October 18, 2016

Amyris' Mysterious Partner

Jim Lane

In California, Amyris (AMRS) has a new partner, described fetchingly yet with near-to-complete vagueness as a “a leader in food ingredients and nutraceuticals” which is roughly as helpful as describing a person as “someone who enjoys ice cream”.

Some ice cream there is, nevertheless, in this agreement, which will bring a short-term collaboration investment of $10 million, an equity investment of up to $20 million at $1.40 per share, and $100 million in annual revenue starting in 2017 connected to the production and cost improvement of fermentation molecules. One thing, and the only one, we discover about the identity of this partner, is that they maintain (presumably extensive) industrial fermentation facilities in Asia. The collaboration is subject to completion of definitive agreements and the obtaining of required approvals. Amyris expects this to be completed by the beginning of December 2016.

Striking as this is, let’s make sure that we separate this from the “expanded partnership” announced with a separate global nutraceuticals market leader on September 30, which included the addition of a new nutraceutical target, a credit line of up to $25mm with a five-year maturity, an option for a $5mm strategic investment, and a material expansion in expected revenue.

Kudos, says The Street, but we’ll wait to revise our earnings targets

Of the agreements, Jeffrey Osborne of Cowen & Company wrote: “We are encouraged by these recent announcements which provides visibility into collaboration funding for the next few years in an end market that has historically carried higher margins relative to other end markets in the space. We are leaving our estimates unchanged at this time given the limited amount of details provided in the release. Amyris expects completion of the definitive agreements and to obtain the required approvals for the collaboration by the beginning of December 2016.”

Amyris’ John Melo was in a bullish mood as well. He said, “We’re very pleased with the opportunity to partner with one of the leading nutraceutical and food ingredient suppliers in the world. Our current annual revenue run rate of over $100 million combined with the $100 million of annual revenue we expect from this partnership starting in 2017, should help us deliver stronger than expected growth in 2017 and beyond.”

The Farnesene Bulls are running

By the way, InsiderFinancial.com writes:

“The thing to recognize here is that demand for farnesene is increasing dramatically (analysts expect the market to grow more than 27% CAGR to 2023, from its 2015 levels of 8 kilo tons in 2015) and Amyris is the only company in the world that can produce it the scale required (we could be even stricter here and say it’s the only company that can produce it full stop) to meet this demand.”

If those numbers hold, that’s good news for Amyris, and investors such as Kuraray and Total. But also let’s not overlook Intrexon. Or even Chromatin.

Back in 2014, the lab geniuses of Chromatin announced that it had created sorghum plants containing elevated levels of the energy-rich compound farnesene. The milestone was supported in part by the Department of Energy’s ARPA-E program Plants Engineered To Replace Oil (PETRO). “We have demonstrated that sorghum can be modified to produce significantly elevated quantities of farnesene relative to commercial inbred sorghum lines, a molecule that can be used to create energy-rich biofuel,” said Chromatin CTO Ken Davenport at the time.

Keep a sharp eye on Intrexon

Over on the low-cost feedstock front, keep an eye out for Intrexon. They tipped two summers ago that they had demonstrated bioconversion of methane to farnesene in the lab. This was the second product, following isobutanol, which Intrexon has upgraded from natural gas employing its unique cellular engineering capabilities.

Intrexon is developing microbial cell lines genetically enhanced to convert methane to higher carbon content compounds at ambient temperatures and pressures, thereby reducing the significant expenditures compared to standard gas-to-liquid processes. In theory, you get low capex — and you get access to that deliciously low-cost feedstock, our friend methane.

The 8 Rays lighting Amyris’ Golden Lamp

In August, we highlighted 7 rays lighting Amyris’ Golden Lamp, in our story “The New Colossus”, here.

We’ll add the pair of nutraceutical deals and name that Ray #1. The other 7?

#2. Gingko. Entered into an Initial Strategic Partnership Agreement with Ginkgo Bioworks to accelerate commercialization of bio-based ingredients and establish clear leadership in industrial biotechnology with a combined offering that we consider unparalleled. In connection with the agreement, a license fee of $15 million was paid on July 25, 2016, to Amyris in exchange for use of certain Amyris technology and the parties agreed to pursue the negotiation and execution of a definitive partnership agreement that includes significant value sharing. The partnership is expected to deliver more new ingredients into the global market over the next three years than the entire industry has achieved in the last 10 years.

Melo pointed to the company’s DARPA collaboration which has identified 400 different molecules, “all of which we can commercialize at our discretion.” Also, 5th. Additional with Gingko, “we are already collaborating to align R&D and take 70 products to the world’s leading brands.”

Melo said that critical to Amyris growth will be “more capacity” and the Amyris potential to “accelerate products”. Meanwhile, “the Brotas plant is running flat-out with farnesene production”, the North Carolina facility too. The company has plans to double capacity at Brotas and is speaking with potential collaborators about potential expansions to increase capacity for 2017.

#3. Cosmetics and personal care. Announced multi-year, multi-million-dollar collaboration in cosmetic active ingredients with Givaudan to engineer and produce cosmetic active targets for global commercialization by Givaudan. Amyris sees this partnership delivering an annual run rate $50M per year

#4. Fragrance & flavors. Began commercialization of novel fragrance product with Takasago International Corporation. The company said that it had greatly expanded in F&F novel fragrance ingredients, partnered with 4 of the top 5 companies, and is “on track to become one of key suppliers.”

#5. Jet fuel. Jointly announced with Cathay Pacific a two-year biojet agreement supporting continued strong farnesene demand and the future of sustainable air travel; initial flight on May 12, 2016 using the biojet blend was the longest flight using a renewable jet fuel to date. This fuel is supplied through the Amyris Total partnership that is dedicated to making BioJet an industrial reality.

#6. Novvi. Announced American Refining Group’s 33.3% equity investment in Novvi LLC, a joint venture of Amyris and Cosan S.A., enabling market access and acceleration in revenue growth of Novvi’s high performance, sustainably sourced, renewable lubricants.

#7. Janssen. Entered into research agreement with commercial license option with Janssen Biotech, facilitated by Johnson & Johnson Innovation, to use Amyris’s µPharm platform for rapid integrated discovery and production of therapeutic compounds thereby opening a new area of compounds previously not accessible for new drug discovery. “We expect to sign one more collaboration by the end of the year, ending at the high-end of our range, to develop a library of natural and natural like of therapeutic compounds, which nature has the potential to provide and we have the ability to produce.”

#8. Biogen. Amyris announced a partnership with Biogen, Inc. to develop alternative cell lines supporting production of therapeutics, marking second major partnership in biopharma market, which is now positioned to become Amyris’s largest opportunity for collaborations. The Biogen partnership is the most exciting of all,” CEO John Melo said,. With it, Amyris he said would make “ a transformative change to biopharma where partner would be able to employ [Amyris biotechnology] instead of using cells from mammals. Others have attempted and failed, but we are positioned to deliver life saving therapeutics and make them more widely available. This could be game changing for biopharmaceuticals, and Biogen will fully fund the development.”

Amyris – time to expand capacity?

At some stage Amyris, which is essentially sold out at Brotas, will have to bite the bullet and expand capacity instead of engaging in margin-munching tolling arrangements. We’ll stand by for that.

When will the stock take off?

Two milestones to watch.

1. If Amyris reaches $100 million in revenue for 2016, that’ll be a milestone we’d expect investors to note and re-value the company at. Identifying at least a couple of these nutraceutical partners wouldn’t hurt either. The company says it has hit the $100M “annual revenue run rate” mark, so that day should not be all that far out ahead, assuming that, when the dust has settled, these revenues are coming in at normal margins and don’t represent giveaway deals to sell out the production volume at the plant.

The average price-to-sales revenue ratio on NASDAQ is 3.2. That would put Amyris around the $330M mark in terms of market cap when it hits $100M in revenues — and the company is at $183M right now. There’s around $100M in debt on the books, but with the NASDAQ debt/equity average hovering around 0.65, the debt level doesn’t appear to be a drag on share prices.

2. Break-even on operations. Fear of dilutive capital raises appears to be on investors’ minds, especially given the potential need to expand capacity soon. The double whammy of raising money for a second plant and to fund continuing operations from the first plant appears to be a factor. Can Amyris reach cash break-even off the first production plant? We’ll probably know when we reach the end of the year — so, somewhere between December and February (when earnings are presumably announced), expect that Amyris investors will substantially and upwardly revise the value of the company, or sigh and settle in for the long-haul of dilutive capital raises until he second plant is constructed and the offtake is sold.

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.

October 14, 2016

Biochar and Activated Carbon Markets

Hugh McLaughlinBiochar and Activated Carbon Markets

by Hugh McLaughlin, PhD., PE

Biochar is an emerging market; growing rapidly, still in its infancy, but with gigaton market potential when we, as in humanity, start addressing the climate crisis. Activated carbons are a mature market of about one million tons annual production, which is growing slowly. They are basically like fraternal twins; they have a lot in common, they share the same world, and they are different.

First, let’s explain the basic difference between THREE materials: activated carbon, charcoal and biochar. Activated carbon, also known as activated charcoal and several other ‘active/activated source-material’ names, all come down to the implication of the modifier ìactivatedî. When used in conjunction with adsorbents, ‘activated’ refers to a small set of processing techniques that increase the internal microporosity of the original carbon-rich source material. All ‘activation’ processes remove individual carbon atoms and create individual nooks and crannies in the carbon-rich material, which are the adsorption sites. The key to activated carbon is that it is optimized for specific adsorption application (water, vapor, certain adsorbates, etc.) and the adsorption capacity is packed into as dense a material as possible to minimize the volume of adsorbent necessary. In the end, activated carbon is an adsorbent ñ intended to remove something, typically organic compounds, from either vapor or liquid streams.

Biochar vs charcoal

In contrast, Charcoal is a fuel that is used for cooking and other heat generating applications and created by heating biomass, typically wood, under conditions of limited oxygen. In general, charcoal burns hotter and with less smoke than the starting biomass, and also can convert mineral ores to the corresponding metals, inspiring a series of ages: bronze, iron, etc.

Biochar is made in the same manner as charcoal, but it is intended for utilization as an adsorbent and/or a soil amendment. Basically, the key is the end use of the material. It is charcoal if it is intended to be used as a fuel; hence it is manufactured with optimal fuel properties. In contrast, if the intended use is adsorption or as a soil amendment, then it is manufactured to a different set of properties and labeled biochar. As a result, biochar shares properties with activated carbon and charcoal, but has a few unique features that distinguish it from both.

While biochar shares adsorption properties with activated carbon, it also exhibits a significant amount of ion exchange capacity, a property that is minimal or absent in traditional activated carbons. The ion exchange property, which is usually measured and reported as ‘cation exchange capacity’, is due to residual carboxylic acid functionalities on the biochar graphitic backbone. Since activation removes any residual side chain aliphatic groups, activated carbons have reduced ionic interactions.

The other big differences between biochar and activated carbons are bulk density and mechanical hardness. Activated carbon is intended for applications where packing as much adsorption capacity into a fixed volume is paramount, like gas masks and fixed-bed adsorbers. In addition, activated carbon can be regenerated and reused in many applications, so mechanical hardness (also known as the lack of friability) allows the carbon to be moved without falling apart or breaking down in particle size.

If one combines the lower adsorption per unit weight of biochar with the lower bulk density, the resulting adsorption capacity on a volume basis is 1/6th to 1/12th that of high quality activated carbons. For this reason, biochar is typically used in applications where the material is spread out on the ground, so low density is not a disadvantage. In fact, in soil applications, where an important property is the ability to capture excess precipitation and retain it, the low density of biochar translates into additional voids that can fill when it rains.

Unique properties

Biochar is a material that is preferred when several of its unique properties can be exploited in the same application. The unique properties of biochar include low density (providing additional voidage and aeration in the soil), significant adsorption and cation exchange capacity, and the ability to promote living microbiology in the soil, enhancing the ìSoil Food Webî. Combining these properties leads to a predictable selection criteria for when to consider activated carbons versus biochar.

As noted earlier, activated carbon is intended and optimized for adsorption applications, and is available in many physical forms and grades that are specialized to the end use. The market has been growing steadily for the past 50 years, driven by specific purification processes in some industries and many applications involving removal of organic compounds from air and water streams prior to discharge into the environment. Indeed, most of the activated carbon demand has been created by a series of environmental regulations that have been enacted over the years, including the Clean Water Act and the Clean Air Act.

Production and markets around the world

The current world production of activated carbon products is approximately one million tons per year, with most production in Tropical and Asian countries. The majority of activated carbon production is exported to developed countries in North America and Europe, where it is used in environmental and processing applications. The activated carbon marketplace is dominated by a relatively small number of international companies that have both production and marketing capabilities.

