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.

Observations

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.

Observations

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

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

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."

September 12, 2016

Gevo To Supply Lufhansa With Renewable Jet Fuel

Jim Lane
 
In Colorado, Gevo (GEVO) has entered into a heads of agreement with Lufthansa to supply Gevo’s alcohol-to-jet fuel from its first commercial hydrocarbon facility, intended to be built in Luverne, MN. The terms of the agreement contemplate Lufthansa purchasing up to 8 million gallons per year of ATJ from Gevo, or up to 40 million gallons over the 5 year life of the off-take agreement.

Gevo utilized the enthusiasm generated in financial markets yesterday to raise $15.6M in cash and to convert $11M in debt to equity.

What the deal means in the short term

Here’s what it means in a practical sense. Expect Gevo to wind down ethanol production and convert the entire Luverne facility over to isobutanol, now that demand is ramping up. There will be a hydrocarbon upgrading technology added, which will give Gevo the option to produce up to 10 million gallons of hydrocarbon fuel from 13 million gallons of isobutanol.

That’s a mix of isooctene and kerosene – that mix can be dialed in to an 80/20 ratio either way, depending on market conditions. The kerosene will be blended by a third party to Lufthansa’s preferred blend. Could be a low percentage, could be high, that’s Lufthansa’s call.

About the agreement

The heads of agreement establishes a selling price that is expected to allow for an appropriate level of return on the capital required to build-out Gevo’s first commercial scale hydrocarbons facility. The heads of agreement is non-binding and is subject to completion of a binding off-take agreement and other definitive documentation between Gevo and Lufthansa, expected to be completed in the next few months.

Then comes the engineering, the financing, the construction. Stand by for 24 months. Mark fall 2018 on your calendar.

And so, Gulliver escapes from the land of the Lilliputians, formerly tied down by the Butamax litigation and the slow-to-emerge though shiningly profitable world of marine fuels. Into the big time of delivering solar fuels to hungry airlines.

Can Gevo go Big?

“We want to get to big scale,” Gevo CEO Pat Gruber told The Digest. “50 million 100 million gallons, where you really start to get economies of scale. We’re sitting here with 75,000 gallons in Silsbee, so how do we get to there from here. We’re going to do this in an intermediate step. We’re going to build out Luverne for isobutanol, we have good traction with Musket and the rest, and there’s a good value proposition based on really high performance. It’s high energy, high octane, lower carbon, lower cost. The pricing and margins are good. But it’s truly a niche not a commodity market, so it will take time to develop that niche.

“So, we have this opportunity to divert more into jet and isooctane, at the same time as Lufthansa wants to see alternatives develop.

“That’s their strategic interest. What they want is to self-regulate on carbon emissions, and avoid a patchwork of regulations everywhere they take off, land or fly over. The cost of compliance would be too great. But what none of us know is exactly what the cost of compliance will be, or the cost of oil, or the cost of alternative fuels in that long-term. So, everyone is moving cautiously although steadily.

“Meanwhile, it’s attractive to the investor community, too. They see the massive market, and they see the obvious need and the airlines actively developing. They understand there’s no electric plane any time soon, so there’s aren’t that many options, and this is one of the last sectors to be addressed in terms of lowering carbon emissions. Investors also see that some of the alternatives are more expensive, or are more expensive to scale.

The background news you can use

The agreement follows the completion of the first commercial flights using Gevo’s renewable alcohol by Alaska Airlines. The airlines used a 20 percent blend. Gevo said at the time that it “believes that its renewable ATJ has the potential to offer the most optimized operating cost, capital cost, feedstock availability, scalability, and translation across geographies.”

Gevo’s alcohol to jet synthetic paraffinic kerosene process turns its bio-based isobutanol into jet fuel that meets the requirements of the recently revised ASTM D7566 (Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons) for up to a 30 percent fuel blend.

In March, we reported that ASTM International Committee D02 on Petroleum Products, Liquid Fuels, and Lubricants and Subcommittee D02.J on Aviation Fuel passed a concurrent ballot approving the revision of ASTM D7566 (Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons) to include alcohol to jet synthetic paraffinic kerosene derived from renewable isobutanol. That’s now done, done and done.

So, now there are 4 approved alternative fuel specs. F/T fuels, which no one is making. Farnesene, up to a 10% blend, which TOTAL-Amyris makes but is expensive at the moment based on sugar and jet fuel prices. There’s HEFA, which is in wide use but also has waste oil / jet fuel price issues at the moment that have limited the production. Now, there’s the isobutanol-to-jet fuel pathway, which essentially is all Gevo’s right now.

Why would anyone make jet fuel from alcohol, anyway?

