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August 28, 2016

Why Only Ethanol?

Where are butanol and other substitutes for gasoline?

Jim Lane

A reader writes:

I’d hoped that the biofuels crowd would have gotten beyond ethanol by now.

The industry has made progress creating all kinds of specialty chemicals from renewable sources and more or less successfully brought them to market. There’s jet and diesel in commercial use whether or not they’re yet profitable.

However they have made zero commercial progress on anything other than ethanol for gasoline. All the major advances have involved better and better ways to crank out ethanol. I don’t see the auto industry co-operating by switching to E85 or E100 technologies, particularly when we’re in the midst of a very long term bear market for oil.

Is there some fundamental reason that the automotive biofuels people haven’t shifted to butanol or iso-butanol or some other compound that would be more compatible with gasoline and the present highly evolved gasoline engines? Is there some fundamental thermodynamic barrier that makes conversion of biomass to butanol impossible?

So, what happened?

For sure, the quick answer is “new fuels are on the way” — Gevo is producing in small quantities, but it is producing at a commercial-scale facility and selling fuels. Butamax has been less visible in terms of timelines, but they also produce isobutanol from corn sugars. And Global Bioenergies is making progress with a renewable gasoline made from isobutene.

Why so few technologies, why so little commercial progress on gasoline substitution, excepting ethanol?

The chemistry of value

The answer lies to some extent in what we might term “the chemistry of value”. Theoretical yields for making isobutanol from sugars, for example, hover in the 41 percent range, while theoretical ethanol yields are in the 51 percent range. Yields for making isoalkanes and aromatics from sugar— typical components of gasoline — are in the low 40s, too.

Right now, the September ethanol contract at CBOT is pricing at $1.46 while the RBOB gasoline price is pricing at $1.49.

So, there’s a 2 percent gain in the price to compensate for a 20 percent drop in the yield.

Now, you probably at this stage would mention the higher RIN values associated with advanced biofuels. Right now, D5 advanced biofuel RINs are selling for roughly the same price as D6 corn ethanol RINs. Absolutely, you get 1.3 RINs for a gallon if isobutanol vs 1.0 RINs for a gallon of ethanol, because of the higher energy density of butanol, but it washes out when you take into account the lower yield in gallons.

So, right now, the market is not rewarding isobutanol makers with a premium price in the road transport market. Sadly, not in the jet fuel market, either.

The two bright spots

Areas of opportunity?

One is the cellulosic fuel market. There is a substantial set of premiums relating to carbon incentives available for cellulosic feedstocks. But, the processes to produce substitutes for gasoline, besides ethanol, from cellulose are still in the R&D phase.

Another is the marine market. There, boat owners, for a variety of reasons generally going back to boat construction materials, prefer an ethanol-free product. In this case, isobutanol is not competing against E10 ethanol-gasoline blends. Rather, they are competing against straight gasoline.

The marine opportunity for isobutanol

We have direct evidence that isobutanol is selling in 12.5 percent blends for a “more than 50% premium” compared to E10 fuel (we reported on this here).

Right now, that’s around $3.23 per gallon.

Now, one of the attractive uses of an isobutanol fuel in the marine sector is that marinas are not obligated parties under the Renewable Fuel Standard, but isobutanol is a qualifying fuel. Hence, a marina owner can blend a gallon of renewable fuel and detach the RIN that comes with every gallon of renewable fuel, and sell it into the marketplace.

Those RINs are selling today at $0.89 each, and you get 1.3 of them for every gallon, as we mentioned above. That’s another $1.16 in value.

Total value created, $4.39 per gallon. That’s excluding value created from a bushel of corn with the distiller’s grains — that’s just the fuel fraction.

Gevo’s production price?

Gevo (GEVO) recently affirmed that they remain on track to reach a production cost of $3.00-$3.50 per gallon for isobutanol by the end of the year — as long as corn doesn’t get more expensive.

How much of that retail value goes to the producer?

Now, remember that the ExpressLube value we mentioned is the retail value, and the retailer gets that RIN, as well, although its value contributes to the price a wholesaler will pay for the product. Gevo says that it a net market price of $3.50-$4.00 per gallon for isobutanol, so long as distiller’s grains do not lose value.

The Bottom Line

The marine market is where its at, for isobutanol, in the near-term. The economics on road transport furls have to improve a bit before we are going to see more substitutes for gasoline, besides ethanol.

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.

August 27, 2016

Green Plains Nabs 3 Ethanol Plants On The Cheap

Jim Lane

In Nebraska, word has arrived from Green Plains (GPRE) that it will purchase the Madison, Ill., Mount Vernon, Ind. and York, Neb. ethanol facilities from Abengoa (ABGOY) Bioenergy with combined annual production capacity of 236 million gallons per year, for approximately $237 million in cash, plus certain working capital adjustments.

The company said it was the successful bidder on three ethanol plants for sale conducted under the provisions of the U.S. Bankruptcy Code.

Upon completion of the acquisitions, Green Plains will own and operate 17 dry mill ethanol facilities with combined production capacity of nearly 1.5 billion gallons per year. With ADM (ADM) putting US ethanol assets on the sale block, the acquisition leaves Green Plains and POET alone at the top in terms of US production capacity.

It was less than five years ago in 2011 that we reported:

“Green Plains Renewables says that the days of snapping up cheap ethanol assets are over, as all opportunities for buying up the right equipment at the right location for under $1 per gallon of installed capacity have been bought up.”

Yet, the acquisitions in this case came at that magic $1 per gallon figure. According to CARD, the return over operating costs for ethanol plants, currently, is hovering between $0.40 and $0.50, suggesting that the payback time for this investment will be between 2 and 2.5 years.

BD Green Plains CARD 082416

A note on CARD operating profit forecasts. CARD says, “This return is calculated as the difference between the revenues from ethanol plant outputs (ethanol and dried distillers grains with solubles [DDGS]) and the costs of variable production inputs (corn, natural gas, and other costs such as enzymes, labor, electricity and water).” More about those projections and assumptions here.

The road to 1.5 billion gallons

2010: Green Plains acquired Global Ethanol’s two operating ethanol plants located in Lakota, IA and Riga, MI with a combined annual production capacity of approximately 157 MGy. The acquisition increased Green Plains’ capacity by 31% to approximately 657 Mgy. The company paid approximately $169.2 million, including approximately $147.6 million for the ethanol production facilities and the balance in working capital.

2011: The company’s round of expansion closed with the purchase of the 55 million gallon per year Fergus Falls ethanol plant for $55 million, which at the time confirmed its status as the fourth-largest ethanol producer behind POET, ADM and Valero.

2013. Green Plains acquired two ethanol plants of BioFuel Energy Corp. for approximately $101 million, plus working capital at closing, from an entity composed of its lender group. Green Plains intended to fund the purchase with approximately $77 million in term debt and the balance in cash. The ethanol plants are located in Wood River, NE and Fairmont, MN. The two facilities have a combined annual production capacity of approximately 220 million gallons.

2015. Green Plains acquired Hereford Renewable Energy, LLC for approximately $93.8 million. The transaction value included $78.5 million for the ethanol production facility with the balance for working capital. The transaction is expected to close this month subject to customary closing conditions and regulatory approvals. The facility is a Lurgi-designed, ICM-modified ethanol plant with approximately 100 million gallons per year of production capacity, a corn oil extraction system and other related assets.

2015. Green Plains acquired an idled ethanol production facility in Hopewell, Virginia, located approximately 20 miles south of Richmond, from Future Fuels LLP. The company paid $18.25M for the capacity. Operating at full capacity, the facility’s dry mill ethanol plant will increase the company’s annual production capacity by approximately 60 million gallons to nearly 1.1 billion gallons per year. Production is expected to resume by the end of the year and corn oil processing is expected to be operational during the second quarter of 2016.

2016. Still on the hunt. Green Plains is taking advantage of low investor interest in biofuels, we reported, thanks to depressed crushing margins. The company is on the hunt to acquire new assets as well as expand production capacity organically, we reported, despite its own weak performance and rising supplies. Even with weak oil prices, CEO Todd Becker said that international demand for US ethanol has not slumped off and instead expects total exports this year to surpass last year, perhaps even reaching 1 billion gallons.


There’s continuing consolidation in the corn ethanol space. Last year, Aventine merged into Pacific Ethanol. The previous September, Flint Hills Resources acquired Southwest Georgia Ethanol’s plant in Camilla, Georgia, the company’s fourth acquisition in a one year period. The company purchased an Iowa plant from Platinum Ethanol. Since then it had begun retrofitting a Southeast Nebraska plant and bought out Petrologistics.

More Consolidation on the Way?

Yes, ADM has put US-based ethanol assets on the block.

We reported earlier this month that ADM now expects to receive bids by the end of August following presentations to seven potential buyers. Half of the company’s 1.8 billion gallons of ethanol production occurs at its three dry mills. Weak ethanol margins were among the reasons for the company failing it hit analysts’ expectations for Q2 in its reporting this week. But we are not expecting the assets to be sold at the $1 per gallon mark and, given that Green Plains is going to be absorbing this set of plants, we’re doubtful that they will be paying top dollar in an auction for ADM’s assets.

Get strong, the Green Plains way

We looked at the Green Plains growth story in November 2015, here, and wrote of “lessons learned”:

1. Get a lead product that’s a platform for a company. Green Plains began as a one-horse ethanol producer with two products, corn ethanol and distillers grains. There were unanswered questions at the time about the market acceptance of the products, the viability of the sector, and whether Green Plains could scale to industry-leading size, and when. They chose, in corn ethanol, a product that can support a company, rather than ease a burn rate and provide some hope to investors. There are $1 million lead products and $100 million lead products and $1 billion lead products. The first provides hope and not much more, the second eases a burn rate, the latter

2. Gain strength by applying advanced technologies to advance the business proposition. Today, Green Plains has more than a billion gallons in ethanol production capacity, and is making money even in a tough ethanol market; it has spun off Green Plains Partners (GPP) into a successful IPO and reported its first dividend to shareholders in that venture this week; it has diversified into corn oil and is working hard on monetizing its CO2 production. It is acquiring terminal capacity as well as production capacity.

Reaction from Planet Green Plains

“We continue to focus on making strategic investments in high quality assets as we expand our production footprint,” said Todd Becker, president and chief executive officer at Green Plains. “The Madison and Mount Vernon plants will give us access to the Mississippi River, supporting our new export terminal planned in Beaumont, Texas. In addition, we will broaden our product offering globally with industrial alcohol production at the York plant. These acquisitions further our commitment to deliver long-term value for both Green Plains Inc. and Green Plains Partners shareholders.”