Over the past few years, the developed countries have been enacting new regulations requiring the removal of trace mercury from industrial emissions, principally impacting the coal-based electric power industries in North America and Europe. This has created an additional market for specialized powdered activated carbons that serve to capture mercury from the flue gases of power plants. The potential market demand for these MATS = Mercury and Air Toxics Standards activated carbon is several hundred thousand tons per year if the entire industry used the technology, but the combination of aging coal plants and cheap natural gas has resulted in significantly lower actual market requirements for mercury-capture activated carbons.

Mercury capture is one of very few market applications where biochar products might complete with traditional activated carbon products, with the other being those remediation applications where soil decontamination due to legacy pesticides or ordnance residues are preventing significant plant growth. In the mercury marketplace, biochar is at a disadvantage due to the presence of established suppliers from the activated carbon producers. In contrast, in remediation, biochar has the advantage that it can provide the initial detoxification requirements, followed by providing the added benefits of improving the soil as a growing medium for all forms of vegetation.

The biochar marketplace is nascent and suffering from ìthe chicken or the egg syndrome. To date, there have not been sufficient reliable suppliers of biochar products to allow the demonstration of the at-scale value propositions in specific biochar markets. Thus, the issue of how cost-effective is biochar in reducing water and fertilizer requirements in specific markets such as corn cultivation is basically unresolved, although credible studies are accumulating in the literature and within individual industrial demonstrations. Furthermore, in the absence of specific market opportunities that demonstrate the value of biochar, financing biochar production capacity is stymied. The development gridlock is slowly being resolved and rapid growth in biochar capacity and adoption is anticipated over the next decade.

External drivers

There are some external drivers that are also promoting biochar adoption, including atmospheric carbon dioxide levels and concerns driven by consequences of climate change. Since biochar is produced from biomass that was created from carbon derived from carbon dioxide from the atmosphere as the plant grew, the carbon in biochar is viewed as ‘carbon-negative’. As such, it represents carbon removed from the air and converted into a form that will remain in the soil (and out of the atmosphere) for centuries or longer.

Unfortunately, to date, the direct financial incentives for sequestering carbon dioxide have been insufficient to significantly stimulate biochar production. With the adoption of the Paris Climate Accord, biochar has become recognized as one of the most viable and accessible methods for reducing a nationís carbon footprint and meeting future emission reduction obligations. This trend will play itself out in many versions in individual nationís public policies for managing the requirements of utilizing fossil fuels and achieving reduced overall climate impact goals.

Frankly, it is impossible to predict how the climate driver will or will not stimulate the future biochar production and utilization patterns. Additional, and equally powerful, drivers for the adoption of biochar are the documented improvements in water requirements in agriculture due to improved moisture retention and management by biochar-enhanced soils. With the improved water retention, the concurrent phenomenon of loss of soluble soil nutrients by leaching, when excess precipitation extracts nutrients out of the soil, is suppressed. It is the combined improvements in water and fertilizer efficiency by an existing growing method, coupled with the potential benefits of enhanced soil health due to improved soil microbiology, that create a powerful economic argument for the widespread adoption of biochar.

However, only time will tell how it will all play out.

 Hugh McLaughlin is a member of Lee Enterprises Consulting. Lee Enterprises Consulting is the worldís premier bioeconomy consulting group, who have consultants and experts worldwide, including in the technologies discussed in this report.† The opinions expressed in the report are those the author, and do not, necessarily, express the views of Lee Enterprises Consulting.

Hugh has a B.S. in Chemistry from Harvey Mudd College, an M.S. in Chemical Engineering from the USC, and a Ph.D. in Chemical Engineering from Rensselaer Polytechnic Institute. He is a registered professional engineer in Massachusetts. Hugh is a recognized technical/technology expert in biochar and activated carbon, having designed and commercialized patented technologies for their production. He is a leading authority on biochar properties and characterization.

October 12, 2016

Ten Clean Energy Stocks For 2016: Just The Numbers (9-1 to 10-11-16)

Tom Konrad, Ph.D., CFA

I missed my regular monthly update of my Ten Clean Energy Stocks for 2016 model portfolio at the start of October due to vacation.  This mini-update will just give the numbers through October 11th, without the regular discussion of company events.  I'll follow up in early November covering highlights for the full two months.  As you can see from the chart below, the portfolio and all sub-portfolios did very well by outperforming their benchmarks by 3% to 12% for the six week period.

10 for 16 September - Oct 11 composites.png

See the May update for a description of the benchmarks.

Individual stocks

Growth stocks led the way, especially MiX Telematics Limited (NASD:MIXT; JSE:MIX).

10 for 16 Aug.png

At the time of the last update, I said "the three growth stocks remain extremely cheap, especially REGI and MIXT."  Readers who bought these two stocks at that time should have seen an average 16% return on the investment over the past 6 weeks, almost all of it attributable to MIXT, which was up 32%.  The big gains for this vehicle tracking stock seem mostly due to the completion of the previously announced repurchase of stock. 

I've been very bullish about the effects of this repurchase in previous updates.  I only wonder why it took so long for the market to notice.  The stock has been so undervalued I believe it still has plenty of room to run.


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.

October 06, 2016

Clean Energy Finance Experts United Against Trump

by Tom Konrad, Ph.D., CFA

This website, AltEnergyStocks.com, endorsed Barack Obama for President in 2008 and 2012.  In those two elections, we based our endorsements on a point-by-point analysis each candidates' energy policies, favoring the candidate who expressed the strongest support for policies to transition our economy away from its dependence on fossil fuels.

This year, the comparison is so stark a point-by-point comparison hardly seems worth the exercise. Here are a few quotes from the candidates' websites that drive the difference home:

On Climate Change

Trump: "I think it's ridiculous, we've got bigger problems right now."
Clinton: "I won’t let anyone take us backward, deny our economy the benefits of harnessing a clean energy future, or force our children to endure the catastrophe that would result from unchecked climate change."


Trump: Accuses Obama of attacking coal, natural gas, and oil industries. Will "save the coal industry" and rescind Obama's Climate Action Plan.
Clinton: Says she will:

  • Generate enough renewable energy to power every home in America,
  • Cut energy waste in American homes, schools, hospitals and offices, and
  • Reduce American oil consumption through cleaner fuels and more efficient vehicles

on "day one".

In short, the contrast is stark.  Clinton makes promoting clean energy and reducing waste a high priority whileTrump wants to revive coal, natural gas, and oil extraction.


Much criticism of both candidates revolves around their personalities.  As an investment manager, I'm used to making high stakes decisions about the future actions of a class of people not known for their morals or honesty: CEOs and other high level company management.  I deal with this credibility gap by looking at manager's incentives, especially their ownership and recent purchases of company stock.  A manager with plans to swindle shareholders will not be a net buyer stock on the open market, which is why I put so much emphasis on insider buying in my stock selection process.

When it comes to selecting a President, it's possible to take a similar approach.  Do we see signs that a candidate is interested in personal enrichment at the expense of the American people? 

The questions about Clinton center around her concealing information (private email server, etc.) and donations to the Clintons' charity.  At worst, this seems to imply to me that she is willing to stoop to underhanded methods for personal power and influence.  The Clintons can't spend charitable money (beyond some publicly disclosed perks and salaries) on themselves, although the charity clearly increases their public profiles and influence.  Why does Hillary Clinton want personal power?  To do what she's been trying to do all along: Use it to make the world a better place, at least as she sees it, and perhaps ensure a place for herself in history.

Trump, in contrast, seems mostly motivated by personal wealth and fame.  Helping people (other than himself and his family) has never been something he even claimed to be interested in before this election.  As with any other CEO, I'm a lot less interested in what he says he is going to do than where I think his incentives are.  In Trump's case, that is almost certainly the pursuit of additional wealth and fame, and I see no evidence that he is likely to treat the American people any better than the many contractors who worked on his projects and never got paid.  Trump is proud that he was able to use the tax code to avoid paying tax.  Taking advantage of the tax code is something we all do, but few of us are proud of it.  The fact that Trump is proud, perhaps even enjoys taking advantage of the tax code, tells us that he is likely to take every opportunity to make sure as much money goes into his own pocket as possible.

The choice seems simple: Do we want a President who wants to make the world a better place and be remembered in the history books, or do we want a president who wants to get richer and increase his personal fame right now.

The Clean Energy Finance Experts

Perhaps you see it differently than I do, so I thought I'd share the opinions of some other financial and clean energy experts.  I sent a note to AltEnergyStocks.com's regular contributors asking for their opinions.  Some prefer to stay out of politics, but most expressed horror at the prospect of a Trump presidency, even those who have doubts about Clinton.

Here's what they had to say, in order of brevity:

Sean Kidney, CEO, Climate Bonds Initiative

"Electing Trump would be akin to climate suicide."

"If Trump gets elected there goes US climate change policy and US clean energy policy. I'm for Hillary 100% and happy to say so in any way available. The alternative is akin to climate change suicide."

Joe McCabe, P.E., Renewable Energy Champion

"As a registered Republican, I can't support [Trump]."

"As a registered Republican I cannot endorse this candidate who my party has put forward. Donald has repeatedly indicated that climate change is a "hoax", both on Twitter and in media interviews. He does not possess the minimum requirements for the position of President of the United States. Hillary Clinton gets my vote this time."

Garvin Jabusch, Chief Investment Officer at Green Alpha Advisors

"There really is only one choice this November"

"Hilary Clinton for President. In the critical climate and economic growth topic of renewable energy, the contrast between Clinton and the GOP nominee could not be more stark.

"Trump has called climate change a hoax, vowed to revitalize coal, promised to break the US' commitment to the Paris Climate Accords and, perhaps most tellingly, has selected North Dakota Congressman Kevin Cramer as his energy adviser and probable Secretary of Energy. Representative Cramer is an oil and gas industry lapdog and a proud climate skeptic.

"Clinton, meanwhile, has made actual energy expert Trevor Houser her energy advisor (Houser is co-author of Economic Risks of Climate Change: An American Prospectus). Clinton has a policy goal of deriving enough electricity from solar PV to power every home in America within 10 years of her inauguration. She says that's about half a billion panels or approximately 150 gigawatts' worth, which is more than three time the capacity the US has installed, ever, up till now. Clinton has said  'someone is going to become the clean energy superpower of the 21st century. It's going to be China, or it's going to be us.'

"If you care about having a shot at avoiding the worst outcomes of climate change, there really is only one choice this November. "

Debra Fiakas, CFA, Managing Director of Crystal Equity Research

"Trump is willing to swindle... our country... with a hollow promise of ‘return to greatness.’"

"While I am not necessarily a fan of Hillary Clinton, the choice in this election is clear.  Despite her weak understanding of truth, her persistent lack of good judgment and sometimes sloppy execution, I will be voting for Clinton.
"About ten years ago I heard Donald Trump described as a “preening egotist with a muskrat on his head.”  At the time I thought it was a bit harsh and expressed this view to my daughter.  Her response was “he is grotesque.”  As I look back on Trump’s conduct over the past months, it is clear that egotist and grotesque are quite appropriate descriptions.   A vote for Donald Trump is a vote for an opportunist and a bully who has artfully used bigotry to garner support from those who truly do feel left out of the election process.  They are left out for good reason  -  their ideas are contrary to our democratic ideals and otherwise foolish economically.    
"Reports that Trump expressed intentions to move forward with a reality TV program from the White House are more than likely true.  Trump is willing to swindle the most vulnerable people in our country  -  unemployed, poor, uneducated and emotionally unstable  -  with a hollow promise of ‘return to greatness’ just for the sake of an elaborate brand building scheme.  It is shameful.  What is even more shameful is that so many people in this country have been willing to support him just for the sake of gaining power.
"Three paragraphs and not one word about the environment or energy!  So sad that this election has put the most critical problems before us on the back burner while we debate the history of weight gain and loss by a Miss Universe contest winner from a two decades ago.  Most likely those who want to see change in the stewardship of the environment will need to take the more costly and time consuming approach of working with each state government."

AltEnergyStocks.com Endorses Clinton

For many of my colleagues, and doubtless many readers, this election seems to be about choosing the lesser of two evils.  That said, it's pretty clear which candidate is playing the role of Satan, and which is just the black sheep in-law. 

For myself, the decision is even easier than that.  I believe that Hillary Clinton has the skills and motivation to be a good or even great President.  She may not be totally honest or have perfect judgement as Debra Fiakas says, but she does know our imperfect political system from many angles and has shown herself willing to reach across the aisle for the greater good.  In my opinion, her goals for the country are (in stark contrast to her opponent) mostly the right ones, and I hope her long political experience will help her be much more effective at accomplishing those goals in spite of a highly dysfunctional Congress.

Tom Konrad, Ph.D., CFA
Editor, AltEnergyStocks.com

DISCLOSURE: It's also worth noting that our holdings of clean energy stocks will perform better under a Clinton presidency than under Trump.  I would not be surprised if a Trump presidency sent the whole stock market downwards, and not just clean energy stocks. Coal companies might benefit, if that's your sort of thing.

