September 13, 2014

Sketches of DuPont's Cellulosic Ethanol Project in Nevada, Iowa

Jim Lane 

It towers above the surrounding Iowa countryside like the Launch Assembly Building lords it over Cape Canaveral — it’s the new DuPont (DD) cellulosic ethanol project, on the outskirts of the town of Nevada.

Functional yet inspiring, imposing yet accessible — when it opens before year end 2014 it is sure to be a monumental addition to the cellulosic biofuels landscape.

Last week we wrote:
“There are strategic reasons to develop this new industrial bioscience business in central Iowa — not just the “we’d love to have you, wages are low, cost of living’s cheap, and no unions” factors that are of genuine appeal to companies — but pertain to Mumbai and Shenyang, too.

That’s not to say that there’s no competition for Nevada. There’s corn stover a-plenty in the Midwest — and many towns and industrial parks rail spurs, power, water, skilled labor and local growers. Blair (NE), Eddyville, Fort Dodge, Clinton, Hugoton (NE), just to name a few.

But once built, they’ll stay, so long as the economics of the product stay sound, And the more infrastructure you build, the more that is there for the next business to tap into. So — these little Metropoli have every reason to hope for growth — and for higher-skill, higher-wage positions to continue to appear, and not to disappear.”

Biomass intake

The biomass intake system — still with a few construction workers in view — that will accept the corn stover and crush it down to a relatively fine powder — there’s some chopping involved, and some hammering, to get the desired consistency for the enzymatic hydrolysis.

Biomass Silo

This unit above looks like the first stage of the Saturn V rocket, but it’s really almost a silo — holding biomass after intake. After this unit, it will proceed left to the core hydrolysis technology where proprietary enzymes will separate out the C5 and C6 sugars

Fermentation and hydrolysis units

The units above include the large hydrolysis unit to the rear, and the fermentation units — three of them, in the front. It’s bacterial fermentation, so that’s a change of pace from the more-traditional yeast.

fermentation, hydrolysis, storage

Here, you see most of the same technology — and some storage, from a different angle, but you also note there’s still a lively construction crew on site, pushing the project towards completion. That’s Fagen — so well known during the first-generation of ethanol construction.

Distillation

Distillation comes last, where the ethanol is separated from the “beer”.

Crane

Here. you can see the official bird of cellulosic biofuels — the crane — spotted all over Iowa and spreading into Kansas of late.

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

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Oil and Gas




September 11, 2014

The Ginsu Knife of Biofuel Litgation: Butamax vs Gevo

Jim Lane 

It’s like the selling of Ginsu knives, the legal dispute between these two companies. No matter how much you hear….but wait, there’s more!

This week, we heard from Butamax that the District Court of Delaware has issued an order scheduling two further rounds of patent infringement actions pending between Butamax and Gevo (GEVO) for resolution.

The next phase of litigation, involving three Butamax patents asserted against Gevo, will begin in September 2014 with the discovery process and trial is scheduled for August 2015. Thereafter the remaining cases, involving three other Butamax patents asserted against Gevo, will recommence later in 2015 with trial scheduled for as early as April 2016.

The news is not all that new — these two rounds of litigation have been long discussed in the Digest and have been on the books — if not on the exact calendar — for a year or more.

Some of the scheduling has to do with the status of litigation that was originally expected to go froward this summer — the first phase. These suits were postponed based on their similarity to an upcoming Supreme Court case.

Bottom line, the Supremes will hear this fall, rule next spring (we expect) — and then phase two and phase three litigation is scheduled for summer 2015 and summer 2016.

According to Butamax, “Butamax continues to assert a total of eight patents against Gevo. Meanwhile, all of the cases involving patents asserted by Gevo against Butamax have either been ruled in Butamax’s favor or dismissed.”

Worth reminding readers that we have reported that almost all of the cases were dismissed on application by Gevo, which is waiting to sue until Butamax is in production and therefore creating actual harm.

Gevo’s final case against Butamax was dismissed by the Court in August 2014, following an Action Closing Prosecution from the Patent Office rejecting all claims.

Butamax also requested Patent Office re-examination or inter partes review of a total of 15 Gevo patents, of which 14 are ongoing and 1 has concluded in Butamax’s favor. Gevo requested re-examination of four Butamax patents, all of which are ongoing.

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 10, 2014

Divesting: Last One Out Loses

Tom Konrad CFA

Anew report written by Nathaniel Bullard at Bloomberg New Energy Finance highlights the difficulties large institutional investors would have divesting from fossil fuels. What it does not specifically discuss is that these difficulties could lead to large financial losses for investors who see the difficulty of divesting as a reason to delay.

Just as we can't easily fill up our cars with solar power instead of gasoline, the report points out that there is no asset class that can directly substitute for oil and gas in large institutional portfolios.

A person with a short commute can simply ditch gasoline for renewable fuel by riding a bike, and small investors can easily divest from fossil fuels without sacrificing growth or yield by using small capitalization stocks and yield cos.

The relatively high yield of oil and gas stocks is the most difficult to replicate, even at its level of 2.41%, which the report describes as “not enormous.” According to the report, the only sector with a higher average yield is REITs (at 4.55%). REITs have a total market capitalization of less than a third of oil and gas stocks, so it would be impossible for more than a fraction of large investors to replace their oil and gas holdings with REITs.

The Instructive Case of Coal

In contrast to oil and gas, the report makes the point that because the market capitalization of coal companies is much smaller, divesting from coal alone is much easier than divesting from oil and gas. The report states that “Coal equities are less than 5% the total value of oil and gas equities, and have already trended down nearly 50% in the past five years... as a result, divesting from coal would be much easier then divesting from oil and gas.”

The report's author Nathaniel Bullard, told me in an interview that divesting from coal would have been more difficult just three years ago. He says, “US coal has had clear indicators of future change in place for a while. … Some coal equities have lost 90% of their value since 2011... This much diminished size means that... the same number of shares will represent a much smaller portion of an investor's overall portfolio relative to 2011.”

Hold High, Sell Low?

To put it more bluntly, investors who have already lost their shirts in coal stocks will have a much easier time selling their much-diminished holdings today than they would have when coal stocks were at their peak. Ironically, it's easier to sell low and buy high than vice-versa, especially for investors who manage large pools of money.

It does not take a multi-million dollar salary to know that waiting until your stocks have fallen by half before you sell is a suboptimal investment strategy. Despite past “clear indicators of future change” and lower estimates of future coal demand due to air pollution regulations in the coal industry, institutions like Stanford are only now beginning to divest from the sector. Most have not yet budged.