So, here’s the critique of jet fuels made from alcohol. Aside from the technical hurdles, why would anyone convert $3.50 corn into $1.20 aviation fuel when the yields are something like 1.3 gallons of hydrocarbon fuel per bushel? Isn’t that $1.56 worth of fuel from $3.50 in feedstock?

Well, yes and no.

First, Gevo is producing its own distillers grains, worth roughly $1.15 per bushel in normal market conditions. And, we believe the fuel will qualify for the biomass-based diesel tax credit of $1.01 per gallon, relying on this from afdc.energy.gov.

Biomass-based diesel is defined as a renewable transportation fuel, transportation fuel additive, heating oil, or jet fuel, such as biodiesel or non-ester renewable diesel, and achieves a 50% GHG emissions reduction.

And there’s roughly $1.00 in RIN value.

So, putting that together, you have $4.72 in value from that $3.50 corn. That’s before considering the fact that the Lufthansa deal is “expected to allow for an appropriate level of return on the capital required to build-out Gevo’s first commercial scale hydrocarbons facility.”

So that’s why you can make money making jet fuels from alcohols.

A Big Deal?

Yes, big. Monster.

Why? Combination of two factors. One, it’s Lufthansa stepping up, big time, despite the low-price oil environment. Second, it’s a multi-year offtake deal with a credit worthy partner. The kind that can get a plant built, as Gevo continues to foster an escape from near-certain death that wouldn’t be out of place in outtakes from Deliverance.

Lufthansa’s progress

In February, we reported that low fuel prices aren’t deterring Lufthansa from continuing to develop aviation biofuels, some it describes as a long-term strategy and not one that is swayed but a tough year or two. The company began looking for fuel alternatives in 2011 and has launched a number of trial flights and commercial flights with different blends of aviation biofuel with fossil jet fuel.

The relationship between Lufthansa and Gevo dates to spring 2014, as we reported here.

Back in 2012, the airlines said that believed that A1 jet fuel will remain the main aviation fuel for the next 20 years but expected renewable jet fuel to replace up to 5% of the market by 2019. With the European economic climate no longer interesting for investors, the airline believes that agricultural investments—for feedstock for aviation biofuel, for example—is an area not yet fully exploited.

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 07, 2016

Solar Module Prices: The Trend Is Down

by Paula Mints

Buckle up, another module price war is afoot – or maybe it’s dumping or maybe it’s panicked selling or maybe it is the result of overcapacity and softening demand or maybe it is China’s government saying NO MORE to it’s out of control market and effectively stranding a whole lot of overcapacity or maybe it is all of the aforementioned. Pricing is always a complex subject.

The average price for modules from China is currently $0.60/Wp (and dropping) and the average price for smaller buyers is $0.66/Wp (and dropping). These are averages and there are prices for inventory as low as $0.33/Wp. There are non-inventory modules available in the $0.49/Wp to $0.60/Wp range. The current trend in module prices is down, pressured by strong production levels in China during the first half of 2016 and a slowdown of deployment.

Comment: Module prices will be tumbling potentially through the end of the year. Look out for quality issues. Manufacturers in China have overproduced and with the Chinese government looking to control deployment many are looking to rid inventory of overproduction.

Lesson: Anyone who things that prices will stay down, think again. Anyone who thinks that prices will tick up to consistent margin recovery level...think again. Module sales in the solar industry are historically an unpleasant competitive area in which to do business as many failed
companies would attest.

module price history 2006-16.png

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

This article was originally published in the August 31st issue of  SolarFlare, a bimonthly executive report on the solar industry, and is republished with permission.

September 04, 2016

Ten Clean Energy Stocks For 2016: August Earnings

Tom Konrad, Ph.D., CFA

My Ten Clean Energy Stocks for 2016 model portfolio continued to coast upward in August after five months of blistering performance since February, while clean energy sector benchmarks and real managed portfolio, the Green Global Equity Income Portfolio (GGEIP), pulled back slightly.  The following chart shows the performance of the model portfolio and its sub-portfolios against their benchmarks.

10 for 16 Aug composites.png

The portfolio, its growth and income subportfolios, and GGEIP all remain far ahead of their benchmarks.  Second quarter earnings announced this month were neutral or positive for the income stocks, but somewhat disappointing for the growth companies, causing the income group to pull farther ahead of its benchmark, and the growth group to lose a little ground. 

See the May update for a description of the benchmarks.

Opportunity to invest in GGEIP strategy

Last month, I mentioned that I was in advanced talks with a mutual fund company to bring the Green Global Equity Income strategy to the public as a mutual fund. I met with them for the fourth time last month, but they decided to pass, in large part because my emphasis on small and relatively illiquid stocks may put a limit on how large (and hence profitable) such a mutual fund can become.