October 05, 2016

Navy Buoys Up Ocean Power Tech

by Debra Fiakas CFA

The last post, Grid Connected Ocean Power, highlighted the claim by the U.S. Navy of the first grid connected ocean power generator in the country.  Two wave power systems have been connected to the electrical system at the U.S. Marine Base in Kanehoe Bay, Hawaii.  The Navy is gathering performance data as part of its on-going program to support renewable energy to perfect system designs, installation strategies on-going maintenance.  That is apparently not enough for the nation’s sailors.  Last week the Navy announced an award of $250,000 to Ocean Power Technologies (OPTT:  Nasdaq) to support the design of a ocean power buoy especially suited for military needs.

Ocean Power Technologies (OPT) already has its PB3 system intended as a continuous power supply to ocean installations such as equipment anchored to the sea-bed or deployed from an ocean vessel’s deck.  Called the PB3, it is deployed near a point-of-use in depths up to one kilometer.  The wave energy is converted to electricity through a direct drive generator that charges an on-board battery pack.   The Navy has already had experience with the PB3.  It was in use off the New Jersey shore during Hurricane Irene in 2011 as part of a demonstration project run by the Navy.  Its power capacity is near 8,400 watt hours per day.

The Navy design contract will take OPT in a new direction.  The new design is to be self-contained and will have no external moving components.  The Navy is looking for a highly reliable renewable power source for mission critical sensors.  The first phase of the contract involves design and testing.  If this phase is completed successfully, the Navy has pledged an additional $500,000 for additional design and testing of the entire power conversion system.

In July 2016, OPT announced its first installation of a commercial version of the PB3 also off the New Jersey coast.  A month earlier the company had signed a lease agreement valued at $975,000 with Mitsui Engineering and Shipbuilding for deployment of a PB3 off Kozu Island in Japan.  Together the two developments bring OPT significantly closer to commercial stage with its ocean power technologies.

OPT is also known for its PowerBuoy system, which can produce output in a range of 350 watts to 15 kilowatts depending upon the installation characteristics.  The PowerBuoy floats on the ocean surface above a seabed anchor.  A float moves up and down with the waves along a central spar, driving a mechanical system that converts the up and down motion to a rotary motion in an electrical generator.  The company had earlier partnered with Mitsui in anticipation of deploying the PowerBuoy at Mitui’s Kozu Island project.  The two companies have been working on an advanced algorithm for assessing ocean wave capture.

The design contract with the Navy is most welcomed by a company that has yet to record product sales let alone profits.  OPT is financed by equity and recently raised $5.3 million in net proceeds from the sale of common stock at $6.75 per share.  At the end of July 2016, directly following the stock offering, the company had $9.1 million in cash in the kitty.  OPT has been using about $3.0 million per quarter to support operations, suggesting there is about nine months breathing room for management.

OPTT shares are among few pure plays on ocean power technology.  With advances in new product development and interest from high-profile prospects, the company might seem promising.  Still investors might be concerned about a $2.5 million contingent liability on OPT’s balance sheet related to settlement of a class action lawsuit.  Although the company expects liability insurance to cover as much as $2.5 million of the original $3.0 million settlement, the liability still casts a shadow across OPT’s balance sheet.

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.

October 02, 2016

What Obama Did To Coal Investors, What The Next President Might, And How Investors Can Survive

by Tom Konrad Ph.D., CFA

Investing in the past is a good way to lose money.  Just ask anyone who has been investing in coal stocks since Obama we re-elected.
Obama bump.png

A glance at the chart above shows that the VanEck Vectors Coal ETF (KOL) is down about 50% over the last four years, even while the broad market (as represented by the SPDR S&P 500 ETF (SPY)) has gained almost 50%.  But even if we knew this was going to happen, should investors have rushed into the energy sectors most loved by liberals: That is, Wind, Solar, or Clean Energy Stocks in general?

Hindsight says "Yes, No, and No," which is hardly a comforting response to a an investor looking to understand what might happen over the next four years.  Wind stocks were up 90%, as shown by the First Trust ISE Global Wind Energy ETF (FAN).  Solar stocks were volatile, and ended basically flat, significantly lagging the market as a whole, as embodied in The Guggenheim Solar ETF (TAN).  Finally, the PowerShares Clean Energy (PBW), a widely held basket of clean energy stocks.

What Obama Did

Shortly after the election in 2012, a reporter with USA Today called to ask me why wind and solar stocks had not taken off.  As you can read in his article, I told him that essentially, one presidential election would not transform the economy.  I predicted legislation promoting alternative energy or attacking coal was off the table- an easy prediction to make, given Republican control of Congress.  I also predicted that Obama would continue doing "Pretty much what he [had] been doing for the" previous three years: doing what he can through rule-making.  Which is what he did. 

What many may find surprising is that Obama's rule-making was only a minor factor in the recent decline of coal stocks.  His administration's most important energy policy, the Clean Power Plan remains tied up at the Supreme Court.  True, coal advocates like the Institute for Energy Research (IER) will point at two other regulations, the Mercury and Air Toxics Standards (MATS) and the Cross State Air Pollution Rule (CSAPR.)

What Obama Didn't Do

The coal industry is like a coddled child sent out into the world: It's not flexible or tough enough for a real-world job, it's bankrupt from credit card debt, and it still has not learned to clean up its room.

The coal industry's problems with MATS and CSAPR hint at the underlying cause of the industry's troubles.  The industry is like a coddled child sent out into the world: It's not flexible or tough enough for a real-world job, it's bankrupt from credit card debt, and it still has not learned to clean up its room.

Take these points in reverse order.  MATS, CSAPR, and even the Clean Power Plan are regulations telling coal plants to be a little less dirty than they are, but not nearly as clean as any of their power generation siblings: natural gas, nuclear, wind and solar.  Like any wayward child, coal promised to clean up its room... remember "Clean Coal?"

Fantasies like Clean Coal and hiring a professional housekeeper to keep a child's room tidy might have been affordable before technology innovation in natural gas drilling, solar, and wind started cutting into the price of power. 

But even without affordable clean coal, MATS is not causing the wholesale closure of coal plants, according to the nonpartisan Energy Information Administration.

EIA coal closures MATS

Technology has recently been sending the price of power in the opposite direction: down.  Ten years ago, coal power could legitimately call itself a source of cheap (if not clean) power.  Now, technology innovation have left coal choking on its own fumes, while clean coal (a.k.a. IGCC) and nuclear as simply too expensive to compete without subsidies, as shown by in this 2015 analysis by financial advisory firm Lazard.

Lazard LCOE.png

Lazard found that, without subsidies, the cheapest sources of power were:

  1. Energy efficiency, at $0 to $50 per MWh
  2. Wind, at $32 to $77 $ per MWh
  3. Utility scale solar, at $43 to $70 per MWh and
  4. Combined Cycle Gas, at $52 to $78 per MWh

Coal was far behind, with the cheapest coal costing almost as much as the most expensive wind, solar, and combined cycle gas at $65 per MWh.  The cheapest nuclear and clean coal (IGCC) were far behind, at $97 and $96. 

Keep in mind that these are unsubsidized numbers.  If the Obama Administration declared a war on coal, it's the invisible hand of economics that won all the battles.  And that is why new capacity additions are overwhelmingly wind, solar, and natural gas:

Source: GTM Research / SEIA U.S. Solar Market Insight, Q2 2016

Adding to the poor economics of coal power, the coal mining industry racked up debt like an irresponsible teenager with a credit card at the worst possible time.  Arch Coal borrowed heavily to fund acquisitions in 2011, Peabody borrowed to fund acquisitions in Australia.  And these are just two in a string of bankruptcies that have left nearly every big coal firm in bankruptcy or emerging from it.  They also play back into the theme of coal not cleaning up its own room: Coal producer bankruptcies are shifting the costs of cleaning up mines to the states.

Baseload: An Unwanted Suitor

Coal advocates like to point out that "the sun does not always shine and the wind does not always blow." They then go on to call solar and wind power "unreliable" and claim that the grid cannot operate without backup power always at the ready. Coal and nuclear power plants are what is called "baseload" power: they run at a near constant level.  That's not the same as being reliable: Reliable people show up when they say and do what they say they are going to do. 

A person who is always there, never goes away even when you want a little privacy, and is always doing things for you even when you don't want anything is more likely to be called an unwanted suitor than "reliable."

We're actually pretty good at predicting the weather, especially over large areas and a few days or hours in advance.  While wind and solar power on the electric grid does vary over time, it's usually there in approximately the quantity we expect.  It would be a great complement to say that a large coal or nuclear power plant was "as reliable as the sun coming up in the morning."  The "Equivalent Forced Outage Rate- Demand" (EFORd), a measure of how often a power plant is out when it's needed, is about 4% for nuclear, 7.5% for coal, and 10% for gas plants [pdf, 2008-2012 data].  So coal power is there most the time (even producing power at 3am when everyone is asleep and it may not be needed.)  Yet even this unwanted suitor fails to show up about one time in 13 when he's really needed.

Solar arrays and wind turbines also go down unexpectedly, but the small size (relative to coal) of solar arrays and individual wind turbines means that they don't all go out at once.  A single 250 MW coal plant produces approximately the same amount of energy as 400 typical 1.5MW wind turbines, or 100,000 to 200,000 home solar arrays.  Some of these will be down at any time, but they won't all go down at once, especially if they are scattered over a wide area.

In this sense, solar and wind are far more reliable than coal.  It's true that solar and wind need to be supplemented with more flexible generation, energy storage, or flexible demand response in order to match the patterns of electricity demand.  But baseload power also needs flexible power resources to match the normal fluctuations of demand, and to stand by at the ready for that one time in 13 when you're hoping it will be there, but it isn't.

What The Next President Can't Do

The heated rhetoric from fossil fuel advocates and environmentalists alike served to hide the very real economic problems coal power has had in adapting to the new reality of falling technology costs for solar and wind and falling fuel prices for natural gas generation. 

The continued decline in the cost of wind and solar generation guarantee that these technologies will continue to be the leading forms of new power on the electric grid.  In turn, their variability will make it more expensive to run baseload power stations such as coal and nuclear, making them even less economic than they already are.

The free market is much more powerful than any president.

Donald Trump has repeatedly promised to 'save' the coal industry.  If elected, he is certain to be even less effective at reviving coal than Obama was at killing it.  The free market is much more powerful than any president, and coal simply cannot compete in a free market. 

If Hillary Clinton is elected, she will almost certainly be accused of putting more coal miners out of work as she tries to promote renewable energy, but she will not deserve the blame or the credit any more than Trump or Obama.

The true blame and credit for the changes in the way we produce and use electricity fall squarely on technological progress and market economics.

How Investors Can Survive and Even Thrive in the Future of Energy

Investors who observed the gridlock in Washington, D.C.four years ago, and rightly concluded that Obama would be ineffective at reigning in fossil fuels were correct.  Nevertheless, they have lost most of the money.

Would they have done better if they had plowed their money into solar and wind?  Not if they bought a solar ETF like TAN or a clean energy ETF like PBW.

Conservative investors (in the financial sense of the word: risk-averse) investors had an additional problem.  The future of energy may lie in solar, wind, and other energy technology, but technology companies are not conservative investments.  The technological innovation driving the rapid price declines for wind and solar is a problem for incumbent companies as well.  Today's leading solar manufacturer is tomorrow's has-been, a fact I pointed out in 2009. In the same article, I also said my top pick at the time was a company that few people would think of as "green:" a Toronto-listed bus manufacturer called New Flyer (NFYEF.)  At the time, New Flyer was trading at C$9 and paid a C$0.62 (7%) annual dividend.  Today, seven years later, the stock trades at C$43, the dividend has been maintained and recently increased, and my readers and I still own it.

In 2012, I could not give the USA Today reporter a similar conservative income pick in what I told him was my favorite energy sector at the time, energy efficiency: Such stocks did not exist.  That changed in early 2013 with the IPO of Hannon Armstrong Sustainable Infrastructure (HASI.)  After interviewing the CEO of Hannon Armstrong, I said, "I can't help but be enthusiastic about the company," which was then trading at $11.75, slightly below the IPO price.  HASI was about to start paying an annual dividend which I estimated would exceed 15 cents a quarter (5%). The company quickly increased its dividend to $0.22 a quarter that December, than to $0.26 in 2014, and $0.30 last year.  I expect it to increase the quarterly dividend to at least 34 cents this year, or 5.9% at the current price.  Did I mention the stock price has doubled?

How do I find conservative income stocks that double or quintuple in a handful of years, while solar and coal investors are losing their shirts?  Not just by understanding the technology.  Anyone who understood solar technology in 2009 would have rightly predicted the enormous growth of the industry - from 2% of new generation capacity in 2010, to 64% in the first quarter of 2016.  But if they had taken that prediction, ignored my warning and bought the Guggenheim Solar ETF (TAN), they would have lost 77% of their money, despite Obama's attepts to promote the solar industry.  Even coal investors would have done better with the VanEck Vectors Coal ETF (KOL): It "only" fell 64% over the same period.

