One of biofuels’ hottest companies aims to accelerate path to break-even; is a shortfall in gallons produced in Q2 meaningful?
In Texas, KiOR (KIOR) reported a Q2 loss of $38.5M, compared to a Q1 loss of $31.3M. on revenues of $239K, up from $71K in Q1. Net loss for the second quarter of 2012 totaled $23.0 million, or $0.22 per share.
The biggest news coming out of the quarterly results is that the company is looking at an additional 500 dry ton/day facility, dubbed “Columbus II”, as an intermediate step between now and building its 40 million gallon plant at Natchez. That would build potential capacity at Columbus to 24 million gallons, overall at KiOR’s stated 72 gallon per ton yields.
According to the company, the capex for the facility is in the $177M to $225M range and the unsubsidized cost of production would be in the $2.60 to $2.80 range. The switch is prompted, according to CEO Fred Cannon, by advances from the R&D team in utilizing other feedstocks in addition to yellow pine.
According to KiOR, the construction phase would last around 13 months and reduce the time needed to bring the company to cash-positive.
“I am happy to report that Columbus has made significant operational progress and is continuing to build its on-stream performance and reliability,” said Fred Cannon, KiOR’s President and Chief Executive Officer. “In addition to making our first shipment of cellulosic gasoline in the second quarter, we more than doubled the run time of our core technology, the Biomass Fluid Catalytic Cracking Unit (BFCC), to 43% in the quarter, up from 20% in the first quarter.”
“In total,” Cannon continued, “we shipped over 75,000 gallons of cellulosic fuel from Columbus. The BFCC unit is running now and producing high quality oil that we are preparing to upgrade into fuel and ship to our customers. Over the next few months, we will focus on further building that progress and we look to push the facility closer to its nameplate capacity.”
Overall, on a per gallon basis, the company was netting some $3.18 per gallon for its gasoline and diesel shipments.
Let’s recap on the KiOR’s past and future milestones.
Q4 2012. The plant was mechanically completed and commissioning began. At the time, the company tipped that it would begin shipping fuel in Q1 and complete the commissioning process by the end of the first half.
Q1 2013. The plant shipped its first cellulosic diesel though it was a minimal 5,000 gallons of cellulosic diesel – right before the end of the quarter. At the time, the company affirmed guidance that it would produce in the range of 3-5 million gallons of cellulosic fuel for the year. Groundbreaking for the second commercial facility, in Natchez, Mississippi, was tipped for 2H13 and expectations were raised that capacity there might be increased from 40 million gallons to 50 million gallons per year. The core technology, the Biomass Fluid Catalytic Cracking Unit, reaches 20% run-time in the quarter.
Q2 2013. The plant ships its first cellulosic gasoline, and reaches 43% run time with its core Biomass Fluid Catalytic Cracking Unit, including a 30-day run announced in early July that occurred in June.
Steady-state operations. Last month we wrote: “The gallonage for Q2 is not nearly as important as the reaching of steady-state operations,” and we continue to emphasize that reaching continuous operations on a regular basis will provide confirmation of a successful design at Columbus – and point towards expanded success when the 40 million gallon Natchez facility is completes. The achievement of 43% run-times is encouraging but there’s far more progress to be made and Q3 will be highly important.
Q3 2013. This is the big, big quarter. As we wrote in July, “that’s where we’ll need to see the production yields move into the 1M+ range for the quarter, if the Natchez project is going to look attractive to providers of lower-cost financing.”
Confusing in the Q2 release was the announce that the company had shipped 75,000 gallons of cellulosic fuels for the quarter, well below the 300,000-500,000 guidance the company gave in May. Why confusing? While the company tipped back in July that it has only commenced shipping fuels on June 28th – obviously, the reason for the low gallonage by quarter-end we’re not sure here at the Digest how to square the run-time increases with the low shipments.
The plant’s nameplate capacity is 2.75 million gallons per quarter (or, 11 million gallons per year), and CEO Fred Cannon indicated that the core technology, the BFCC (biomass fluid catalytic cracking) unit had 43 percent uptime in the quarter. Accordingly, we would have, ordinarily, expected 1.18 million gallons is the plant had been running at full capacity. So, we’re left to surmise that about 1,000 tons of wood were processed during the quarter a fraction of the plant’s capacity.
Why? Possibly, to conserve on cash while run-time was increased.
Another possibility is that the BFCC unit produced far more than 75,000 gallons of intermediates but they were not upgraded into fuels for cost, quality, customer or logistic reasons.
Another possibility is that the yields out of the BFCC unit were lower than the 72 gallons per ton that the company has aimed for making it possible to have high run-time but low output. The company has tipped that, having achieved continuous operation by the end of June, it will focus on increasing output in Q3, and yield optimization in Q4.
Suggesting that a combination of low yields, reduced inputs and Q2 downtime were the trio of culprits for the unexpected low gallonage for the quarter. For definitive answers, we’ll have to wait and see how the crucial Q3 shapes up.
Ben Kallo at Baird:
We reiterate our Neutral rating and $6 price target following KIOR’s Q2 earnings call. KIOR successfully shipped its first commercial batch of cellulosic gasoline, increased run times at Columbus, and is considering a Columbus II plant in an effort to shorten the amount of time needed to become cash flow positive. Despite shipping cellulosic fuel, capital constraints remain a major overhang. Q2 misses estimates. Capital need overshadows the positives. KIOR ended the quarter ~$11.5M of cash and will need to raise capital for the construction of Columbus II or Natchez. Management has indicated a 1:2 equity/debt ratio for a potential capital raise. We need to see a successful capital raise and additional progress at Columbus to become buyers of the stock.
Pavel Molchanov at Raymond James:
KiOR reported a 2Q net loss of $0.36 per share, vs. our $(0.29) estimate and consensus’ $(0.34), reflecting higher plant startup costs. This was the second quarter with sales from the Columbus plant. Revenue jumped 3Q sequentially, to $239,000, though production volumes were still fairly slim. (Recall, KiOR announced on July 1 that continuous operations have been achieved, meaning that 2Q results cover only a partial quarter of steady-state production.) On the balance sheet, cash remained stable at $11 million; there is additional borrowing capacity under a bridge loan, though a sizable financing round has long been telegraphed by management, and we anticipate it taking place over the next several months. Columbus II Option Offers Lower Cost, Lower Risk. Building a copy of the existing plant would be able to use existing engineering while incorporating the latest catalyst improvements and potentially cheaper feedstock. The lead time to completion may be several months shorter, and startup would be aided by having an ex
perienced team already at the plant.
The bottom line.
Reaching continuous production was an important milestone moving from commissioning in late 2012 to continuous production in Q2 is monumentally faster than some of its peers in cellulosic and/or advanced biofuels. Confusion over production of intermediates and shipment of fuels not withstanding. But it all sets up for a hugely important Q3 that’s when KiOR will need to show that it can raise production in order that it can raise money for Natchez.