Fortunately, I've been working on alternatives, two of which are now available for small investors.  My friend and colleague Jan Schalkwijk, CFA at investment advisor JPS Global Investments is now offering a version of the GGEIP strategy to his clients (new or existing) clients.  If you are interested, you can contact him here.  There is a also stripped-down but free version of GGEIP I launched on the Motif platform in June.

Or you can just continue to follow the income stocks in this annual model portfolio.  Although this group of seven is outperforming most other versions of the strategy this year, I think that difference is mostly luck.  The strategy had an excellent year in 2015 as well:  The six income stocks were up 24% and GGEIP was up 12% even though their income benchmark fell 30% because of the bursting of the Yieldco bubble.
10 for 16 Aug.png

The chart above gives detailed performance for the individual stocks.  Selected news driving individual stocks is discussed below.

Income Stocks

Pattern Energy Group (NASD:PEGI)

12/31/15 Price: $20.91.  Dec 31st Annual Dividend: $1.488 (7.1%).  Beta: 1.22.  Low Target: $18.  High Target: $35. 
8/31/16 Price:  $23.80.  YTD Dividend: $1.161. 
Expected 2016 Dividend:$1.58 (6.6%) YTD Total Return: 20.2%

Wind Yieldco Pattern Energy's revenues were at the low end of the company's projections due to generally low wind speeds, but earnings and cash available for distribution (CAFD) were strong due to good cost management and performance of the company's wind farms.

The company also announced the sale of 10 million shares of stock at $23.90, with an additional 1.5 million share underwriter's option.  It intends to use the cash to fund the purchase of the 180 MW Armow Wind power facility in Ontario from its sponsor.  I expect the acquisition to increase CAFD and dividends per share even after the dilutive effects of the share issue.

Enviva Partners, LP (NYSE:EVA)

12/31/15 Price: $18.15.  Dec 31st Annual Dividend: $1.76 (9.7%).  Low Target: $13.  High Target: $26. 
8/31/16 Price:  $25.47.  YTD Dividend: $1.495  Expected 2016 Dividend: $2.10 (8.2%) YTD Total Return: 49.9%

Wood pellet focused Master Limited Partnership (MLP) and Yieldco Enviva Partners increased its distribution to $0.525, and increased its full  distributable cash flow guidance from $67-$71 million to $70-$72 million.  The company reaffirmed full year distribution guidance of at least $2.10 per unit.  The new guidance increases the likelihood that Enviva will distribute more than that.

The market seems to have gotten the message that this wood pellet manufacturer has fuel to burn: The stock was up 19% for the month.

Green Plains Partners, LP (NYSE:GPP)

12/31/15 Price: $16.25. 
Dec 31st Annual Dividend: $1.60 (9.8%).  Low Target: $12.  High Target: $22. 
8/31/16 Price:  $18.42.  YTD Dividend: $1.218.  Expected 2016 Dividend: $1.64 (8.9%) YTD Total Return: 21.4%

Ethanol production Yieldco Green Plains Partners increased its quarterly distribution to $0.41 per unit, and reported $0.43 in per unit income for the quarter.  It's parent company, Green Plains (GPRE) produced a record volume of ethanol in the second quarter.  In the first quarter, the partnership relied on minimum volume guarantees from its parent to support revenues.  The recovery in ethanol volumes means that GPRE no longer needs to rely on these guarantees.

NRG Yield, A shares (NYSE:NYLD/A)

12/31/15 Price: $13.91.  Dec 31st Annual Dividend: $0.86 (6.2%). Beta: 1.02.  Low Target: $11.  High Target: $25. 
8/31/16 Price:  $16.09.  YTD Dividend: $0.695.  Expected 2016 Dividend: $0.96 (6.0%) YTD Total Return: 27.8%

Yieldco NRG Yield (NYLD and NYLD/A) increased its quarterly dividend to $0.24 and reaffirmed its guidance that the dividend would continue to grow by 15% annually through 2018.

The Yieldco entered an agreement to acquire the 51% of the California Valley Solar Ranch Holdco it does not already own from its parent.  The transaction was financed with $200 million of senior secured debt financed with a 4.68% interest rate.

Terraform Global (NASD: GLBL)

12/31/15 Price: $5.59.  Dec 31st Annual Dividend: $1.10 (19.7%). Beta: 1.22.  Low Target: $4.  High Target: $15. 
8/31/16 Price:  $3.62.  YTD Dividend: $0.275.  Expected 2016 Dividend: $0.60 (17.2%). YTD Total Return: -27.8%

Yieldco Terraform Global's delayed financial filings due to the bankruptcy of its former sponsor, SunEdison (SUNEQ), put it into technical default with some of its bondholders.  The company successfully negotiated a waiver extending the deadline for filing the delayed reports until December 6th. 

