This week, Gevo (GEVO)
reported its year-end results, generally in line with
expectations, with a $0.35 loss per share and $24.6M in the bank.
Given the company’s rate of progress with isobutanol, the cash
burn rate, the low share price, and high prices for ethanol — the
company announced that it is “transitioning the Luverne plant to
the production of both isobutanol and ethanol…Producing both
ethanol and isobutanol allows Gevo to fully utilize the Luverne
plant and increase cash flow as Gevo continues to commercialize
its isobutanol production capabilities.”
“Our original vision was to focus our efforts on one product,”
said CEO Pat Gruber. “However we now are confident that we can
leverage the flexibility of our technology and more fully utilize
all the operating units in the plant to produce ethanol
simultaneously with isobutanol. Needless to say, the expected
additional cash flow is a benefit as we work to maximize the
learning per dollar as we scale up our technology.
“Therefore, we plan to run three of our fermenters to produce
ethanol, while the fourth fermenter will remain dedicated to
isobutanol production. We are calling this configuration “side by
side”, meaning both ethanol and isobutanol could be produced
Rob Stone and James Medvedeff, Cowen & Co:
The economics now favor, and the
science now enables, concurrent production of isobutanol and
ethanol at Luverne. However, we believe ramping to full nameplate,
regardless of configuration, is still at least several quarters
Luverne is shifting to concurrent
production of ethanol and isobutanol, to take advantage of current
wide ethanol spreads. The initial mix will be three fermenters
producing ethanol, one producing isobutanol. We believe this
demonstrates the flexibility of the GEVO technology, and
highlights successful isolation and eradication of sources of
infection. It may have been influential in attracting the two
licensing LOIs signed since October. Important side benefits
include more stable flows of corn mash, water recycling, and
solids removal (animal feed) from the plant, the opportunity to
optimize operations at higher production rates, and reduced cash
Mike Ritzenthaler, Piper Jaffray
The decision to produce ethanol
‘side-by-side’ with increasing isobutanol production rates will be
controversial – but ultimately we view as a positive for cash
(with spot ethanol EBITDA margins >$1/gallon) and provides more
stable operating parameters. This will further aid isobutanol
optimization efforts that have seen ~71% of target gallons per
batch and a lift to 1-2 batches per week on average (from 1-2
batches per month in December). We are adjusting our estimates due
to incremental ethanol sales that we did not previously factor
into our model.
We expect ethanol production to start
in mid-May and reach a 15k gallon/year run-rate starting in 3Q13,
resulting in FY2014 Sales of $45 million. Ultimately, however, we
see ethanol production at Luverne tailing off in 1H15 as
isobutanol continues to ramp. This results in FY14E revenues of
$45.4 million (from $14.5 million) and ($20.7) million in EBITDA,
from ($36.5) million previously.
This should make the technology
package more attractive to potential licensors while investors
should welcome the cash flow attributes of ethanol production as
isobutanol production ramps, in our view. Our price target is
based on 5x our FY15 EBITDA estimate (from FY15 EBITDA discounted
to 2014), with $0 million in net debt and 49 million shares.
Progress with the Process
Gevo reported in this cycle the following process improvements:
• Commissioned a proprietary system to sterilize corn mash.
• Proven that its two key technologies, our isobutanol producing
yeast and our GIFT system, work at commercial scale utilizing
full corn mash to produce isobutanol.
• Achieved up to 71% of our targeted gallons per batch goal.
• Produced isobutanol that met quality targets.
• Demonstrated that the company can manage infections during
fermentation, achieving over 100% of goal, although not with the
consistency or reliability that we need.
• Operated all of the fermenters and GIFT systems and they
performed as expected.
• Begun the integration of the water recycle streams, and
achieved greater that 90% water recycle in fermentation.