It takes knowledge of economics, technology, and the whole energy system to successfully navigate the Future of Energy.  Knowing who is going to win the election in November might help on the margin, but neither Trump nor Clinton can roll back the progress of technology nor battle with Adam Smith's Invisible Hand of the market.

Disclosure: Long NFYEF, HASI

Tom Konrad Ph.D., CFA is a freelance writer and portfolio manager specializing in income stocks positioned to benefit from ongoing changes in the energy economy.

September 29, 2016

Grid Connected Ocean Power

by Debra Fiakas CFA

The U.S. Navy is laying claim to the first electric grid connected wave power generator in the country.  A test site has been set up near military facilities at Kaneohe Bay in the Hawaiian Islands, where wave activity is known to be exceptional.  Yes, Hawaii is part of the United States.  The project consists of two wave-power generation systems or ‘power buoys’ anchored about a half-mile off shore.  The two buoys are connected by undersea cable to the Marine Corps base at Kaneohe and ultimately to Oahu’s electric power grid.

The first of the two buoys is produced by Northwest Energy Innovations.  Its Azura wave energy device was first deployed at the Hawaii test site in June 2015.  The buoy sits atop the ocean with about 12 feet rising above the waves and another 50 feet extending below the surface.  The system weighs 45 tons and uses both up and down as well as side to side motions to generate electricity.  Northwest got help installing the Azura in Hawaii from a contractor, Sea Engineering, which also helped with the assembly and launch.  The Azura was developed in collaboration with Callaghan Innovation, a government agency of New Zealand and Energy Hydraulics Ltd., also located in New Zealand.

It seems that ‘takes a village’ to put a wave power buoy into the ocean.  The corrosive conditions of salt water and the dangers presented by the unpredictable waves and currents present significant challenges for engineers.  Device design, materials, anchoring and grid connections each present unique hurdles. 

The second buoy was developed by Fred. Olsen Ltd. based in Great Britain.  Its Lifesaver wave power system is a 50-foot wide and 3-feet thick doughnut-shaped device, which is anchored to the ocean floor by cables.  It is the action of the cables as the ocean moves that turns the generator.  The Lifesaver was put in place at the Hawaii site in April 2016, with help from Healy Tibbitts Builders and Sea Engineering, Inc.  The smaller of the two buoys, the Lifesaver is expected to generate about 4 kilowatts.

The Kaneohe projects is a first for the U.S., but not a first for the world.  The first grid-connected wave power station in the world was turned on in early 2015 of the coast of Western Australia by the device developer Carnegie Wave Energy Ltd (CWE:  AUS or CWGYF:  OTC/QB).  There are limited ocean power grid connections in the United Kingdom and Norway as well.  The U.S. has remained behind developers in these areas where the engineering community has been quicker to embrace innovation and where public policy has been supportive of alternative energy development.  Over the past decade the U.S. military has invested about $300 million in hydrokinetic research and development, well behind investments in the United Kingdom, Australia and northern Europe.  The Hawaii project has been made possible by financial support from the U.S. Navy, which has interests in reducing energy costs at Hawaii military installations.

The Navy will collect performance data from the Hawaii project in the coming months, which will be used to make adjustments to the power buoys installation as well as to the grid connections.  Northwest Energy Innovations also plans changes in its Azura power buoy to increase electric output from 20 kilowatts to 500 kilowatts.

For now the companies involved in the Navy’s project in Hawaii are all privately held and are beyond the reach of most individual investors.  Wave power is still in the nascent stages and few ocean power projects underway anywhere have reached the point of generating power on a consistent basis.  Some investors might remember solar energy in the 1980s, when solar cells had been proven capable of generating electricity but had not consistently generated profits for any company.  With practical knowledge of system design, construction and operation accumulated, the early companies were eventually able to achieve scale and then began generating consistent income streams.

The realization of a full and complete grid connection in Hawaii makes ocean power more certain for U.S. coastal markets.  In a study commissioned by the U.S. Department of Energy, RE Vision Consulting estimated that the theoretical ocean wave energy resource potential in the U.S. could satisfy more than 50% of the country’s annual demand.  This is a resource that cannot be ignored no matter how challenging the engineering work.   

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.

September 27, 2016

Darling Ingredients' Bean Stalk

by Debra Fiakas CFA

Once upon a time there was a boy named Jack,
Who lived with his widowed mother
On their small farm in the country.
---Benjamin Tabart, The History of Jack and the Bean Stalk

Jack made a mistake or two on the road to fixing his family’s income problems, but in the end Jack’s bean deal prove lucrative.  We are wondering if Darling Ingredients' (DAR:  NYSE) acquisition of VION Group in early 2014, will prove as beneficial to the food by-products processor.  The VION operation was a division of VION Holdings N.V. based in the Netherlands that just like Darling collects and re-purposes by-products of grain and animal food production in Europe.

The VION deal expanded Darling’s food by-products business with six new brands that at first appeared to simply add processing capacity and visibility in the European and Asian markets.  Indeed, like its new parent VION operates rendering plants that produce both edible and non-edible fats, cures hides, biofuel, and proteins, blood and other edible products used as food ingredients.  However, over the last year and a half, the addition of those six brands appears to have confused rather than enhanced valuation of DAR.

Darling’s long history as a recycler of food by-products was altered with the Company’s entrance into a renewable diesel joint venture with Valero Energy (VLO) in 2009.  This week the Company staged an investor-analyst forum in New York City to highlight its building position in the food ingredients market.  Darling is recasting itself as a producer of ‘sustainable food, feed and fuel solutions’ and has put VION in the middle of the table as the center piece.

VION produces two products that standout among others as more than Darling’s usual commodities. Gelatin is produced from chicken, beef and pork bones and is sold under the brand name Rousselot.  In the increasingly health conscious society gelatin food producers are finding more and more applications for gelatin.  Likewise gelatin is gaining use in the pharmaceutical industry for capsules, sponges, vaccines and fillers.  Made from bioactive proteins collagen is sold under the name Peptan, which is becoming increasingly visible in final products that advertise the use of organic and healthy ingredients.  These two products require closer collaboration by VION with end users and lift the veil of anonymity that typically hide commodity producers.

We believe Darling paid for VION’s high value-added product line, but its shareholder base has not fully appreciated the merits of the deal.  The purchase price of $2.2 billion, represented a multiple of 8.0 times EBITDA and 0.9 times sales at the VION division in the twelve months ending June 2013.   Darling shares have struggled since closing the VION deal, in part because profit margins have been under pressure and in part because of the added leverage required to complete the deal.  However, we also believe the highly visible brands of VION have been more a cause for concern than a reason to bid the stock price higher.  

The senior executives of VION were in attendance at the Darling analyst forum, providing details on the product line and explaining VION’s position in end markets.  The event was designed to make clear Darling’s expanded share of its markets.  Although it was not immediately apparent in trading in DAR, in the days following the event, the presentations may eventually accomplish the desired effect on valuation.

The forum event may have also provided unintended peak under Darling’s corporate kimono.  There appears to be a cultural divide between the U.S.-based senior management and the European-based leadership at VION.  One side was typified by the gregariousness, age and mostly wide-girth of U.S. executive leadership and the other by the more svelt and youthful Europeans.  The former knows well the requirements of managing the spread between the cost of raw materials and selling prices for finish goods  -  knowledge which have driven the consistent profits that are at the core of our bullish investment thesis for Darling.  On the other hand the VION team appears to understand the competitive positioning and marketing requirements for a line of leading edge food and feed ingredients, but lacks the full awareness for conservative management of profit margins.

Indeed, the two groups were physically positioned apart from each other, providing a somewhat unsettling optic for the forum event.  Retirement age and health questions were clearly visible as executive officers stood before the audience of analysts and investors.  The image at the event begged the question of succession.  The company already had to call back its chief financial officer from retirement after his replacement failed to ‘find a home’ in Darling’s corporate culture.  We foresee more turbulence related to cultural and succession issues in the coming years.  Of course, VION is not the only source of talent to tap for the C-suite.  There are any number of possible candidates among experienced and capable individuals in the U.S. and Canadian operations.

We continue to rate Darling a Buy at this time.  A stable, consistent management style and a conservative operating structure have always been at the foundation of our investment thesis for Darling.  The issue of succession is causing some concern that as the Company has grown, the old decision making frame work and operating infrastructure cannot sustain the company in the future.  The ‘VION bean’ that Darling has sown may depend upon real change in Darling’s corporate culture.

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. Crystal Equity Research has a Buy rating on DAR and Darling Ingredients is included in the Biofuel Group of the Beach Boys Index of alternative energy developers and producers.

September 25, 2016

Graphite Producers In Production

by Debra Fiakas CFA

The series on graphite resource development is completed with a discussion of the companies that are currently in production.  The U.S. Geological Survey estimates 1.2 million metric tons of flake graphite are produced annually.  The vast majority  -  780,000 metric tons  -  are produced in China.  India and Brazil follow with 170,000 metric tons and 80,000 metric tons, respectively.  North America, which seems to show so much promise to the graphite resource developers that have been featured over the past few articles, is currently only contributing 30,000 metric tons per year to the graphite supply stream.

For investors the clutch of graphite producers offers interesting alternatives to play the growing demand for lithium ion batteries and the graphite materials required to produce them.

SGL Group (SGL:  DE) is a global producer of carbon-based products, including graphite materials.  The company operates 41 production sites around the world, of which 22 are in Europe, 11 in North America and 8 in Asia.  Historically graphite electrodes for the steel industry have been at the core of the company’s production, but the company’s newer Graphite Materials & Systems division is targeting high-grow industries such as semiconductors and batteries.  The company’s Composite Fibers and Materials division also has a partnership with BMW, which is using carbon composites with greater intensity for automotive body and frame components.

Just like the smaller graphite resource developers such as Northern Graphite, Nouveau Monde and Ontario Graphite, SGL Group may be gearing up for the wave of new demand for spherical graphite from battery manufacturers.  The anodes in lithium ion batteries require a particular shape and purity that is best met by highly refined graphite particles.  The graphite ore is refined in a step called ‘micronization,’ shaped through ‘spheronization, and then coated with a metal layer.  In August 2016, SGL Group announced plans to invest in a coating line for its production facility in St. Marys, Pennsylvania.  The company cited the need for coated graphite materials used for manufacturing wafers used in light emitting diode production, but noted in the future “other graphite-based solutions could be enhanced by coatings.”

A restructuring effort appears to be completed, leaving SGL a leaner, more focused operation.  Yet in 2015, SGL Group reported slightly lower sales of €1.5 billion (USD$1.7 billion) compared to the previous year, producing an operating profit of €32.6 million (USD$36.5 million) before non-recurring charges totaling €160.9 million (USD$180.2 million) related to restructuring charges and impairment losses.

SGL Group shares trade on the Frankfurt Exchange at 0.78 times sales or 5.94 times book value.  Of course, the price-earnings multiple is negative.  The stock has trailed off over the last few years, as the top-line has weakened and losses persist.  The restructuring effort and new market focus is expected to bring the company back to profitability.  With a debt-to-equity ratio of 1.85, the company has not had the flexibility some investors might prefer for a company in transition.  The stock is now trading near the midpoint of its 52-week low and high.

If Germany’s SGL Group is unappealing, investors can turn to France’s Imerys S.A. (NK:  PA), a self-described supplier of minerals-based industrial solutions.  Its products include ceramics, pigments, graphite, carbons and other materials.  Importantly, Imerys is one of two companies in North America with current graphite production from its Lac-des-Iles mine north of Montreal.  Graphite ore production from Lac-des-Iles is further refined at Terrebonne, Canada for use in the automotive, battery and polymer industries.

The company has fared a bit better in the current economy than SGL Group and has remained profitable.  Imerys reported a 13% operating margin in the last twelve months.  We believe this is due in part to a well diversified product line offering significant added value to customers.  Higher profits have also helped fortify the balance sheet, which is leveraged to 85.9 debt-to-equity.     Still Imerys is trading at a multiple of 65.0 times trailing earnings.  Even with a dividend yield of 2.7%, the valuation seems a bit steep.

Likely the output from Lac-des-Iles mine represents a good share of the 30,000 metric tons produced annually in Canada.  Some of the balance could be natural flake graphite production from Eagle Graphite’s Black Crystal project in British Columbia.  The company plans to produce 2,100 metric tons in 2016, and estimates production could increase to 7,500 metric tons by 2019.  While relatively new to the sector, Eagle Graphite (AMPFF:  OTC/QB or EGA: V) has already established its credibility with potential customers in the battery industry.  Test samples of spheronized graphite from the Black Crystal project exceeded the 99.95% purity level required from lithium ion batteries.
Eagle is more of a graphite/battery pure-play than SGL or Imerys, but the company has yet to produce significant sales and, of course, there are no profits.  While Eagle is several steps ahead of the other graphite resource developers in North America, the stock is still priced like an option on its assets.