It was also reported that Indian company Greenko would pay $100 million for SunEdison's Indian assets along with the assumption of outstanding debt, including some nonoperational assets which SunEdison had agreed to transfer to Terraform Global upon completion in exchange for an advance payment prior to its bankruptcy.  It is not clear how the continuing dispute between the Yieldco and SunEdison over the use of the advance payment will affect this deal.

Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).

12/31/15 Price: $18.92.  Dec 31st Annual Dividend: $1.20 (6.3%).  Beta: 1.22.  Low Target: $17.  High Target: $27. 
8/31/16 Price:  $23.98.  YTD Dividend: $0.60.  Expected 2016 Dividend: $1.25  (5.2%). YTD Total Return: 30.4%

Clean energy financier and REIT Hannon Armstrong reported increased second quarter core earnings to $0.32 per share, easily enough to continue to support the current dividend of $0.30 per share and an expected increase to at least $0.34  per share in December.

Hannon Armstrong has a target of paying out 100% of core earnings in dividends and a policy of increasing the dividend once per year in the fourth quarter.  Since Core Earnings have historically always increased or held constant from quarter to quarter, they typically lag the dividend in the first two quarters, but exceed them in the second half of the year. 

I expect this year to be different.  Results in the first half of the year were boosted by a larger securitizations (selling assets to third parties rather than keeping them on the books.)  While producing strong earnings in the quarter when they happen, securitizations produce no ongoing income.  After raising $91 million in equity in June, the company will again return to placing more transactions on the balance sheet, a change which I expect to reduce core earnings in the third quarter before returning to growth in the fourth quarter. 

I expect my anticipated decline in third quarter earnings in early November to catch some investors by surprise.  Investors looking to buy the stock should wait until then.  Investors considering taking some gains may want to sell before the November announcement.

TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/15 Price: C$10.37.  Dec 31st Annual Dividend: C$0.84 (8.1%).   Low Target: C$10.  High Target: C$15. 
8/31/16 Price:  C$14.08.  YTD Dividend: C$0.586  Expected 2016 Dividend: C$0.88 (6.3%) YTD Total Return (US$): 50.4%

Canadian listed Yieldco TransAlta Renewables reported results "tracking toward the upper end of the guidance we provided for 2016."  The company's major South Hedland project continues on budget and on schedule for completion in mid-2017.  The company anticipates a further dividend increase when it is delivered.

Growth Stocks

Renewable Energy Group (NASD:REGI)

12/31/15 Price: $9.29.  Annual Dividend: $0. Beta: 1.01.  Low Target: $7.  High Target: $25. 
8/31/16 Price:  $8.97.    YTD Total Return: -3.4%

Advanced biofuel producer Renewable Energy Group reported strong market demand for biomass based diesel and increased sales, which were limited only by production capacity.  But per share earnings of $0.16 fell short of analyst's expectations, causing the stock to pull back.

Federal and state support remains strong, and analysts have been raising current year earnings estimates.  I believe the current pullback provides an excellent opportunity for short term gains before the end of the year.

MiX Telematics Limited (NASD:MIXT; JSE:MIX).
12/31/15 Price: $4.22 / R2.80. Dec 31st Annual Dividend: R0.08 (2.9%).  Beta:  -0.13.  Low Target: $4.  High Target: $15.
8/31/16 Price:  $4.99 / R2.90.  YTD Dividend: R0.06/$0.101  Expected 2016 Dividend: R0.08 (2.8%)  YTD Total Return: 21.0%

Software as a service fleet management provider MiX Telematics rose in its native currency, the South African Rand, but these gains were erased by the strong dollar.

Ameresco, Inc. (NASD:AMRC).
Current Price: $6.25
Annual Dividend: $0.  Beta: 1.1.  Low Target: $5.  High Target: $15. 
8/31/16 Price:  $4.78.  YTD Total Return: -19.2%

Energy service contractor Ameresco continued to report strong growth in revenue, earnings, and cash flow.   While the past few years have been disappointing, I believe that the company has returned to sustainable growth and expect the stock to continue to recover.

Final Thoughts

The broad stock market been very strong this year despite continued and increasing global uncertainty.  This is likely because US economy has appeared to be a lone bright spot.  Indications of future growth have been mixed however, and I believe a defensive stance is warranted.  While none of these stocks is the screaming bargain they were in the first quarter, the income stocks remain inexpensive and good defensive plays going forward.

While more sensitive to a weakening economy, the three growth stocks remain extremely cheap, especially REGI and MIXT.  These low valuations limit their downside should the broad market fall, while allowing for large gains if they catch investors' attention.

Disclosure: Long HASI, AMRC, MIXT,,  RNW/TRSWF, PEGI, EVA, GPP, NYLD/A, REGI, GLBL, TERP, GPRE

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 02, 2016

The Low Cow-bon e-Cow-nomy

Jim Lane

This month in Finland, a team of intrepid researchers herded one thousand European cows one-by-one into a glass “metabolic chamber” to measure their methane emissions, digestion, production characteristics, energy-efficiency, metabolism, and the microbial make-up of their rumens.