Are Oil and Gas Next?

The report begins with a quote from an executive who describes the divestment movement as “one of the fastest-moving debates I think I've seen in my 30 years in the markets”. If this fast-moving debate leads to fast-moving divestment, the sheer size of institutional oil and gas holdings would lead to a scale of the selling that could easily drive down prices of oil and gas stocks as fast as coal stocks have fallen over the past few years.

The divestment movement was only in its infancy when coal stocks peaked in 2011, so divestment has been only a minor contributor to their decline. Bullard attributes most of the decline to fundamental factors, such as low gas prices and (to a limited extent) wind power in the US, and concerns about air pollution in China.

That said, the long term fundamentals of oil and gas are not favorable. Industry costs are rising as producers shift towards unconventional sources such as tar sands and tight oil and gas which are extracted with relatively expensive techniques such as hydraulic fracturing (“fracking”). Meanwhile, high fuel prices are beginning to reduce average driving distances in mature markets such as the US and Europe while the declining costs of efficiency technologies such as hybrid and electric vehicles further lower demand. In the fastest growing vehicle fuel market, China, air pollution concerns have led the government to aggressively promote “new energy” vehicles, particularly hybrids and EVs.

Natural gas faces increasingly inexpensive competition in electricity markets from wind and solar generation. That, combined with technologies such as storage, smart grid, demand response, and better transmission which make it easier and cheaper for these variable sources to supply a larger portion of electricity demand with less reliance on dispatchable generation such as natural gas, hydropower, and biomass-fired electricity.

The fundamentals of all fossil fuels will be further undermined if the world ever makes a concerted effort to rein in carbon emissions. At the moment, the prospects for large scale regulatory moves seem dim, but at some point the increasing costs in terms of falling crop yields, widespread and severe heat waves and droughts, ocean acidification and the like will lead to political action. At this point it will almost certainly be too late to avoid significant economic and human costs from climate change, but that does not mean that it will not help us avoid even greater damage. And the longer we delay taking substantive actions to curb greenhouse gas emissions, the more draconian those actions will have to be. Drastic moves to curb carbon emissions will have even more drastic effects on the fundamentals of fossil fuel industries.

Conclusion

In part because it is so hard for large investors to exit fossil fuels, it is unlikely that a majority of such investors will move to divest before they have lost a large portion of their current holdings to price declines driven by the fundamental factors outlined above and selling from more motivated investors.

Some of the factors listed above, such as concerted political action to curb carbon emissions, may take a long time to be felt. Other factors, such as the declining cost of renewable energy and efficiency technologies and the increasing costs of fossil fuels are moving energy markets today.

When these factors will begin to hurt oil and gas stocks is unclear, but the coal industry shows that, although divesting is hard, it does not pay to wait too long.

This is where the analogy to replacing fossil fuels in your commute by buying an electric car breaks down. With electric cars, the more people own them, the easier and cheaper they will be to use: growth in charging infrastructure will rise with the adoption of plug-in vehicles, while higher volumes should help bring down their initial cost.

In contrast, it pays to be first rather than last when divesting from fossil fuels. While it is possible to be too early, at some point the worsening fundamentals of fossil fuel industries and/or a large scale divestment movement will undermine the value of all fossil fuel stocks. Those who divest sooner will have much more money to invest elsewhere than those who delay because divesting is just too hard.

Fortunately, small investors have it easy. Divesting, for once, is a place where the small investor has the advantage on Wall Street.

This article was first published on Renewable Energy World, and is republished with permission.

September 07, 2014

Ten Clean Energy Stocks For 2014: September Update and Thoughts on the Finavera Deal

Tom Konrad CFA

Clean energy stocks and the market in general rebounded strongly in August.  My broad market benchmark of small cap stocks, IWM,  rose 4.5%, returning to positive territory up 1.7% for the year. My clean energy benchmark PBW also jumped back into the black with an 11.1% gain for the month and 10.8% for the year to date.  The less volatile defensive stocks in my 10 Clean Energy Stocks for 2014 model portfolio rose 1.9%.  For the year to date, the model portfolio is up 6.2%.

(Note that the monthly numbers are for August 5th to September 4th, and the YTD numbers are from December 26th to September 4th.  I use numbers as of when I have time to write, rather than strict month-end in order to make these updates up to date as possible.)

10 for 14 - September.png

Individual Stock Notes

(Current prices as of August 5th, 2014.  The "High Target" and "Low Target" represent my December predictions of the ranges within which these stocks would end the year, barring extraordinary events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/26/2013 Price: $13.85.     Low Target: $13.  High Target: $16.  Annualized Dividend: $0.88.
Current Price: $14.31.  YTD Total US$ Return: 6.5

As expected, Sustainable Infrastructure REIT Hannon Armstrong's second quarter report was generally positive, beating analysts' estimates by a penny.  Earnings in Q3 should be significantly higher as recent large investments were only producing income for part of the second quarter.  The stock has recovered from the lows which had me adding to my position at the start of last month, as discussed in the last update.

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
12/26/2013 Price: C$4.85.   Low Target: C$4.  High Target: C$6. 
Annualized Dividend: C$0.24.
Current Price: C$4.50. YTD Total C$ Return: -3.5%.  YTD Total US$ Return: -5.0%

Green building company PFB has recovered a little from recent lows. The company's largest shareholder continues to purchase its stock on the public market.  PFB paid its normal C$0.06 quarterly dividend.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF)
.

12/26/2013 Price: C$4.44.   Low Target: C$3.  High Target: C$5.  
Annualized Dividend: C$0.30.
Current Price: C$4.38.  YTD Total C$ Return: 31.8%.  YTD Total US$ Return: 29.7%

Independent power producer Capstone Infrastructure held steady throughout the month, without significant news.  Analysts at Scotia Bank raise their price target slightly from C$4 to C$4.50, but did not change their "market perform" rating on the stock.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
12/26/2013 Price: C$4.93.   Low Target: C$4.  High Target: C$7. 
Annualized Dividend: US$0.28. 
Current Price: C$6.00.  YTD Total C$ Return: 24.4% .  YTD Total US$ Return: 22.3%

Waste heat recovery firm Primary Energy announced a regular quarterly dividend of 7¢ US to holders of record on August 15th. but there was no other significant news.  The gain shown here was mostly a big jump at the close today (Aug 5th.) It might just be a blip (the stock is thinly traded), or there may be trading based on rumors of some real news about to be announced.

