November 25, 2014

MagneGas' Industrial Plasma

by Debra Fiakas CFA

Alternative chemicals developer MagneGas Corporation (MNGA:  Nasdaq) is posting another guard at the gate.  The company recently filed a patent application to protect new enhancements of its plasma arc technology and gasification system.  Plasma is any gas taken to a whole new phase through extremely high temperatures.  For perspective the sun is actually a very large ball of plasma.  Here on Earth MagneGas is using its proprietary system to gasify carbon-rich liquids such as municipal wastewater to produce hydrogen gas for industrial applications and vehicle fuel. 

Many investors have probably heard about plasma gasification technology and might be wary that there is little to differentiate the MagneGas system from everyone else.  Granted MagneGas is not the first to use a plasma torch powered by an electric arc.  The electric arc provides a spark to ionize a gas and perform an operation like cutting metal.  Electric arc welders, torches and furnaces are widely used in manufacturing construction and solid waste treatment.

However, MagneGas has a lengthy history with plasma arc technology.  The company’s engineers have figured out how to maintain a stable electric arc under water.  Organic matter in the water is catalyzed by the electric arc and turned into a usable gas product.  The company calls it ‘submerged electric arc’ and already has received patent protection for their unique application, process and design.  MagneGas management touts its submerged electric arc innovation as more effective than vacuum or air electric arc technologies, especially when it comes to liquid wastes.

Technology Turns into Product with Large Market Opportunity

The company is using its plasma gasification system called Venturi to process waste water into a hydrogen-based alternative fuel.  The fuel is sold under the brand MagneGas2 as a substitute for natural gas to power industrial equipment or as an alternative to acetylene.   A highly flammable colorless gas, acetylene is put to wide use by industry, principally as feedstock for production of chemicals like butanediol.  However, acetylene is also commonly used for welding applications and metal cutting because of its high flame temperature.  The automotive, aerospace and glass industries are big consumers of acetylene.  Yet even these industrial users are sensitive to acetylene’s origins from hydrocarbons via calcium carbide (coke) or from methane combustion and the greenhouse gases that are emitted during the production steps.

MagneGas2 has been well received by the metalworking market because it is over a third faster than acetylene.  Using MagneGas2 also reduces the oxygen requirement, saving industrial customers time and money on the job, not to mention improving safety conditions for workers.  The company is planning demonstrations of MagneGas2 at trade shows to build awareness and interest.  To accelerate the penetration of the industrial market, MagneGas recently acquired a well-established gas distribution company based in Florida.  The plan is to cross-sell MagneGas2 to the distributor’s customers.

The company has a challenge ahead.  The acetylene market is highly concentrated and dominated by a few well-established suppliers, which compete intensely on price.  Air Products and Chemicals (APD:  NYSE), Linde AG (LIN:  DE) and Praxair (PX:  NYSE) are the incumbent acetylene suppliers, from which MagneGas will need to grab some market share by converting users of acetylene to MagneGas2.

Additional Markets

Management has additional markets in its sights.  The technology can also be used for sterilization so waste streams can be treated and re-used or safely disposed.  Plasma processing of waste is ecologically clean and the lack of oxygen in the process prevents formation of toxic materials.  An alliance with Pioneering Recycling has been struck to gain access to the medical waste market, where contaminated organic matter is a common problem.  The alliance is planning to use the Venturi system in sterilization mode to efficiently and effectively treat liquid medical wastes.

MagneGas has also teamed up with Future Energy in Australia to target the energy market.  An unnamed third party has been lined up to help with a demonstration to prove the viability of co-combusting MagneGas2 at a coal fired power plant.  The expectation is for higher electric output and reduced emissions.

Interested parties can also buy the equipment used to gasify liquid wastes such as chemicals or sewage.  The company is prepared to sell its plasma arc flow refinery in various sizes from 50 kilowatts to 500 kilowatts at about $10,000 per kilowatt.  Sales of the refinery system have been far and few between and do not seem to be a promising revenue source for MagneGas without a more serious business development effort.   

Better Mouse Trap at Bargain Price

It appears MagneGas really has invented a better mouse trap in the form of ‘submerged electric arc’ technology, but investors have yet to acknowledge the earnings potential of the invention.  Then again valuation is challenging.  The company has recorded revenue from early sales of MagneGas2 as well as development contracts, but the company has yet to post a profit.  In the most recently reported twelve months sales totaled $1.1 million resulting in a net loss of $6.8 million.  Accordingly, MNGA is valued at 27.5 times sales and its price-earnings multiple is negative.  

MNGA shares are trading below one dollar per share after backing down from a 52-week high stock price of $2.45.  The retreat in the share price might seem appealing for the bargain hunters.  However, investors interested in MagneGas technology will need to be patient in waiting for the company’s market penetration strategy to bear fruit.  The business model probably will take at least two to three years to unfold.  Thus watching quarterly results could get frustrating for investors with a need for fast action.  Trading volume in MNGA shares has built up to about 250,000 shares per day, helping to narrow the bid-ask spread to just under a penny.  Nonetheless, the stock is relatively volatile as measured by a beta of negative 2.80.   A long position in MNGA could quickly show a loss  -  at least on paper.

Surprisingly given the modest profile of this emerging business, a sizeable short position has built up in MNGA shares equal to about 1.3 million or 6.3% of the shares not held by insiders.  If the naysayers are proven wrong about MagneGas, the stock could get a boost higher as traders have to buy shares to close out their losing short positions.

In the meantime, patient investors might consider a reasonable case for sales, earnings and valuation for MagneGas based only on the market potential of its most developed product  -  MagneGas2.  If the company captures just 0.1% of the $40 billion world industrial gas market by successfully selling MagneGas2 as acetylene and natural gas substitutes, it could realize $40.0 million in annual sales.  In the long-term a 10% net margin is reasonable for MagneGas based on the success of incumbents in the industrial gas market.  That implies estimated earnings per share for MagneGas near $0.11.  The large chemicals and industrial gas suppliers are trading at an average of 18.0 times earnings suggesting that MagneGas shares could be worth $1.98 per share under this scenario.

Now that would be financial plasma!

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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November 24, 2014

Walmart Loves SolarCity

SolarCity (NASDAQ: SCTY) is up 5% on an unsurprising new solar deal with Walmart (NYSE: WMT)

By Jeff Siegel

slarwmtSolarCity (NASDAQ: SCTY) investors were a bit giddy Friday.

The company enjoyed a nice bump after it was announced that Walmart (NYSE: WMT) had hired the company to install new solar projects at Walmart facilities in up to 36 different states over the next four years.