The Project is known as RuminOmics, but if it had been titled The Truman Show II: When the Cows Come Home, we wouldn’t have been a bit surprised.

The Cow Emission Crisis. No Kidding Around.

The ultimate aim of the study was to find an optimal, low-emission, high-yield cow, and the team noted in its premise that of all greenhouse gases produced by humans, five percent comes from cattle.

By most conventional measures, that’s more than the global aviation industry. So, when we consider the cost and intensity of the effort to develop sustainable aviation fuels, it adds perspective to this laudable effort to produce a Low Carbon Cow.

Specifically, 16 percent of greenhouse gas impact consists of methane, of which one third originates in cattle production: more than one billion cattle graze the planet, and each of them emit around 500 liters of methane every day.

The Research team

RuminOmics is led by the University of Aberdeen and funded by the EU; in all, ten other European research institutes, investigated the interaction between a ruminant’s genotype, feed, and the microbial make-up of the rumen, examining the role these factors played in the energy-efficiency of dairy cattle and their methane emissions. Cows’ daily feed consumption and milk production is measured and recorded, and the manure and urine produced is collected.

Food creates fuel

The researchers expected that that Finnish and Swedish cows would produce more methane than cows in other countries. “This is attributable to their feed which is dominated by silage, not by the climate.” Yet, results from the study indicate that “many cows with low methane emissions are inefficient due to the fact that they are unable to make use [of the energy] contained in fodder.”

So, it’s not simply a case of selecting cows with low emissions compared to the rest, or varying the diet.

Older and more productive cows emit less

Practice may make perfect, in this case. The researchers found that “relative methane emissions of a cow per production unit, kilo of milk or beef are reduced if the production level or production age are increased.” So, longer lives and better production conditions play a role. Lucky for the cows.

The genetics of low-carbon cows

The study identified areas in the cow’s genotype, the variation of which was linked to the amount of methane produced per kilo of milk produced. So, can a Super Low-Carb cow be identified and can this genotype be bred for.

Consider that noble alternative to the Holstein, the Jersey or the Thai Milking Zebu. For your consideration, the Carbonfree. Researchers are optimistic.

“We will investigate” said their report, “whether these genes affect the variation in the microbial make-up of cows’ rumen or other characteristics of cows such as the size of their rumen, production level of capability to use fodder.”

Making healthier milk

One other impact area of the study? How microbes in the cow’s intestine and rumen on their part play a key role in the functioning of the cow’s entire biological system.

Earlier this week in the Digest we looked at the impact of gut flora (the micro-biome) on human health and the relationship of nutrition and gut health, here.

But there might be a combination of nutritional advantage and progress on greenhouse gas emissions from this work. For example, researchers were targeting microbes to better understand how and why microbes in the cow’s intestine and rumen transform unsaturated fatty acids in fodder into saturated fatty acids in milk. 70 percent of the fats in milk comprises solid fats.

The Low Carbon Cow Standard

If researchers find impactful opportunities, we may find ourselves with the opportunity for a global Low Carbon Cow Standard. Well, it’s silly of course. But not completely.

Consider the climate advantages from, say, reducing cow emissions by half in 2050 compared aa baseline of say, 2005. That would be equivalent to the impact of the entire Sustainable Aviation movement around the world through 2050. And, we might well in addition see a healthier milk in terms of fat profile and nutritional content, or even taste and human digestibility.

So bring on those herds of Carbonfrees.

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 01, 2016

US Solar: Lawsuits, A Quiet Exit, and Grand Plans But Fewer Results

Lessons From SunEdison, First Solar, and SolarCity

by Paula Mints

SunEdison (SUNEQ)

Currently SunEdison faces at least 15 lawsuits. SunEdison, Terraform (TERP) and other defendants asked to have the cases against them consolidated.

Along with the lawsuits, from October 2015 through May 26 at least 20 security class actions have been filed against SunEdison its subsidiaries, officials and underwriters. Many of these actions relate to claims that investors were misled about the liquidity of SunEdison, et al. Meanwhile, GCL-Poly wants to buy SunEdison’s (MEMC) polysilicon business for $150-million and those in charge of selling off the company bit by bit are eager to nail this bid down.

Comment: Potential buyers aren’t just circling overhead they are diving swiftly in. Meanwhile, future investors in renewable funds should learn to think very carefully before investing the retirement funds of groups such as the Municipal Employee Retirement System of Michigan.

The solar industry remains volatile and despite ongoing growth is still subject to heartbreaking, dream shattering and retirement income depleting crashes.