Update: The jump seems to be due to the immanent acquisition of Primary Energy by Fortistar.  The Wall Street Journal reported that a deal was "near" shortly after the close.

5. Accell Group (Amsterdam:ACC [formerly ACCEL], OTC:ACGPF).
 
12/26/2013 Price: €13.59.  Annual Dividend €0.55 Low Target: 11.5.  High Target: €18.
Current Price: €13.75. YTD Total  Return: 5.2% .  YTD Total US$ Return: -0.8% 

Bicycle manufacturer and distributor Accell Group fell 4% during the month, mostly due to a 3% decline in the value of the Euro.  On the business side, the company bought Spanish bike parts and accessories Comet.  I think this acquisition is good for Accell's business since it strengthens the company's distribution network in Southern Europe. 

The press release was also encouraging in that "Comet’s annual normalised operating result as a percentage of profit is slightly higher than the historical average (6%) of Accell Group... The acquisition will make an immediate contribution to Accell Group’s earnings per share."  In other words, the acquisition should be good for per share earnings, even before any synergies are realized.

6. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/26/2013 Price: C$10.57.  Low Target: C$8.  High Target: C$16. 
Annualized Dividend: C$0.585.
Current Price: C$13.68.  YTD Total C$ Return: 33.1% .  YTD Total US$ Return: 31.0%.

Leading transit bus manufacturer New Flyer announced second quarter results on August 5th. Deliveries, revenues, and earnings were all up strongly over the same quarter last year.  Investors and analysts liked what they heard, with the stock advancing over 7% for the month.  Canaccord Genuity raised their price target and upgraded the stock to "Buy" from "Hold", and CIBC raised their price target as well.   

7. Ameresco, Inc. (NASD:AMRC).
12/26/2013 Price: $9.64Low Target: $8.  High Target: $16.  No Dividend.
Current Price: $8.12  YTD Total US$ Return: -15.8%.

The stock of energy performance contracting firm Ameresco continues its recovery from previous lows after the much less negative comments from management I discussed last month.

The company also bought UK energy service provider Energyexcel LLP, which fits its long term strategy of small acquisitions which broaden its geographic reach or skill set.  Insiders continue to buy the stock on the open market.

8. Power REIT (NYSE:PW).
12/26/2013 Price: $8.42Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $9.15 YTD Total US$ Return: 8.7%

Solar and rail real estate investment trust Power REIT filed its second quarter report, which remains dominated by the legal costs of its civil case against the lessees of its railway property, Norfolk Southern (NYSE:NSC) and Wheeling & Lake Erie Railway.  A court transcript from July and the most recent litigation update offer some hope that the end of the litigation is in sight.  The parties are now working on their motions for summary judgement, on which the court will likely rule in early 2015.  The summary judgement might bring resolution, but, if not, the case is expected to go to trial in February next year.  Any resolution, even one in favor of the lessees, is likely to be good news for Power REIT's shareholders.

9. MiX Telematics Limited (NASD:MIXT).
12/26/2013 Price: $12.17Low Target: $8.  High Target: $25.
No Dividend.
Current Price: $9.41. YTD Total ZAR Return: -19.9%. YTD Total US$ Return: -22.7%

Global provider of software as a service fleet and mobile asset management, MiX Telematics reported second quarter results.  As has been the case in recent quarters, the company has been making rapid progress selling its bundled, software-as-a-service (SaaS) offering.  When SaaS sales replace equipment sales, as they did this quarter, it reduces short term earnings, but increases long term revenue streams, so this earnings report was moderately good news, despite the fact that quarterly earnings missed analysts' estimates.

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
12/26/2013 Price: C$0.28. Low Target: C$0.20.  High Target: C$0.60. No Dividend.
Current Price: C$0.32   YTD Total C$ Return: 12.5% .  YTD Total US$ Return: 10.7%.

Renewable energy developer and operator Alterra Power closed on a C$110 million loan from AMP Capital to finance construction at its Jimmie Creek run-of-river hydro and Shannon Wind projects.

Two Speculative Clean Energy Penny Stocks for 2014

Ram Power Corp (TSX:RPG, OTC:RAMPF)
12/26/2013 Price: C$0.08.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.02   YTD Total C$ Return: -75% .  YTD Total US$ Return: -75.5%
Terminal US$ Return -57% (when I said to sell on June 3rd.)

Geothermal power developer Ram Power's stock remains in the dumps at $0.02.  The decision to take our losses in June continues to look like a good one.

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). 
12/26/2013 Price: C$0.075.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.14   YTD Total C$ Return: 86.7% .  YTD Total US$ Return: 83.7%.

Wind project developer Finavera got a nice lift when it gave some details of its long-promised plan for its business going forward.  It signed an agreement, pending shareholder approval, to purchase San Diego, CA based solar installation marketer Solar Alliance of America (SAoA) for C$4 million in cash and C$2 million in stock.  The stock portion of the deal will be priced at the higher of C$0.21 or the 20 day weighted average price of Finavera stock following closing of the deal.

Shareholders have been promised a vote to either go ahead with this deal or to wind up the company and distribute what I estimate to be approximately 12 to 14 Canadian cents per share after paying off and renegotiation of its liabilities and receiving the final payment for its Cloosh wind farm from SSE. 

Long time readers will know that solar is the one clean energy sector that I stay away from, mainly because it gets so much attention from other investors and analysts.  That's one reason I find this deal impossible to value, the other being that we have no information on SAoA's profitability, only its revenues.  Finavera CEO Jason Bak has told me he hopes to release more information about the deal before the Annual Meeting on September 15th, but that date is rapidly approaching.

Although I find the deal impossible to value, I find it encouraging that the stock portion of the deal was priced at C$0.21 or above, and I know that other investors are both much more knowledgeable and enthusiastic about solar installation than I am.  Hence, I expect the deal will increase Finavera's stock price over time.  Barring any surprises ahead of the annual meeting, I will probably vote for the deal, but then look to exit the stock as Finavera begins to present itself to investors as a residential solar pure play, and the stock appreciates accordingly.

Conclusion

The only big news this month was in speculative pick Finavera, and I still feel as if I do not have enough information its plans to purchase Solar Alliance of America.  That said, I expect the move into residential solar will be good for the stock price, and its nice to see gains in Finavera easily covering the losses incurred in the first half in my other speculative pick, Ram Power.

The main portfolio continues to perform as designed, advancing modestly but with much less volatility than most clean energy stocks.

Disclosure: Long HASI, PFB, CSE, ACC, NFI, PRI, AMRC, MIXT, PW, AXY, FVR.  