Another perhaps more appealing pure-play on battery graphite is in the shares of Elcora Advanced Materials Corp. (ECORF:  OTC/QB or ERA: V).  The Sakura graphite mine in Sri Lanka has been in production in the past, reaching 18,000 metric tons annually under the name Ragedara.  More recently the mine has produced about 500 metric tons per year.  Elcora has set up a processing facility near the mine and claims output with purity over 99%.

To impress potential battery sector customers, the company recently reported results from ‘C20’ tests, which on the simplest terms indicate a battery’s capacity or amp hour rating when discharged over twenty hours.  The tests established that the reversible capacity of the Elcora graphite used in the battery anode is very high and well suited for lithium ion battery applications.  Last month the company also introduced a proprietary technology aimed at simplifying the graphite refinement process.  While not providing specifics the announcement claimed Elcora’s approach could eliminate most of the advanced preparation stages for micronizing and spheronizing materials for turning out spherical graphite.  We note that Elcora’s processing facility near Sakura mine is set up to complete the initial steps such as grinding, flotation and dewatering.

An article about investment opportunities in current graphite production would be incomplete without a nod to Leading Edge Materials (LMF:  V or LEMIF:  OTC/QB), the combination of Flinders Resources and Tasman Metals Ltd. in August 2016.  The company began producing graphite from its Woxna project in Sweden in 2014, targeting an annual production rate of 10,000 metric tons.  Unfortunately, low selling prices forced the company to suspend production in July 2015.  The halt at Woxna may have provided part of the incentive for Flinders management team to look for an alliance with Tasman and its Norra Karr rare earth project in Sweden.  The two projects could give Leading Edge a triple threat in the battery market with graphite, lithium and aluminum materials output.
production graph
Source: Statistica

The halt at Woxna has put Leading Edge shares back below a ‘dollar’ after hitting a five-year high of CDN$2.81 in 2012.  Indeed, the share price appears to have followed the same trajectory as graphite prices.  In the chart below reveals the erosion of reported prices from 2011 to 2014, during which time price fell by an average of 49%.  Statistic has publish a forecast of prices through the 2020 time frame, suggesting that the worst will likely be arrive in 2017.  Then demand for graphite for lithium ion batteries is expected to drive prices for large flake graphite to unprecedented levels.  Lesser graphite materials are expected to experience improved pricing as well, but are not expected to recover to even to price levels at the beginning of the previous decade when the world’s economies were attempting recovery from recession.

Selling prices will likely dictate the future for these ‘senior’ producers as well as the rest of the graphite developers.  As demand begins to put pressure on prices, all of these companies will dust off production equipment.  Investors have alternatives for taking a stake in the graphite drama.  Alternatively, the stake could be a long position in all the stocks.  With the exception of Imerys and SGL Group, the stocks are low enough in price to make that feasible for even an individual investor.

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.

September 23, 2016

The Year Of Living Disingenuously: KiOR

The Inside True Story of a Company Gone Wrong, Part 4

by Jim Lane

In 2011, KiOR raised $150 million in its June IPO, claiming that it was generating yields of 67 gallons per ton in its Demo unit operations. But it was miles short of that.

In our previous installments, we have charted how KiOR moved from a promising early-stage technology to a public company with serious technological flaws that could have been fixed, but were ignored in what a senior team member speaking for the record, Dennis Stamires, characterized as a “reckless rush to commercial”.

But so far, the company and its celebrity investors and directors such as former Secretary of State Condoleezza Rice and famed venture capitalist Vinod Khosla had escaped close scrutiny.

Read the previous Parts in this Series

KiOR: The inside true story of a company gone wrong, Part 1

KiOR: the inside true story of a company gone wrong, Part 2

KiOR: The inside true story of a company gone wrong. Part 3, “You’ve Cooked the Books”

The methods for keeping the truth bottled up were not pretty. According to our sources for this story, dissenters had been fired, data had been faked, and opportunities to address the impending debacle with improved technology were ignored, underfunded or shelved. Meanwhile, the Board was misled either proactively or through lack of guidance on key performance indicators. Trouble that had been looming in 2010 had boiled into outright crisis in 2011.

Some progress had been made on technology, but not enough, Not nearly enough. The critical success factor, the bio-oil yields, had been increased from “the low 30s to the low 40s,” one staffer recalled.

And, worse, the production cost was “several dollars per gallon” according to those familiar with the state of technology development. The progress achieved had stemmed from changing the Technology from the original BCC reactor design and using a new ZSM Zeolite catalyst

Fatally, the progress on yields had been made at a catastrophic increase in the catalyst cost. One source close to the technology at that time recalled, “it was too far away from a production cost necessary to sustain an economically feasible business without government subsidies.”

The Spreading Fear

The result? Fear inside the company’s management team. The funds needed to be able to continue operations would soon be depleted. Potential investors, said one company insider, became skeptical about the over-glorified, profitable financial picture the Management team was claiming and deceitfully presenting to the public and to investors.”

Technical staff members at the time were particularly incensed over claims that yields were increasing from 67 to 72 gallons per ton, the projection of 90+ gallon per ton yields at the proposed Natchez, Mississippi commercial-scale plant, and a claim that production costs were being reduced to “close to $2 per gallon of fuel.”

“They were scared of exposure,” former CTO and board director Paul O’Connor recalled, “and [they made] a series of reckless actions.” And small wonder, for story that was told to the public was one of steadily increasing yields and progress in major company partnerships.

As the Motley Fool observed in March 2012:

“KiOR has been successful in steadily improving yield over the last few years from 17 gallons per ton to 67 gallons per ton. Notably, it has backing of large industrial companies like Chevron…The Columbus facility is on schedule to begin production in the second half of this year with an annual production capacity of 13 million gallons of biocrude. We cannot overemphasize how important a positive outcome at Columbus is.”

Yet, the yields were lower and the Chevron relationship, as originally envisioned in the form of an offtaker of crude bio-oil, was in tatters. Chevron would only take a finished fuel.

The Motley Fool was right on the money in one respect. Columbus was key. But there were intense risk factors implicit in the company’s yield targets. With the plant’s stated capacity of 500 tons per day, even with an 82% uptime, the yields would have to reach 87 gallons per ton to reach the targeted 13 million gallons of biocrude production.

That was more than double what the company had yet achieved in the demo or pilot plants, according to staff familiar with the state of technology development at the time.

A split in the management team

By the first quarter of 2012, KiOR team members pointed to a spilt in the management team, which had previously insulated itself from the technical staff.

“The modus operandi was “Reckless rush to Commercial,” recalled Dennis Stamires.

“Khosla and Kaul made the important decisions,” Stamires added, “while Ditsch and Cannon simply executed the orders. And Ditsch, Hacskaylo, Artzer, and Cannon set the [day-to-day] policies, and communicated with the public and investors. The rest of the management team were kept in the dark. It created confusion, poor morale, fear, discord, and mismanagement. On February 20th, I resigned from KiOR Management team, and notified the CEO, Fred Cannon, that I would devote all my time and available resources to developing a new, economically feasible technology capable of meeting KiOR’s business objectives.”

Paul O’Connor agrees that there was an unhealthy organization. “There was this tactic to silence people and [prevent them from] revealing secrets. At BIOeCON we would ask our technical people to tell shareholders what issues there were. Our perspective was that, if you know what the problem is you can solve it.”

The most obvious sign of technical trouble was over work on the company’s BFCC technology.

Despite claims of higher yields in the IPO documentation and elsewhere, the demonstration unit, using the latest ZSM zeolite catalysts, was still a dud. When the oxygen content was kept below 15%, the actual bio-oil yields reached into the 30s in gallons per ton. And 15% was the technical threshold where scientists at the time that the bio-oil could be converted into a salable fuel, by anyone.

Think of it this way. KiOR projected it could acquire its feedstock, Southern yellow pine, at an average cost of $66 per ton. Even at 40 gallons per ton, that would equate to $1.65 in cost. Before paying for the conversion technology. Or the building of the plant. Or the operating of it. Or anything to pay the workers. Much less pay back the investors. Or lenders like Mississippi.

Today, on a wholesale basis, finished gasoline blendstock sells for $1.40 per gallon. A financial debacle of immense proportions loomed, unless something could be done.

But it got worse, not better. Members of the technical team believed that the BFCC conversion process was not scalable to full commercial size plants without further reducing the yields. Yet, KiOR’s R&D management insisted on continuing work on the BFCC Technology and optimization of the ZSM catalysts.

“They were beating a dead horse,” one technical team member recalled.

By the end of the first quarter of 2012, KiOR team members of the time said that the company had lost much of its original core of expertise, as “most key technical personnel had left , or were planning soon to leave”. They were fearful that the truth would come out, investors would flee, KiOR would fall, and with it would go their jobs.

The Clock Begins to Run Out

Technical staff felt that exposure would come no later than the opening of the Columbus plant, when it would start operation and not be able to meet the yields used in the financial models and presented to investors.

In January 2012, Dennis Stamires requested the formation of a task force, called “Project Team Oil Yield”, operating separately from Hacskaylo’ R&D group and reporting directly to CEO Fred Cannon, with the objective to introduce in the DEMO Unit and subsequently to the Columbus plant, “a new feasible Technology capable of meeting KiOR’ Business objectives.” At that time, Professor Vasalos had also agreed to participate. BioeCON founder and former KiOR board member Paul O’Connor was in support.

Stamires recalled that, at the time he explained to CEO Fred Cannon, “it was very important to conduct a technology review and assessment in the presence of an Independent expert. It would make the findings and conclusions more credible. It could have convinced the board, and Khosla to act swiftly. It could have saved KiOR.”

Cannon stalled in making a decision. In late January, according to Stamires, he said that “I am still considering doing that, but not sure how to do it without getting Hacskaylo pissed-off”.

But time was beginning to run out.

Meanwhile, Professor Vasalos planned a three-day visit to KiOR on January 25th, and prepared a brief to present to Cannon on the new proposed technology.

But, in the end, Cannon declined to meet with Vasalos during the entirety of his stay. And on February 22nd, Cannon contacted Stamires to say, based on what he described as “legal confidentiality concerns,” that Vasalos could not be included in any review or assessment meeting.

The Vasalos decision is a puzzle.

First, Vasalos was confidentially bound by his Consulting Agreement Contract to KiOR. Second, he had previously analyzed KiOR’ Pilot plant and the Demo unit’s raw data. Second, after consulting with Robert Bartek, together with Dr. Steve McGovern had written an “Independent Review and Analysis Report of KIOR’s Pilot Unit Data”, submitted in March 2010. Third, Vasalos had, earlier, licensed his own Reactor design to KiOR, which KIOR had incorporated into the design of the KBR Pilot Plant and in the Demo Unit, resulting in a substantial increase of bio-oil yields. They could hardly have found a more expert, independent voice more tied down in confidentiality agreements.

It is difficult to imagine how a company could have better conveyed an attitude of fear of independent review, as if there was a scam in the works and a rush to transfer ownership to duped retail investors as soon as humanly possible.

O’Connor reaches out to Khosla Ventures, and is rebuffed

According to the State of Mississippi, “on February 8, 2012, O’Connor requested that Vinod Khosla and Samir Kaul schedule a time to speak with him,” concerning the state of technology development. Kaul refused to speak with O’Connor. Mississippi alleges that Kaul’s motives were “an effort to conceal his role and the role of his boss, Vinod Khosla, in the cover-up of the actual yields being achieved in KiOR’s pilot and demonstration units.” But there is no confirming evidence of this.

The Technology Review

On March 2nd, Paul O’Connor wrote to Stamires, and said, “this is really very weird/strange”. KiOR had a draft agenda for a Technology Review scheduled to take place on March 8th. The draft had a list of speakers and invited staff. No Stamires. Only a handful of subjects to be discussed.

“It was a fiasco,” said a KiOR team member who attended. “The discussion was heavily censored and rehearsed, and it certainly did not answer any of O’Connor’s questions regarding actual bio-oil yields and related costs. it was rigged and staged, full of smoke and mirrors.”

By this time, O’Connor was on a hunt for answers, in order to report back to the Board on the actual status of the technology. During his visit to Houston for the Review, O’Connor met privately with Stamires and discussed extensively the proceedings of the meeting, and discussed the prospect of both men making a visit to Vinod Khosla in California.

Then, Stamires met with Cannon and warned him that in “dodging O’Connor’s questions and not providing him with complete truthful information about actual bio oil yields, the Management team had misled O’Connor, undermined the KiOR’ Board, and fatally hurt KiOR.”

On March 11th, Stamires provided O’Connor with a list of the most important issues of KiOR’ Technology problems to be included in his presentation to the Board.

O’Connor strikes

On the morning of March 15th, O’Connor wrote directly to Cannon.