Closing details

The company’s acquisition agreements are subject to review and approval by the U.S. Bankruptcy Court for the Eastern District of Missouri at a hearing currently scheduled for Aug. 29, 2016. The acquisitions are expected to be complete no later than Sept. 30, 2016, subject to regulatory approval and customary closing conditions, at which time the ethanol storage and transportation assets will be offered to Green Plains Partners.

Green Plains Inc. is a diversified commodity-processing business with operations related to ethanol, distillers grains and corn oil production; grain handling and storage; a cattle feedlot; and commodity marketing and distribution services. The company processes 12 million tons of corn annually, producing over 1.2 billion gallons of ethanol, approximately 3.5 million tons of livestock feed and 290 million pounds of industrial grade corn oil at full capacity. Green Plains owns a 62.5% limited partner interest and a 2.0% general partner interest in Green Plains Partners LP (NASDAQ:GPP), a fee-based Delaware limited partnership that provides fuel storage and transportation services by owning, operating, developing and acquiring ethanol and fuel storage tanks, terminals, transportation assets and other related assets and businesses.

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.

August 19, 2016

Amber Means Caution But BioAmber Means Go

Jim Lane

In Canada, BioAmber (BIOA) recorded net income of $4.8M for Q2 2016 and an operating loss of $1.0M on revenues of $2.5M. Revenues were up 73 percent over Q1 and 637 percent compared to Q2 2015.

For those less familiar with the company, it produces succinic acid from sugar at a first commercial-scale plant which opened recently in Sarnia, Ontario. Succinic acid has a small existing global market but can be converted into a variety of chemical building blocks used to produce a range of plastics, paints, textiles, food additives and personal care products.

If for some this relatively small venture is “the hope for the renewable chemicals movement”, the reason lies in oxygen. Which is to say, sugar has it, succinic acid has it, but petroleum doesn’t. That means that any effort to make succinic acid from petroleum involves at least one extra process step — the add-back of oxygen. It also means that the yield of succinic acid from sugar is inherently higher, on a percentage basis than, say, the production of hydrocarbons used as diesel or jet fuel, or chemicals such as ethylene.

That lowers the threshold at which renewables can compete on cost with petroleum-based molecules — and that’s no small matter when fossil fuel prices have tumbled to 10-year lows. Combine that with the usefulness of succinic acid as a building block, and you have a powerful combination.

So, many eyes — beyond the usual collection of employees, investors, and supply chain partners — have been on the Succinic Sultans of Sarnia.

The 5 Key Trends

Let’s look at five key BioAmber trends, and measure’s the venture’s progress.

1. Product cost.

Aside from product acceptance — already assured via a transformative offtake deal with Vinmar that we covered here, there’s nothing more important than product cost. It’s the fatal problem for most early stage advanced bioeconomy ventures. It’s the difference between being stuck in small, high-margin niche markets, possibly forever and certainly while the cash runs out — and a breakout into larger volume markets where the growth lies.

There’s good news here. “The cost per ton of bio-succinic acid sold continued to decrease, with a 30% reduction relative to the previous quarter,” said the Company in its earnings report. In the context of overall goals? “Sarnia variable costs were lowered to the Company’s 2016 target.”

2. Up-time.

If you’ve been following the travails of various cellulosic ethanol ventures, you know that they have excellent product prices at the moment and mandated markets. Production plant up-time has been a huge headache.

On that note, it’s excellent news to read that “Sarnia achieved an uptime rate of over 80% in the month of June 2016, having increased steadily during the second quarter.” The Q3 uptime rates will be critical to understanding if BioAmber has cracked the operational puzzle, but the progress if highly encouraging.

3. In-spec production.

One of the ventures key performance indicators has been the production of in-spec chemicals. It’s fermentation regime has shown a tendency to wobble off course in the early days — the result, 37% of the product was off-spec in Q1. Could be that the corner was already turned here. Less than 7% of total Q2 production of bio-succinic acid was off-spec.

4. Cash and inventory on hand.

The miseries imposed by a cash drain need no great emphasis here, for readers who have worked on early-stage ventures in the cash- burn phase. Suffice to say, if there’s one type of burning sensation in the Valley of Death more painful than the others, it’s usually the cash burn. Cash is a little light in BioAmber world — but the burn rate is low. There’s $5.5M on hand as of June 30, compared to cash on hand of $6.9M on December 31, 2015. The company added in its quarterly earnings call that it closed on an additional $7.6M from the previously disclosed BDC Capital loan. So, liquidity is assured for now, but a dilutive capital raise may be in the cards before the venture breaks even at Sarnia. We’ll keep an eye on that one.

Another item to note is that the company has 1,200 metric tons of product inventory on hand as of Q2. The plant has a rated capacity of 30,000 tons — so, it’s not a big pile-up, but worth watching as both a source of future cash and as a sign that BioAmber’s deliveries are timing well with its production.

5. Overheads.

Project watchers have been keeping an eye on R&D expense, which had ballooned to $5.0M in Q2 2015 as the company readied to launch the new commercial plant. Happily, that’s tumbled to $1.5M.

Interestingly for a company going through a ramp-up, sales expense is dropping. In Q2 2015 the figure hit $1.1M for the quarter, but dropped to $584K in Q2 2016. The company noted that stock option value has dropped as the value of the company’s stock has declined. If the stock begins to rise, that’s go up again. But it’s also a sign that the company’s embrace of a big offtake relationship with selected partners such as Vinmar is going to keep that expense lower than at projects that opt to sell direct to customers.

Reaction from Planet BioAmber

“BioAmber continues to meet ramp-up expectations at its Sarnia plant. We have made excellent progress in the plant’s reliability and performance, while continuing to increase production levels and drive down unit costs,” said BioAmber CEO Jean-Francois Huc. “Second quarter sales were on track, generating a 73% increase in sales over Q1, while Q2 operations improved throughout the quarter, culminating in a June uptime rate of over 80%. The team is now entrenching its operating routines as our Sarnia facility moves towards full production levels,” he added.

The Bottom Line

Progress? Excellent. One more quarter of results is probably all that is needed to assure observers that BioAmber’s start-up period is essentially over. Then, of course, the questions will be the more usual ones of price and production volume. And in the world of renewables, the rate of adoption by customers and the rate of application development.

Which brings us to formulations. We raised this issue with coverage of TerraVia last week. One of the real advantages of succinic acid is that it can be used as a chemical building block. We noted in a review here that “Bio-succinic acid forms the basis for many high-value replacement products, including phthalic anhydride, adipic acid, and maleic anhydride. Fumaric acid is commonly used as a preservative in food and beverages, in the production of paints and coatings, as well as in the production of paper. It is the chemical equivalent of maleic anhydride (MAN) and water, and therefore can be used as a replacement for MAN.”

So, we’ll be keeping a sharp look-out for evidence that formulators are switching from petroleum-based feedstocks to biosuccinic as a source for any or all of those. It will be a huge demand driver, ultimately, not only for BioAmber but for Reverdia, the joint venture between DSM and Roquette Frères, which in 2012 commenced operations in Cassano Spinola, Italy, at a 10K/yr biosuccinic acid plant. And somewhere out there is the mysterious Myriant venture, which opened its plant in Louisiana and drew a thick iron curtain around the project’s progress.

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.

August 17, 2016

Amyris: The New Colossus Aims To Unlock Its Golden Door

Jim Lane

In California, Amyris (AMRS) reported a Q2 net loss of $13.8M on revenues of $9,6M, up from $7.8M in Q2 2015. Revenues rose 27% from the corresponding period in 2015 primarily driven by the shipment of a new novel fragrance product, as well as Neossance Squalane sales. At the same time, Amyris, which has recorded $18.4M in revenues for the first half, re-affirmed guidance for the year that it would reach $90M in annual sales and positive cash flow from operations in 2017.

With that, Amyris would have increased revenues by 400% in the second half, compared to the first half — so, a breakout for the company which was ranked last year as the #1 Hottest Company in the sector by the Digets’s readers and international selectors.

The Seven Rays lighting Amyris’ Golden Lamp

Let’s look at the 7 factors that have the company poised for a revenue transformation in the second half.

1. Gingko. Entered into an Initial Strategic Partnership Agreement with Ginkgo Bioworks to accelerate commercialization of bio-based ingredients and establish clear leadership in industrial biotechnology with a combined offering that we consider unparalleled. In connection with the agreement, a license fee of $15 million was paid on July 25, 2016, to Amyris in exchange for use of certain Amyris technology and the parties agreed to pursue the negotiation and execution of a definitive partnership agreement that includes significant value sharing. The partnership is expected to deliver more new ingredients into the global market over the next three years than the entire industry has achieved in the last 10 years.

Melo pointed to the company’s DARPA collaboration which has identified 400 different molecules, “all of which we can commercialize at our discretion.” Also, 5th. Additional with Gingko, “we are already collaborating to align R&D and take 70 products to the world’s leading brands.”

Melo said that critical to Amyris growth will be “more capacity” and the Amyris potential to “accelerate products”. Meanwhile, “the Brotas plant is running flat-out with farnesene production”, the North Carolina facility too. The company has plans to double capacity at Brotas and is speaking with potential collaborators about potential expansions to increase capacity for 2017.

2. Cosmetics and personal care. Announced multi-year, multi-million-dollar collaboration in cosmetic active ingredients with Givaudan to engineer and produce cosmetic active targets for global commercialization by Givaudan. Amyris sees this partnership delivering an annual run rate $50M per year

3. Fragrance & flavors. Began commercialization of novel fragrance product with Takasago International Corporation. The company said that it had greatly expanded in F&F inovel fragrance ingredients, partnered with 4 of the top 5 companies, and is “on track to become one of key suppliers.”

4. Jet fuel. Jointly announced with Cathay Pacific a two-year biojet agreement supporting continued strong farnesene demand and the future of sustainable air travel; initial flight on May 12, 2016 using the biojet blend was the longest flight using a renewable jet fuel to date. This fuel is supplied through the Amyris Total partnership that is dedicated to making BioJet an industrial reality.

5. Novvi. Announced American Refining Group’s 33.3% equity investment in Novvi LLC, a joint venture of Amyris and Cosan S.A., enabling market access and acceleration in revenue growth of Novvi’s high performance, sustainably sourced, renewable lubricants.

6. Janssen. Entered into research agreement with commercial license option with Janssen Biotech, facilitated by Johnson & Johnson Innovation, to use Amyris’s µPharm platform for rapid integrated discovery and production of therapeutic compounds thereby opening a new area of compounds previously not accessible for new drug discovery. “We expect to sign one more collaboration by the end of the year, ending at the high-end of our range, to develop a library of natural and natural like of therapeutic compounds, which nature has the potential to provide and we have the ability to produce.”