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.

September 05, 2014

Capital Pacific Bank: Free Market Alternative with a Conscience

Not A Bankster

By Jeff Siegel

In the long, slow recovery from the 2008 financial collapse, the banking industry has increasingly been regarded as a buglight for the untrustworthy.

The Libor (London Interbank Offered Rate) scandal brought banking corruption to the front of the news, and showed the world a huge ethical hole that had burned through the middle of major banks.

In a 2012 essay entitled “Is Banking Unusually Corrupt, and If So, Why?” Financial analyst, Circuit Court judge and University of Chicago Law School Lecturer Richard A. Posner laid out the reasons why the system might foster unethical behavior.

"The complexity of modern finance, the greed and gullibility of individual financial consumers, and the difficulty that so many ordinary people have in understanding credit facilitate financial fraud, and financial sharp practices that fall short of fraud, enabling financial fraudsters to skirt criminal sanctions,” Posner said.

The public embraced a depression-era term to show its feelings of distrust and disgust.

“Banksters.”

A portmanteau of “bankers” and “gangsters,” the term was first used in 1933, but embraced anew when people saw what had become of their assets. Trust in banks sank.

Seventy-eight percent (78%) of people surveyed in the Consumer Banking Insights Study believed big banks were fully to blame for the financial crisis of 2008 and the subsequent recession. Thirty one percent (31%) of those people said they didn't trust big banks with their money even though they were already customers of one.

Smaller banks and credit unions started to become more attractive to disaffected customers as a result, and America's credit unions recently passed 100 million members, according to the Credit Union National Association (CUNA).

“[It's] the unique structure - not-for-profit, member-owned cooperative - of credit unions that gives them the ability to offer better rates and member-focused service,” CUNA said in a statement in August.

Beyond local banks and credit unions, Americans looking to bank differently have yet another option: the B Corp Bank.

A bank with a philosophy

Benefit Corporations and Certified B Corps are companies that are committed to responsibility beyond providing shareholder value. They have to uphold certain environmental standards, labor standards, and tax standards; and are bound to provide something more than just profit.

We recently took a look at B Corps and liked what we saw.

With more than 1,000 corporations submiting to B Corp certification, a select group of banks has begun to gravitate toward the philosophy, too. Earlier this summer, the sixth bank attained Certified B Corp status.

It's a public company, too.

Portland, Oregon's Capital Pacific Bank (OTCBB:CPBO) was founded in 2003 as a local bank to serve the needs of local businesses. In the intervening decade, it has grown into a full-scale financial institution that also has a mission of sustainability and community involvement.

B Labs has given CPB a score of 98 out of 200 on the B Corp certification scale. The lowest score allowed to keep certification is an 80, so it is closer to the low end of the scale than the high. However, it's only been certified for a couple of months, so its score can improve with each monthly review. It's also on par with the Business Development Bank of Canada, another Certified B Corp bank.

At the end of 2013, CPB had $239 million in total assets, and net income of $1.8 million, or $0.69 per share, the highest annual earnings in the company's history. It had double digit growth in both deposits and loans, and an 8.8% return on equity for the year. It closed out the year with a book value per common share of $8.36.

“Many banks are dealing with sluggish loan growth due to lackluster demand, low-interest rates, and increasing regulatory and compliance costs,” Mark Stevenson, CEO and President of Capital Pacific Bancop wrote in the company's annual report to shareholders. “Unlike many of our peers, we’ve been successful in achieving growth in our loans, deposits and net interest income in spite of these headwinds, and our profits have grown to record levels, putting us among the top performing banks in the Pacific Northwest.”

It's also worth noting that Capital Pacific Bank has only one single physical location. This was chosen to diminish its footprint and streamline its operations, and it shows that CPB is in tune with broader trends.

Branch closures in the U.S. hit its all-time highest level in 2013, with 1,487 branch locations closing over the course of 2013. This is the most significant decline ever recorded by SNL Financial, a financial market analysis firm.

Since the crisis of 2008, banks have increased their efforts in mobile and online banking services to cut any overlap in service. If a customer can deposit his checks and manage his finances online, he would have no reason to go to his local branch and waste several hours of his precious time.

Time is money, after all.

So Capital Pacific bank is keeping it small and local, while adhering to more stringent regulations outlined by B Labs. It's a new kind of bank for a post-crash economy.  And from a free market perspective, I like seeing this kind of alternative.

 signature

Jeff Siegel

Full Disclosure: I currently own shares of SCTY.

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

September 04, 2014

Trina Thrives On Solar Financing

Doug Young

logo_trinasolar[1].gif

Investors were applauding a new announcement by Trina Solar (NYSE: TSL), after it announced a deal that would see it help to finance and build a massive solar power farm in southwest Yunnan province. The deal should indeed help Trina generate big sales for the near-term, as it involves construction of a farm with huge capacity of 300 megawatts of power. But I’m just a bit wary of this kind of development, which will also see Trina pay most of the bills to build the facility.

This kind of creative financing, which sees solar panel makers take big stakes in plant developers and then sell their own panels to the projects, is good when many sophisticated long-term buyers are available to purchase those finished plants upon completion. But China is hardly such a market, and it’s far from clear that anyone will be ready to purchase this massive new solar farm from a Trina-controlled entity once construction is complete.

According to Trina’s new announcement, the company is taking a 90 percent stake in Yunnan Metallurgical New Energy Co, which will build the new plant in the southwestern Chinese province. (company announcement) Three local partners will hold the remaining 10 percent in the company, whose farm will become the biggest solar power generating facility in Yunnan province.

No financial terms were given, which is slightly unusual as this investment is likely to be quite costly. To put things in perspective, the 300 megawatts in new panel orders Trina is likely to get from the deal are equivalent to nearly a third of the panels it shipped in its most recent reporting quarter, when it generated $519 million in revenue.

Thus if panel prices remain relatively constant, this new plant could generate some $171 million in sales for Trina over the construction period, most likely the next 1-2 years. That means Trina’s investment in the developer should total nearly $200 million, again invested over the next couple of years. That’s not a small sum for solar panel makers like Trina that are still struggling under big debt burdens following a prolonged downturn for their industry.

Despite that risk, investors cheered the news and bid up Trina shares by 5.6 percent after the announcement. It’s probably worth noting that even at their latest closing price of $13.23, Trina’s shares are still nearly 30 percent below their peak reached back in March when solar shares were soaring on hopes for a rapid sector recovery. Since then those hopes have been tempered by new punitive anti-dumping tariffs on Chinese solar panels exported to the US, and signs that the EU could take similar steps.