The Licensing Option
On March 6, 2014, Gevo announced that Porta Hnos signed a letter
of intent to become the exclusive licensee of GIFT in Argentina to
produce renewable isobutanol. Porta is a 131 year old family owned
company in Argentina that produces liquor, vinegars and has a 120
m3/day corn ethanol plant (approximately 12mgpy).
In addition, Porta has designed and built two 250 m3/day ethanol
plants for others and they are working on two more ethanol plants
for 2014. Half of all current ethanol plants in Argentina were
designed by Porta, and they have a joint venture with Alpha Laval
to provide separation and evaporation expertise.
Offtake and testing: the Q4 highlight reel
In Q4 2013, Gevo began selling bio-isooctane for specialty fuel
applications such as racing fuel. Gevo’s renewable isobutanol from
Luverne, Minn. is being converted into bio-isooctane at its
biorefinery at South Hampton Resources. Initial volumes are being
used for testing purposes.
Also in Q4 2013, the U.S. Army has successfully flew the Sikorsky
UH-60 Black Hawk helicopter on a 50/50 blend of Gevo’s ATJ-8
(Alcohol-to-Jet). This testing is being performed as part of the
previously announced contract with Gevo to supply more than 16,000
gallons to the U.S. Army. Gevo’s patented ATJ fuel is designed to
be the same as petroleum jet fuel, and to be fully compliant with
aviation fuel specifications and provide equal performance,
including fit-for-purpose properties.
In December, Gevo announced that Underwriter Laboratories
approved the use of up to 16% isobutanol in UL 87A pumps,
providing all of the service stations across the country with the
assurance that isobutanol blended gasoline will work in their
current gasoline pumps without the need to purchase new equipment.
The Move to Ethanol
Let’s be frank about this — for a long time, Gevo has taken a dim
view of the first generation biofuels it now proposes to produce.
“1st generation biofuels created conflict,” the company noted
earlier, citing that refiners lose volume, pipeline companies lose
volume, customers get lower energy fuel and ethanol producers
struggle with the blend wall, with the push for ethanol causing
The company switched “back to ethanol” once before, in fall 2012,
at the time its contamination difficulties were becoming more
apparent at scale. “Gevo has successfully demonstrated commercial
scale isobutanol production, has navigated idiosyncratic
biocatalyst challenges in past scale-ups, and elected to utilize
the Luverne asset while the contamination controls are optimized,”
Piper Jaffray analyst Mike Ritzenthaler wrote in 2012. Adding,
that “the biologists are working to improve the production strain
and fermentation parameters to enable better control of competing
reactions, a process that in our experience will take a handful of
months at most to optimize.”
“The switch to ethanol does not reflect any change in strategy,”
Ritzenthaler added. “Management is electing to operate the
facility rather than conduct the strain improvement at such a
Having noted all that, Gevo has been consistent in touting the
“carbohydrate market” and superior US productivity in this regard,
compared to the oil market — as much or more as they have waded
into the ethanol-or-isobutanol question.
Doubtless, given normal price environments and steady-state
operations in ethnaol and isobutanol, they would generally produce
isobutanol. The switch to ethanol reflects the “Market opportunity
driven by the spread between carbohydrate and oil” as they have
detailed in many presentations. With oil topping $100 and corn
sub-$5, Gevo is clearly seeing that the time to produce alcohols
is now — and if isobutanol is not yet ready for immediate
scale-up, the other alcohol will do nicely.
But there’s a caveat in their strategy. Spreads are high, but
they vary, and often quickly. CEO Pat Gruber has been out front
with the industry on warming about the dangers of selling the
“same” molecule with the “same” price and performance, as this
Further to that point, one has to consider how much damage has
piled up on the Gevo “brand” over the past two years, with the
well-publicized difficulties in getting to full production at
Luverne — while discussions of a conversion at Redfield seem to
have pushed off into the distance. On the potential for selling
into markets with a damaged brand, Gruber was stark in his
Gevo’s legion of admirers will be quick to point out that the
company’s struggles are not untypical for introducing
first-of-kind technology, and they are temporary in nature —
causing delays rather than failure — and that the brand of the
company is strong with partners like Coca-Cola and the US Army.