7. Biogen. Amyris nnounced partnership with Biogen, Inc. to develop alternative cell lines supporting production of therapeutics, marking second major partnership in biopharma market, which is now positioned to become Amyris’s largest opportunity for collaborations. The Biogen partenrship is the most exciting of all,” CEO John Melo said,. With it, Amyris he said would make “ a transformative change to biopharma where partner would be able to employ [Amyris biotechnology] instead of using cells from mammals. Others have attempted and failed, but we are positioned to deliver life saving therapeutics and make them more widely available. This could be game changing for biopharmaceuticals, and Biogen will fully fund the development.”

Reaction from the Street

Jeffrey Osborne at Cowen & Company wrote:

Amyris reported revenues of $9.6 mn, coming in below both Cowen and Street estimates of $10.6 mn and $15.22 mn respectively due to timing of product shipments and collaboration payments. About 90% of its revenue for 2016 and about 70% of its revenue for 2017 [is] committed.

Finally, the company expects continued growth from personal care as well as a significant ramp up in health and industrial segments in the second half, with ~33% coming from health, ~40% coming from personal care, and the rest coming from industrials. We are taking a wait and see approach given the uncertain pace of cost reductions. $1.25 price target.

The Bottom Line

Amyris started out in so many ways as a biopharma technology with the potential to radically transform, through synthetic biology, the potential to produce at radically lowered cost, and much bigger volume, a range of life-saving molecules. First was artemisinin, that has now been manufactured at commercial volumes for a couple of years now (primarily by Sanofi to date) as a low-cost malarial treatment. It was this aspect of Amyris technology that originally attracted the Bill & Melinda Gates Foundation.

Now, Amyris is back to the future, as it were. After a long tour through the potential for its technology to produce industrials, which has had spotty success due to price point, and a nascent effort to expand into personal care, which is small but promising — the company now sees 33% of its immediate growth coming from the health care sector.

Next in importance is personal care — but we also are fascinated by the company potential in flavors & fragrances. In short, a diversified portfolio — although the company is sharpening its portfolio and selling off “non-core assets”, it is truly delivering on its original vision to have a balanced and broad product portfolio. Just farther up on the cost curve — generally excluding much of the expected fuels volume – for now. That may change as oil prices rebound.

The company says that with Gingko it will “take 70 products to the world’s leading brands” — and the time is nigh for that to unfold. Indeed, then the New Colossus will lift its lamp beside the Golden Door.

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.

August 15, 2016

There's Graphite In Them Electric Vehicles

by Debra Fiakas CFA

The market for lithium ion batteries is expected to reach $46 billion by 2022.  That represents 11% compound annual growth over the next six years.  Few other markets if any are growing at such a feverish pace.  The adoption of electric cars is the center of the excitement, but the proliferation of smartphones, tablets and other electronic devices also plays a part.  Suppliers of critical battery materials such as lithium, cobalt and graphite are salivating over potential sales to battery manufacturers.

Graphite with its strong conductivity and heat-resistant qualities is a perfect material for the anode component of a battery.  A large electric vehicle battery can require as much as 55 pounds of graphite, although the typical family car probably requires around 22 pounds to 40 pounds of graphite.  Indeed, the typical lithium ion battery destined for electric vehicles requires more graphite than lithium.

According, to Avicenne Energy, a consulting firm focused on supply chain economics, the battery sector  -  transportation as well as storage batteries  -  is expected to require as much as 290,000 metric tons of flake graphite by the year 2025.  This compares 118,000 metric tons of graphite used in 2014 for batteries.  The graphite must be 99.5% pure to qualify for battery use, but graphite developers can charge a higher price to pay for the purification process.

It is no surprise then that graphite miners in particular see a bonanza as Tesla, Ford and Toyota and others roll out one electric car series after another.  The market opportunity has inspired several developers back into the field.  China controls about 75% of the global graphite production, much of which is synthetic graphite manufactured from petroleum coke.  However, there are known reserves of natural graphite in North America, Australia and Europe.

Natural flake graphite in particular is coveted for battery applications.  Crystalline flake graphite is composed of flat, plate-like particles with irregular edges.  It is found in layers or pockets in metamorphic rocks and sometimes in massive accumulations in veins or lenses.  There are other graphite types, such as those called ‘lump’ or ‘amorphous’, that are lower in purity and occur in less commercially useful particle sizes.  Graphite of all types is put through some beneficiation process to remove contaminants, improve particle size and enhance purity.   Processing costs can have a significant impact on profitability for a graphite mine developer.

The next few posts will take a closer look at several graphite mining companies that have in recent years accelerated development of graphite resources.  Besides processing costs we will look at resource quality, extraction and transportation requirements.  With demand rapidly expanding we will probably find all the graphite developers are exude confidence in commercial success.

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.

August 12, 2016

Gevo: Clever Escape Or Watery Grave

Jim Lane
This week, Gevo (GEVO) reported its Q2 financial results, reaffirmed its guidance on production cost targets, lengthened out the timing on its production targets, and placed all the near-term chips on marine biofuels.

Market reaction was generally pretty hateful, with the stock dropping 33% today. Investors seem to have translating Gevo’s messaging thus:

Gevo says: We’re staking our near-term prospects on marine biofuels.
Investors hear: We’re underwater.

Gevo says: Timing delay in our isobutanol gallonage, took longer to get the fixes implemented, we’ll make up on the back side. May need more equipment.
Investors hear: Dilutive cap raise coming. Women and children into the lifeboats.

Seriously, 33%? You’d think that Gevo had announced that they burnt the Luverne plant to the ground.

Is Gevo rising from Davy Jones’ locker, or wrapped in fiscal chains and headed down inexorably into a watery grave. Let’s take the news, in order.

The financial results

This week, the Colorado-based firm reported a Q2 operational loss of $5.5M on revenues of $8.1M, compared to a $6.5M loss on sales of $8.89 for Q2 2015. Revenues dropped primarily with falling ethanol and distillers grains prices. Hydrocarbon revenues were $700K for the quarter, representing sales of jet fuel, isooctane and isooctene made at its plant in Silsbee, Texas.

Cost targets

Perhaps most importantly, Gevo affirmed that they remain on track to reach a production cost of $3.00-$3.50 per gallon for isobutanol by the end of the year — aso long as corn doesn’t get more expensive. They expect to have a net market price of $3.50-$4.00 per gallon for isobutanol, so long as distiller’s grains do not lose value.

Bottom line there, isobutanol production will be somewhere between breakeven and a 33% margin by year-end.

The workload has been time-consuming to get there, this year.Additional distillation system equipment that was ordered after the March 2016 re-start, has pushed back the production ramp-up. And, the company still needs to optimize further and will continue those efforts into 2017.

Production rate, titre and yield

Good news for those who follow fermentation rate, titre and yield. Gevo says that the fermentation process is working well, and it has surpassed, on at least one production run, it’s 18,000-20,000 gallons per batch target, hitting just north of 20K gallons.

Production ramp-up

With the delayed ramp-up, Gevo says it will be able to produce 500K-650K gallons of isobutanol this year, and produced 80K gallons in Q2. Based on run-rate, the company expects to get a production capacity of 1.5 million gallons per year — but said actual production levels will be lower until they have reached cost targets.

Interestingly, the company is signaling a shift of attention from “everything is about optimization” to “optimization plus capacity expansion.”

Let’s review that. Generally speaking, experts tell The Digest that an isobutanol plant should be able to yield about 80% of what an ethanol plant yields, in gallons. With one production train out of four at the 19M gallon Luverne facility devoted to isobutanol, the capacity for isobutanol, at a theoretical level, would be somewhere in the 3.5M gallon range, per year. If the industry’s math is right, there’s good room for optimization and expansion, still.

Some of that will depend on Gevo finding good markets for its fuels. Let’s move to that.

Gevo’s markets

Alcohol-to-jet. The market that attracts the most attention right now is alcohol-to-jet,. When Alaska Airlines successfull demonstrated Gevo’s fuels in June with two flights originating in Seattle and flying to San Francisco International Airport and Ronald Reagan Washington National Airport, respectively — Gevo’s stock shot up so quickly that the company was able to raise quite a bit of capital and cushion its cash position. The two Alaska Airlines flights utilized a 20 percent ATJ fuel blend.

With a cost of $3.00-$3.50 per gallon, however, Gevo’s ATJ is going to be purchased in very small quantities as a feedstock for hydrocarbon jet fuel production. It’ll be a showcase fuel, for the most part, we’re told. Producing from cellulosic sources will add something like $2.00 per gallon or more to the target price, because of credits available under the Renewable Fuel Standard. So, it’s significant that Gevo is working closely with the Northwest Advanced Renewables Alliance to produce isobutanol from cellulosic feedstocks, such as wood waste.

But as we have pointed out on that front here, the ATJ jet fuel market is going to be strangled by policies that offer two RINs for two gallons of ethanol but only one RIN for a resulting gallon of jet fuel. The path from isobutanol to jet doesn’t reduce the gallonage quite so drastically, but it’s still a factor.

Marine markets. Based strictly on costs and margin, the best bet for Gevo in the near-term, we’re told, are the marine markets. So it was big news in June that Gevo announced an agreement with Musket Corporation a fuel distribution division of Love’s and a conduit to the marine and off-road markets in the Southwest. Musket has taken delivery of its first railcar of isobutanol and is moving it through their distribution system.

Bottom line, boaters are not big fans of E10 ethanol blends because, for one, they can cause problems with fiberglass-based components found in older boats. Isobutanol blends offer compliance for the fuel blender with the Renewable Fuel Standard, and happier customers. We looked at the economics of this market and saw a potential value of $4.75 per gallon in this market, here.

The chemicals options

Let’s not forget that Gevo also produces ethanol — in fact, 95% of its production in Q2 was that molecule. The biggest news there is an agreement with Clariant Corp to develop catalysts to enable Gevo’s Ethanol-To-Olefins technology.

This would be a path to tailored mixes of propylene, isobutylene and hydrogen, which are valuable as standalone molecules, or as feedstocks to produce downstream derivative products such as diesel fuel, chemical intermediates, and polymers. It’s early days — the key will be the catalyst, but certainly thee are premium markets.

Gevo’s liquidity

We’ve saved perhaps the best news for last. Gevo’s shored up its cash position, mightily. Five months ago, it was mooting a sale of the company owing to liquidity concerns.