SCTY has actually been working with Walmart since 2010, so it's not particularly surprising that Walmart's next round of solar installations is being carried out through SolarCity.

Now while I'm certainly pleased to see SCTY continue its healthy relationship with Walmart, it's not the actual solar installations I'm so excited about this morning. You see, this deal includes energy storage projects as well.

As I've mentioned in the past, it's the company's storage initiative that I believe will help keep it ahead of the curve. And for the past few years, SCTY has been testing storage projects at 13 Walmart locations. This new deal adds another ten storage projects to the list.

Of course, despite today's news and the nice push, SCTY is still trading below $60. Well below where I expected to see it this time of year. So it's still a pretty good bargain if you're looking for a long-term play in the solar space.

I currently have a one-year price target of $70.

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

November 23, 2014

Yield Co Pricing Less Irrational, But Plenty Of Opportunity Left

Tom Konrad CFA

  Yieldcos are companies which own clean energy assets and use the cash flows from them to deliver a high level of current dividend yield and (in some cases) the promise of significant dividend growth.  Investors like them because yield is scarce in the current low interest rate environment. 

While investors like the relatively high yield offered by yield cos, they are only starting to discriminate between yield cos on the basis of current and future dividends.  Four months ago, I published the following chart and noted that the yield cos with the highest current and expected yields were the most attractiveYieldcos by yield.png.  They were (from most to least attractive): "TransAlta Renewables [TSX:RNW, OTC:TRSWF], Hannon Armstrong [NYSE:HASI], Capstone Infrastructure [TSX:CSE, OTC: MCQPF], Brookfield Renewable Energy Partners [NYSE:BEP, TSX:BEP], Primary Energy Recycling [TSX:PRI,OTC:PENGF], and Innergex Renewable Energy [TSX:INE, OTC:INGXF]."

In the four months since then, the six yield cos I listed have produced an average total return of 3.9%, compared to the remaining five, which lost an average of 5.3%, even after the payment of dividends.  These relative moves make current pricing slightly more rational, but a mere 9% relative move is not nearly enough to correct the mispricing in this new and still misunderstood sector of clean energy investing.

Below, I will present an updated version of the same chart, accounting for dividend increases and price moves in the meantime, along with a couple corrections about plans for dividend increases at Abengoa Yield (NASD:ABY) and NextEra Energy Partners (NYSE:NEP).  Note that while correcting these mistakes would have made ABY and NEP relatively more attractive, they were overpriced relative to my six picks, just less overpriced than I thought.  NEP remains relatively overpriced today.  I also incorrectly showed Pattern Energy Group (NASD:PEGI, TSX:PEG) as a US-listed company when, in fact, it is also listed in Canada.  I've corrected these mistakes in the following chart:

Yieldcos by yield Nov 2014.png
The most attractive yield cos are the ones shown in the upper right.  The vertical axis shows current yield, while the horizontal axis shows the expected increase in yield over the next two year, based on management targets.  The changes in bubble size are in part due to increases in market capitalization due to secondary offerings, and partly due to my decision to use full market capitalization, as opposed to just the market capitalization of the stock which is held by the public.

Ignoring the green London-listed yield cos which are almost impossible for a US investor to purchase, the two most attractive yield cos remain Hannon Armstrong (HASI) and TransAlta Renewables (RNW).  Neither has changed much in price, but Hannon Armstrong has become significantly more attractive because of an increased dividend. 

Two other notable moves are Pattern (PEGI)) and Primary Energy Recycling (PRI.)  Pattern has become more attractive after a 21% decline in its stock price (resulting in a 27% corresponding increase in yield.)  I've dropped Primary Energy from the new chart because the company is in the process of being taken private and has suspended its dividend in the meantime.

What will happen in the next four months?  If the market continues its slow moves to price yield cos more rationally, it's a good bet that the three most attractive yield cos (Hannon Armstong, TransAlta Renewables, and Capstone Infrastructure) will out perform the three least attractive yield cos.  Those are Terraform Power (TERP), NextEra Energy Partners (NEP), and NRG Yield (NYLD.)

I'm invested accordingly. 

Disclosure: Long HASI, BEP, PEGI, RNW, CSE, INE, PRI, TRIG.  Short NYLD.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

November 21, 2014

Northland Power's Solar-Backed Bond

By Beate Sonerud

Canada’s Northland Power (TSX:NPI / OTC:NPIFF) issued an asset-backed bond (ABS) last month through a SPV (Northland Power Solar Finance One LP). The amortising bond was a private placement of CA$232m with 18-year tenor. Semi-annual coupon is 4.397% and DBRS (Canadian credit rating agency) rated the issue BBB.

It is Northland’s first bond backed by renewable energy projects.  Since the bond is asset-backed the recourse is to the solar projects instead of to Northland Power. This allows Northland to move operational-phase renewable energy assets off their balance sheet, freeing up space for new renewable energy investments. The specific assets are six “Ground-Mounted Solar Phase I projects”, with each operating a 10MW solar facility that sell all electricity to the Ontario electricity grid.

Stable revenue streams for the duration of the bond are provided by the 20-year feed-in tariff contract between Northland’s solar projects and the Ontario grid. This is a good illustration of how policies providing price signals for green in the real economy can enable climate bond issuance. That the bond has achieved a BBB investment-grade rating without further credit enhancement is exciting: As feed-in-tariffs are in place in many countries, there are vast opportunities for other utilities to copy Northland’s model for ABS issuance backed by renewable energy assets that have their less risky operational phase.

Proceeds from the bond “will be transferred via intercompany loans to the six Ground-Mounted Solar Phase” and to Northland for “general corporate purposes”. Now, at first we were a bit worried about the latter, as Northland Power operates facilities for natural gas as well as wind, solar and hydro - meaning general corporate use of proceeds would have excluded the bond from our climate bonds universe.  However, we were happy to include it after Northland confirmed that the proceeds of the bond that are not used for the solar projects has been earmarked for the purchase of a large offshore wind project (Nordsee One) due to close early next year.

So why is that so exciting? Essentially the bond is an ABS version of the corporate use of proceeds bonds (such as Verbund) where proceeds are earmarked for specific green purposes. This matters as the bond not only refinances the underlying projects (that we would expect) but also enables Northland Power to grow its green portfolio - this additionally is what so many investors are looking for.

Now, Northland’s bond is not actually labelled green, but as we clarified that proceeds are aligned with a low-carbon economy, the bond issuance does fall into our unlabelled climate bonds universe. While we are happy to include the bond in our non-labelled climate bonds universe, future similar bonds could benefit from being labelled green. If Northland had decided to monitor and report on proceeds (and ideally gained a second opinion on green) we could easily have welcomed it to the green labelled universe.