Dear Fred

Further to my visit and our telephone conversation Monday, I would like some additional information/data to round of my feedback to the board:

1) Actual performance data from the Demo Plant. Reactor effluent oil yields (BOE or GPBD) and oxygen content (%) as a function of time since demo start-up (No info on reactor or catalyst necessary).

2) Best estimate you have today on % oil recovery to calculate the “Overall product yield” from the reactor effluent yield.

3) Your assumptions and calculation of the $ 1.80 / gallon product cost for a 1500 ton/day plant @ 67? GPBD yield

4) List of abandoned patents (~28) of which I am a co-inventor

I will contact Samir to see how he wants to discuss this at the board. I agree with you that an Oral presentation is the best.

And on March 22nd, O’Connor reported back to the KiOR board.

On March 8th at the invitation of Fred Cannon (CEO) I visited KiOR to discuss my concerns about the in my mind the limited improvements in the overall process yields obtained over the last 2 years.

My concerns were based on the scarce and conflicting information on product yields I received during the board of director meetings (BOD) in the period of 2009 up to 2011 These concerns are further amplified given the fierce, rapidly evolving and well-funded competitive technologies in this space. One example is the JV between Ensyn and UOP.

The following assessment is based on limited additional information I received during the meeting and presentations at KiOR on March 8th, and is constrained by the following limitations:

1) I requested, but did not receive the “raw” actual pilot plant and demo plant yields to be able to check the validity of the data presented to me.

2) I asked, but was not given the opportunity for private one-to-one interviews with key technical personnel, who actually perform the work.

3) I did not receive answers to several critical questions asked during and after my visit to KiOR.

4) I asked, but was not allowed assistance from the in-house expert consultant, Prof Vasalos, to analyze and validate yield performance.

5) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw bio-oil to be hydro-treated for upgrading.


Notwithstanding the foregoing it is still possible for me to make the following observations:

1) The KiOR management team has made excellent progress in building the organization and scaling up the BCC process from the Pilot to the Demo phase and now also the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.

2) The KiOR management and technical personnel feel confident that they can start-up the Columbus plant in 2012 and produce good quality salable products (Gasoline, Diesel, Low S Heavy Fuel Oil).

3) As can be expected, the major effort of R&D has been and still is in the scaling-up of the process and the catalyst and hence only limited effort has been spent on searching for the next breakthroughs. In fact the catalyst and reactor concepts presently being developed were already conceived in 2009.

4) The way in which product yields are being reported (e.g. to the BOD) by R&D management is incomplete and misleading and does not correspond with the actual goal of improving overall yield of sale-able liquid products.

5) The present overall yield of sale-able liquid products, estimated from the information received falls short of the targets set for 2012…and has not improved considerably over the last two years .

6) In my opinion it is still possible to reach the target…and possibly even also the long term target…but this will require a drastically different approach, than presently being pursued by R&D.

On March 21st, O’Connor sent back to Stamires his first draft of a report to be presented to the Board during its March 23rd meeting,“Technology Assessment-March 2012”, asking for his further comments. , which Stamires reviewed. Ultimately, O’COnnor would address emails to Cannon on March 23rd, April 21st, and April 23rd asking for response on these items.

No Eeyores at KiOR

Yet, by April 2012, management still expressed a stubborn belief that the Natchez commercial-scale plant would produce 80 gallon per ton yields. That month, CEO Fred Cannon wrote to staff announcing promotion of Ed Smith’, acknowledging of his accomplishments in building the pilot plants and the Columbus commercial plant on time and under budget.

In the memo, he could have not spelled out the proposed yields more clearly.

“Smith will oversee the construction of KiOR’ next commercial plan of 1,500 ton/120,000 gallon/day facility planned for Natchez.“ 120,000 gallons from 1500 tons of biomass: that’s an 80 gallon per ton yield. Yet yields in the Demo plant were no higher than the mid-30s, and technical staff feared that they would sink even lower in the commercial-scale plant at Columbus.

“It was the oil recovery,” O’Connor told The Digest. “The whole problem was there. Although some may speculate that the KiOR team were including water content in calculating oil yields, there’s no firm evidence for that. But some oil is so emulsified, that you can’t recover it, it goes out with the water when you separate. I believe that’s why the yields were low in actuality compared to what was being reported, They reported the oil content, not the oil they were capable of recovering. You only have to look at the trouble KiOR was getting into for the water that was being discharged by the plant. It was so full of oil that regulators were complaining.”

But, here, there is an ongoing disagreement between O’Connor and other members of the staff research team who spoke with The Digest, They contended that the real issue was that the bio-oil yields observed in the Pilot Plant and DEMO Unit, where the oil separation from water was very good, were about half of the required amount to be an economical and feasible process.

New technical reports confirm the low yields and are suppressed

In March 2012, Dr. Peter Loezos and Liang Chen wrote a report describing the operations and analyzing the results of the Demo unit’s test results, including bio-oil yields. Loezos was a chemical engineer formerly working for ExxonMobil, and was at this time the Technical supervisor of the Demo unit. He reported to John Hacskaylo. And Loezos and Chen wrote another report in June 2012. Both confirmed that the yields were far lower than the 67 gallons per ton claimed in public documents.

According to a team member familiar with the reports, “they were not allowed by Hacskaylo to publish or discuss their reports and conclusions, even within their own R&D group and their colleagues.”

O’Connor’s Second Strike

On April 21st, Paul O’Connor wrote an update for the Board. His concerns about not receiving raw data were not new, but were revived. But he levels charges at management of preventing him, as a board member, the assistance of an independent expert to review the state of technology advancement. But for the first time, he refers to misleading statements by R&D management. And he called for the hiring of a strong CTO — a position he had himself filled in the distant past.

Most importantly, there is a clear theme in his note of calling for experts and Board actions independent of management. Although he did not directly attack the overall management of KiOR, or Cannon himself, there is a clear sense of wariness in his missive.

He wrote:

As one of the few directors of KiOR with a technical background I feel I have a special responsibility to critically review the progress being made at KiOR in the fields of Technology and Research & Development. Overall the information we have been receiving in the area of Technology and R&D as directors of the board has been very limited and very superficial.

In December last I expressed concerns about the limited improvements made in R&D related to the overall process yields. My concerns were based on scarce and conflicting data received during the board meeting in December. At the invitation of Fred Cannon (CEO) I visited KiOR early March to discuss these concerns, while after the BOD meeting of March 23rd the R&D Manager gave a very limited R&D overview to the directors present, which confirmed my opinion that the metrics presently being used to monitor R&D progress are inadequate.

The following assessment is based on limited information received during the meeting and presentations at KiOR on March 8th, and the presentation of the R&D Manager on March 23rd and is constrained by the following limitations:

1) I did not receive the “raw” actual BCC and BCC HT oil hydro-treater pilot plant and demo plant yields.

2) I was not given the opportunity for private one-to-one interviews with key technical personnel.

3) I did not receive answers to several critical follow-up questions asked during and after my visit.

4) I was not allowed assistance from an expert consultant, to analyze and validate the BCC and BCC HT process performance in depth.

5) I was not given any information on the bio-oil/water separation.

6) I was not given access to detailed information regarding the properties, handling, and the suitability of the raw BCC bio-oil to be hydro-treated for upgrading into saleable products.

Therefore this review and assessment is very preliminary and should definitely not be considered as a full in depth technology audit. Notwithstanding these limitations is still possible for me to report some key observations and recommendations.


1) KiOR management team has made excellent progress in building the organization and scaling up the BCC process from the Pilot to the Demo phase and now also to the commercial phase (Columbus plant) in a record time of less than 5 years, considered impossible in the process industry.

2) KiOR management feels confident that they can start up the Columbus plant in 2012 and produce good quality saleable products (Gasoline, Diesel, Low S Heavy Fuel Oil).

3) As can be expected, the major effort of R&D has been and still is in the scaling-up of the process and the catalyst and hence only limited effort has been spent on searching for the next breakthroughs. In fact the catalyst and reactor concepts presently being developed were already conceived in 2009.

4) The way in which overall product yields are being reported by R&D management is incomplete, inadequate and misleading and does not correspond with the actual business goal of improving the overall yield of saleable liquid products.

5) The present overall yield of saleable liquid products, roughly estimated from the information received falls short of the targets set for 2012…and has not improved significantly over the last two years.

6) It is possible to reach the target of and possibly even also the long term target…but this will require a drastically different approach, than presently being pursued by R&D.

Recommendations to the CEO

1. Appoint a strong and knowledgeable CTO to effectively lead the important development efforts still required by R&D and Technology.

2. Review and adapt the performance metrics being used by R&D to correspond with the actual business goal of improving the overall yield of saleable liquid products

3. Replace the existing R&D Director . His lack of relevant knowledge is exemplified by his poor reporting of inadequate and even misleading metrics. He has demonstrated not to have the right competences and skills to ensure R&D progress over the last 1-2 years.

4. Establish a separate Discovery Team with dedicated resources, staffed with scientists and engineers with experience in the field and managed by an established, well respected expert reporting directly to the CEO and/or CTO.

To the Board of Directors (BOD)

1. Appoint a knowledgeable independent team reporting to the BOD to perform a true in-depth technology review , without the limitations that constrained my present assessment.

2. Establish a Board Technology Committee (similar to the existing Audit committee) to review the technological progress on a regular basis.

3. Establish a Technical Advisory Board (TAB) consisting of world recognized experts and specialists to advise and assist the CEO, CTO and Board Technology Committee with its tasks (e.g. technology auditing)

Cannon admits a problem

On the afternoon May 18th, Stamires met with Cannon at his office, and recalled that “Cannon admitted that there were indeed certain serious problems and he was thinking to hire a new senior person with management experience reporting directly to him, to help him specifically address the problems.”

“By this time, KIOR practically had no funds left to keep its doors open,” Stamires told The Digest, “and after four years of intensive R&D work, KiOR did not have a scalable and economically feasible technology. Knowing the real test results, management should have stopped lying to the public and investors, changed the technology and re-designed the Columbus plant.”

By July, three groups had access to the Demo data and analyzed it. Loezos and Chen, Charlie Zhang and Dennis Stamires, and Professor Vasalos from CPERI. All three teams came to the same conclusion: the yields were far below the 67 gallons per ton that management was claiming in the IPO documentation.

Zhang and Dydak delve into the yield crisis

Agnes Dydak and Charlie Zhang were KiOR chemical Engineers who had worked at the Demo Unit and also at the Columbus Plant. Zhang did the original development work of Bio oil Upgrading / Hydrotreating for producing the Diesel and Gasoline fuels at the PARK Lab in Pittsburg, and worked on the development of processes to separate more efficiently the oil from the water phase coming out from the Reactor. Zhang also had for a period been night shift process supervisor at the Columbus Plant’ production of Bio oil.

Dydak was a Senior Process Engineer analyzing the DEMO Plant’ data. Using a process simulation modeling program, she was forecasting what will be the bio-oil yield at the Columbus Commercial plant when in operation. This was critical since the reactor was 50 times larger at Columbus.

Her forecasts were devastating.

The model predicted that the production would drop from an average yield of 37 gallons per ton at the Demo plant to a range of 17-21 gallons per ton at Columbus. She reported her finding to her supervisors. A team member familiar with the response said that Hacskaylo and Loescher directed her not to publish the results of her Computer process simulation and yield prediction results of the Columbus plant, and not discuss them with anybody else.

Dydak became ‘extremely concerned’ about KiOR’s future and her job security. Also, her daughter was working at KiOR as an IT specialist. She agreed to meet confidentially with Stamires and, outside of normal working hours, contribute towards the development of an alternative technology, to replace the BFCC process which was used at the Demo unit and also planned for use at Columbus.

Further, the frustrations and concerns of Agnes became much more exasperated when she informed her Management Superiors about the results of the computer process simulation study, indicating that the bio oil yield at the Columbus Plant will be much smaller than the actual yield measured at the Demo Plant, and that her superiors told her not to publish her report or discuss the results with anybody else.

O’Connor’s Third Strike at the Board level

Meanwhile, on April 30th, Paul O’Connor reported again to the Board, in a memo entitled “Towards a prosperous future for KiOR.” For the first time, the fast-dropping KiOR stock price was invoked.

But there was more. Catalyst costs were far above predictions, trashing the expected profit margins. Problems in bringing the Columbus plant on-line were noted. The tone of O’Connor’s note moved from deep concerns in some areas, to a general sense of alarm about a connected series of shortfalls that could have a ruinous impact, if unchecked.

O’Connor wrote:

I would like to repeat myself by starting to congratulate Fred Cannon and the KiOR team, in particular Ed Smith for the timely and on budget completion of the first cellulosic biomass conversion plant in Columbus.

During my time at Akzo Nobel Fred and Ed delivered similar achievements in construction and commissioning of chemical plants, amongst other in Houston with the completion of the “CRUSADE” (Cost Reduction USA Damn Exciting) project, which saved Akzo’s FCC catalyst business in the USA. So once again: Congratulations!