Lesson: SunEdison stands as a stark lesson in solar industry bad behavior. Hubris encouraged Icarus to fly too close to the sun. Overtime too many solar companies have followed his path up and unfortunately met the same fate.

First Solar (FSLR)

In July First Solar finally pulled the plug on its crystalline ambitions by announcing it would shutter TetraSun and convert the manufacturing facility in Malaysia to CdTe production.

Comment: Well ... First Solar tried CIGS and quietly pulled the plug following at least two unsuccessful years and now it has less quietly exited crystalline manufacturing after a couple of years of assuring everyone that it would be very successful in this regard. As a-Si production
is almost nonexistent hopefully the company will now focus 100% on CdTe and continue with its world leadership in this regard.

Lesson: Hopefully First Solar has learned that shifting focus from its core technology focus just results in a shifted focus because it certainly has not resulted in revenue.

SolarCity (SCTY)

In SolarCity’s August earning call the company, meaning proud new parent/owner Elon Musk spoke enthusiastically about Silevo’s new custom BIPV product and basically ignored offering any details about manufacturing delays and manufacturing cost. SolarCity announced a gross  profit of $118.8-million for 2015, operating losses of $647.8-million and net losses of $768.8-million. SolarCity also lowered its installation guidance for 2016.

Comment: Hmmm. So, SolarCity’s Silevo acquisition has shipped nothing from its 1-GWp manufacturing facility and though it has produced nothing and shipped nothing is announcing a new custom BIPV product that will be more expensive to manufacture than the panels it has yet to produce. SolarCity loses money on its sales business. Daily there is an article or blog either announcing the SolarCity/Tesla merger as evidence of the genius of Elon Musk or, well, something entirely different from genius. Perhaps the genius is to continue announcing grand plans followed by delays in grand plans and to continue losing money while piling on the debt and expanding.

Lesson: The lesson is that the market loves a unicorn and will embrace one even if it is an illusion. Sometimes all one can do is watch in fascination.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

This article was originally published in the August 31st issue of  SolarFlare, a bimonthly executive report on the solar industry, and is republished with permission.

August 28, 2016

Why Only Ethanol?

Where are butanol and other substitutes for gasoline?

Jim Lane

A reader writes:

I’d hoped that the biofuels crowd would have gotten beyond ethanol by now.

The industry has made progress creating all kinds of specialty chemicals from renewable sources and more or less successfully brought them to market. There’s jet and diesel in commercial use whether or not they’re yet profitable.

However they have made zero commercial progress on anything other than ethanol for gasoline. All the major advances have involved better and better ways to crank out ethanol. I don’t see the auto industry co-operating by switching to E85 or E100 technologies, particularly when we’re in the midst of a very long term bear market for oil.

Is there some fundamental reason that the automotive biofuels people haven’t shifted to butanol or iso-butanol or some other compound that would be more compatible with gasoline and the present highly evolved gasoline engines? Is there some fundamental thermodynamic barrier that makes conversion of biomass to butanol impossible?

So, what happened?

For sure, the quick answer is “new fuels are on the way” — Gevo is producing in small quantities, but it is producing at a commercial-scale facility and selling fuels. Butamax has been less visible in terms of timelines, but they also produce isobutanol from corn sugars. And Global Bioenergies is making progress with a renewable gasoline made from isobutene.

Why so few technologies, why so little commercial progress on gasoline substitution, excepting ethanol?

The chemistry of value

The answer lies to some extent in what we might term “the chemistry of value”. Theoretical yields for making isobutanol from sugars, for example, hover in the 41 percent range, while theoretical ethanol yields are in the 51 percent range. Yields for making isoalkanes and aromatics from sugar— typical components of gasoline — are in the low 40s, too.

Right now, the September ethanol contract at CBOT is pricing at $1.46 while the RBOB gasoline price is pricing at $1.49.

So, there’s a 2 percent gain in the price to compensate for a 20 percent drop in the yield.

Now, you probably at this stage would mention the higher RIN values associated with advanced biofuels. Right now, D5 advanced biofuel RINs are selling for roughly the same price as D6 corn ethanol RINs. Absolutely, you get 1.3 RINs for a gallon if isobutanol vs 1.0 RINs for a gallon of ethanol, because of the higher energy density of butanol, but it washes out when you take into account the lower yield in gallons.

So, right now, the market is not rewarding isobutanol makers with a premium price in the road transport market. Sadly, not in the jet fuel market, either.

The two bright spots

Areas of opportunity?

One is the cellulosic fuel market. There is a substantial set of premiums relating to carbon incentives available for cellulosic feedstocks. But, the processes to produce substitutes for gasoline, besides ethanol, from cellulose are still in the R&D phase.