Now, it’s been raising money by diluting shareholders, essentially, which is sub-optimal for the shareholders but a lifesaver for the company,. One industry expert told us that, had Gevo not gone public and given itself the opportunity to raise cash through dilution, it would have gone out of business or been sold. The company raised $9.5M in s share offering in June, $10.8M from exercise of warrants, $3.5M in a share offering in April and has $22M in the bank.

It’s burn rate target by year-end is $3.5-$4.5 million. Leaving Gevo with roughly 15 months of runway, based on its cash position today. Much, much better.

The Bottom Line

Gevo has to hit its targets, and there are a bunch of them. Rate, titre, yield, production cost, production volume, market price, burn rate. So, it’ll be busy in Boulder, Silsbee and Luverne this year, all right. But 2017 is shaping up to be a much prettier year for Gevo than perhaps any since 2012.

$1 per gallon margins on isobutanol production — those take the company to breakeven on an EBITDA basis with roughly 14M gallons of production. Sooner, if the company picks up an R&D contract or two. That’s not entirely far down the track.

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.

August 10, 2016

TerraVia: No Going Back

Jim Lane
TerraVia burns the boatsAt the outset of his historic Conquest, Cortés gathered the men and burned the boats.
As TerraVia jettisons its break-out industrial product line and completes the pivot to Food, what lies ahead in the New World?

Gromeko: They’ve shot the Czar. And all his family. Oh, that’s a savage deed. What’s it for?
Zhivago: It’s to show there’s no going back.
Dr. Zhivago

In California, TerraVia (TVIA) recorded a loss of $27.4M for Q2 2016 on revenues of $9.9M as the company made milestone announcements in its transition from industrials to nutrition including the divestment of an 80% stake in Algenist to Tengram Capital Partners and the tapping of former Mars North America chief Apu Mody as the company’s new food-focused CEO.

Let’s take those in order.

The financial results

Thin sales, $9.9M vs last year’s $11.7M and the Street consensus of $11.4M. Excluding Algenist sales, the revenues were $4.4M for Q2 and the company did not break down further between industrials and nutrition except to note that these reflected “reflecting planned declines in industrial revenue partially offset by strong growth in food revenue,” and that food platform sales tripled in Q2 2016 compared to Q2 2015 and that Thrive “Culinary Algae Oil, saw a three-fold increase in units sold in the quarter versus Q1 of this year.”

Losses narrowed, $27.4M on a GAPP basis and $21.2M on non-GAAP, compared to $37,2M and $31,7M in the corresponding period last year. “EBIT of ($17.1mn) significantly outperformed our ($25.9mn) estimate, as the company delivered better than expected gross margins, and operating expenses,” writes Cowen & Company’s Jeffrey Osborne.

Market reaction

Osborne added: “The company announced mixed results for 2Q16. Sale of Algenist allows the company to remain exposed to cosmetics market, while allowing management to focus on its key end markets going forward. We are encouraged by the announcement of new CEO Apu Mody. 2016 revenue guidance (excluding Algenist)…remains unchanged with management continuing to look for high double digit revenue growth at a pro forma revenue assuming a ramp in food, decline in industrials, flat to modest increase in R&D programs and the 5x ramp at Moema. We are maintaining our $2.75 price target.”

Divesting Algenist

Just ahead of the Q2 earnings story was the divestment of Algenist.

For those less familiar, Algenist was TerraVia’s breakthrough product line, described these days as “a prestige beauty brand that delivers anti-aging and color correcting innovation based on a suite of TerraVia’s proprietary algae-based ingredients including Alguronic Acid and microalgae oil. The brand has achieved a global distribution footprint across 23 countries and including major retail channels like Sephora, ULTA and QVC.”

The companies said that they have formed a partnership focused on leveraging TerraVia’s innovative algae-based ingredient platform and Tengram’s brand-building and investment expertise to pursue compelling new opportunities in the beauty industry. Tengram will also “contribute significant capital to the business to accelerate broader commercialization.”

Overall, the company retains a 20% stake and will supply ingredients to the divested company — no commentary at this time on volume or timing of that. TerraVia will receive “approximately $20 million” at closing in Q3. That’s roughly a $25M valuation on the business, or 1.13X the current Q2 revenues.

For comparison purposes, the overall NASDAQ price-sales ratio is 3.373 and TerraVia’s ratio at the moment is 4.76 — so Algenist divested at a significant discount to TVIA’s market cap.

Tengram? It’s a private equity firm, “A private equity firm formed to acquire exceptional, highly recognizable, consumer brands.” which has investments current in Laura Geller, Differential Brands, Zanella, Luciano Barbera and a number of other companies.

That Which Remains

Crucially, the Unilever arrangement is there, and cost-plus — meaning that TerraVia will have a locked in cash flow to count on as it explores opportunities in the food and nutrition space. These are the AlgaPur oils, “including a more sustainable alternative to palm oil for the specialty personal care market.”

The brands that TerraVia has at the moment? Revenue-wise, it’s early-days but they include AlgaVia Protein-Rich Whole Algae, AlgaVia Lipid-Rich Whole Algae, and AlgaWise Ultra Omega-9, and Thrive Culinary Algae Oil, For the animal and aquaculture nutrition markets, they have AlgaPrime DHA, an omega-3 fatty acid.

Mody appointed as new CEO

The new CEO of the re-positioned and re-christened TerraVia is Apu Mody, most recently President of Mars Food America; previous to that, six years at Del Monte Foods, ultimately as SVP and GM for the $2.4B Consumer Products Division.

For the financial markets announce, Mody said:

“I’ve been passionate about Healthy Living and have seen many substantial changes across the industry. In my 25+ years in the food and CPG industry, nothing I have seen comes close to the exciting potential of TerraVia. I believe there are opportunities across the grocery store driven by accelerating demand for plant based foods and nutrition. And with TerraVia’s unique portfolio of ingredients that provide better nutrition and sustainability with outstanding taste, the Company is on the verge of great things.”

Mody’s commitment to, and analysis of, the opportunities in what can be called the New Nutrition are no joke. Taking the helm at TerraVia has been hush-hush, but Mody has been as outspoken and as visible as anyone in terms of seeing a transition from the old food company model to the New Nutrition. And the value of small companies in that effort.

Today, we publish remarks by Mody on the New Nutrition, here.

The Bottom Line

TerraVia made a big turn this week with Mody arriving and Algenist departing. A quibble over Algenist’s exit price aside, the company is staking its future in the New Nutrition and success therein — no doubt about it.

But here’s the thing. Mody in remarks elsewhere this season has noted that that gap in the food sector that established companies are struggling with is less about technology, or ideas. They have manufacturing expertise, they have distribution. They do line extensions well, they change ingredients and re-formulate well. Big Food companies are weak on brands that appeal to the New Consumer. That’s the chink in the food sector’s armor.

At the end of the day, TerraVia is not yet a brand company. The Algenist deal frames it: Tengram Capital Partners is infusing capital and “brand-building and investment expertise.” Incoming CEO Apu Mody inherits a company built as an industrial manufacturing play. It has been about getting developing new oils, getting technology to work at scale, and getting costs down.

What TerraVia has been brilliant at is developing new ingredient options. And the market needs new ingredients, for sure. But TerraVia either has to formulate new products, and develop brand traction, or count on someone else.

Of the roads forward, the first route looks tough. That means building a consumer marketing machine of real prowess inside a small company where dollars are scarce.

Which brings us to the other road — getting someone else to do the formulations. First, there’s the urgency problem. The company you engage with might dither. Elevance could write a book on it. The marketing partner could fail, or dump you and go it alone. Happened to the old Solazyme in its partnership with Roquette.

So, leaving the brand work to others has its own share of heartbreaks. If TerraVia could really push the needle on brand creation, the company would be a high-value farm club for the Big Food majors.

For now, it’s an ingredient manufacturer of real distinction, in a market that hasn’t yet decided whether it will adopt those ingredients. And the market is changing, as Mody has noted elsewhere, at a frenetic pace and in epic ways. That’s a challenge for smaller companies, and investors feel the peril.

And so, TerraVia sets off on its journey into the New Nutrition, which is replete with brassy companies based in bold technological advances and warrior pride in the certainty of their own ascendancy. Somewhere Friedrich Nietzsche must be smiling, with a copy of Also Sprach Zarathustra in his hands. The übermensch have arrived, grounded in biotechnology, risen above the limits placed by evolution and DNA in a sector as fundamental as food.

TerraVia calls algae “the mother of all foods, the original superfood“. There it is, the überessen from überalgae, and all in the city of Uber Technologies. But how many überventures the market could sustainably support, on that subject even Nietzsche was silent.

More on the story.

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.

August 08, 2016

BioAmber: Fingers Crossed

by Debra Fiakas CFA

Plastic is everywhere  -  our homes and offices, the cars we drive, our personal items, food containers and even our dental fillings.  Plastic is also toxic.  Dioxins, BPA (bisphenol A) and PCBs (polychlorinated biphenyl), both of which are critical chemicals in plastics, have been identified as endocrine disruptors, upsetting hormonal balance, triggering the growth of tumors and interfering with sexual development in fetuses.

Even people who deliberately avoid plastics are exposed to the toxicity.  For example, we ingest BPA when eating fish that lived in waters contaminated with plastics.  Remember that ‘island’ of plastic the size of Texas floating in the Pacific Ocean?  It is showing up in bits and pieces on your plate.

Succinic+Acid[1].gif Thus it seems the need to replace plastic with renewable materials is of dire importance.  This is why BioAmber (BIOA:  NYSE) has remained on the list of companies to watch.  Bio-succinic acid and butanediol are BioAmber’s specialty.   Both are intermediate chemicals that are used widely to make final products such as polymer fibers for clothes, food, surfactants, resins, lacquers, coatings, and detergents.   Bio-succinic acid alone represents a $4 billion market opportunity, while bioplastics and elastomers offer another $5.5 billion in demand.
Unfortunately, even with outsized markets the biochemical business has been challenging.  Significant innovation is required to create a drop-in renewable substitute for low-cost petroleum-based biochemicals.  BioAmber is striving to be cost competitive with petroleum-based succinic acid even at crude oil prices as low as $30 per barrel.   The BioAmber process involves fermentation of sugars using specialized yeasts licensed from Cargill.  The company has applied its expertise and knowhow of industrial scale biotechnology to reduce the required sugar input, thereby reducing the overall cost of production. 

Nonetheless, in five years, the company has yet to achieve profitability, although revenue has been building.  In 2015, the company reported $2.2 million in total sales and a net loss of $41.2 million.  When the company reports financial results for the June 2016, on August 9th no one expects profits even if sales activity has increased.