Up to the completion of Columbus KiOR has been on time and budget with the delivery of her milestones, however unfortunately since then the success ratio has not been so dramatic, resulting in the following delays and shifts in performance targets:

A. The Columbus plant is not yet on-stream, and the suggestion is that it may take up to nine-months before the plant is completely on-stream and ramped up to its capacity…and product yields.

B. The product yields are not at the Gallons per bone dry wood [level] as estimated at the IPO, and in fact the suggestion is that the GPBD will only be reached in the larger (and modified?) Natchez plant.

C. The catalyst being used at Columbus is based on large quantities of an expensive…(apparently public knowledge!) and the rumor is that no substantial costs reductions are to be expected.

E. Based on A, B and C the overall economics and cash flow of KiOR will be substantially less positive than estimated at the IPO etc. While KiOR management is holding the info on A, B and C confidential, the overall financial result is and will become more clearly visible.

D. Because of A, financing of Natchez plant has been delayed and so also start-up of Natchez has been shifted at least one quarter from 4Q 2014 to 1Q 2015.

The result of the foregoing has been a dramatic drop in the KiOR share value, hurting the interests of all it’s shareholders.

While I still fully believe in the benefits and the potentials of further development of KiOR’s technology, I am very concerned about the way the technology is being implemented. My strong impression is that KiOR’s management although very competent and successful in the construction and commissioning phase, lacks the people with experience, vision and leadership to move forward with necessary improvements of the technology (yield improvement and catalyst cost reduction) and operations (capacity, ramp-up and time on stream). This is hurting KiOR now and could in worst case even turn a potential success into a failure if no appropriate corrective action is taken.

Suppressing a discovery

According to a KiOR team member, at this time R&D manager John Hacskaylo concealed invention disclosures that showed promise in improving bio-oil yields, lowering production costs and replacing the BFCC Technology.

His motive? It is alleged that “such an event would in the eyes of the public and investors indicate that the BCC/BFCC Technology was not really working, and that past claims of 67 gallon yields, projected 80+ gallon yields, and $1.80 per gallon costs were false claims.

Ditsch departs

In April, a signature event occurred for those who had theorized that a “troika” was running every aspect of KiOR, when one of the troika, Andre Ditsch, resigned. A bitter KiOR staffer recalled, “The head-fraudster…made his millions by badly screwing KiOR.”

Meanwhile, a stealthy effort, described as “outside regular office hours , weekends and vacations,” principally involving Zhang, Dydak and Stamires but also with the unpaid support of Vasalos and Lappas, was underway to develop an alternative technology, as the summer unfolded.

The stock in free-fall

The stock had hit $20.74 in September 2011, and then drifted downwards to $10.18 by December 30th. The stock recovered to a 2012 high of $13.37 by March 30th, and then went into abject free-fall. By June 8th, the stock was selling for $6.82, more than 50% off the IPO price of a year before.

Investors were worried. And the stock would rise and fall in fits and starts but would close out the year at less than $7 per share.

O’Connor bails on the stock

Following the failure of his numerous strikes at salvaging KiOR’s technology, frustrated with what the State of Mississippi alleged to be “obstacles to his technology audit, ”co-founder and director Paul O’Connor started to bail. He resigned as a director in May 2012, and started to unload shares. Fast.

Although other directors and officers were selling shares in 2012, no single KiOR insider besides directors Ralph Alexander or O’Connor sold more than 20,000 shares during the year. Alexander unloaded more than 50,000 shares, hauling in more than $400,000. O’Connor, who held 12 million shares with a market cap of more than $100 million at the beginning of the year, started to sell in large chunks. Nothing before he attempted to rouse the KiOR management and board on three occasions. But he unloaded more than 834,554 shares at $8.84 on May 23rd, and 430,000 more shares before the end of the year, at least, in a $5.92 to $7.08 range.

He may have sold far more. In a May 23rd filing he reported holding more than 12 million shares, but in his October 31 filing, he reported holding 1.958 million. There’s no direct report of a further sale.

“Recklessness and misleading conclusions”

In August 2012, the state of Mississippi alleged recklessness in the financial modeling. The state said, in its lawsuit against KiOR:

“Max Kricorian emailed the corporate financial model to the Company’s executive leadership team and asked that they sign off on the [assumptions] within it. The recipients included John Kasbaum, John Hacskaylo, Ed Smith, John Karnes, Chris Artzer and Fred Cannon. The entire executive leadership team signed off on the key assumptions, despite the recklessness and misleading conclusions to which they led.”

The Sunny Q2 earnings statement

On August 14th, Kior announced a $23 million net loss for the quarter, but Cannon stated:

“We are proceeding on schedule with the commissioning of our Columbus facility and are on track to start the facility up next month. With startup in September, we anticipate that the Columbus facility will be providing America’s first truly sustainable cellulosic gasoline and diesel for American vehicles in the fourth quarter. Also, we expect that the final construction costs for the Columbus facility will be about four percent under our latest cost estimate.”

“In addition to the progress at the Columbus facility, our research and development efforts have generated major advances to our proprietary biomass-to-fuels technology. Once implemented, we believe that these improvements should allow us to increase our nameplate capacity up to 20 percent and significantly decrease the capital intensity of our facilities.”

“Don’t Sell Shares”

In August 2012, O’Connor and Stamires were notified by Samir Kaul not to sell KiOR shares. The rationale? Despite the healthy IPO in 2011, KIOR would soon running out of funds to keep operating, and was in the process of talking to different potential investors. According to Dennis Stamires, Kaul warned that sales of shares, especially by O’Connor and Stamires as co-founders of BIOeCON, would raise strong negative warning signals to the stock market and to the potential investors, adversely affecting KiOR’s future funding negotiations.

Stamires did not sell shares, and O’Connor suspended selling activity until October 31st.

Smith, the Hero of Columbus, loses confidence

Earlier in the year, Vice President of Engineering and Construction Ed Smith has been commended by management for his work in bringing in the construction of the demo unit and the first commercial plant at Columbus on time and under budget. Praise also had been offered by O’Connor.

But the State of Mississippi alleges that, by no later than October 7th, Smith had lost confidence in KiOR, as well. The proximate cause? A series of runs conducted in its Pasadena, Texas pilot plant, according to Mississippi, which based its allegation on an email Smith penned to KiOR employee Arnold Korenek.

The Stealth Team Reports

The Stealth team within KiOR, working nights, weekends and vacations, had not given up. On October 25th, Dennis Stamires delivered to Cannon a detailed Technical Report entitled: “Proposal for Commercial Use of an Efficient, Cost-effective Integrated Process for the Conversion of Biomass to Liquid Fuels.”

Cannon’s Public Response, and Private Non-Response

While the Stealth team awaited a response from Cannon, the CEO went on a PR offensive regarding the company’s bullish prospects. In the Q3 2012 earnings call on November 8th, Cannon stated:

“Based on our experience at our pilot plant and demonstration scale facilities here in Houston , we expect that our technology on implementing the unit at our full-scale commercial plant, in Natchez, would achieve a yield of 72 gallons per bone dry ton of biomass. We believe that the progress generated by R&D investments to date, reflect a steady march to our target yield of 92 gallons per bone dry ton.”

It was the alternative technology which the Stealth Team had been pursuing and which a consensus of technical team members said KiOR needed to close the gap between public projections and actual results.

Cannon thanked Stamires for the Proposal and told him that he will study it and would come back to him.

The report did not directly credit Dydak and Zhang, who were afraid of retribution from Hacskaylo and Loescher. However, Stamires was able to indicate to Cannon only that the Report also represented the work of others, but with names withheld.

In many ways it was a sign of KiOR’s progress from a collaborative group of technologists to a group on fearful employees working in silos.

In the report, Stamires stated the fact that KiOR’s yield gains were essentially stalled at not much more than half of the yields communicated to shareholders. And that only the Pilot Plant was showing even these results, and all of this involved a cost of “several dollars per gallon.”

The concern at the time, was not just about shareholder backlash, but competition. The report contended in its opening that “KiOR was not able to compete with Ensyn/UOP, who were said to producing Bio oil with yields of 80+ gallons per dry ton of Biomass, at a cost of less than $2 per gallon.” In short, the very yields that KiOR hoped to achieve.

The New Technology

The new technology was described as “entirely novel and should be patentable.” There was other good news, specifically that the catalysts and heat carriers, to be used in the new technology would replace the ruinously expensive ZSM Zeolite catalyst. They had been already made by former KiOR staffer Mike Brady and tested by Robert Bartek at the pilot plant in 2009. Their chemical compositions, the proposal outlined, could be further optimized, as well.

At the heart of the technology? A new family of materials exhibiting “Dual-Functionalities”, proprietary to KiOR. They were described as “Metal-Doped Clay-based Spinels”. The proposed new Biomass overall Conversion process, contained certain key individual process steps which had been tested and commercially evaluated, as published in prior art, led Stamires to report that it “ensured that the overall process was scalable up to large commercial size Plants, and Bio oil yields of 80+ gallons per dry ton of Biomass with acceptable quality, and low production cost, will be obtainable.”

Curiously, the IP became somewhat mangled, according to Stamires. “It turned out that some of the new materials and catalysts, invented and developed by Brady and Bartek, had been patented by Paul O’Connor, on Dec. 28th, 2011 and assigned to BIOeCON.”

KiOR hires a fixer

Despite the rosy chat with shareholders and the world, towards the end of 2012, Cannon hired Bill Parker who had worked under Cannon at AkzoNobel as a production and start-up manager, and also at Albemarle, where he was a project manager. Albemarle was located just across the street from KiOR. He came to KiOR having earned a reputation as “a decent, very professional guy, and a person with high integrity,” according to one KiOR staffer. Hopes were high that he would help the company recognize the troubles with its current technology.

A Mystery Next-Gen Catalyst

In a press release released November 8th, concurrently with the earnings call, Cannon went into further detail regarding the state of KiOR’s technology.

“I am pleased to announce that we have commenced operations at the Columbus facility and have produced a high quality oil that is in line with our specifications for upgrading into cellulosic gasoline and diesel. More importantly, we believe the high quality of the oil from the Columbus facility validates KiOR’s proprietary biomass fluid catalytic cracking, or BFCC, technology at commercial scale. The facility’s performance to date not only meets our expectations based on our experience at our pilot and demonstration scale facilities, but also gives me confidence that we remain on track to upgrade our oil in order to ship America’s first truly sustainable cellulosic gasoline and diesel for American vehicles.”

The statement is more than a little disingenuous. Cannon is specifically limiting himself to noting that the oil that was being produced was upgradable into cellulosic gasoline and diesel, without referencing the cost of same.

To be perfectly frank, so long as oil is being produced with less than 15% oxygen content, virtually any pyrolysis oil can be upgraded successfully to cellulosic gasoline and diesel, so long as an appropriate technology is used, so long as cost is not a consideration. The statement by Cannon astutely avoids any discussion of catalyst cost, regeneration, coking and poisoning — factors which routinely frustrated efforts to upgrade bio-oil at an affordable cost, as the Pacific Northwest National Lab noted here.

Was the catalyst being regenerated while retaining activity? Was the process able to run for significant lengths of time on a single catalyst charge? Was the water/oil problem solved so that significant amounts of oil were not leaving the plant via the effluent stream? The Cannon statement sidesteps the issues with a bland statement of confidence that KiOR could produce an in-spec fuel. Something that has been done for decades, successfully. KiOR’s technology wasn’t about making cellulosic fuels. It was about making them cost-effectively.

Cannon looked ahead when he looked at yields. In the press release, he added:

“Furthermore, our research and development efforts continue to make progress increasing our yields and reducing our capital intensity. Our work continues on our next generation catalyst platform, which we believe can produce a yield of 72 gallons per bone dry ton of biomass when implemented at our full scale commercial facility in Natchez. Moreover, we believe that this catalyst platform will reduce the amount of coke made in our process by up to 25 percent, which would enhance the capital efficiency of our commercial facilities by giving us the ability to process up to 25 percent more feedstock without significant additional capital.”

Cannon did not indicate where the next generation catalyst was coming from. Or when it would be ready. Since Cannon had not responded to the Stealth Team, we can presume it wasn’t coming from them. Yet, no KiOR staff member of the era we communicated with on or off the record had any other firm recollection of any catalyst under development at the time which would create yields in this rage, reduce the coking by the suggested amount, and allow the company to “process up to 25 percent more feedstock without significant additional capital.”

But it was more than that. Processing more feedstock didn’t improve the low yields, or the high variable costs associated, for example, with ruinous catalyst costs. Rather, these fixes addressed capital costs — the process technology remained as damaged as ever.

Was there another stealth technology? One supposes in a company as wrapped in mystery as KiOR, perhaps there’s another breakthrough technology in the wings that would deliver on the promised results for Columbus and Natchez.