Another is the marine market. There, boat owners, for a variety of reasons generally going back to boat construction materials, prefer an ethanol-free product. In this case, isobutanol is not competing against E10 ethanol-gasoline blends. Rather, they are competing against straight gasoline.

The marine opportunity for isobutanol

We have direct evidence that isobutanol is selling in 12.5 percent blends for a “more than 50% premium” compared to E10 fuel (we reported on this here).

Right now, that’s around $3.23 per gallon.

Now, one of the attractive uses of an isobutanol fuel in the marine sector is that marinas are not obligated parties under the Renewable Fuel Standard, but isobutanol is a qualifying fuel. Hence, a marina owner can blend a gallon of renewable fuel and detach the RIN that comes with every gallon of renewable fuel, and sell it into the marketplace.

Those RINs are selling today at $0.89 each, and you get 1.3 of them for every gallon, as we mentioned above. That’s another $1.16 in value.

Total value created, $4.39 per gallon. That’s excluding value created from a bushel of corn with the distiller’s grains — that’s just the fuel fraction.

Gevo’s production price?

Gevo (GEVO) recently affirmed that they remain on track to reach a production cost of $3.00-$3.50 per gallon for isobutanol by the end of the year — as long as corn doesn’t get more expensive.

How much of that retail value goes to the producer?

Now, remember that the ExpressLube value we mentioned is the retail value, and the retailer gets that RIN, as well, although its value contributes to the price a wholesaler will pay for the product. Gevo says that it a net market price of $3.50-$4.00 per gallon for isobutanol, so long as distiller’s grains do not lose value.

The Bottom Line

The marine market is where its at, for isobutanol, in the near-term. The economics on road transport furls have to improve a bit before we are going to see more substitutes for gasoline, besides ethanol.

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 27, 2016

Green Plains Nabs 3 Ethanol Plants On The Cheap

Jim Lane

In Nebraska, word has arrived from Green Plains (GPRE) that it will purchase the Madison, Ill., Mount Vernon, Ind. and York, Neb. ethanol facilities from Abengoa (ABGOY) Bioenergy with combined annual production capacity of 236 million gallons per year, for approximately $237 million in cash, plus certain working capital adjustments.

The company said it was the successful bidder on three ethanol plants for sale conducted under the provisions of the U.S. Bankruptcy Code.

Upon completion of the acquisitions, Green Plains will own and operate 17 dry mill ethanol facilities with combined production capacity of nearly 1.5 billion gallons per year. With ADM (ADM) putting US ethanol assets on the sale block, the acquisition leaves Green Plains and POET alone at the top in terms of US production capacity.

It was less than five years ago in 2011 that we reported:

“Green Plains Renewables says that the days of snapping up cheap ethanol assets are over, as all opportunities for buying up the right equipment at the right location for under $1 per gallon of installed capacity have been bought up.”

Yet, the acquisitions in this case came at that magic $1 per gallon figure. According to CARD, the return over operating costs for ethanol plants, currently, is hovering between $0.40 and $0.50, suggesting that the payback time for this investment will be between 2 and 2.5 years.

BD Green Plains CARD 082416

A note on CARD operating profit forecasts. CARD says, “This return is calculated as the difference between the revenues from ethanol plant outputs (ethanol and dried distillers grains with solubles [DDGS]) and the costs of variable production inputs (corn, natural gas, and other costs such as enzymes, labor, electricity and water).” More about those projections and assumptions here.

The road to 1.5 billion gallons

2010: Green Plains acquired Global Ethanol’s two operating ethanol plants located in Lakota, IA and Riga, MI with a combined annual production capacity of approximately 157 MGy. The acquisition increased Green Plains’ capacity by 31% to approximately 657 Mgy. The company paid approximately $169.2 million, including approximately $147.6 million for the ethanol production facilities and the balance in working capital.

2011: The company’s round of expansion closed with the purchase of the 55 million gallon per year Fergus Falls ethanol plant for $55 million, which at the time confirmed its status as the fourth-largest ethanol producer behind POET, ADM and Valero.

2013. Green Plains acquired two ethanol plants of BioFuel Energy Corp. for approximately $101 million, plus working capital at closing, from an entity composed of its lender group. Green Plains intended to fund the purchase with approximately $77 million in term debt and the balance in cash. The ethanol plants are located in Wood River, NE and Fairmont, MN. The two facilities have a combined annual production capacity of approximately 220 million gallons.

2015. Green Plains acquired Hereford Renewable Energy, LLC for approximately $93.8 million. The transaction value included $78.5 million for the ethanol production facility with the balance for working capital. The transaction is expected to close this month subject to customary closing conditions and regulatory approvals. The facility is a Lurgi-designed, ICM-modified ethanol plant with approximately 100 million gallons per year of production capacity, a corn oil extraction system and other related assets.