Late last year BioAmber did start commercial operations in its Sarnia, Ontario facility, which has capacity to produce 30,000 metric tons of bio-succinic acid each year.  Two years ago Vinmar, a distributor based in Houston, Texas, signed an off-take agreement for 10,000 metric tons per year for 15 years.  Vinmar is apparently so keen on BioAmber’s potential, it  has signed additional off-take agreements totaling 300,000 metric tons for more bio-succinic acid as well as other bio-based industrial chemicals that could be produced at plants now still in the planning stages.

In the meantime, BioAmber operations need cash.  Over $32 million is cash was needed to support operations during 2015, a dramatic increase over previous years.  BioAmber uses a combination of stock and debt to finance its product development and commercialization activities.  By the end of March 2016, the company had raised a total of $259 million in equity capital since inception in 2008, and had $40 million in debt on the balance sheet. 

In the first three months of 2016, BioAmber and one of its subsidiaries both issued shares, raising another $29.5 million in new capital.  At the end of March 2016, the last time the company reported asset figures there was only $14.1 million in total cash left on the balance sheet.  Going through cash at that pace, shareholders must have their fingers cross that commercial success is just around the corner.  Personally, I am hoping for plastic-free fish.

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.

August 06, 2016

Climate Bonds Mid-Year Roundup

by the Climate Bonds Team

Halfway in 2016: Issuance Up on 2015: New Underwriters from China: And Where Will Green Bonds Land by Dec 31st?

The Headline Figures:

  • At the end of Q2, issuance for 2016 stood at USD 34.6bn – bringing it close to the total issuance for 2015 with 6 months of the year to go.
  •  In the first two weeks since the end of Q2 - total issuance surpassed the 2015 total. We expect even more in the second half of the year.
  •  USD 18.6bn issued in Q2 alone making it the highest single quarter of green bond issuance on record.
  •  Over USD 4.5bn in Certified Climate Bonds – it has been a record breaking year for Certification, with bonds from issuers in India, Australia, Germany, Netherlands, the US and Philippines
  •  65% of issuance received reviews or certifications from external parties representing good practice in accordance with the Green Bonds Principles.
  •  New issuers accounted for approximately 54% of issuance. This includes some of the record breakers such as Shanghai Pudong Development Bank– a sign of a growing and diversifying market[1]-and the emerging momentum in China.
  •  Repeat issuers are returning –making up approximately 46% of issuance, in the first two quarters. Repeats are a good indicator that the issuance process is worth the additional disclosure and reporting requirements.
  •  Green bonds are not just a one-off exercise, reflected by the repeat issuance. They are an increasingly important tool to attract investors and capital.
  •  Issuer breakdown has changed from Q1 to Q2 with banks making up a smaller proportion of the market and corporates dominating – this is due to large issuances totalling over USD 5bn from Shanghai Pudong Development Bank in Q1. In Q2, over 20 corporates issued bonds ranging from USD 28m – USD 1.6bn (Toyota)
  •  Our league table shows Bank of America leading Q2 issuance, closely followed by JP Morgan and Citi.
  •  Q1 was the first time we saw Chinese underwriters contesting for top 10 spots. The year as a whole is taking on a different composition due to the entrance of Chinese underwriters in Q1.
  •  China growing larger in the green bond story – the first half of the year saw Chinese issuers issue over USD 8bn in green bonds; including large issuers such as Shanghai Pudong, Industrial Bank and others. This number has increased even more in the start of Q3. We have not included all Chinese bonds in our numbers – more detail below.
  •  Muni bond issuance remained flat from Q1 to Q2 but continues to make up an important part of the market. Issuance is dominated by US municipalities; a trend that is likely to continue given the size and maturity of the US municipal bond market and the need to replace aging infrastructure.
Will 2016 total issuance reach the Climate Bonds Initiative goal of $100bn? We’ll have more to say on this in a coming Blog. Stay tuned for the biggest Green Bond question in 2016. 

in breif

Underwriter League tables for Q1 & Q2

Our league tables show Bank of America and JP Morgan in first and second place for both Q2 and for the first 6 months of the year.


Chinese underwriters Guotai, Haitong and Huatai entered our league tables for the first time in Q1 this year and we expect them to continue challenging for the top spots.
League table

China has set the bar – now what?

The People’s Bank of China (PBoC) published official green bond guidelines in December 2015 and since then, we’ve seen a LOT of new bonds from Chinese issuers;  over USD 8bn in the first half of the year and another USD 5bn in Q3 so far.

Given the importance of China in global climate change action, these developments are hugely encouraging – particularly the scale of investment being diverted to green activities.

However, criteria around what is classified as green have some controversial aspects to them; leading to differences between local market and internationally accepted best practices.

For the moment, the 'green definitions' sanctioned by China's PBoC includes investments such as ‘clean’ coal. While clean coal is cleaner than regular coal, helps reduce air pollution, it is excluded in international definitions used by investors concerned about climate change, who believe it needs to be avoided in a rapid shift to a low-carbon economy.

Why? Well… the steepness of the emissions reduction needed to hold global warming at 2°C means that coal in any form is excluded from international green bond definitions.

This is because improvements in the emissions efficiency of coal fired power plants have the perverse effect of extending the life of these assets, beyond the point at which we will need to close them down to meet global carbon budgets - it makes the overall transition harder.

As a result, you will see some differences between the Chinese green bond totals (as consistent with local regulation) and those Chinese green bonds that are brought into global green bond listings.

We aim to keep monitoring the reporting from China; we’ll update you on developments.

Rounding Out the Mid-Year Round Up

The acceleration of the market has been noted by commentators, as has the rise of China and India, developments long foreshadowed by Climate Bonds Initiative amongst others. What’s also of interest in the first half of 2016 is the diversification of market participants, issuers, underwriters and verifiers.

Behind this headline market growth, lower in prominence but no less important, is the regulatory developments in China and India; the laying of firmer foundations for global investors to take greater exposure in these markets.

In the post COP21 and now COP22 shift of focus from agreement making to implementation, green bonds are increasingly being highlighted as part of converting country commitments (NDCs) to climate finance actions.

However, the first 6 months of figures are encouraging rather than exhilarating.  The recently released Climate Bonds State of the Market 2016 Report demonstrates again the scale of investment needed to meet global temperature goals.

Green finance is firmly on both the G20 and COP22 agendas. What will their influence be on green bond development for the remainder of 2016 and beyond?

We’ll keep you posted!


‘Till next time,

The Markets Team

Note: Climate Bonds League Table figures may differ to other sources for the following reasons:

  • Only bonds with 100% proceeds for green projects (as defined by the relevant Criteria of the Climate Bonds Standard) are included
  • All green municipal bonds are included
  • Date of issuance is used to determine Quarter (not announcement date)
  • USD exchange rate is taken from the last price on the date of issuance
  • Amount attributed to each issuer is calculated by dividing the total deal size by the number of lead underwriters on the deal.
Disclaimer: The information contained in this communication does not constitute investment advice and the Climate Bonds Initiative is not an investment adviser. Links to external websites are for information purposes only. The Climate Bonds Initiative accepts no responsibility for content on external websites.

The Climate Bonds Initiative is not advising on the merits or otherwise of any investment. A decision to invest in anything is solely yours. The Climate Bonds Initiative accepts no liability of any kind for investments any individual or organisation makes, nor for investments made by third parties on behalf of an individual or organisation.
[1] Note: Despite having ‘development’ in its title, SPDB provides commercial and retail banking services and is classified as a commercial bank by international industry classification standards

——— The Climate Bonds Team includes Sean Kidney, Tess Olsen-Rong, Beate Sonerud, and Justine Leigh-Bell. 
 The Climate Bonds Initiative is an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

August 04, 2016

KiOR: "You've Cooked The Books"

by Jim Lane

Note. This is Part 3 of our series on the inside true story of KiOR.

In part 1 of our series here, and part 2 here.

BD TS 080416 KiOR3 smOur story so far

KiOR was hanging by a thread as the summer of 2010 commenced. In a few days, the first recorded visitors to Pasadena demo unit, representatives of the Mississippi Development Authority, were expecting to see the demonstration unit in action.

The company was beginning to hurtle towards an IPO. But the fuel yields were low; the fuel was not usable by their initial chosen downstream partner; the catalyst they were using to get even down to this unsatisfactory product, ZSM zeolite, was in the $7,000 per ton range. Catalyst stability would be challenged, everyone knew, with the water that is contained in wood chips. Steam can be highly problematic for zeolite.

More than that, the company was facing a potential problem with the metal content in the biomass feed that accelerated the deactivation rate of the catalyst, which resulted in excessive amount of daily catalyst replacement, according to one KiOR scientist.

There were reactor design issues. The pilot reactor that was working wasn’t used for the demo unit.

There was a rush to commercial-scale of the NASA type. Management issues, communications issues can be seen. Disclosure issues, “truth in data” issues. And, a series of statements to the state of Mississippi that would be impossible to live up to without major improvement in yield. Capital needs were going to be tremendous, and beyond an IPO there was a loan guarantee process and the state of Mississippi loan application to be successfully navigated.

Why the rush to scale? All venture-backed companies rush. But was there a special rush on with Khosla-backed companies, and did that rush apply successfully to industrial technology? The State of Mississippi quoted this passage from the Harvard Business School case study, Khosla Ventures: Biofuels Gain Liquidity:

Khosla played an active role in helping his portfolio companies determine appropriate milestones in the process of moving from a pilot to a commercial operation. He encouraged his companies to focus on 15-month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

The goal was to test ideas in 10% of the time that it would take a large company. Once that was achieved he often challenged the team to reach another 10x reduction in cycle time. month or 15-day or 15-hour innovation cycles, unlike the 15-year cycles of innovation in the nuclear business, in order to “test, modify, allow lots of mistakes and still succeed.”

Everyone was counting on everything to improve in the demo unit, and in 2011. As sometimes happens. And, with design corrections, fingers crossed this could be translated to a commercial scale unit. It’s been known to happen, yields improving as scale increases and design improves. Not always, not often, but sometimes. Could KiOR pull it off?

Maybe, just maybe.

We’ll see how all those concerns worked out in the next part of our series, as KiOR launched its demonstration unit, geared up for more financing and an IPO, and hurtled towards commercial-scale.

Back to square one

2011 started with bad news. Robert Bartek resigned. He had been described by a member of KiOR’s staff as “the most knowledgeable chemical process engineer expert in pilot plant design and operation. Also, Bartek was “one of the main contributors to the development of a new improved technology that had replaced the failed BCC Technology and catalyst,” as one observer put it.

It widely regarded as a huge loss to KiOR.

A former KiOR staffer recalled. “He was unfairly punished because he did not agree and participate in the manipulation of pilot plant data, and because of his statements that the BCC Technology was useless to KiOR, and urging the Management to change it.”