With a strong brand, Gruber took the view that even a “same”
product at the “same” price and performance could have very strong
sales prospects, here.
The delays with isobutanol
The delays have been, for its investors and stakeholders,
frustrating to say the least. Two years ago, the company was “on
track for isobutanol production in 2012″ and expected to be
bringing Redfield online in 2013.
We didn’t hear much back then about the time delays associated
“Learning to run a ‘new-to-the-world’ process at the scale of our
Luverne plant with 1 million liter fermenters requires a lot of
work. Working through the issues that arise creates the crucial
know-how needed for steady full scale production, expansion, and
licensing,” as Gevo reflected on its progress in its latest
The company’s strong management team — especailly in managing
start-ups with first-of-kind-technology — caused many to
underestimate the challenges of scaling this technology. “While
every novel process startup contains some uncertainties, we
believe Gevo has an outstanding team in place with the optimal
expertise needed to understand and mitigate risks – and meet or
exceed important production milestones between now and the end of
Piper Jaffray analyst Mike Ritzenthaler wrote in May 2012. He
added in July: “Based on our background and observations, we
believe startup is proceeding remarkably well, and we are
confident that Gevo’s team can quickly handle normal startup
issues, should they arise.”
The biojet options
The company’s struggles with isobutanol have to some extent
overshadowed its successes with biojet fuel — passing Army tests
with flying colors, and proceeding rapidly towards an adoption of
an approved ATJ (alcohol to jet) fuel spec in the not-distant
future. The company’s South Hampton demonstration plant has been
supporting those efforts.
The isobutanol option
The company would like to produce all-isobutanol no doubt about
it: as Pat Gruber pointed out, “isobutanol and its derivatives can
serve multiple large markets.” But here’s the caveat, he warned in
2013: “low cost isobutanol is the enabler,” and frankly, Gevo’s
yields and throughput is keeping its isobutanol out of all those
The Bottom Line: the vital importance of getting back to
Let’s be clear about restating this: Gevo has never spun a story
about a “single molecule” strategy. But they simply have not
showcased their ethanol capabilities in this respect. Ethanol has
been a sub-optimal fallback. They’ve been much more excited about
opportunities with isobutene and renewable jet fuel, for example.
Why? As Gruber warned the industry at ABLC 2012, “drop-in fuels
can realign value chains. Refiners gain volume, pipelines too.
Downstream logistics costs decrease, consumers get a better
product, and there’s no blend wall.”
As we outlined in the Bioenergy Project of the Future series,
staring with a first-generation ethanol plant is a great idea.
Stating with that technology a while while other technologies are
introduced: that’s fine, for a while, But falling back on
first-generation fermentation is not a demonstration of production
flexibility, in a 19 million gallon facility that is unlikely to
be able to compete with the likes of POET and its fleet of 100
million gallons plants, based on economies of scale.
So, this is a temporary move, based around cash conservation,
aimed according to analyst estimates at improving EBITDA by an
estimated $15.8M in 2014. Coincidentally, about the same amount of
capital the company parted with in early 2013 in a $15M share
buy-back program. The company also takes the view that it helps to
solidify its licensing story, by giving licensees a side-by-side
production opportunity in isobutanol and ethanol.
We’re a little skeptical, here in Digestville, about the
long-term value of that strategy. Short-term, while the company
works through what is proving to be a 3-year scale-up effort, it
makes sense. Should ethanol prices hold up, it will certainly help
with earnings and cash – though it will tie-up talent, working
capital, and divert the focus to some extent. We’ll see shortly
how Gevo navigates those waters — as it continues to make steady,
if slow, progress towards its game-changing isobutanol ambitions.
Jim Lane is editor and
publisher of Biofuels Digest where this
was originally published.
Biofuels Digest is the most widely read Biofuels daily read
by 14,000+ organizations. Subscribe