All that said, let’s return to the main point, which is that this kind of self-financed plant construction is a risky proposition. This kind of model got former industry pioneer Suntech into big trouble, and ultimately set off a chain of events that led to the company’s bankruptcy. Rival Canadian Solar (Nasdaq: CSIQ) has used the model to build smaller plants in Canada, and Yingli (NYSE: YGE) earlier this year set up a similar $160 million fund to build solar plants in China.

Canadian Solar’s model has worked in part because most of the plants it has built are in Canada, where big institutional investors exist to buy such plants after their completion. China is still largely an untested market in that regard, and it’s quite clear that many local state-run enterprises are participating in these new projects to help Beijing meet its ambitious targets to build up the country’s solar power.

Perhaps this new farm is well-designed and a strong long-term buyer will recognize that fact and purchase it after its completion, providing big profits for Trina. But it’s equally possible the plant will run into unforeseen problems, which could easily leave Trina with headaches as it figures out what to do with the massive facility.

Bottom line: Trina could be left holding a big pile of problematic debt if its plan to build a massive new solar plant in southwest China runs into difficulties or fails to find a long-term buyer.

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

September 01, 2014

Tesla's China Strategy Charges Up At Unicom Outlets

Doug Young

Tesla Logo
Tesla plugs in
with Unicom

Despite disappointing progress in China’s plan to put hundreds of thousands of new energy vehicles on its roads by next year, American electric car maker Tesla (Nasdaq: TSLA)has made remarkable progress despite its late arrival to the market. The company has won its strong initial results though a smart combination of savvy marketing and initiatives to encourage building of necessary infrastructure to support its buyers.

The latest of those initiatives saw Tesla last week announce a partnership with Unicom (HKEx: 762; NYSE: CHU), China’s second largest mobile carrier, to install charging stations at hundreds of Unicom outlets nationwide. (English article) As a result of these and other efforts, Tesla has been the lone player so far to succeed in China’s broader consumer market, an area that will be critical to achieving Beijing’s goals.

Other Chinese aspirants like BYD (HKEx: 1211; Shenzhen: 002594; OTC:BYDDF), SAIC (Shanghai: 600104) and Geely (HKEx: 175) would be wise to follow this example, allocating big funds to forge partnerships and create similar marketing campaigns to convince Chinese consumers that electric vehicles (EVs) are not only good for the environment, but also fun to drive.

Beijing has been pushing hard to put more new energy vehicles on its roads, in a bid to clean up the nation’s air and develop new technologies. Yet despite generous subsidies and other incentives, the nation currently only has about 78,000 such vehicles on the road – far less than the 500,000 that Beijing had originally targeted by 2015.

A big portion of those are buses and taxis purchased by local governments and other state-owned enterprises, whose decisions that are often motivated as much by politics as by economics.

What’s really needed to jump-start sales is development of the consumer market. Just last week, Beijing announced yet another round of incentives to attract consumer buyers, saying it would stop levying sales tax on 17 new energy car models. (English article) The move complements existing direct subsidies that are already available to buyers of such vehicles. But consumers remain wary, not only because of high prices but also over image issues and lack of supporting infrastructure.

Tesla’s success story goes back to the vision of its founder, Elon Musk, who realized that special marketing and other efforts would be needed to get consumers to accept EVs. He realized such cars are seen as experimental technology that often comes with problems, and that consumers would worry about lack of necessary infrastructure like charging stations and maintenance facilities.

The company proceeded to tackle the problem by targeting the high end of the market, selling cars with a starting price of $70,000. Targeting such wealthy consumers allowed the company to use the most advanced and reliable technology, and also to market itself as an elite brand.

That strategy has worked very well in status-conscious China, where Tesla only began taking orders last year and made its first high-profile delivery in April at an event that coincided with the nation’s biggest auto show. During that time, the company had embarked on a slick campaign highlighting its state-of-the-art technology, combined with a trendy angle that appealed to people wanting to become the first to own the latest cool and expensive gadget.

As a result, a number of China’s high-profile elite were among the first to sign up as buyers when Tesla delivered its first EVs, including the owner of the Lifan soccer team and the founder of Autohome, China’s biggest online car website. Musk further boosted his company’s profile by holding high-profile events where he personally delivered the first batch of cars to their new buyers, creating buzz through a slick campaign that was widely followed by domestic media.

Since then the company has worked hard to maintain its momentum and build up its order book, with an aim of selling thousands of cars in its first year. In its latest initiative, Tesla announced the new Unicom partnership last week to make charging its cars more convenient. Under that deal, Tesla and Unicom will build charging posts at 400 Unicom outlets in 120 cities, as part of Tesla’s broader commitment to spend hundreds of millions of dollars on such stations in China.

This kind of high-profile announcement, combined with its previous savvy marketing campaign, is helping Tesla to succeed despite an arrival to China that’s already several years behind more aggressive domestic names. Some of those names, including BYD and Geely, should think hard about investing big money not only in product development, but also in high-profile marketing and infrastructure campaigns if they hope to find success in the broader consumer market.

Bottom line: Chinese new energy car makers need to invest more money in marketing and infrastructure to copy the success of Tesla in the market.

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

August 29, 2014

Interview With Nathaniel Bullard On Fossil Fuel Divestment

by Tom Konrad CFA

Renewable Energy World asked me to write a commentary on Bloomberg New Energy Finance's recent report on the difficulties institutional investors are likely to have divesting from fossil fuels.  The report details how the scale, yield, liquidity, and historic growth of the oil and gas sector are impossible to match with any other investment sector.

While this is quite true, much of the other coverage has missed the point.  Ironically, I thought Bloomberg News' coverage was some of the worst, because it focused on the least important aspect of fossil fuels as an investment sector: historical growth.  While a sector's yield, liquidity, and especially scale generally persist for decades, growth trends are prone to sudden reversals.  The fact that oil and gas stocks have done so well over the last five years should prompt all wise investors to start taking some profits, regardless of their attitudes towards the environment.

Instead, I focus on likely future trends for oil and gas stocks, and consider how fundamental factors and the potential growth of the divestment movement may affect the potential future growth of the oil and gas sector.  The prognosis is not good.

You can read the whole commentary here: Divesting from Fossil Fuels: Last One Out Loses.

I interviewed the report's author, Nathaniel Bullard, for the piece.  He had some interesting points that did not fit into my commentary, so I include the whole transcript below.