“Hacskaylo and Ditsch were concocting false information about Bio-oil yields and related costs, and feeding them to the KiOR Board, to Khosla and to the public. Bartek [had been] isolated from the team. He was kept in the dark.”

Meanwhile, there was good news and bad news on the technology front.

The Good News? By replacing the BCC Technology and its HTC Catalyst with zeolite catalysts , the Bio oil yields were more than doubled, with a less coke and char, and with less than 15% oxygen in the oil.

However, these improved oil yields still needed to be doubled again to reach the level of 80-90 gallons per ton yields that would be required to support a commercially viable KiOR.

But it was more than the loss of a technical leader. It was a cautionary tale for many of the staff.

The Wrong Design

Bartek’s isolation from the R&D team while working on the design of the demonstration unit, caused additional damages to KIOR.

The delivered and installed Biomass Convertor/Reactor had the original Pilot plant design, which was inefficient, and produced much lower bio oil yields. Bartek had replaced it with a higher efficiency Convertor/reactor based on a design KiOR had licensed from CPERI.

The damages included, costs of disconnecting/reconnecting, and modifying the already installed inefficient Reactor, plus months of delay in starting the operation of the demonstration unit .

“Management’s policies and actions were to promote deception to the public and investors and punish correctness,” commented Dennis Stamires. “It led to a  loss of trust and caused a serious demoralizing effect on most employees, and so, as is the usual case under such circumstances, the most qualified and experienced Scientists and Engineers have more job opportunities and leave first.”

And on technical grounds, the company was still at what Stamires, in a burst of frustration, expressed as “back at square one” in a January 31st note to Dr. Angelos Lappas, Professor Vasalos and Mike Brady.

“As you have heard thousand times,” he wrote, “we are still looking for a suitable catalyst, hopefully without containing ZSM, or at least a small portion. You can see how frustrated I am , after two or three years and all the work we have done, millions of dollars spent , we are now stuck in a Hole with the ZSM.”

Big News from DOE

But in management circles, there wasn’t a corresponding sense of gloom. In fact, there was a celebration going. KiOR had received a Loan Guarantee term sheet for a $1 Billion project, from the US Department of Energy, on January 3rd.

In the complex world of loan guarantees, a term sheet is a first step. Ultimately loans are made by banks, and guarantees are applied to them. And they never guarantee the entire loan, only a portion of it, typically around 60 percent. This is the government’s way of ensuring fiscal discipline. They need the bank to have skin in the game to avoid funding improbable loans. So, KiOR would likely have to persuade a bank, and equity partners, to should up to $400 million in risk on a loan for a first-of-kind technology. The company, for that reason, was a long ways from a financing event.

And, there was a bomb hidden in the news.

The project, as described in a note to staff written by CEO Fred Cannon, was expected to produce more than 11 million gallons of fuel per year.

Why was that a problem?

What was worrying at the Columbus plant was less the amount of fuel coming out as much as the amount of feedstock going in. The plant had a nameplate capacity of 500 tons of dry biomass per day.

Staff could do quick calculations and realize that, assuming an optimistic 85% up-time for the plant, the bio-oil yields would have to be 73 gallons per ton of biomass.

With that, staff realized for the first time that the company was representing yields to the Department of Energy that were materially above what the technology was achieving.

In his note to staff, Cannon thanked the team and singled out one individual for the loan guarantee milestone.

It was Andre Ditsch, author of what KiOR colleagues said were grossly inflated yields.

Changing the yields

In its lawsuit against KiOR, the state of Mississippi alleges that Andre Ditsch’s work on what might be termed “synthetic yield improvement” was not complete.

“On January 31, 2011, three weeks after [a] strategy session with Vinod Khosla was conducted,” the state alleges, “Andre Ditsch notified Yuan Wang, a KiOR employee under Ditsch’s direction, that the current yield in the Company’s financial model had changed…Ditsch made this change in the financial model in order that KiOR would appear to potential investors to be commercially viable without RIN and tax credits.” The state added that “Ditsch did so at Khosla’s direction,” the first indication, if true, that Vinod Khosla may himself have become entangled in the faking of yields.

Cherry-picking the data

In February 2011, John Hacskaylo published an internal R&D Update Report at KiOR, which now can be revealed. In it, he showed dramatic improvement in bio-oil yields produced at the Demonstration Unit. Allowing for a responsible level of oxygen content, sufficiently low for the product to be upgraded to a finished fuel, the data showed a 67 per gallon output. Hacskaylo extrapolated to 84 gallons per ton as a target for the future.

But there was a problem.

According to KiOR staff members of that time, the data was cherry-picked; the most optimistic data was being used. Favorable bursts based on a handful of moments in time.

In fact, when the Demo plant was lined up and operating in steady-state condition at least for a few days, what were described by KiOR staffers familiar with the data as the actual “measurable, recoverable and reproducible bio-oil yields with oxygen content of less than 15%” (the maximum for a refinery to handle), were in the range of 34-38 gallons per ton.  Substantially much lower that the bio-oil yields that Hacskaylo was reporting.

But it was worse than that.  The yields were lower than the Bio oil yields produced with same catalyst and process conditions at KiOR Pilot plant.

It was a dagger in KiOR’s path to commercial viability — because yields were supposed to go up, in the demonstration, which was intended to be an improved design based on pilot plant data. Not down. Not with the same process conditions and catalyst. Something was very wrong with the demo design. Something that was concerning Stamires and Charlie Zhang who were monitoring and analyzing the raw DEMO data and comparing them to those obtained from the KCR Pilot plant . But no one on the commercial management team would know about it for quite some time.

Worse, if this trend-line was valid, and could be extrapolated to larger size plants, then it was possible that Bio oil yields at the commercial-scale Columbus plant, when operational and using the same catalyst and process variables would be even smaller than the Demo.

The drag from pilot yields to demo yields was around 25%, so it was possible that commercial-scale yields would drop into the 20s. Well below financial viability under any foreseeable combination of circumstances.

“No one would take our stuff”

In February John Karnes joined KiOR as the new CFO replacing Kevin Denicola who had resigned. It was a critical moment. As an early-stage company, KiOR was cash-hungry. One of the most important sources for funds to build out the company’s projects was the loan from the Mississippi Development Authority.

KiOR hired Dennis Cuneo, a business executive with established ties to Mississippi state officials, as its representative.

As the state of Mississippi alleges:

“Faced with the realization that no oil company would agree to offtake and refine the Company’s oil, Khosla explained KiOR’s situation to Dennis Cuneo and asked him to present the blendstock agreement to the MDA as having satisfied the terms of the MOU. On or about February 20, 2011, Cuneo notified Governor Barbour that KiOR had entered into an offtake agreement with Hunt. Cuneo requested that Governor Barbour direct the MDA to release funds. Governor Barbour called the MDA’s CFO, Kathy Gelston, after communicating with Cuneo. Governor Barbour notified Gelston that she would soon receive a communication from Cuneo in which Cuneo would request a release of funds. Governor Barbour instructed Gelston to release funds upon Cuneo’s request.”

The problem? The offtake agreement with Hunt did not supply them with a bio-oil for Hunt to upgrade using refinery-based hydrotreating technology. Rather, Hunt agreed to offtake finished blendstock, upgraded by KiOR.

“It was the alkali content, said former KiOR staffer Larry Bauer. “we had found quickly that no one could take our stuff.”

Meanwhile, ExxonMobil was having problems of its own. It wasn’t a question of being able to upgrade the fuel.

On February 28, according to the state of Mississippi:

ExxonMobil Corporation Vice-President of Corporate Strategic Planning, William M. Colton, notified Cannon and Khosla of problems Exxon was having making KiOR’s numbers work.

Busy in the Big Dark

But the KiOR could hardly spare a moment to think about the consequences of bad news from Exxon. During the first quarter of 2011, the company was a beehive of activity on multiple fronts.

As one KiOR insider told The Digest, “there were several main projects going on, including the negotiations with DOE for the loan guarantee preparation for the S1 and filing, fuel registration, road show preparation, continuing discussions with Chevron/Catchlight for some kind of offtake agreement and preparations for the opening ceremonies in April for the first Commercial Bio Fuels Plant in Columbus.

As March came to a close, attention shifted sharply to the DOE loan guarantee. It was a substantial sum – $1 billion, that’s billion with a “b”. And there was a big problem.

The catalyst was rapidly and severely de-activating. The company’s forecasts were based on the performance of a fresh, activated catalyst.

On March 28, 2011, the state of Mississippi claimed that “Andre Ditsch sent an email to KiOR’s Vice-President of Research and Development, John Hacskaylo, and others that discussed the Company’s dealings with Shaw Consultants International, Inc. an engineering firm the DOE had retained to conduct technological due diligence in conjunction with KiOR’s $1 billion loan application for Project Alpha.”

The fear was that Shaw’s engineers would turn up the problem, and scuttle a loan guarantee until KiOR came up with a new catalyst. But that would take time and there was no guarantee that a new catalyst could be developed — or that it would perform as well as projected in the forecast.

Matters came to a head on April 8th. According to the state of Mississippi:

Instead of revealing these facts to Shaw and/or the DOE, Cannon and Ditsch concealed these matters and doubled down on their hope that their new catalyst, KC2, would achieve commercial scale yields and economics while used in steady state operations.

Shaw’s engineers reported to DOE, according to the State of Mississippi, that they could not support a 67 gallon per ton yield based on the performance of the demonstration unit. And Shaw’s figures, which were derived from reports and not from direct independent measurement, The Digest learned, did not take into account the catalyst de-activation problem, and did not subtract water content from the overall yield.

When all else fails, IPO

With catastrophe on the horizon relating to the catalyst performance and the yields at Columbus, on April 11, 2011 KiOR filed for an IPO with the SEC, and claimed in the prospectus:

Our proprietary catalyst systems, reactor design and refining processes have achieved yields of renewable fuel products of approximately 67 gallons per bone dry ton of biomass, or BDT, in our demonstration unit that we believe would allow us to produce gasoline and diesel blendstocks today at a per unit unsubsidized production cost below $1.80 per gallon, if produced in a standard commercial production facility with a feedstock processing capacity of 1,500 BDT per day.

The state of Mississippi vehemently disagreed. They alleged that, in addition to the failure of the KC1 catalyst:

KC2 never generated commercially viable yields and neither did any of KiOR’s later generations of catalysts.

It was the first appearance of the inflated yields in a document that would be relied upon by the retail investor.

