The renewable chemicals and biofuel company Gevo, Inc. (GEVO: Nasdaq) is scheduled to report fourth quarter 2013 financial results on March 25th. Analysts have a couple of weeks to prepare questions for management during the earnings conference call. Top on the list has to be got to be about Gevo’s recent agreement to license its novel isobutanol technology to Porta Hnos of Argentina. Porta Hnos is a well established ethanol producer so if the license is consummated, it is expected that this partner has the ability to execute on plans to produce isobutanol for the South America market.
Isobutanol is popular as a solvent, but it has a plethora of applications across several industries. It is used in paint solvents, varnish removers and automobile polish. Importantly it is a building block for plastic bottles and synthetic textiles. It even has a use in food production as a flavoring agent. That all adds up to the kind ‘very large market opportunity” that generates strong sales and profits.
Gevo has already begun production for other markets and the company has several off-take agreements and supply agreements in place, including Sasol Chemical Industries and Land O’Lakes Purina Feed. The company has also been diligent in putting together development agreements with high profile customers like Coca Cola and the U.S. Army to build the market for its isobutanol made from the fermentation of sorghum, barley wheat or corn.
In December 2013, Gevo announced successful test flights by the U.S. Army with a Black Hawk helicopter fueled up with a 50/50 blend of Gevo’s alcohol-to-jet fuel and conventional jet fuel. The test was part of the Department of Defense program to get all of its craft certified to operate on alternative fuels. Gevo already had agreed to supply up to 16,000 gallons to the U.S. Army for test purposes, but has yet to get a long-term supply contract. Thus another great question for Gevo management is what visibility they have into the DOD’s plans for USING alternative jet fuel.
In the most recently reported twelve months Gevo claimed $8.5 million in total sales, resulting in a net loss of $62.6 million. This is well below revenue levels in previous periods. Indeed Gevo has had a fairly erratic track record as its isobutanol sales are still at an early stage and have not yet replaced the sale of ethanol that had previously been produced in the company’s Luverne, Minnesota plant. The cash burn was nearly as discouraging. Gevo used $52.5 million in cash in the most recently reported twelve months.
The logic of converting an ethanol plant to isobutanol production is understood. Unfortunately, while we appreciate the route Gevo has mapped out, the journey seems to be taking some time. What we really need to understand is “ARE WE THERE YET?” In December 2013, the company raised about $25 million through the sale of common stock and warrants. Some of the money will be used to ramp up production at the Luverne plant.
A review of recent trading patterns in GEVO has not been encouraging. Many of the technical formations in recent months point to continued bearish sentiment. One source of concern for shareholders has been the suppressive effects of the recent common stock issuance on near-term trading. Shareholders need to know if the pain of dilution is going to be worth it.
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.