Nathaniel Bullard Interview

Conducted via email, 8/28/2014


TK: Why do you focus on past performance in your analysis?
NB: The past is where the data are available for analysis (as opposed to forecasts and predictions) and I think this is particularly applicable to older, established sectors such as fossil fuels.

TK: Do institutional investors generally believe past performance is a reliable indicator of future returns?
NB: I do think that oil and gas dividend yields in particular will be viewed in a "past performance is a reliable indicator of future returns" paradigm. US coal, however, has had clear indicators of future change in place for a while, in particular cross-state air pollution regulations, so companies such as Bloomberg have been able to analyze the number of plants which are likely to be removed from market, therefore lowering coal demand.

TK: If you had done this analysis in mid 2011, how would that have changed your conclusions?
NB: US Coal would have performed relatively better if we used the original start position of mid-2009, largely because the US shale gas boom was not yet depressing gas prices and leading to massive fuel switching -  though prices began slipping in 2011. Chinese coal stocks were higher and stable, but would later be hit with overcapacity concerns.  Clean energy equities were in the midst of overcapacity depressing margins and share prices, in particular solar stocks.

TK: Do you have any thoughts on why Coal has so greatly underperformed other fossil fuels over the last 4 years?
NB: In the US in particular, natural gas prices (but also to some extent the price of wind power) have moved coal from the bottom of the merit order.  In China, coal is quite oversupplied and many of coal companies are heavily indebted, often with local debt that is a bit opaque.
China has lots of particulate emissions laws in place around coal, and it's making them more stringent - but 1) they're not always enforced and 2) they're not really making a major dent in coal demand...yet. They are, though, shaping our expectation of future demand.  While China does not have the strong and proximate regulations in place to shift demand away from coal, environmental concerns in China's major cities are forcing coal production to move out of urban areas and there are efforts underway to ramp up domestic gas production (and gas imports) as a substitute.

TK: If coal stocks had not declined so drastically in the last couple years, would they be as easy to divest from now?
NB: In a word, no. Some US coal equities have lost 90% of their value since 2011 (Arch Coal, for instance).  This much-diminished size means that all other things being equal, or not equal in a stock market that is performing well, coal stocks are underperformers and the same number of shares will represent a much smaller portion of an investor's overall portfolio relative to 2011.

TK: If or when one of more of the paradigm shifts you discuss in section 7 take place and the divestment movement reaches scale, what would be the effect on the portfolios of investors who choose not to divest?  What would be the effect on the portfolios of those who are divesting today?
NB: I think we can expect some oil and gas stocks to still generate dividends, meaning that the yield attribute they carry is still in effect and attractive to some investors.  Using the Fossil Free Index which I mentioned in my white paper, historical data suggests that removing fossil fuels from a broad portfolio should not adversely impact returns and could in fact be slightly positive.

TK: Do you have any other thoughts you'd like to add?
NB: I wrote this paper because divestment is a fast-moving idea with the first signs of traction outside of its motivated core of intellectual founders.  The sectors it touches upon are essential parts of our physical energy system, at least today, and are almost as deeply embedded in our financial system due to their scale. I thought that divestment deserved a thought exercise, passed without judgment: if divestment is to occur at scale, what shape might it take?

August 24, 2014

Playing The Advanced Biofuel Lottery

by Debra Fiakas CFA

Over the past six months advanced biofuel producers have raised $450 million in new capital.  The industry has finally gained traction after shifting focus from strictly cellulosic ethanol technologies to a mix of biochemical and renewable fuels.  Few if any of the advanced biofuel companies ‘climbed up out of the red,’ but we suspect the investors who had a chance to participate in these deals thought they had got a whiff of profits.  Indeed, Gevo, Inc. (GEVO:  Nasdaq) promised to achieve breakeven at its Luverne, Minnesota plant this year as the ethanol and isobutanol producer was raising capital for renovations and capacity expansion.  The stock still languishes below a dollar per share.

If we take the view that so-called smart money participated in these transactions and that the capital infusion will have a catalytic effect on operations, then the public advanced biofuel companies could be strong growth stocks.  I looked at each of the public biofuel developers  -  PEIX, MEIL, GEVO, AMRS, REGI and KIOR  -  that have raised capital in the last six months to see which one looks like a strong buy.

None of them have earned a dime in profits for shareholders, so we are unable to make a comparison using a valuation metric such as price to earnings or price to cash flow.  In terms of price-to-sales, Pacific Ethanol (PEIX:  Nasdaq) and Renewable Energy Group (REGI :  Nasdaq) are the most interesting, with stocks that trade at 0.40 times sales.

However, a relatively low valuation metric might not be the most compelling factor.  A short interest has built up in shares of Kior, Inc. (KIOR :  Nasdaq), a developer of cellulosic gasoline and diesel, that is near a quarter of the company’s float.  The stock is trades for pennies per share in modest volumes, largely because by all accounts it is on its last leg so to speak.  KiOR raised $10 million earlier this year, but still needs more capital to stay in business. Reportedly, management miss a loan payment and long-time investor Vinod Khosla seems to have lost interest.  However, a last minute infusion of capital or a sale of the company to a strategic investor would likely drive the stock higher from the current price level.

Amyris, Inc. (AMRS:  Nasdaq) has also won the disrespect of short-sellers who are not impressed with the company’s specialty chemicals and biofene business model.  Just over a quarter of AMRS has been sold short.  Near the end of June AMRS shares formed a so-called ‘low pole warning,’ suggesting the stock could sink lower.  However, the stock almost immediately began trading new momentum and traded dramatically higher in the last week, as the company announced the availability of a new loan facility to support development of farnesene technologies.  A short-squeeze could change things.  I believe a majorty of shares was shorted at prices between $3.50 and $4.20.  Thus any development that might push the shares above $4.20 would likely put some fear into the hearts of short-sellers.  The stock has tested the $4.20 price level twice in recent weeks and failed both times, so it might be worthwhile to watch AMRS closely.

The only stock left on our short-list of advanced biofuel developers is that of Methes Energies International Ltd. (MEIL:  Nasdaq). The company raised $5.0 million in new capital through the sale of common stock in May this year.  The shares were sold at $2.00 per share, leaving everyone who participated in the offering under water as the stock has steadily downward ever since the deal was priced.  The company has announced a string of accomplishments over the past couple of months and appears to be on the cusp of delivering its first shipments of biodiesel valued t $6.0 million.  Investors have not been impressed, but it is possible they are missing an important turn.

In my view, the odds a bit better with any of these stocks than lotto…and a few a priced better than a lottery ticket! 