A KiOR staff member at the time recalled: “Contrary to the findings of the three above mentioned workers, Hacskaylo’s grossly inflated data showed almost double the Bio oil Yields, compared to actual, measurable/recoverable and reproducible Bio oil Yields listed in the spread sheets of the raw DEMO data produced at the same period. However, Hacskaylo’s Bio-Oil Yields were consisted with the Yield numbers used by Ditsch and others in the S1.”

Problems erupt with KiOR’s intellectual property portfolio

By May, the troubles at KiOR expanded to include the handling of processing of patent applications and the securing of the company’s intellectual property.

On May 15th, Dennis Stamires fired off a letter to CEO Cannon, notifying him that he would handle certain high value patent Applications directly with Jennifer Camacho, separately and outside Hacskaylo’s IP team.

One issue? As Stamires recalled for The Digest, “Hacskaylo’s name appeared, as a co-inventor, on patent applications on which he had not made any intellectual contribution.”

From the point of view of the KiOR shareholder, this represented a potential disaster of the first magnitude. The inclusion of a co-inventor on a patent, who has made no intellectual contribution to the invention, is serious business in the world of patents. The practice represents grounds, in and of itself, to invalidate a patent.

Putting some of KiOR’s intellectual property, potentially, right into the public domain. Damaging to the other co-inventors — and ultimately for the company to whom the patent rights are routinely assigned.

The Loan Guarantee withdrawal

Meanwhile, the company’s efforts to obtain a loan guarantee were failing, as became clear to financier Vinod Khosla after a telephone discussion on May 6th with Jonathan Silver, Executive Director of the DOE’s loan guarantee program.

The primary issue? Data to support the assertion that the company’s yields were commercially feasible.

The State of Mississippi stated:

Ditsch’s concerns about KiOR’s ability to prove the commercial viability of its technology to the DOE loomed large over the Company’s decision to press forward with its loan guarantee program application. KiOR’s executive leadership team and Khosla chose to withdraw the Company’s application, but not before Khosla considered pressuring Ray Mabus to call Jonathan Silver and/or the United States Secretary of Energy, Steven Chu.

The biocrude offtake agreement that wasn’t

Meanwhile, the company was scrambling to obtain an offtake agreement that would satisfy the requirements of the company’s loan from Mississippi.

In the first half of May, according to the state of Mississippi, Dennis Cuneo notified Governor Barbour that “Kior will announce on Tuesday that it has an offtake agreement with the Chevron/Weyerhaeuser joint venture – Catchlight.”

A biocrude offtake agreement is what had originally been intended by KiOR. But this wasn’t a biocrude offtake agreement at all. Rather, it was a gasoline and diesel offtake deal. KiOR’s Columbus plant would ship upgraded gasoline and diesel blendstocks to Chevron’s Pascagoula refinery, where it would be blended into the fuel supply.

It’s a significant switch. The original plan had been to ship biocrude and let Chevron and others hydrotreat the biocrude to remove excess oxygen, and then blend the upgraded fuel. But Catchlight, as we reported, had not been able to make the biocrude work in Chevron’s refinery. So, KiOR would have to build a hydrotreating unit at Columbus, and a hydrogen plant.

At Columbus alone, it would add $90 million to the project cost.

The state of Mississippi alleges that KiOR concealed the true reason for the switch.

After a question from the governor, Cuneo explained the Catchlight deal: Kior decided to integrate forward into diesel and gasoline to take advantage of the renewable fuel credits (which otherwise would have gone to Chevron.) As a result of the forward integration – the investment in Columbus is larger than originally anticipated.

Cuneo’s explanation prompted Governor Barbour to ask, “Will Hunt refine biocrude from Kior or also take gasoline and diesel?” Cuneo responded as follows: The Hunt deal is also for gasoline and diesel. Kior can make a nice additional margin by making gas and diesel – plus they get to keep the renewable fuel credits – which are gravy. That’s why they decided to upgrade their facilities beyond the crude oil stage. This means the investment at Columbus, which was originally targeted at $100 million is now $190 million. Their large scale facilities will be in the $200 to $250 million range for each facility – which means that the total investment in Mississippi will easily exceed $600 million (vs. $500 million in the MOU.)

What Mississippi described as a “bait and switch” — the failure to secure an offtake agreement for biocrude, presented as an “opportunity to sell gasoline and diesel” would become a key point in the state’s lawsuit against KiOR.

Courts will rule on this point eventually, but it is difficult to imagine that, so long as KiOR was able to supply fuel to Catchlight that was suitable for blending — no matter what equipment was used on site to produce the blendstock — that KiOR owed a duty to disclose changes in technology it was utilizing to produce a fuel. So long as KiOR disclosed that its financials had materially changed with any particular change in process, which it did.

What’s a blendstock, anyway?

There are as many as 100 different molecules that might show up in a gallon of gasoline — gasoline is a fuel specification rather than a single molecule — and ultimately all “raw feeds” into gasoline refining are “blendstocks”, because refiners are blending different feeds to make the highest margin they can while remaining in spec. So, whether KiOR was supplying product from a reactor that was dewatered into biocrude, or biocrude that was further processed through hydrotreating into a “gasoline blendstock”, they are both blendstocks, although they would have different paths in a petroleum refinery to the ultimate gasoline or diesel stream.

A scientist approaches KiOR’s General Counsel

In June, Dennis Stamires met with KiOR’s General Counsel Chris Artzer. He told The Digest:

“I showed him the actual raw (unmassaged) demo plant oil yield data and also the raw actual Oil Yields produced by the KCR Pilot Plant. I pointed out in detail the large discrepancies between the low yields KiOR was producing and the much larger inflated ones which KiOR was disclosing to the public. Also, I provided him with pertinent documents on Hacskaylo’s mishandling of the IP and certain patent applications. I gave him copies of the data, and he promised to study them.”

What happened?

Stamires told The Digest, “I kept going back to Artzer’s office to discuss those issues, several times in 2011. I tried hard to convince him that he must take action. Artzer told me he was still studying his documents. I never heard back from him on these issues.”

“You’ve cooked the books”

On June 6th, Bill Coates arrived, as KiOR’s new Chief Operating Officer.

A KiOR staffer recalls: “I thought he was a highly intelligent person with extensive operational experience in high level management positions in the Oil Industry. I was very impressed with his knowledge and his plans to make KiOR move forward. I though he was the right person and had a chance to save KiOR.”

Coates had a quick and rough indoctrination.

On June 24th, KiOR filed an amended Form S-1/A and Form 424(b)(4) in conjunction with KiOR’s 10 million share IPO. In a meeting with Dennis Stamires in June, he was advised that the biocrude yields in reality were much lower than the 67 gallons per ton, as stated in the IPO filing .

The State of Mississippi alleges:

Coates immediately began investigating the accuracy of the yield data and cost estimates. On June 27, 2011, Coates received a slide presentation for KiOR’s Vice President of R&D, John Hacskaylo, which outlined several basic differences between the Company’s financial model and actual operations…The Company’s financial model assumed a catalyst cost of $3000 per ton when the Company actually believed it would pay as little as $6000 per ton and had received a quote for as high as $30,000 per ton. Moreover, whereas the Company’s financial model assumed a catalyst addition rate of 0.83% per day based on the total weight of Catalyst inventory in the Unit, whereas the actual catalyst addition rate was nearly 9% per day.

Subsequently, Coates also reviewed the operations and results with raw data of the Pilot plant and the Demo unit, the report by Vasalos and McGovern on maximum yields. He also looked at the technology of Dynamotive, based on the public information. He brought in Max Kricorian, KiOR’s Finance Director, who discussed KiOR’s business and financial Model, and financial projections and forecasts which KiOR’ Management was disclosing to the public.”

Kricorian reviewed the business models based on input from the science team, and concluded that the actual costs were much higher than $2 per gallon of fuel, and substantially different from the costs the management team had projected.

According to KiOR staffers from this period, Coates concluded that there were large, unjustifiable discrepancies in the yields claimed and those achieved.

He would write on July 15th to a KiOR scientific staffer: “We have a difficult but not an impossible mountain to climb. Let me think about this for a few hours, as I have been thinking along the same lines, lets discuss further tomorrow morning at 10 at my office.” Coates also set a meeting for July 18th to arrange the testing of the new materials in the demonstration unit.

In fact, Coates had determined to form a Task Force aimed at to changing the technology to a new one that could meet the Technical performance, in particular the bio-oil Yield and related production costs as disclosed in the S-1. He directed that the Task Force be composed from experts coming from KiOR and from outside.

An internal technical proposal was his guide. In it was proposed a new technology capable of increasing substantially the Bio oil Yields, scalable to commercial size Plants, and dramatically reducing the production costs. It involved the use of a new family of catalysts/heat carriers with dual functionalities discovered by Brady, Bartek and Stamires in 2009 and pending patent application. These were based on low cost clay, metal doped Spinel’s. These would have reduced catalyst cost by an order of magnitude.

Meanwhile, Coates met with Fred Cannon, CFO John Karnes and Chris Artzer on July 15th. According to a staffer who spoke with Coates, “He confronted them with the problems involving the inflated yields, under valued production costs and bogus financial projections. They rejected his claims. The State of Mississippi, which placed the meeting in August, stated:

During the course of this meeting, the State of Mississippi alleges that Coates told Cannon and Karnes that they had “cooked the books” and informed them that he was not “going to be a part of this scam.”

The meeting set for the 18th never happened. According to Stamires, Cannon and Artzer met with Coates in his office prior to 10 o’clock and fired him.

But there was still a hope that his work had not been in vain. Prior to being fired, Coates also, according to the state of Mississippi, “reported the results of his investigation to the Chairman of the Audit Committee of the Board of Directors, Gary Whitlock.”

Whitlock undertook a review, interviewing Fred Cannon, Andre Ditsch, John Hacskaylo and Chris Artzer, declined to hire third party experts, and concluded his investigation on July 22nd without further action.

As the state of Mississippi observed:

No member of the Audit Committee or the Board of Directors requested that outside counsel and/or independent technologists be consulted to examine the substance of Coates’ concerns. In contrast, when the SEC notified KiOR in 2014 that it was the subject of a formal securities fraud investigation, KiOR hired Special Investigative Counsel and an independent engineering firm to investigate the veracity of matters at issue. The matters brought to light by Coates were identical to those investigated by the SEC over three years later.

The reach-out to the CFO

By the end of July, members of the science team had become aware of the Whitlock investigation, and its closure.

Dennis Stamires recalled: “I reached out to John Karnes, the CFO, and I met with him on August 3rd and 4th, I showed him the data and asked Karnes to convince Cannon to stop disclosing false information to the public and to work with a Task Force to change the technology. Karnes promised me that he would do his best. I thought he Karnes was in a better position, as CFO, to convince Cannon to do something about it. I had presented him with information, but all I got was the same lip-service.”