The Year of Living Disingenuously

Former GE CEO Jack Welch once said, “an organization’s ability to learn, and translate that learning into action rapidly, is the ultimate competitive advantage.” He added that “The essence of competitiveness is liberated when we make people believe that what they think and do is important – and then get out of their way while they do it.”

Would KiOR pass the Welch test? For sure, numerous KiOR staffers of the time believed that the company had a management problem more than a technology problem. No matter how dire the technological challenges seemed.

As Paul O’Connor observed, “no one [in power] analyzed the pilot plant data. Andre [Ditsch] would say ‘oh, go out and hire MIT PhDs.’ But they are not the ones who are going to scale up a process. Fred let Andre go his way, and they hired too many people from Albemarle across the street. Catalysts are important; you need a few people. But you need a lot of process people, and that balance went wrong.”

Other staffers point to a highly competent technical team that had been assembled. “KiOR forced them out or fired them or they left because of the poor professional working environment,” said one team member of the time.

The balance was precarious, as 2012 dawned. Everything was riding on the performance in the first commercial plant.

In our next installment, we’ll see how that next-gen catalyst platform, and KiOR’s attempt to make Columbus produce 67 gallons per ton worked out. The promoters said that it was not only possible, it was being done at the Demo unit. The skeptics said that the Demo unit was producing 60% as much as was claimed. That Columbus would produce around half that, again. And then there was the Stealth Team, proposing a radical new technology capable, they believed, of reaching something like 80 gallons per ton. And then there was the “next-gen catalyst” platform that Cannon was referring to and “a steady march to our target yield of 92 gallons per bone dry ton.”

If 2012 was another year of private failure and public bravado, a year of living disingenuously, 2013 would be the year in which the multiple streams of fiction and non-fiction would merge into a river of raw data that would make the truth clear. The company had reached scale, but was still in the slow process of commissioning, so there was still room for doubt, or hope.

Skeptics, promoters, innovators — who would be proven right? We continue the story in the next part of our series.

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.

September 18, 2016

The Graphite Hustle

by Debra Fiakas CFA

The Klondike Gold Rush of the 1800s has given way to the Canada Graphite Hustle of the 21st Century.  In what may seem to many an interminable series on graphite resources developers we have made note of over a half dozen companies in Canada attempting to bring new supplies of graphite ore out of the earth.  The action is not limited to Canada.  There are at least a dozen other aspirants with plots in Canada and the rest of North America as well as in Australia and Africa.

Piecing together disclosures by the North America group alone there is at least 250 million metric tons of inferred resources under development.   Planned graphite production in North America is estimated at as much as 214,000 metric tons per year  -  all of it natural flake graphite  -   that could come online over the next few years.  Is the additional capacity needed?

North America Graphite Resource Developers
Alabama Graphite Corp.  (ALP:  V or ABGPF:  OTC/QB)
Canada Carbon, Inc.  (CCB:  V or BRUZF:  OTC/QB)
Canada Strategic Metals, Inc.  (CJC:  V or CJCFF:  OTC/QB)
Focus Graphite, Inc.  (FMS:  TSX-V or FSCMF:  OTC/QB)
Graphite One Resources, Inc.  (GPH:  V or GPHOF:  OTC/QB)
Great Lakes Graphite  (GLK:  V or GLKIF:  OTC/QB)
Lomiko Metals, Inc.  (LMR:  V)
Mason Graphite, Inc.  (LLG: V or MGPHF:  OTC/QB)
Northern Graphite, Inc.  (NGC.V or NGPHF:  OTC/QB)
Nouveau Monde Mining Enterprise  (NOU:  V or NMGRF:  OTC)
Ontario Graphite  (private)
Zenyatta Ventures Ltd.  (ZEN:  V or ZENYF:  OTC/QB)

According to the U.S. Geological Survey in 2014, natural flake graphite production was approximately 1.2 million metric tons.  Approximately 67% originated from producers in China with the balance coming from a mix of resource companies in India, Brazil, Canada, North Korea and Sri Lanka.  Planned North American production would increase total production by 18%, bringing total annual production to 1.4 million metric tons.  More importantly, the successful start-up of all the currently planned production in North America would propel the region into the number two spot among leading producing regions.

As noted in the first article in this series, the widespread adoption of electric vehicles for both commercial and personal use is driving demand for lithium ion batteries that need graphite for make the anode component.  According, to Avicenne Energy, a consulting firm focused on supply chain economics, the battery sector  -  transportation as well as storage batteries  -  is expected to require as much as 290,000 metric tons of flake graphite by the year 2025.  This compares 118,000 metric tons of graphite used in 2014 for batteries.

It may appear to be a significant increase in production capacity, but given the additional graphite supply needed to satisfy hungry battery manufacturers, the planned North American production may be needed.  However, when the other resource developers around the world are considered the math could be different.  Unfortunately, the data points are not as reliable for resources developers with patches in Australia, South America and Africa.  For five that have revealed details, estimated indicated resources and planned annual production are 138.9 million metric tons and 162,000 metric tons per year, respectively. 

Rest of World Graphite Resource Developers
Bora Bora Resources, Ltd.  (BBR:  ASX)
Sri Lanka
CKR Carbon  (CKR:  TSX.V)
Elcora Advanced Materials  (ERA:  TSX.V or ECORF:  OTC/QB)
Energizer Resources Ltd.  (EGZ:  TSX.V or ENZR:  OTC/QX)
Graphex Mining Ltd.  (GPX:  ASX)
Extrativa Metal Quimica  (private)
Hexagon Resources, Ltd.  (HXG:  ASX)
Kibaran Resources, Ltd.  (KNL:  ASX)
Nacional de Grafite  (private)
Saint Jean Carbon  (SJL:  TSX.V or TORVF:  OTC/QB)
Sri Lanka
Talga Resources, Ltd.  (TLG:  ASX)
Valence Industries, Inc.  (VLQCF:  OTC/QB)

Some of the existing graphite producers have had difficulty keeping bills paid and several have shut down production due to low graphite selling prices.  Statistica reports that flake graphite prices declined approximately 49% from 2011 to 2014, predicted a further decline of 10% through the current year 2016.  Bringing on new production in the current price dynamic may sound the death knell for companies that are not able to produce at a low price.  Any investor looking at the graphite market should look carefully at the business model and proposed operating structure before taking a long position.

This may be one reason the stocks of the companies listed above are trading more like options on management’s ability to execute on strategic plans than on the present value of future cash flows from the sale of graphite.  That said, some might consider the current share prices as  modest premiums to play the sector’s future.

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.

September 13, 2016

Can Public Equity Investing Have Impact?

by Garvin Jabusch

There’s an argument in the world of impact investing that goes something like, "impact happens only through private investments; there is no real impact, apart from shareholder engagement efforts, in public equity investing." An associated perception is that investment impact means capitalizing an enterprise beyond what would happen otherwise, meaning private equity alone has the power to provide real impact. But is this true?

Publicly traded corporations are the largest and most visible social and environmental bellwethers of the global economy, and the high allocation to public equities in most investor portfolios means public equity investing is and must remain one of our key opportunities for impact. To cause a positive impact, families, institutions, and individuals can invest in public companies whose primary businesses activities address pressing social, economic, and environmental challenges at scale. This does not mean companies with a pretty sustainability report or that are incrementally making their operations less carbon-intensive, but firms that have made it their purpose to enable a better world with an indefinitely sustainable economy. Skipping traditional investment practices to focus on buying these companies sends the clear signals that markets do value solutions, and that markets will devalue businesses that are the leading causes of our most pressing risks. In addition, flexible, go-anywhere public equities strategies may invest in micro and small cap firms where there may be limited liquidity, and we can have meaningful impact just by being there.

Clearly, how we invest in public equities matters.

A growing number of public markets strategies are being developed to meet investor demand for solutions-focused investing. These strategies (including Green Alpha’s own) are pushing boundaries in terms of how managers define risk, and are challenging preconceptions from traditional portfolio theory in order to invest in the best solutions to the dangers presented by the business-as-usual economy. Public equity portfolios can have real impact, and yet we must acknowledge that the perception that they do not exists. But why is that?

The Index Trap for Impact

Most investment managers have been trained to think about risk-adjusted returns in the same way, and in the case of equity strategies, that means making sure to exhibit correlation with your self-identified and/or assigned benchmark, usually the S&P 500 or other broad-market index. A competitive absolute return can still be considered a poor risk-adjusted return if you have more volatility along the way than your underlying benchmark. This can be traced back to the near-universal indoctrination into Markowitzian modern portfolio and efficient-markets theories, popularized by Jack Bogle and etc.

Bogle’s saying, "Why look for the needle when you can buy the haystack," has come to mean "if you vary from the haystack, you may be punished." This index-supremacy has been institutionalized to the point that rating agencies have a hard time imagining risk defined any other way than relative benchmark correlation, or how much a portfolio looks like the broad market. Morningstar, for example, determines its star ratings for equity funds on the basis of absolute return vs. the peer group bench, less any deduction for higher volatility than the peer group. In this way, some funds can and do beat their peer group's performance over time, yet receive a rating of two or three stars (out of five) despite overall superior returns. Thus, fund managers, fearing for their retail sales, try very hard to mimic their benchmark, ideally outperforming it by a little but not enough to be considered "volatile."

The overall result of all this is too many dollars chasing the same benchmark constituent companies, leading to unintended consequences such as, for example, the average S&P 500 firm right now having negative 12 month forward earnings per share (EPS) growth rate, yet at a high average price-to-book value near 3. Not great, from a value point of view, which to me shows this culture of index-homogeneity is causing market distortions. Moreover, indexing and index-mimicking generally ignore a lot of interesting innovation that occurs outside of index constituent companies, which is unfortunate because this innovation is where a lot of economic growth occurs, and also where we confront and solve the realities our most pressing systemic risks.

Thus, to have impact, we must recognize that equity investing can actually involve companies not found within traditional benchmarks, and, with some financial analysis, interesting portfolios can be constructed and opportunities can emerge. So it is imperative to look as closely at our public equity holdings as we do at our private equity investments, and also, equally, to stop concerning ourselves with correlation to traditional indexes.

Real impact depends upon voting with your dollars for the future economy, for the actual catalysts of change, for the viable growth areas where we can reasonably expect to earn good equity growth in this era of rapid change. This means a higher level of due diligence that avoids the trap of thinking public equities are “set it and forget it.” Even when selecting funds that market themselves as sustainable, it is key to do your homework. Many green public equity funds correlate very closely with the S&P 500, meaning they are still largely invested in the legacy economy, which of course is a lousy way to have impact with your public equity dollars. In fact, the prevalence of investment funds that hug their benchmark first and think about impact second is why it is so commonly assumed that public equity investing can’t have impact.

Well, it’s not that public equity portfolios can’t have impact, it’s just that they usually don’t. But if we can change the way we think about risk and indexing in public equities, we can and will see real impact ripple around the world.

So, where to invest?

Next Economy, Innovation Economy

If economic history shows us nothing else, it is that innovation and better products and systems that perform better and cost less always win in the marketplace. And this is what sustainability is -- innovation-led gains in efficiency that mean we can have a thriving economy while lessening our footprint on our required yet delicate earth systems. It’s imperative to direct capital into the future that you in fact see coming, in part through public equity investing. That investment represents real impact and also positions your stock portfolio to grow as that future emerges and grows, supplanting the old fossil-fuels based economy.

For investors, the best Next Economy solutions simply outperform their old economy counterparts and predecessors, all while circumventing our most daunting long-term risks. In addition, there’s now a growing demographic demand from women and millennials for solutions-oriented investments that growing in size and wealth as part of the $40 trillion wealth transfer that is occurring in the U.S. In short, we’re at the early stage of share price appreciation for meaningful, scalable solutions.

In this light, we view investments through a holistic lens, and therefore deploy impact on the world across asset classes of private equity, public equity, and debt. In other words, if you have a commitment to impact, it’s not just a private equity hobby, it’s across all classes. Again, strategies dedicated to seeking equities that are solving big risks by investing in solutions amplify powerful market signals that firms with proven business models addressing challenges around climate and resource scarcity are now highly valued.

In the case of public equities, this does mean letting go of the idea that high correlation to the old indexes is somehow safer or even a good way to measure risk. Investing in public equities that are addressing looming systemic risks means looking for companies where financial return drivers and impact are inextricably linked, without regard to how well this tracks the S&P 500 or any other old index.

Public equity is a core component of a diversified investment portfolio -- why would we not seek maximum impact from this key piece of our total assets? Next Economics, focusing on what the de-risked economy will look like, and building portfolios that reflect that economy now, is compelling both in terms of affecting change and also in terms of financially benefiting from that change: Impact.

Garvin Jabusch is cofounder and chief investment officer of Green Alpha®Advisors, LLC. He is co-manager of the Shelton Green Alpha Fund (NEXTX), of the Green Alpha Next Economy Index, and of the Sierra Club Green Alpha Portfolio. He also authors the Sierra Club's economics blog, "Green Alpha's Next Economy."

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