Overall, exciting issuance structure – we hope to see it replicated by other utilities and renewable energy developers. Great work, Northland!

———  Beate Sonerud is Policy Researcher at the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

November 20, 2014

Amyris' Date With Destiny: Better Late Than Never

Jim Lane amyris logo

Amyris was dismissed by the critics some time ago, but is ately continuing a big comeback.

We have become so accustomed to receiving obituaries of Amyris (AMRS) that recently I was inspired to re-read the Devotions of John Donne to discover if, in fact, he wrote, “Send not to know for Whom the Bell Tolls, it Tolls for Amyris.”

Amyris, we were recently assured by short-sellers, was as dead as a doornail, just as Jacob Marley was reputed to be in the opening stave of A Christmas Carol — and it is therefore enough to startle the angels when the quarterly earnings roll in and we read that not only is Amyris alive and well, sales are up 177% for Q3 (compared to Q3 2013), the company is expanding to a second molecule, and expects “cash payback on its Brotas plant” by 2016.

It is tempting to see the story of Amyris as one of unexpected redemption, a rescue from Hades effected by the miraculous intervention of Olympian gods, as if Orpheus had gone down to the underworld and rescued biobased farnesane from certain oblivion.

But it probably is more of a mundane case of Chicken Littles amongst industry observers— the plant was not ready for prime-time when first launched, a gigantic learning curve was embarked on in the harsh light of public company reporting, and what we are seeing is success delayed, rather than the deliverance of a soul from the underworld. Turns out that Chicken Little, in looking at the 10-Ks and declaring that the sky was falling in, was wrong yet again.

Now, if the company spent a considerable amount of time in the penalty box, that it understood — this market in these times is always happy to whack a technology stock that mistimes the forward projection of its arrival at break-even. There is little doubt that the Amyrisians up in Emeryville would like to have arrived in 2012 where they are today, and that they have been chopped up in the public markets for running the trains late — and running the trains on time, as we might recall, even propped up Mussolini’s reputation for a number of years. It is a virtue never to be discounted.

But there is indeed good news from Planet Amyris, and we are delighted to see it.

The New Molecule

On the molecule front, Amyris is now selling, via its global distributor network, a second renewable ingredient under its Neossance brand. Neossance Hemisqualane is a pure, plant-derived, light emollient with high spreadability and proven performance characteristics. Amyris touts that “this ingredient addresses the mid-price emollient market with better performance and competitive pricing compared to existing products in this large and growing market.”

Chief Business Officer Zanna McFerson adds: “Building on the success of our Neossance Squalane product, and after positive reaction from more than fifty customers who sampled our new hemisqualane product, we are expanding our Neossance portfolio of ingredients with another high performance solution for the cosmetics industry.”

What is hemisqualane, again?

If you have not quite yet mastered hemidemisemi, er, hemisqualane — you might not have memorized exactly what an emollient is, either, unless you have been spending more time with QVC or the Home Shopping Channel than might be good for you. An emollient is a moisturizing skin cream that softens and relaxes.

Back in the days when I was gainfully working at ELLE magazine, we would have regarded the arrival of a new, high-performing emollient right before Christmas as evidence that Santa Claus exists and that no hope for a year-end bonus is too outrageous as long as it is grounded in the desire of people to have youthful-looking skin well past the age of 115.

Amyris adds:

“Neossance Hemisqualane is a natural alternative to petroleum-based paraffins and silicone ingredients. Neossance emollients offer many high-performance properties that make them ideal ingredients across beauty categories including skin, hair, sun care, makeup and cleansing.

“In skin care, hemisqualane’s great sensorial profile and high spreadability create elegant and light textures with a non-tacky, non-greasy and smooth finish. Hemisqualane has a soft and silky after-feel with the ability to maintain a persistent emollience on the skin, making it a superior ingredient for many skin care products. In addition, its ability to dissolve crystalline UV filters makes it an ideal ingredient for sun care products.

“In makeup, hemisqualane facilitates a smooth and even application for lipsticks and foundations due to its high spreadability. It also demonstrates excellent cleansing properties for makeup removal applications including for waterproof formulations like mascara.

“For hair care, hemisqualane has good slip and a soft after-feel, which are critical attributes for products like conditioners and styling products.

Not surprisingly, Amyris touts: “We are very encouraged by the early response and demand we are experiencing from some of the leading brands in Japan, the Americas and Europe.”

Face vs fuel

Now, we’ve written much about food vs. fuel — who hasn’t? But there’s been less written about “face vs fuel” which is to say, why are companies like Amyris that were supposed to make jet fuels and diesels on the road to massive impact on bottom line and society, making emollients?

Keep in mind that squalane is a hydrocarbon, and a terpene — and if you visited ABLC Net this past week you would have received quite an earful regarding the bridge between flavorings, fragrances and high-performance fuels that exists in the world of terpenes. There must be more than 50,000 of them in nature — and when you are delighted by the fresh scent of Ponderosa Pine as you trek through California’s natural wonderlands, you are in fact getting a whiff of terpenes. They are advantaged hydrocarbons, as well, when it comes to super-dense fuels — and farnesane, which is Amyris’ primary pivot point, is already a source of fuels via its partnership with Total and we may well see some large-scale production of same before the end of the decade.

But for now, Amyris is all about generating business, and as most of us holiday shoppers have observed, fragrances are selling at just a teency bit of a premium over diesel. Like $100 for 3.5 ounces, vs $3.50 a gallon.

The financials

Accordingly, as Amyris ramps up production, the operating results of the company have a tremendous focus on the chemicals side.

Cowen & Company’s Jeff Osborne writes:

“Amyris reported strong operational improvements in 3Q. Product revenue of $11.5 mn was up 177% y/y due to strong fragrance strains; however jet fuel sales appear to be ramping slowly due to regulatory delays. The company now expects to be cash flow positive in 2015 versus late 2014, due to a change in collaboration inflows. Brotas appears to be running well and cash cost is targeted at below $3/L.

He added: “Amyris introduced a new farnesene strain at the Brotas refinery during the quarter, which should allow sub-$3/L production costs. We were pleased to see the company transition from making high ASP fragrance oil to farnesene without any issues or elongated downtime. The plant has run smoothly for 3 months, which should allay some investor fears after an up down initial 15 months out of the gates.”

