Gevo Finds A Way

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Jim Lane

gevo logoLike Rocky Balboa, no matter how many punches they take, Gevo [NASD: GEVO] just won’t fall over. In fact, the company’s prospects have brightened considerably in recent months is the company “gonna fly now”? How and why is success on the horizon?

For most of its history, Gevo has looked like a long-shot a company aiming at making high-value, bio-based butanol, mostly from corn sugars, via retrofitting its exotic bug into ethanol fermenters.

The opportunity is pretty simple to understand. Isobutanol sells for around 60 cents a pound, sugars check in at 16 cents a pound. If you can make the yields work, the upside is pretty good.

Of course, you have to get the butanol out of the broth before it reaches a point of concentration where it kills the magic bug if you’ve splashed some rubbing alcohol on a wound to kill unwanted microbes, you’ll understand right away why an alcohol like butanol is deadly to Gevo’s modified yeast biocatalyst. So that’s part of Gevo’s portfolio of magic, a GIFT system for separating butanol out of the broth, that was so deft it felt like it was right out of Hogwarts:

Bacterium de-brothemus divisium!

Voila, a batch of butanol and all those magic bugs, separated out. Step right this way to clang the NASDAQ bell after your monster IPO, please.

It sort of worked out that way. The company raised a whole bunch of capital, recruited a team of notables and worthies, bought an ethanol plant that was too small to make money any more for a technology demonstration at scale, and navigated an IPO.

Then the butanol hit the fan.

Two problems beset Gevo even before the ink was dry on its IPO registration: a debilitating battle over intellectual property with DuPont, and an infection in the ethanol plant that was about as welcome to Gevo’s microbe as the ebola virus.

So beganneth Gevo’s long descent into a seemingly perpetual winter. The cash burn began to require ever-more dilutive capital raises.

“You have to hand it to [CEO] Pat Gruber for finding a way to keep going,” wrote a longtime reader in essaying Gevo in a private note last month.

For some time, it has looked grim, as the costs of litigation have stacked up, and not every battle has gone 100% Gevo’s way in the courts (though no knockout punches have been recorded by either party). Meanwhile, that little ethanol plant that didn’t make any money became an isobutanol plant that didn’t make any money. So, plans emerged to have it retro-retrofitted to make either ethanol or butanol, depending on which one offered a better return.

Which sounded to critics like a whole lot of optionality on the road to not making any money.

But then.

Against all odds

In its Q3 earnings announce, Gevo reported a net loss of just $200,000 on $10.1 million in revenue compared to a loss of $15.9 million on revenues of $1.1 million for Q3 2013.

What? Where’s the funeral, the undertaker, the mournful relatives and investors dropping their share certificates onto Gevo’s coffin like flowers on a casket?

Gevo commented: “The increase in revenue during 2014 is primarily a result of the production and sale of approximately $9.2 million of ethanol and distiller’s grains following the transition of the Luverne plant to the SBS. During Q3, hydrocarbon revenues were $0.8 million, primarily related to the shipment of bio-jet fuel to the U.S. military during the quarter. Gevo also continued to generate revenue during the third quarter of 2014 associated with ongoing research agreements.”

It’s not all good the company did not generate positive cash flow, and warned that it expects, ahem, “an increase in expense associated with its ongoing litigation with Butamax Advanced Biofuels,” another way of saying that the lawyers are rolling through the dollars about as fast as they did in Jarndyce v Jarndyce, the case that ruined nearly every life it touched in Charles Dickens’ masterful Bleak House.

But there were a number of operational highlights: In Q3, Gevo decreased the plant-level EBITDA loss for the quarter by almost 70% as compared to Q1 2014, and has managed to double the isobutanol batch sizes and cut the batch turnaround times in half and has been seeing prices of $3.50-4.50 per gallon from isobtuanol sales, as well as some revenues beginning from selling iDGs, its branded animal feed product from the isobutanol side of the Luverne plant.

Gevo’s Take

“Even before purification, isobutanol purity levels have been at 95%, excluding water, which has exceeded our targets. At the same time, isobutanol production costs continue to improve, and importantly, based on Luverne data, we can see that our long-term isobutanol production cost targets remain achievable with incremental process improvements. The team at Luverne has done a very good job implementing the SBS, moving down the isobutanol learning curve while successfully operating the ethanol side of the plant,” said the ever-optimistic CEO Pat Gruber.

But he had some friends in the land of Wall Street, which of course has been known to invest in some Hogwartzian enterprises from time to time, but when it comes to singing choruses of “Stand by Me”, rarely sticks with anything except the real thing for more than a few quarters.

Encouragement from the Street

Piper Jaffray’s Mike Ritzenthaler now has the stock (trading at sub-50 cents) price targeted at two bucks. He writes:

We maintain our Overweight rating and $2 target on shares of GEVO following a 3Q print which highlighted continued, steady technology improvements – suggesting that the company is on track to exit FY14 with the Luverne facility at cash break even, and poised to transition more ethanol fermenters to isobutanol in FY15.

“Higher than expected purity levels, reduced batch turnaround times, and a steadily increasing rate of isobutanol production should enable a run-rate of ~100k gallons of isobutanol per month. Turning to FY15, we see the potential for further cost cutting measures to further slow the cash burn, although we also note the probability of additional capital infusions as the company moves toward corporate-level EBITDA break-even.”

Ritz adds: “The most important takeaway on the technology front, in our view, is the high purity level of isobutanol production which should help drive production/tolling costs down. Combined with other improvements (such as lower cycle times and higher productivity) management was able to make and ship commercial quantities of isobutanol out of one fermenter at Luverne and is on track to hit a year-end run-rate of 50-100k gallons per month. Management reiterated on the call that ASPs for isobutanol are in the $3.50-$4.50 per gallon range, and while long-term economic targets are still in the distance, we think the company is sufficiently seeding markets needed to reach an inflection point in the business model in the 3-4 coming quarters.”

The Street is expecting one more dilutive cash raise between now and break-even but the company is targeted for $66 million in sales, even in these days of falling commodity prices as China’s big economic engine grinds in low gear.

The Fast 500

Looking back, the growth is impressive. Just this week, Gevo was named on Deloitte’s Technology Fast 500, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences and clean technology companies in North America. Gevo grew 1,146% during this period and was ranked 103rd overall but, notably, in the industry where it competes, Gevo ranked third out of all clean technology companies.

Bottom line, break-even at Luverne and some
welcome dollars from the ramp-up in production appears to be on the horizon in 2015. It looks like Gevo has found a way.

Jim Lane 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.

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