability persists after thermal oxidizer installation, full capacity could be delayed beyond mid-2026, compressing the return on $80 million of invested capital and potentially requiring additional equity or debt financing.

Market timing risk cuts both ways. While supply shortages create pricing power, any softening in PFAS enforcement or slower RNG adoption would reduce demand just as ARQ's capacity comes online. Competitors show no meaningful supply response today, but Kuraray's Calgon Carbon holds dominant market share with patented PFAS removal technologies and established customer relationships. If ARQ's product performance in field trials disappoints, securing premium pricing in industrial markets could prove difficult despite supply constraints.

Financial leverage remains manageable but could become a constraint. The $30 million revolving facility had $13.8 million drawn as of December 2024, leaving limited headroom for operational shortfalls. While the debt-to-equity ratio of 0.16 appears conservative, negative free cash flow of -$74.7 million on a trailing twelve-month basis consumes liquidity. The $8.5 million in restricted cash collateralizing surety bonds further reduces available capital. If GAC ramp delays extend beyond mid-2026, ARQ may need to tap equity markets despite management's preference against dilution.

On the positive side, several asymmetries could drive upside beyond base case assumptions. Success in asphalt additive commercialization would create a parallel revenue stream that could absorb all current Corbin production, effectively derisking the feedstock strategy while GAC optimization continues. Rare earth mineral extraction or synthetic graphite production could unlock additional value from waste streams, turning environmental remediation into multiple revenue sources. Perhaps most significantly, the current supply shortage could intensify if EPA accelerates PFAS compliance timelines or if major utilities lock up capacity through long-term contracts, pushing spot prices even higher for ARQ's uncontracted volumes.

Valuation Context

At $3.36 per share, ARQ trades at an enterprise value of $170.96 million, representing approximately 1.57 times trailing twelve-month revenue of $108.96 million. This revenue multiple sits between Cabot's 1.24x and Ingevity's 2.62x, reflecting ARQ's smaller scale and unprofitable status versus Cabot's established profitability but superior growth trajectory compared to Ingevity's declining business. The EV/EBITDA ratio of approximately 10.23x appears elevated for a company with negative operating margins, but this reflects the recent transition to positive EBITDA and the market's forward-looking assessment of GAC potential.

Balance sheet strength provides a valuation floor. With $7 million in unrestricted cash, $30 million in available revolving credit capacity, and a conservatively estimated $500 million asset replacement value, the enterprise value implies a significant discount to tangible asset value. This suggests downside protection independent of operational success, though realizing this value would require asset sales that management has shown no intention of pursuing. The low debt-to-equity ratio of 0.16 and current ratio of 1.10 indicate manageable near-term liquidity risk, while the quick ratio of 0.54 reflects the working capital intensity of inventory-heavy manufacturing.

Profitability metrics remain challenged but are improving directionally. Gross margin of 36.84% exceeds Ingevity's 33.99% and significantly exceeds Cabot's 25.48% (which benefits from scale but suffers from commodity exposure). Operating margin of -2.39% and profit margin of -3.33% reflect GAC start-up costs and underutilized fixed assets, but the PAC business's underlying margins exceed 40% when excluding these effects. The path to sustainable profitability depends on GAC volume ramp rather than pricing pressure, a healthier dynamic than many early-stage industrial companies face.

Peer comparisons highlight ARQ's unique position. Cabot generates $3.71 billion in revenue with 8.91% net margins and 22.82% ROE, but its activated carbon business faces margin pressure from commodity competition. Ingevity's struggles show in its -4.77% profit margin and -204.65% ROE despite $1.41 billion in revenue, demonstrating the risks of high leverage and market concentration. Kuraray's Calgon Carbon subsidiary benefits from global scale and patented PFAS technologies but faces currency headwinds and slower growth. ARQ's domestic, waste-derived model offers a differentiated value proposition that could command a premium multiple once GAC execution is proven.

Conclusion

ARQ presents a classic industrial turnaround story where a revitalized core business funds an ambitious growth initiative, backed by tangible assets that limit downside risk. The PAC segment's transformation from cash consumer to cash generator creates a self-sustaining foundation that can fund maintenance needs while management solves GAC commissioning challenges. This reduces the binary nature of the investment; even if GAC ramp delays extend beyond mid-2026, the company can operate as a profitable, albeit smaller, business rather than facing existential liquidity risk.

The investment thesis ultimately hinges on operational execution rather than market development. Demand for GAC is not in question—supply shortages, regulatory tailwinds, and premium pricing in RNG markets create a highly attractive commercial environment. The variable is whether ARQ can consistently process variable feedstock through a facility with known design constraints. Management's decision to delay Phase 2 investment until Phase 1 proves itself demonstrates capital discipline, while the exploration of alternative feedstock blends shows technical adaptability.

For investors, the key monitoring points are GAC production rates exiting 2025, the timeline for thermal oxidizer installation, and ASP trends in spot markets. Success on these fronts could drive meaningful multiple expansion as the market rewards proven execution with a scarce asset in a supply-constrained market. Failure would likely compress the stock toward asset value, but the $500 million replacement cost of mines, facilities, and permits provides a hard floor that distinguishes ARQ from asset-light growth stories. The margin of safety lies in the ground; the upside lies in the kilns.