For the science team, the urgency was not just an impending IPO, but a loss of morale and personnel. Jacques De Deken, Kevin Denicola, Robert Bartek and now Bill Coates had left. Catalyst expert Mike Brady was excluded from participating in the R&D meeting and from receiving technical information and resigned that month. Dr. Conrad Zhang, an expert on Biomass and bio-oil chemistry was re-assigned to teaching chemistry to some university students, and he later resigned.

One investor looks deeper

On September 17th, Samir Kaul of Khosla Ventures became the first investor to request supporting data. According to the state of Mississippi, “Kaul requested that Cannon provide him with the supporting data of the yields set forth in the graphs. He also asked that Cannon arrange a conference call for Cannon, Kaul and Ditsch to discuss the information.”

Outreach again to the CEO

Internally, nothing came of the outreach to Karnes, and Stamires attempted again in mid-September, this time meeting with CEO Fred Cannon. The meeting took place on September 20th, and Cannon was warned specifically that:

1. The R&D group under the leadership of Hacskaylo were “working in the wrong area of research, not capable of producing yields close to 84 gallons per dried ton of Biomass with reasonable quality, and production costs close to $2 per gallon of fuel.”

2. To date only minor improvements had been made on the zeolite catalyst, and it was able to reach actual and reproducible Bio oil yields no higher than 46-50 gallons per ton 15% or less oxygen content, at the KiOR’ Pilot plant with new more efficient Reactor licensed from CPERI.

3. The yields were far less from the those needed to sustain a profitable business, and substantially less than the 67 gallons per ton stated in the S-1 for the IPO.

Cannon received a follow-up email on October 10th repeating the same points. And on October 30th, Cannon received another email on this subject, urging him to form “a Task Force“ called “Project Team Oil Yield”, reporting directly to Cannon, composed of experts in the Field, to solve the present problems with the very low Bio oil yields and extreme high costs for producing the fuels.

Cannon did not reply.

Another investor gets nervous

On October 5th, John Schneider of Artis Capital Management, L.P. (a principal investor in KiOR) notified Cannon that Artis, as the state of Mississippi alleged in its lawsuit, “suspected that KiOR had not been honest in its public filings.”

A Climate of Fear

A KiOR insider from this period described it as a “fearful working atmosphere” by the end of 2011. For employees to “to survive and keep their jobs , and not being isolate or fired, they had to remain silent and accept the “party-line” involving the fraudulent and deceiving information fed to the public and investors.”

Paul O’Connor resurfaces

On November 29th, Paul O’Connor called Dennis Stamires and told him straight out that he had concerns about the authenticity of the data on yields and related costs which Hacskaylo has been reporting to the Board. In particular, O’Connor analyzed and compared the data the Board was receiving from Hacskaylo and noted several discrepancies.

The state of Mississippi in its lawsuit stated:

John Hacskaylo made a power point presentation to the Board of Directors in December 2011 that included a graph that plotted projected yields of 63 [gallons of] biocrude per bone-dry ton. Paul O’Connor compared the graph in the [latest] presentation to one that had been presented in February 2011 and concluded that the presentations were inconsistent.

Stamires and O’Connor agreed to work together to convince the board to launch an independent technology audit, but not to reveal their misgivings to the public just yet. Rather, they decided to focus on the Board or, alternatively, a direct approach to Vinod Khosla.

O’Connor recalls: “I was trying to be careful, because I had seen the tactic from some of the people, to silence people from revealing secrets. But I felt if you know what the problem is, you can solve it.”

The two also agreed to try to engage Professor Vasalos in the Audit . He was an expert on biomass conversion to fuels and had reviewed KiOR’s technology and data from the pilot and demo units. Also, he had spoken to Cannon about changing the KiOR’s technology to improve yield. They agreed he was in an excellent position to conduct an unbiased diligent assessment of the status of KiOR’ technology, and O’Connor agreed to meet with Vasalos in Amsterdam.

The state of Mississippi said:

O’Connor emailed Samir Kaul on December 14, 2011 to notify him…having received no response, O’Connor sent another email to Kaul on December 17, 2011 that further elaborated his concerns.

Meanwhile, Stamires reached out to Jennifer Camacho, an Attorney from Greenberg Traurig in Boston, who did patent and freedom to operate work for KiOR. Stamires knew that Camacho had a long good relationship with Samir Kaul, having worked together at another company before KiOR, and he knew that Camacho had frequent discussions with Kaul regarding KiOR’s activities.

Stamires recalls: “By now I had a real sense of urgency, and I asked Jennifer to brief Samir about Hacskaylo’s manipulation and falsification of the data, and the highly inflated yields. I told her that incorrect data may not only adversely affect the financials of KiOR’s business, but also may compromise the legal validity of patents based on false data.”

On December 12th, Camacho replied to Stamires, writing: “Thanks for your note. I will reach out to Samir tomorrow.

A company falling into the abyss

By the end of 2011, the company had filed for its IPO, and what have been described as “false data”, “overstated yields” and “unrealistic financial projections” are in the public domain. The COO came and went. Top science people had resigned. Investors were showing signs of nervousness. The first commercial’s project cost had ballooned $90 million. Representations to the state of Mississippi would be later characterized by the state as “fraudulent.”

The root cause: the low yields and oxygen-replete product. Which go back to ineffective catalyst; the only ones working much at all are said to be ruinously expensive.Pleas to revise the technology ‘before it is too late’ were going unheard.

Truly, KiOR is beginning to slip over the precipice and down into the abyss. But some remain hopeful that KiOR can be saved, that a better science result will save the company. Differing voices express differing ideas on how to achieve that.

Could the catalyst finally work? Would it work in the design for the first commercial, which is well on the way to being finalized. KiOR may be failing as 2011 gave way to 2012, but perhaps the staff could catch a branch and stabilize before tumbling into the darkness.

Maybe, just maybe…

We’ll see how all those hopes worked out in the next part of our series, as KiOR readied for its commercial unit and sailed towards a date with NASDAQ and its IPO.

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.

August 02, 2016

Offshore Wind Blows Into The US: Seven Stocks To Catch The Breeze

Tom Konrad CFA

The Growth of Offshore Wind

Offshore wind has finally gotten a toe hold in the United States.  

The United States' first offshore wind farm, the 30 megawatt (MW) Block Island Wind Farm, is under construction.  A new project, the South Fork Wind Farm will be  three times the size of Block Island (90 MW), is set to be approved by the Long Island Power Authority.  This project will be located 30 miles East of Montauk, NY and Southeast of Block Island in a wind energy area designated by the federal Bureau of Ocean Energy Management (BOEM.)

BOEM also recently designated 81,130 acres of outer continental shelf off New York's Long Island and New Jersey as a new commercial wind energy area.  This area's proximity to some of the nations' most expensive and capacity constrained parts of the nations' electric grid make it an excellent site for relatively expensive but abundant offshore wind energy.

Both are projects of Deepwater Wind, the country's leading offshore wind developer.

Offshore Wind Stocks: Over The Horizon

Investors looking for a way to invest in offshore wind will be disappointed to note that Deepwater Wind is principally owned by the D.E. Shaw group, a privately held partnership.  The best investment opportunities in offshore wind stocks are, like offshore wind itself, often located beyond the horizon.

One place to look for stock market investments are the suppliers to wind farms.  Offshore wind turbine suppliers are a natural first choice.

GE (NYSE: GE) is supplying the turbines for Block Island Wind.  Again, this will be a little disappointing to stock market investors.  While GE is a publicly traded company, offshore wind turbines are not a significant part of its business.  The company's Renewable Energy segment accounts for less than 20% of total revenue, and offshore wind is a tiny fraction of that.

Offshore wind turbines tend to be larger and more rugged than their onshore counter parts.  The large size is due to the expense of foundations, making it important for an offshore farm to generate as much power as possible from each turbine.  A typical onshore wind farm uses turbines with peak power output of around 2 MW each.  Block Island is using just five 6 MW turbines.

These large sizes make it difficult for new entrants to challenge established manufacturers.  This means that offshore wind manufacturers a very elite bunch.  This is good for offshore wind investors because it means that industry incumbents (which are often public) are likely to remain leaders for far into the future.  But it is bad for investors looking for a pure-play exposure to offshore wind.  Offshore wind turbine manufactures simply do not exist without a large onshore wind business to support the investment in manufacturing and R&D.

Most wind turbine manufacturers serve both the onshore and offshore market, but the ones with the biggest names in offshore wind are European players Siemens AG (OTC:SIEGY) and Vestas (OTC: VWDRY). 

It's not particularly surprising that European manufacturers lead the offshore wind turbine market, since Europe has long been the leading offshore wind market.  Because offshore wind sites are almost by definition accessible by ship, I expect that the early dominance of European offshore wind manufacturers will prove to be more durable than the early dominance of European solar manufacturers proved to be in the early 2000s.


Another way offshore wind is different from its onshore cousin is the need for underwater electrical connection to shore.  Again, investors will not find pure-play offshore wind companies, but underwater cables need to be strong and durable enough to survive decades under salt water and the occasional encounter with a ship's anchor or other submarine hazard.

Submarine cables are expected to be the fastest growing segment for electrical cable manufacturers over the next five years.  US-Based General Cable (NYSE:BGC) and European Prysmian S.P.A. (OTC:PRYMF) both have large submarine cable businesses.

Owners and Developers

No article on offshore wind stocks would be complete without a mention of Danish energy giant Dong Energy A/S (Copenhagen:DENERG.)  Dong is a diversified energy developer and utility with a focus on sustainable energy.  The company has long pioneered new offshore wind technology, and is a leading European developer.


Much of the investment in offshore wind is under the surface of the water, in the foundations.  Constructing these giant, incredibly strong structures under windy seas is also a technical feat requiring specialized equipment.  Holland's Sif Group (Amsterdam: SIFG) is the leader in this market, where it gets approximately two-thirds of its revenue.  This makes Sif the closest thing to a pure-play offshore wind company available.  The balance of its revenue comes from foundations for oil and gas.


Offshore wind is a rapidly growing and exciting form of renewable energy, and the established industry leaders have wide moats protecting them from startup competition.  This combination means that current leaders are likely to continue to lead, but it also means that pure offshore wind exposure is difficult, if not impossible to find.  The only stock that is more offshore wind than anything else is Sif Group, and that company's exposure to oil and gas may be too much for some investors excited about renewable energy.

This article was first published on GreenTech Media on July 19th.

Disclosure: Tom Konrad manages and invests in The Green Global equity Income Portfolio, which owns BGC.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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