In New York, in the wake of a $37 million Q1 loss in its sugar unit, Bunge [BG] CEO Soren Schroder, who took the reins of the company in June, announced yesterday that the trading giant is commencing what he termed a “thoughtful comprehensive review” for its sugar business, including a potential sale of all the assets.
The company, which announced a $137 million overall quarterly loss, after posting a Q4 loss of $599 million in June. The Q4 loss included write-downs and charges of $683 million, including a $327 million write-down in its sugar and bioenergy unit.
Bunge’s sugar woes
The cause of the troubles? After buying five sugar mills in 2006 and entering the sugar business in 2006, Bunge has struggled along with the entire sector in the face of low sugar prices, which declined to a low of 16 cents a pound (the May 2014 NYMEX sugar contract has since recovered to $0.183, but apparently not enough to convince Schroder of the long-term opportunities in sugar. The sugar business had swung into losses starting with the forth quarter, losing $49 million in the face of falling ethanol and sugar prices.
The improvement in this quarter was slight and, though Bunge projected a profit in 2014, it described its $8-$10 per tonne profit target as “difficult.”
Brazil-wide output troubles
In addition to price troubles, the sector has been hit with poor cane yields with Bunge finance director Drew Burke, the Bunge finance director noting that “Last year’s average ATR [cane sugar concentration] was near historic lows and this year it is expected to be below that level,” and indicated that delays in the harvest would also provide challenges in terms of getting all the cane off the fields.
According to a Reuters report, sugar output in Brazil has already been trimmed nearly five percent from a high of 690 million tonnes, as some 40 smaller mills have been forced to shut down, or have been consolidated into larger operations.
The shift from sugar? What does it mean for partners like Solazyme and Cobalt
The company did not discuss its new directions in detail as it announced its quarterly results except to say that it had not had specific discussions with any buyers. Speculation from observers ranging from outright sale of the entire unit. to a sale of selected assets as Bunge reduces exposure, to the shutdown of capacity to stem the flow of losses.
The announcement puts more strategic light on Brazil for advanced biofuels which is recent years has been considered a haven for potential collaboration between US technologies and Brazilian producers but often finding deployment challenges as both early-stage advanced technology developers, as well as cash-strapped Brazilian operations struggled to form capital for large-scale deployments of new technology.
One bright spot, to date, has been the sustained entry of Bunge into the sugar business and especially its plans to add advanced biofuels and especially high-value chemicals and tailored oils into its product mix.
Bunge and Solazyme [SZYM]
This past summer, Solazyme and Bunge broke ground on a their 100,000 metric ton renewable oil production facility adjacent to Bunge’s Moema sugarcane mill in Brazil. Construction started on schedule and the plant is targeted to be operational in the fourth quarter of 2013. It will service the renewable chemical and fuel industries within the Brazilian marketplace and will initially target 100,000 metric tons per year of renewable oil production.
A new Bunge agreement signed at the end of last year will expand the joint venture-owned oil production capacity at Solazyme Bunge Renewable Oils from the current 100,000 metric tons under construction in Brazil to 300,000 metric tons by 2016 at select Bunge owned and operated processing facilities worldwide.
In a recent quarterly report, Bunge posted $2.395 billion in edible oils sales, representing 1.692 million tons of product sold at $1,415 per metric ton. In that context, this deal represents $424 million in potential revenues at current prices, using the average edible oils prices that Bunge is currently generating.
Bunge and Cobalt
Last October, Bunge’s innovation arm invested an undisclosed amount in the Series E funding round for California-based Cobalt Technologies and Bunge aid at the time that it anticipates introducing the biobutanol technology in its sugarcane mills. The companies are working Rhodia to produce n-butanol from bagasse at a pilot facility in Campinas.
Last summer, Cobalt Technologies and Rhodia announced they would begin joint development and operation of a biobutanol demonstration facility in Brazil. The Cobalt/Rhodia plant is planned to utilize sugarcane bagasse to make n-butanol; bagasse is used at sugar mills to provide process energy to drive the mill and to supply power to the local grid; the Cobalt project will utilize that fraction of the bagasse that generates power for the grid, or any residual biomass that is burned as waste.
Work was scheduled to begin in August 2012 and move to a mill site in early 2013 for integration testing. Operational testing at the demonstration plant was expected to be completed by mid-2013. The exact production capacity of the plant was not disclosed.
Not exactly a fire sale
Bunge bought the assets for $1.5 billion and CEO Schroeder said that the had a “replacement value” today of $3 billion which indicates that the company is not exactly in a “desperate to sell at any price” mode at this time. At the same time, despite the losses, Bunge stock has been riding high, with shares recovering from a low of $69.00 in June to reach $80.11 in yesterday’s trading.
Support from the Brazilian government
This year, substantially good news came from the Brazilian government when it announced that it plans to invest $2.85 billion in renewable energy and biofuel technology research. The funds were specially pointed towards support for companies like Bunge Ltd. and Petroleo Brasileiro SA to develop high-margin chemicals and increase ethanol output. Brazil is seeking to be a leader in next generation biofuels development after a decade of underinvestment in research.
Expanding in soy, biodiesel
At the same time that its sugar and ethanol operations are in doubt, Bunge is still growing its biodiesel unit in Brazil. In March, Bunge inaugurated its new biodiesel factory in Nova Mutum, Mato Grasso, which has a capacity of nearly 110,000 gallons of biodiesel per day from soy, or 40 million gallons per year.
The bottom line
In hindsight, you can see the overall wisdom of Bunge’s strategy in advanced biofuels.
The Solazyme rel
ationship not to mention the stake in Cobalt had taken Bunge from a typical Brazilian sugarcane ethanol play to a unique and dynamic venturist looking to connect its sugar and oil trading operations, through biotech that converts low-cost, renewable sugars into tailored, high-value renewable oils.
Will Bunge, in fact, hold on, in time reap the benefit from its substantial investments of time and money? We suspect they will – not only because of the company’s confidence in its strategy, but because it may be hard to find suitors for all these assets at one time, and with its advanced bioenergy investments at such a critical juncture.
If Bunge unloads assets, it may find reasons to hang on to Moema and at least one other plant, to reap the benefits of the connection between low-cost sugar and high-priced oils that it has sought.