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.

August 22, 2014

3 Stocks For The Coming Solar Shortage

By Jeff Siegel

An impending glut of solar panels was going to be the death knell for the industry.

Or at least that's how the solar bears framed the argument just a few short years ago.

Today, however, it's a different story...

A shortage of solar panels is now going to kill the industry.

Or at least that's how the bears are framing the argument this time.

Meanwhile, I'm grinning ear to ear. Because just as opportunity existed during the great solar glut, opportunity exists as the solar industry gears up for a potential shortage.

So don't hate, my friends. Participate!

Solar Goose Bumps

On Tuesday morning, Bloomberg published a pieced entitled, “Solar Boom Driving First Global Panel Shortage Since 2006.”

Ah, that headline gives me goose bumps.

According to Bloomberg New Energy Finance, the solar industry may install as much as 52 gigawatts this year and 61 gigawatts in 2015. That's up from 40 gigawatts in 2013 and more than seven times what developers demanded five years ago.

Bottom line: The smart money is doubling down on the solar manufacturers gearing up for the shortage.

Easily Worth $75

Right now, Canadian Solar (NASDAQ: CSIQ) is building a new solar cell factory that, when completed, will be able to pump out 300 megawatts of annual capacity.

SunPower (NASDAQ: SPWR) has a new facility in the works, too. Production at this new factory is expected to begin in 2017 and will pump out 700 megawatts per year.

And of course, there's SolarCity (NASDAQ: SCTY). This financing and installation company announced in June that it would be acquiring solar panel manufacturer Silevo (as well as building a new manufacturing plant) in an effort to lock in a steady supply of product to meet demand.

We are in discussions with the state of New York to build the initial manufacturing plant, continuing a relationship developed by the Silevo team. At a targeted capacity greater than 1 GW within the next two years, it will be one of the single largest solar panel production plants in the world. This will be followed in subsequent years by one or more significantly larger plants at an order of magnitude greater annual production capacity.

Given that there is excess supplier capacity today, this may seem counter-intuitive to some who follow the solar industry. What we are trying to address is not the lay of the land today, where there are indeed too many suppliers, most of whom are producing relatively low photonic efficiency solar cells at uncompelling costs, but how we see the future developing. Without decisive action to lay the groundwork today, the massive volume of affordable, high efficiency panels needed for unsubsidized solar power to outcompete fossil fuel grid power simply will not be there when it is needed.

Even if the solar industry were only to generate 40 percent of the world’s electricity with photovoltaics by 2040, that would mean installing more than 400 GW of solar capacity per year for the next 25 years. We absolutely believe that solar power can and will become the world’s predominant source of energy within our lifetimes, but there are obviously a lot of panels that have to be manufactured and installed in order for that to happen. The plans we are announcing today, while substantial compared to current industry, are small in that context.

I remain extremely bullish on SolarCity, and I do hope you picked some up after I suggested you do so following the free fall that took the stock down to below $50 back in March.

sccty

Today, SolarCity trades for around $70 a share. On the low end, I maintain that this is easily a $75 stock, while Goldman puts it higher at $85 and Deutsche Bank at $90.

Of course, if you prefer a little more action and the opportunity for an even bigger gain in the solar space, consider one of the up-and-coming solar tech plays that don't get much attention in the mainstream but that are poised for major gains as the solar market continues to soar.

To a new way of life and a new generation of wealth...

 signature

Jeff Siegel

Full Disclosure: I currently own shares of SCTY.

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

August 20, 2014

REG Sells More Biodiesel, Earnings Drop, Acquisitions Are Future Wild Cards

Jim Lane REG logo

Biodiesel giant Renewable Energy Group (REGI)  is up on gallons, down on dollars as market prices weigh on results.

In Iowa, REG announced net income of $10.8 million for the second quarter on revenues of $332.9M, a drop from its Q2 2013 net income of $19.6 million, and a 13% drop in revenue despite an 11% lift in gallons produced. The company noted that net income was boosted by a tax benefit of $11.9 million, recognized primarily from the release of a valuation allowance resulting from recording deferred tax liabilities related to the acquisitions of Syntroleum and Dynamic Fuels and the convertible debt offering. The company recorded adjusted EBITDA of 6M.

In announcing results, the company highlighted:

  • 77 million gallons sold, up 11% y/y, 56 million gallons produced, down 1% y/y
  • Total assets surpassed $1 billion
  • Completed acquisitions of Syntroleum Corporation and Dynamic Fuels, LLC
  • Executed $143.75 million convertible debt financing

At June 30, 2014, REG had liquid assets, which includes cash, cash equivalents and marketable securities, of $125.9 million, a decrease of $10.2 million during the quarter. REG raised $139.2 million in cash from the convertible debt financing. Of those funds, $101.3 million was put in escrow as restricted cash supporting REG Geismar’s obligation on $100 million of Gulf Opportunity Zone Bonds issued for Dynamic Fuels in 2008, $30 million was used to acquire Tyson Foods, Inc.’s interest in Dynamic Fuels, LLC and $11.9 million to acquire a capped call relating to the convertible debt.

Expansion: new facilities

In addition, the company gave updates on three acquisitions in Mason City, New Boston and Geismar. Specifically, REG noted:

The Company’s two most recent biodiesel acquisitions, REG Mason City and REG New Boston, are now able to run at nameplate capacity. All upgrades are complete at REG Albert Lea, while previously announced upgrades to increase feedstock flexibility are progressing at REG Newton and REG Mason City. The Company also prepared for future improvements at its Danville, Illinois facility with the acquisition and rezoning of adjacent land. Finally, REG maintains a toll manufacturing arrangement that offers additional production capacity flexibility.

As announced in early June, the Company launched REG Synthetic Fuels, LLC with the acquisition of Syntroleum Corporation, which included Syntroleum’s 50% interest in Dynamic Fuels, a 75-million gallon per year nameplate capacity renewable diesel biorefinery located in Geismar, Louisiana. REG Synthetic Fuels acquired the remaining 50% of Dynamic Fuels from Tyson Foods a few days after the Syntroleum acquisition. Dynamic Fuels, LLC was renamed REG Geismar following the acquisition.

“Our second quarter results demonstrate the resilience of our business in the face of challenging market conditions,” said REG CEO Dan Oh. “We believe the industry has worked through the excess inventory from year-end and we have seen demand increase since the first quarter. During second quarter, REG demonstrated its ability to operate an expanding business while also investing for future growth. On top of ramping up gallons sold 63% from first quarter, we executed a complex series of transactions in order to acquire Syntroleum and Dynamic Fuels. Integration of both are underway and we are excited about the new employees, technology and products added to REG. With these acquisitions, our total assets now exceed $1 billion.”