Looking forward, Cowen & Co expects:

“About $30 million of renewable product sales in 2014 and a doubling of that in 2015, with a cadence of $10 mn per qtr in 1H15 and $20 mn per quarter in 2H15, as 6 new molecules ramp. Management reiterated that Brotas will have reached a cash payback by early 2016 as the company focuses on maintaining a total cash gross margin structure over 60%

Osborne warns: “We are keen to see how the company handles marketing 1 molecule in 1H14 to 2 currently to 8 by the end of next year. (aided by an ASP of ~$10/L with gross costs below $3/L).

Over at Raymond James, the always quotable Pavel Molchanov writes:

“After a period of retooling while in the “overpromise and underdeliver” penalty box, 2013-2014 have been Amyris’ first years with operations truly in commercial mode. There is visible scale-up progress, but the historical reliance on partner-based R&D payments makes quarterly financials choppy. In addition to updates on the production ramp-up at the Brotas plant, the market wants to see additional clarity on the pace at which Total will be scaling up its fuels joint venture with Amyris. We maintain our Market Perform rating.

Molchanov highlights that expectations were “on” for Amyris to reach break-even in late 2014 on a cash basis:

“The clear-cut aim was for cash flow to finally turn positive in 2H14. Following 3Q’s cash burn, the updated timeline is for this milestone to be reached not right away but rather on a full-year basis in 2015. Lower near-term collaboration inflows are the main culprit for the pushout.

He adds: “It’s worth noting that Amyris is deliberately running Brotas to avoid complications, particularly after the painful experience of 2011-2012. Margins are emphasized over volumes, and, as such, our model projects late 2015/early 2016 for achieving full nameplate capacity at Brotas.”

On the recent downturn of stocks in the sector: “The stock has, of course, shown weakness amid the oil price selloff – as have essentially all other companies in the broad category of petroleum substitutes. As a sentiment trade, it’s understandable, but as a practical matter, there is virtually no linkage between the prices of oil and farnesene/squalane. The current focus for Amyris – and plenty of others in the bioindustrial space – is high-value materials rather than commodity fuels, and until Amyris establishes a meaningful footprint in the fuel market – unlikely until 2017 at the earliest – the direct read-through from oil prices for production economics is minimal.”

The Bottom Line

A new molecule, pushed out financials but nothing that deters analysts from predicting imminent turn to cash-positive in 2015, and an outlook that pushes on into larger-volume products later in the decade, including fuels: that’s the welcome news from Amyris.

Turns out that the company was not as dead as once broadly thought — but rather something of a late bloomer, and that’s not always a bad thing — as Ronald Reagan’s many admirers will recall that he only entered elective politics at age 55. He said something else that might be well re-purposed to a discussion of the Advanced Bioeconomy: “You and I have a rendezvous with destiny. We will preserve for our children this, the last best hope of man on earth, or we will sentence them to take the first step into a thousand years of darkness. If we fail, at least let our children and our children’s children say of us we justified our brief moment here. We did all that could be done.”

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 18, 2014

Advanced Energy: Bargain Green Stock Turns Around

by Debra Fiakas CFA

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed three stocks trading below industry average multiples of forecasted earnings. This is the final article in the series, the first looked at Ormat (ORA:NYSE), and the second looked at Kadant (KAI:NYSE). 
The first week in November 2014, could have been a turning point for trading in shares of Advanced Energy Industries, Inc. (AEIS:  Nasdaq).  The company reported flat sales in the quarter ending September 2014, compared to the same quarter last year, but delivered higher earnings by 15%.  Investors were thrilled with the results, bidding the stock higher in the first week of trading following the announcement. 

Advanced Energy supports industrial customers and the solar power industry with power conversion technologies and products.  Continued difficulty in utility-scale solar power sector has cut into demand for the inverters Advanced Energy supplies.  Sales in this segment were down in the most recently reported quarter.  Fortunately, demand for precision power products has been robust, delivering low double digit year-over-year growth.  Precision power products represent the largest portion of the company’s total sales.

What really got shareholders excited was management’s guidance for the December 2014 quarter that was announced during the earnings conference call.  Sales are expected to be in a range of $140 million to $150 million, a level which was in-line with the prevailing consensus estimate.  However, guidance for earnings in a range of $0.29 to $0.37 for non-GAAP earnings was well above the consensus estimate.  Advanced Energy has a consistent track record of beating the consensus estimate, which suggests management does a very good job of managing expectations with guidance levels that are achievable.

The prospect of higher than expected earnings helped the stock register a particularly bullish formation in a point and figure chart in the first day of trading following the earnings announcement.  The quadruple top breakout alerts investors to a significant amount of unmet demand and suggests the stock has developed sufficient momentum to reach the $30.00 price level.  If achieved this represents 47% upside potential.  Note that there is a very strong line of price support at the $19.00 price level, setting up a particularly appealing risk/reward picture for investors taking a long position in AEIS.

At the current price AEIS trades at 11.6 times the consensus estimate for 2015.  That multiple might even improve if analysts following the company take management’s bullish guidance into consideration.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 17, 2014

Gevo Finds A Way

Jim Lane

gevo logoLike Rocky Balboa, no matter how many punches they take, Gevo [NASD: GEVO] just won’t fall over. In fact, the company’s prospects have brightened considerably in recent months — is the company “gonna fly now”? How and why is success on the horizon?

For most of its history, Gevo has looked like a long-shot — a company aiming at making high-value, bio-based butanol, mostly from corn sugars, via retrofitting its exotic bug into ethanol fermenters.

The opportunity is pretty simple to understand. Isobutanol sells for around 60 cents a pound, sugars check in at 16 cents a pound. If you can make the yields work, the upside is pretty good.

Of course, you have to get the butanol out of the broth before it reaches a point of concentration where it kills the magic bug — if you’ve splashed some rubbing alcohol on a wound to kill unwanted microbes, you’ll understand right away why an alcohol like butanol is deadly to Gevo’s modified yeast biocatalyst. So that’s part of Gevo’s portfolio of magic, a GIFT system for separating butanol out of the broth, that was so deft it felt like it was right out of Hogwarts:

Bacterium de-brothemus divisium!

Voila, a batch of butanol and all those magic bugs, separated out. Step right this way to clang the NASDAQ bell after your monster IPO, please.

It sort of worked out that way. The company raised a whole bunch of capital, recruited a team of notables and worthies, bought an ethanol plant that was too small to make money any more for a technology demonstration at scale, and navigated an IPO.

Then the butanol hit the fan.

Two problems beset Gevo even before the ink was dry on its IPO registration: a debilitating battle over intellectual property with DuPont, and an infection in the ethanol plant that was about as welcome to Gevo’s microbe as the ebola virus.

So beganneth Gevo’s long descent into a seemingly perpetual winter. The cash burn began to require ever-more dilutive capital raises.