2015. Green Plains acquired an idled ethanol production facility in Hopewell, Virginia, located approximately 20 miles south of Richmond, from Future Fuels LLP. The company paid $18.25M for the capacity. Operating at full capacity, the facility’s dry mill ethanol plant will increase the company’s annual production capacity by approximately 60 million gallons to nearly 1.1 billion gallons per year. Production is expected to resume by the end of the year and corn oil processing is expected to be operational during the second quarter of 2016.

2016. Still on the hunt. Green Plains is taking advantage of low investor interest in biofuels, we reported, thanks to depressed crushing margins. The company is on the hunt to acquire new assets as well as expand production capacity organically, we reported, despite its own weak performance and rising supplies. Even with weak oil prices, CEO Todd Becker said that international demand for US ethanol has not slumped off and instead expects total exports this year to surpass last year, perhaps even reaching 1 billion gallons.

Consolidation

There’s continuing consolidation in the corn ethanol space. Last year, Aventine merged into Pacific Ethanol. The previous September, Flint Hills Resources acquired Southwest Georgia Ethanol’s plant in Camilla, Georgia, the company’s fourth acquisition in a one year period. The company purchased an Iowa plant from Platinum Ethanol. Since then it had begun retrofitting a Southeast Nebraska plant and bought out Petrologistics.

More Consolidation on the Way?

Yes, ADM has put US-based ethanol assets on the block.

We reported earlier this month that ADM now expects to receive bids by the end of August following presentations to seven potential buyers. Half of the company’s 1.8 billion gallons of ethanol production occurs at its three dry mills. Weak ethanol margins were among the reasons for the company failing it hit analysts’ expectations for Q2 in its reporting this week. But we are not expecting the assets to be sold at the $1 per gallon mark and, given that Green Plains is going to be absorbing this set of plants, we’re doubtful that they will be paying top dollar in an auction for ADM’s assets.

Get strong, the Green Plains way

We looked at the Green Plains growth story in November 2015, here, and wrote of “lessons learned”:

1. Get a lead product that’s a platform for a company. Green Plains began as a one-horse ethanol producer with two products, corn ethanol and distillers grains. There were unanswered questions at the time about the market acceptance of the products, the viability of the sector, and whether Green Plains could scale to industry-leading size, and when. They chose, in corn ethanol, a product that can support a company, rather than ease a burn rate and provide some hope to investors. There are $1 million lead products and $100 million lead products and $1 billion lead products. The first provides hope and not much more, the second eases a burn rate, the latter

2. Gain strength by applying advanced technologies to advance the business proposition. Today, Green Plains has more than a billion gallons in ethanol production capacity, and is making money even in a tough ethanol market; it has spun off Green Plains Partners (GPP) into a successful IPO and reported its first dividend to shareholders in that venture this week; it has diversified into corn oil and is working hard on monetizing its CO2 production. It is acquiring terminal capacity as well as production capacity.

Reaction from Planet Green Plains

“We continue to focus on making strategic investments in high quality assets as we expand our production footprint,” said Todd Becker, president and chief executive officer at Green Plains. “The Madison and Mount Vernon plants will give us access to the Mississippi River, supporting our new export terminal planned in Beaumont, Texas. In addition, we will broaden our product offering globally with industrial alcohol production at the York plant. These acquisitions further our commitment to deliver long-term value for both Green Plains Inc. and Green Plains Partners shareholders.”

Closing details

The company’s acquisition agreements are subject to review and approval by the U.S. Bankruptcy Court for the Eastern District of Missouri at a hearing currently scheduled for Aug. 29, 2016. The acquisitions are expected to be complete no later than Sept. 30, 2016, subject to regulatory approval and customary closing conditions, at which time the ethanol storage and transportation assets will be offered to Green Plains Partners.

Green Plains Inc. is a diversified commodity-processing business with operations related to ethanol, distillers grains and corn oil production; grain handling and storage; a cattle feedlot; and commodity marketing and distribution services. The company processes 12 million tons of corn annually, producing over 1.2 billion gallons of ethanol, approximately 3.5 million tons of livestock feed and 290 million pounds of industrial grade corn oil at full capacity. Green Plains owns a 62.5% limited partner interest and a 2.0% general partner interest in Green Plains Partners LP (NASDAQ:GPP), a fee-based Delaware limited partnership that provides fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage tanks, terminals, transportation assets and other related assets and businesses.

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.

Next Page >>>




Search This Site

Share Us







Flipboard

Subscribe to this Blog

Enter your email address:

Delivered by FeedBurner


Subscribe by RSS Feed



Archives

Certifications and Site Mentions


New York Times

Wall Street Journal





USA Today

Forbes

The Scientist

USA Today

Seeking Alpha Certified

Seeking Alpha Certified

Twitter Updates