The Digest’s Take

It’s been a rough ride for biodiesel prices this year to date — and as the industry leader, REGI has been taking it on the chin, suffering through three downgrades from Piper Jaffray, Stifel Nicolaus and Cannacord Genuity in the process. Considering the run-up in the stock last year and the price environment, REG’s been doing quite well from an operating POV to maintain an average rating of “buy” from the Street, according to NASDAQ.com.

If the biodiesel tax credit makes a comeback — that’ll be a major company windfall, but we’re not expecting anything on taxes from Congress, in an election season, until the lame-duck session beginning in November.

For the longer term, we’ll be watching progress with the newly-renamed REG Geismar, the former Dynamic Fuels facility that offers the company an entry in the drop-in renewable diesel market. REG Life Sciences — the former LS9 — remains a significant wildcard upside option for REG in 2015 and beyond — given that LS9 was generally focused around sugar as a feedstrock, we’ll be watching REG’s expansion into that area of feedstock acquisition to see if their proven ability to play strong in upstream works well on the sugar side, too.

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.

August 19, 2014

Amyris Aims For Huge Second Half

Jim Lane amyris logo

The Pharaohs of Farnesene continue to pick up momentum.

In California, Amyris (AMRS) reported a net loss of $35.5M for the second quarter of 2014 on sales of $9.3M, with a 5.4 percent increase in sales over Q2 2013. Renewable product sales were $4.4M for the quarter, while “Recognized grants and collaborations revenues” reached $4.9M.

In announcing results, the company highlighted:

• End of quarter cash, cash equivalents and short-term investments balance of $90.2 million.
• Lowest farnesene production costs to date and successful start of fragrance molecule production.
• Addition of Braskem as a new collaboration partner for renewable isoprene and Natura for cosmetics sector.
• Produced and shipped jet grade farnesane, now in use in commercial flights at 10% blends with Jet A/A1.

In addition, the company affirmed guidance for doubling renewable product sales year-on-year and achieving cash flow positive from operations in second half of 2014. Specifically, Amyris expected for 2014:

Inflows. Renewable product sales to be over $32 million, doubling our 2013 renewable product sales, and to achieve positive cash margin from products. In addition, we continue to expect collaboration inflows, a non-GAAP measure, in the range of $60 million to $70 million by the end of the year.
Expenses. Cash operating expenses for R&D and SG&A in the range of $80 million to $85 million and capital expenditures less than $10 million in 2014.
Earnings. Positive cash flow from operations during the second half of the year and to achieve positive EBITDA in 2015.
Payback. Cash payback for our Brotas biorefinery in the next two years (following 2013 start-up year), based on plant cash contributions of $10 million to $15 million in 2014 and $40 million to $50 million in 2015.

“With two new collaboration partners, continued progress on renewable product sales, and our best operational performance to date, we’re well positioned to double our renewable product sales this year over 2013 and deliver positive operational cash flow in the second half of this year. In May, we completed a $75 million convertible note financing and, since quarter-end, increased our cash balance sheet with payments from our ongoing collaborations as well as additional inflows from new collaborations,”said John Melo, Amyris President & CEO.

“We rounded out our developing product portfolio for the tire industry when Braskem joined our collaboration to develop and produce renewable isoprene, and our expanded collaboration with Kuraray for liquid rubber. With TOTAL, we obtained industry certification for sales of our renewable jet fuel and have begun sales of jet fuel. We continue to experience strong demand for sustainable products that perform better than the alternative and are cost competitive, while solving the supply challenges our customers face in growing their business,” concluded Melo.

The analysts react:

Rob Stone and James Medvedeff, Cowen & Company

Q2 non-GAAP loss was 36c (vs. St. 30c) on $8.2MM (vs. St. $12.4MM). Product costs are improving, but COGS reflected higher-cost inventory. New collaborations and product segments are encouraging, raising our PT to $3.50 (vs. $3.00), but expected product sales for 2014 are heavily H2-weighted. Execution risk on a steep ramp and potential dilution from converts keep us at Market Perform (2).

Product revenue of $4.4MM missed our $7.0MM estimate. A new fragrance molecule was not yet shipping. Three new products should launch in 2015, and a total of 10 molecules supports expected growth.

Adjusting Our Model for Smaller 2015 Ramp, Slower Cost Reduction. We now project 2014-15E losses of $1.01 and $1.23, on sales of $76.3MM and $115MM, vs. prior ($0.64) and ($0.35) on $76.5MM and $196MM.

Pavel Molchanov, Raymond James & Company

After a period of retooling while in the “overpromise and underdeliver” penalty box, 2013 and 2014 have been Amyris’ first years with operations truly in commercial mode, and the outlook for the rest of 2014 (and beyond) is encouraging. There is visible commercialization progress, but the top line’s reliance (for now) on partner-based R&D revenue makes quarterly results very choppy. We maintain our Market Perform rating.

* Brotas: steady as she goes. The 50 million liter Brotas plant in Brazil made its first farnesene shipment over a year ago and is back online (following its 1Q downtime). Recall, as of last November, the initial 2014 target has been for product sales to at least double – likely conservative after last year’s shortfall. This target remains in place, and our current “guesstimate” for product sales is $38 million for 2014, up ~2.5x.

* $3.50/gal diesel: intriguing target, but we’ll believe it when we see it. It is on the Total front that the most interesting revelations came out of yesterday’s call. Amyris is working on a framework for producing renewable diesel in Europe – as part of the fuels JV with Total – with a long-term target cost of $1.00/liter, or $3.50/gallon. The feedstock is… to be disclosed later, so we can’t help but feel some skepticism. The working assumption is that the first large diesel plant will start up in 2017, with two or three by decade’s end. If true, this would solidify Total’s status as one of the most active strategics in bioindustrials.

Valuation. Consistent with peers, we apply a discounted cash flow approach to arrive at a DCF value of $2.90/share.

The Digest’s take

The analysts don’t see much upside in the stock for now — a ramp-up in price over the past year has absorbed most of the short-term potential. It’s highly intriguing that the company is targeting $3.50 diesel with a Total/Amyris plant as soon as 2017. That’s big news, if it materializes — but we would expect a move away from the spot Brazilian sugar market in order to facilitate this. Cellulosic sugars would be appropriate targets for anything sold in the aviation to avoid food vs fuel debates.

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

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