“You have to hand it to [CEO] Pat Gruber for finding a way to keep going,” wrote a longtime reader in essaying Gevo in a private note last month.

For some time, it has looked grim, as the costs of litigation have stacked up, and not every battle has gone 100% Gevo’s way in the courts (though no knockout punches have been recorded by either party). Meanwhile, that little ethanol plant that didn’t make any money became an isobutanol plant that didn’t make any money. So, plans emerged to have it retro-retrofitted to make either ethanol or butanol, depending on which one offered a better return.

Which sounded to critics like a whole lot of optionality on the road to not making any money.

But then.

Against all odds

In its Q3 earnings announce, Gevo reported a net loss of just $200,000 on $10.1 million in revenue — compared to a loss of $15.9 million on revenues of $1.1 million for Q3 2013.

What? Where’s the funeral, the undertaker, the mournful relatives and investors dropping their share certificates onto Gevo’s coffin like flowers on a casket?

Gevo commented: “The increase in revenue during 2014 is primarily a result of the production and sale of approximately $9.2 million of ethanol and distiller’s grains following the transition of the Luverne plant to the SBS. During Q3, hydrocarbon revenues were $0.8 million, primarily related to the shipment of bio-jet fuel to the U.S. military during the quarter. Gevo also continued to generate revenue during the third quarter of 2014 associated with ongoing research agreements.”

It’s not all good — the company did not generate positive cash flow, and warned that it expects, ahem, “an increase in expense associated with its ongoing litigation with Butamax Advanced Biofuels,” — another way of saying that the lawyers are rolling through the dollars about as fast as they did in Jarndyce v Jarndyce, the case that ruined nearly every life it touched in Charles Dickens’ masterful Bleak House.

But there were a number of operational highlights: In Q3, Gevo decreased the plant-level EBITDA loss for the quarter by almost 70% as compared to Q1 2014, and has managed to double the isobutanol batch sizes and cut the batch turnaround times in half — and has been seeing prices of $3.50-4.50 per gallon from isobtuanol sales, as well as some revenues beginning from selling iDGs, its branded animal feed product from the isobutanol side of the Luverne plant.

Gevo’s Take

“Even before purification, isobutanol purity levels have been at 95%, excluding water, which has exceeded our targets. At the same time, isobutanol production costs continue to improve, and importantly, based on Luverne data, we can see that our long-term isobutanol production cost targets remain achievable with incremental process improvements. The team at Luverne has done a very good job implementing the SBS, moving down the isobutanol learning curve while successfully operating the ethanol side of the plant,” said the ever-optimistic CEO Pat Gruber.

But he had some friends in the land of Wall Street, which of course has been known to invest in some Hogwartzian enterprises from time to time, but when it comes to singing choruses of “Stand by Me”, rarely sticks with anything except the real thing for more than a few quarters.

Encouragement from the Street

Piper Jaffray’s Mike Ritzenthaler now has the stock (trading at sub-50 cents) price targeted at two bucks. He writes:

We maintain our Overweight rating and $2 target on shares of GEVO following a 3Q print which highlighted continued, steady technology improvements – suggesting that the company is on track to exit FY14 with the Luverne facility at cash break even, and poised to transition more ethanol fermenters to isobutanol in FY15.

“Higher than expected purity levels, reduced batch turnaround times, and a steadily increasing rate of isobutanol production should enable a run-rate of ~100k gallons of isobutanol per month. Turning to FY15, we see the potential for further cost cutting measures to further slow the cash burn, although we also note the probability of additional capital infusions as the company moves toward corporate-level EBITDA break-even.”

Ritz adds: “The most important takeaway on the technology front, in our view, is the high purity level of isobutanol production which should help drive production/tolling costs down. Combined with other improvements (such as lower cycle times and higher productivity) management was able to make and ship commercial quantities of isobutanol out of one fermenter at Luverne and is on track to hit a year-end run-rate of 50-100k gallons per month. Management reiterated on the call that ASPs for isobutanol are in the $3.50-$4.50 per gallon range, and while long-term economic targets are still in the distance, we think the company is sufficiently seeding markets needed to reach an inflection point in the business model in the 3-4 coming quarters.”

The Street is expecting one more dilutive cash raise between now and break-even — but the company is targeted for $66 million in sales, even in these days of falling commodity prices as China’s big economic engine grinds in low gear.

The Fast 500

Looking back, the growth is impressive. Just this week, Gevo was named on Deloitte’s Technology Fast 500, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America. Gevo grew 1,146% during this period and was ranked 103rd overall but, notably, in the industry where it competes, Gevo ranked third out of all clean technology companies.

Bottom line, break-even at Luverne — and some welcome dollars from the ramp-up in production — appears to be on the horizon in 2015. It looks like Gevo has found a way.

Jim Lane Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 14, 2014

Kadant: Will Investors Clean Up With This Bargain Green Stock?

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed three stocks trading below industry average multiples of forecasted earnings. This is the second article in the series, thee first looked at Ormat (ORA:NYSE). 
A couple of weeks ago shares of Kadant, Inc. (KAI:  NYSE) registered an particularly bullish formation  -  at least from a technical standpoint.  A ‘triple top breakout’ was formed in a point and figure chart, suggesting demand for the stock outpaces supply.  Given the new momentum that has developed, the stock could reach as high as $52.00, representing 25% upside potential.

Kadant is trying to clean up the paper production industry with more efficient virgin pulp processing equipment and recycling solutions.  The company also makes biodegradable absorbent granules from papermaking by-products for agriculture, lawn, ornamental and industrial uses.  The company earned a 10.8% operating profit margin on $391.7 million in revenue in the most recently reported twelve months. 

Analysts who follow Kadant expect the company to deliver as much as 20% earnings growth over the next five years.  That is impressive and we would expect to have to pay as much as 20 times earnings to buy KAI.  Yet the stock is trading at 18.4 times trailing earnings and 13.5 times earnings predicted for 2015.  A current dividend yield of 1.4% makes the stock seems even more appealing.

The discussion today might be more or less academic.  A technical indicator, the Commodity Channel Index that has served me so well, suggests the stock is overbought at the current price level  -  at least temporarily.    A review of historical trading patterns suggests the stock has a fairly well developed line of price support at the $38 price level and another at $34.  While it is not clear if fundamental performance would disappoint investors enough to send the stock down to the $34 price level, it does seem possible that the stock could retrace price to the $38 price level.  Third quarter results send the stock soaring the day following the earnings announcement.  Any period of weakness in the broader market could bring the stock back to lower orbit near $38 per share.  For investors with a view to hold KAI for a period of time should find it worthwhile to wait and watch for a compelling entry point.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 13, 2014

GCL-Poly Mops Up Chaori Solar Mess

Doug Young

Bottom line: Solar consolidators like GCL-Poly and Shunfeng will suffer short-term pressure due to difficult acquisitions, but could be longer-term beneficiaries as they earn government goodwill for their actions.

The latest deal involving an insolvent solar panel maker is seeing a group led by GCL-Poly Energy (HKEx: 3800) take control of bankrupt Chaori Solar, in a takeover that looks slightly ominous but also potentially interesting for investors. The ominous element comes from the fact that these bankruptcy proceedings are occurring Chinese courts, where local politics are often more important than forging deals that make commercial sense.

But the interesting element comes from the fact that many of these insolvent companies enjoy strong backing from their local governments. That means that once all the finances are cleaned up for these insolvent firms, they could actually become good longer-term assets for their new owners.

The short-term headaches for solar buyers are evident in the recent mixed fortunes for Shunfeng Photovoltaic (HKEx: 1165), which looked like a rising solar superstar when it purchased bankrupt former solar superstar Suntech. But Shenfeng’s fortunes have suffered a sharp setback in the last month, as the Suntech effect wears off and people realize the turnaround story could be long and difficult.

We’ll come back to the Shunfeng-Suntech story shortly, but first let’s look at the latest news that has the parent of GCL-Poly leading a group that will buy 66 percent of Chaori for 1.46 billion yuan ($240 million). (English article) The deal was part of a broader restructuring for Chaori, which made headlines this year when it became the first company in modern China to default on a corporate bond. (previous post)

The restructuring plan was approved by the Shanghai Municipal First Intermediate People’s Court late last month, and the buyer group has pledged to return Chaori to profitability this year and re-list it in 2015. That kind of pledge means that the buyer group has probably received key government support for the restructuring and will find a way to meet its targets, even if that means using aggressive accounting to return to profitability and calling on state-owned investors to make the new IPO a success.

It’s important to note that this GCL-Poly deal has several key differences from the earlier Shunfeng-Suntech one. In this case the buyer is actually GCL-Poly’s privately held parent, Golden Concord Holdings, meaning the risk associated with taking over Chaori isn’t being shouldered by the publicly listed company. In addition, the GCL-Poly parent is part of a larger group that includes 8 other members, and thus Golden Concord will only own 30 percent of Chaori after the deal, equating to an investment of about $72 million.

So, how have GCL-Poly’s shares reacted to the news? The stock has dropped steadily over the last 6 weeks, and is now down 17 percent from a peak at the end of September. That performance mirrors Shunfeng, whose shares have lost nearly half of their value over the last 2 months after media reports emerged saying a major solar plant it was helping to build had run into trouble. (previous post)

I suspect the magnitude of the Shunfeng sell-off was at least partly due to profit taking after a big run-up in the company’s shares on high hopes after the Suntech deal. And in fact, Shunfeng’s shares are now almost exactly at the same levels where they were at the start of this year before they embarked on a major rally.

So, the next bigger question becomes: What’s ahead for consolidators like GCL and Shunfeng, whose actions are motivated as much by local politics as by commercial factors? As I’ve said above, the political element of the equation means the stocks could come under short-term pressure as they deal with financial issues related to their purchases. But the goodwill they receive from local governments could be quite valuable over the longer term, meaning the stocks could see some strong upside potential once the current messes get sorted out.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

November 12, 2014

Ormat: A Bargain Green Stock?

by Debra Fiakas CFA

Everybody likes a bargain.  Investors really like a good cheap buy.  A review of our four alternative energy industries revealed several stocks trading below industry average multiples of forecasted earnings.
Tracking the geothermal power generators has frequently taken us to the door of Ormat Technologies, Inc. (ORA:  NYSE).  Ormat has two revenue segments:  power generation through geothermal generators and energy recovery and equipment sales to utility and industrial customers installing geothermal power plants.  The company owns and operates plants with 626 megawatts generating power and has supplied equipment around the world for another 1,200 megawatts.  The development pipeline is populated by thirty-five potential geothermal locations in the U.S., Southeast Asia, South America and New Zealand.

Last week during the company’s third quarter 2014 earnings conference call management spent quite a bit of time talking about two of its newest projects.  The company was recently awarded a $22.3 million contract to install its proprietary air-cooled energy converter at a natural gas compression station in Utah.  The station is part of the Kern River gas transmission system.  This will be the second recovered energy power generation facility on the pipeline.  The recovered energy plants reduces the use of energy content of the natural gas by about 30%.

Ormat also recently signed an agreement to design, construct and operation a 35 megawatt geothermal power project in Kenya.  Once completed Ormat will also arrange for financing and expects take advantage of guarantees from the African Development Bank.  Kenya Power and Lighting Company has agreed to buy all the power from the project.  This will be Ormat’s fifth power project in Kenya.

Investors have to pony up about twenty times projected earnings per share to take a long position in ORA.  That is a bit richer than the average PE multiple for the S&P 500, which is 16.7 times forward earnings for the group, but right on par with the forward earnings ratio for the Russell 2000 Index.  The geothermal segment of the power generation industry is trading at approximately 21.2 times trailing earnings.

On the surface the comparison of earnings multiples does not make ORA look like much of a bargain.  However, Ormat is set apart from the group.  ORA is among the most stable of the power generation stocks. True enough, utility companies are known for their stability in both earnings and stock performance.  However, it is rare to observe fast rates of growth and low beta measures of risk.  ORA offers both  -   a beta of 0.80 and forecasted earnings growth of 22%.  Thus ORA could trade at a multiple of 22.0 times earnings.  On a risk adjusted basis, ORA’s PE/Growth or PEG ratio is a compelling 0.73.

Furthermore, Ormat recovers some power of its own from its revenue in the form of operating cash flow.  In the most recently reported twelve months the company converted 43% of sales to operating cash flow.  Cash flows help support capital investments and a small dividend of $0.20 per share.  The forward dividend yield at the current price level is 0.7%.  Taking the dividend into consideration, provides a risk adjusted PE/Growth Plus Yield of 0.70

From a technical standpoint, ORA is neither overbought or oversold.  There is no strong trend higher or lower other than the short-term vacillations in the stock price.  Nonetheless, money appeared to have been flowing into the stock in the run up to the third quarter 2014 earnings announcement. Investors who want to take a long position in ORA might wait for the signs of upward momentum before committing capital or simply use the dividend payments as compensation for the time commitment.

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

November 11, 2014

Interview With Dan Oh, CEO Of Renewable Energy Group

Jim Lane REG logo

Leading a series this week, “The Strategics Speak", in which we’ll look at what a number of major strategic investors see in the landscape relating to industrial, energy and agricultural investment, Biofuels Digest visited with Dan Oh, CEO of Renewable Energy Group (REGI), which has long been the US’s leading independent biodiesel producer but in recent years has steadily diversified and expanded operations.

In many ways, REG is the entire industrial biotech business in a nutshelll. They’re fermentation (through REG Life Sciences), and thermocatalytic (through REG Geismar and their extensive biodiesel business). They use both sugars and lipids as feedstocks. They make both biodiesel and drop-in renewable diesel. They make fuels and an array of chemicals. They’re in the distribution and blending business — distributing their fuels blended with traditional fossil distillates. They have multiple plants and labs in the West, Midwest and Eastern sections of the country. They’re deep into some of the most exotic commercial synthetic biology out there.

In other ways, they achieve what others aspire to. Multi-feedstock, multi-product — it’s a reality, not a goal. Publicly traded after a successful IPO — a reality. Generating substantial cash flow — a reality. And don’t let the “aw, shucks” demeanor fool you for a moment — if they don’t “talk the talk” with the hyperbole of Silicon Valley, they “walk the walk” when it comes to building capacity, building revenues, and building reputation.

Dan OhThe Digest: The company has substantially diversified, in recent years, let’s start there.

Oh: That journey started in a practical sense in 2010, although we’ve always planned to be a broad energy & chemicals company. We’re grounded as a team in the lessons and disciplines of commodity agriculture, so we knew that we had to have to have a lot of options, more than just one raw material choice, adaptable technology, and many different products out of that.

So, we started with one feedstock and expand across the lipid spectrum, and in 2010 we started targeting other chemicals and fuels, beginning of a long we’ve of diversification. To date, we’ve invested almost $300m in diversification.

Lipids are a worldwide business as are sugars, and we are looking for base platforms that wecan grow and adapt, with a focus on the distillate area and the intermediate speciality chemicals. Right now, we’re building out biomass based diesel across North America, and ultimately taking it international, based on fundamental internal growth, M&A,plus technology upgrading and innovation. We’re generating great cash flow from advanced biofuels, and we have array of technology options out there, so we have got so many good choices that it is almost about what you’re not going to do rather than what you’re going to do.

The Digest: After a successful IPO, you now find yourself in a leading position when it comes to dialogue with Wall Street about industrial biotech. How do you talk about these advanced technologies there?

Oh: Money’s not brave. Wall Street want to see profitable companies, they want to see the downside protected and lots of upside. In our case, we are building an industrial business that happens to be green, and I think we’re getting credibility as an industrial company, with strong balance sheet, and looking backwards, over 100M in EBITDA each year on average. Our strategy is born from practical needs and experience, in the end, you’ve got to run a business, and be subject to standard finance practice just like everyone else, and let’s face it, all companies have a hard time raising money [at this stage].

The Digest: In the past year you acquired LS9, now known as REG Life Sciences, one of the hottest technology sets available. How it is going?

Oh: LS9 was a bit more like late stage private equity, there’s a body of work there that’s very good, now it’s time to move to commercialization and become profitable. We think the company will do better without, as a venture-backed company, worrying about about where the next round of finance is coming from, and not having to swing for the fences with a home-run product right away. The LS9 technology has the ability to iterate a lot of products, and on our side we have put together a platform of 500 people — and there are a lot of PhDs here, master degrees, these are not not minimum wage jobs here, this is a high talent business — when you combine out platform of people and logistics and distribution with a platform that can iterate a lot of products, you can see how to get that technology and those products into the market.

In many ways, these were two companies born of the same idea, both were originally designed to make biodiesel, we started with lipids, they started with sugars. The cool thing for us is that, from their earliest days until today, they continue to improve the tools, they are always innovating the science.

The Digest: The other major recent acquisition was the Dynamic Fuels / Syntroleum business. What’s the latest there?

Oh: We’re very pleased with the investment, and the transition from prior to current ownership, we’ve built from a lot of great decisions from the prior owners, and what we have been able to bring is a seamless commercialization team that understands refining, plus we have brought our feedstock pretreatment and refining technologies, and logistics system. It takes a total effort to make any plant work — you can’t just have a cool core technology. Now, as we have announced recently, we have achieved 90% utilization compared to nameplate capacity.

The Digest: For years now — whether it is the Renewable Fuel Standard, tax credits, or other aspects of energy policy, there’s been an extended dialogue with Washington DC about the advanced bioeconomy. Now, the midterm elections have swept Republicans to power int he Senate. How do you see that dialogue changing after the elections?

Oh: Advanced biofuels do have broad bipartisan support, in each region and state there are a body of politicians who see the benefits, and in general things come up on the “happy and satisfied” side of the scale when they look at the sector. we’ve talked wide and far to lots and lots of people,and we’re confident that that support is going to continue, and in fact the declining energy prices make it simpler for people to think about the good aspects of our energy policy in energy security, environment when there’s less extra cost pressure from energy, and it is a heck of a lot easier to absorb costs [from advanced technologies] into a low cost energy mix.

Our job is simple: we have to make quality fuel, we have to be affordable, we have to compete. But every gallon of biodiesel makes it easier to achieve the broader energy policy goals of diversifying the energy mix — and the benefit of biofuels on the agricultural sector are not difficult to see and there are more sectors that are benefitting from it, such as advanced manufacturing and high tech. Bottom line, you can be a hard core neoconservative, hard core environmentalist, or only interested in agriculture or some other industry, and you’ll find lots to like about advanced biofuels.

The Digest: There’s been quite a bit of expansion, yet you’ve spoken of international opportunities, should we expect to see more from REG? And if you target international expansion, will you be looking for advantaged feedstock, or a solid market, or what other factors might be on your mind?

Oh: We’re not done growing, that’s for sure! We’ve done something of consequence every quarter. We tend to be product and logistics focused when looking at a new market — right now we are long biomass based diesel, and the two biggest markets are the US and EU, and our strength in lipids might feed into a number of products there. But it’s not just a case of looking for a good market, there are lot of good technologies developed overseas, too. We look far and wide, we’ve not done anything but we do state that “we are actively looking”, and we will lead with things we do well, and we want to retain a fantastic group of people that we have built up.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

November 10, 2014

Ramp-Up Delay Sends Solazyme Stock Into Free-Fall

Jim Lane solazyme logo

Revenue and customer numbers are up at Solazyme (SZYM), 60% YOY growth from Q3 2013 to Q3 2014. But a slowdown in the rollout at Moema capacity leads to a spectacular 58% one-day drop in the stock price.

What happened?

Solazyme has been on a relatively steady downward trajectory for the past few quarters, dropping from the $11-$13 range and down into the $6-$8 range.

And then plunged a stunning 58 percent to $3.14 yesterday – amidst downgrades by Cowen & Company, Pacific Crest and Baird — generally to Market Perform or Neutral, and remains at “Underweight” over at Piper Jaffray. Target stock prices have come way down.

All this carnage, we might add, even after a signature partnership with Versalis was announced to commercialize Encapso dilling oils. Versalis said that its initial emphasis for Encapso will be oil and gas fields operated by its parent company Eni, which represent a significant amount of the world’s petroleum drilling activity. Encapso will be featured as part of the company’s recently launched Specialty Oilfield Chemicals product portfolio.

What exactly gives for San Francisco’s [advanced bioeconomy] Giants?

Here’s the news

Total revenue for the third quarter of 2014 was $17.6 million compared with $10.6 million in the third quarter of 2013, an increase of 65%. Third quarter GAAP net loss was $39.7 million, which compares with net loss of $30.7 million in the prior year period. On a non-GAAP basis, the net loss was $35.3 million for the third quarter of 2014, compared with net loss of $22.3 million in the prior year quarter. A reconciliation of GAAP to non-GAAP results are included below.

“Our Clinton/Galva and Peoria facilities are performing well,” said CEO Jonathan Wolfson.”

Good news, so far. Then this:

“Progress at Moema is more mixed with the upstream process operating as expected, while the downstream process will require continued work to establish consistent, fully integrated operations.”

Analysts would, as we’ll see later in this report, used this new guidance from Brazilian operations as a catalyst to downshift the revenue growth rate to around 15% for 2015, targeting $70M instead of $350M.

Then this, on the company’s strategy.

“Commercially, we’re continuing to establish our Encapso and AlgaVia products in the marketplace while focusing additional attention on the development of higher value specialty products,” Wolfson said. “Strategically, we’re moving to intensify our focus on our high-value specialty portfolio, a move that will alter the near-term trajectory of our production ramp but which we believe will ultimately drive greater value for the Company.”

CFO Tyler Painter summarized:

“Our near term focus is on bringing Moema to fully integrated operations and focusing commercial activity around our high-value specialty products. As we execute on these goals, we are emphasizing prudent management of our capital, optimizing our product mix and positioning our manufacturing assets to maximize returns.”

Analysts would use this shift in strategy as further reason to downshift revenue growth, push out the “reaching break-even date” and raise the specter of a dilutive capital raise in 2015 to ensure liquidity for the company on its elongated timeline.

In plain-spoken words

Moema’s delayed, the big volumes are now in 2016 or 2017, so we’re shifting to higher margin, lower-volume markets.

What the analysts say

Pavel Molchanov at Raymond James expressed “frustration” with Moema delay, but said the “strategy makes sense” and saw value with the stock so far down. He wrote:

Downstream issues at Moema: frustrating, but ubiquitous in the space. Production challenges based on downstream processes at the Moema plant in Brazil are the main factors behind the slower-than-expected production scale-up and move down the manufacturing cost curve. Early costs at Moema were both higher, and lasted longer, than originally anticipated. Choppy power and steam operations – yes, something as prosaic as that – are among the specific culprits. None of this, to be sure, pertains to the core of Solazyme’s technology platform, but it’s frustrating nonetheless.

Slow ramp spurs retooling of production strategy. The operational shortfalls at Moema have led to a rethink of the strategy for production expansion. The new mantra – and E&P investors will be very familiar with this – is “value not volume”. Solazyme will further narrow the product range (and thus the scope of customers served), leading to lower sales volumes but higher pricing and blended margins…All in all, we think the strategy makes sense, even though the market clearly does not like the top-line pushout (shares are down 20% pre-market), and we continue to recommend buying the stock, particularly on weakness today.

Jeffrey Osborne at Cowen & Company was rethinking the models. He wrote:

Solazyme reported sub-par results for Q314. Management’s shift from high volume capacity to lower volume / high margin sales comes as a surprise, in the wake of low ASPs in its popular oils. Encapso and AlgaVia progress was stressed, and 2015 sales were guided well below consensus. With the loss of Moema as a catalyst, we are lowering our rating to Market Perform, and our price target to $7

Management’s overhaul in business strategy follows negative margins in typically lower margin product areas. As a result, the company has guided for only a 15% increase in 2015 revenue

The shifted focus to low-volume, high margin sales, in tandem with operational benchmarks falling short, is inhibiting the company from consolidating Moema’s operations in 2015 financials. This accounts for the ~$70 million in 2015 revenue guidance falling drastically short from our and consensus estimates (we were at $350 million previously for 2015).

Management has noted that despite delays, it expects to fully bring Moema onto its balance sheet in 2016, albeit not producing at the previously intended annual capacity of 100k MT/yr. We expect the Moema run rate to fall short of 20k MT/yr by 2016, given the change in strategy, as well as a pause in the completion of the Clinton facility ramp. This could prove ultra conservative; however, we would rather set the bar low.

Meanwhile, Mike Ritzenthaler of Piper Jaffray was trying out for Les Miserables. He wrote:

Start-up & reliability issues, the slower pace of market adoption, and lower than expected ASPs have substantially delayed execution timelines; management used the conference call to reset investor expectations much lower. Even with the technology working as expected, the timeline needed to ramp the facilities (including Moema which is currently experiencing operational issues) is well beyond previous expectations. The business model shift toward value products versus volumes is not surprising, but we continue to see material risk from niche market development and a sizeable capacity overhang (new partner Versalis is targeting ~3k MT of Encapso sales, or ~2.5% of capacity). Further, we see a capital infusion in 1H15 as likely and no longer believe that cash break-even in FY15 is reasonable. We have made healthy cuts to estimates, which result in a lower price target (to $2 from $4) and we maintain our Underweight rating.

The anatomy of the stock’s free-fall

You can see it right here. The news came out last night, and there was a huge imbalance in the buy-sell. The stock was routed before trading started, opening at $3.85, and falling throughout the day to a intraday low of $2.98 before rebounding to $3.14 at the close.


We’ve seen it before. Pounding of earlier-stage stocks for any delays in the march to break-even. Doubtless we’ll see it again.

Those are timing issues for investors — and legitimate for their purposes, of course. But let’s focus on the larger story here — while significant ramp-up risk is out there for the long-term, investors have priced in almost zero revenue growth next year, at this stock price, if we take the Cowen & Company analysis which pegged a $4 target price to 15% growth.


Which makes this an opportunity for those who see in the Eni deal the means of revenue growth that investors have discounted for the near-term.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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