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September 13, 2014

Sketches of DuPont's Cellulosic Ethanol Project in Nevada, Iowa

Jim Lane 

It towers above the surrounding Iowa countryside like the Launch Assembly Building lords it over Cape Canaveral — it’s the new DuPont (DD) cellulosic ethanol project, on the outskirts of the town of Nevada.

Functional yet inspiring, imposing yet accessible — when it opens before year end 2014 it is sure to be a monumental addition to the cellulosic biofuels landscape.

Last week we wrote:
“There are strategic reasons to develop this new industrial bioscience business in central Iowa — not just the “we’d love to have you, wages are low, cost of living’s cheap, and no unions” factors that are of genuine appeal to companies — but pertain to Mumbai and Shenyang, too.

That’s not to say that there’s no competition for Nevada. There’s corn stover a-plenty in the Midwest — and many towns and industrial parks rail spurs, power, water, skilled labor and local growers. Blair (NE), Eddyville, Fort Dodge, Clinton, Hugoton (NE), just to name a few.

But once built, they’ll stay, so long as the economics of the product stay sound, And the more infrastructure you build, the more that is there for the next business to tap into. So — these little Metropoli have every reason to hope for growth — and for higher-skill, higher-wage positions to continue to appear, and not to disappear.”

Biomass intake

The biomass intake system — still with a few construction workers in view — that will accept the corn stover and crush it down to a relatively fine powder — there’s some chopping involved, and some hammering, to get the desired consistency for the enzymatic hydrolysis.

Biomass Silo

This unit above looks like the first stage of the Saturn V rocket, but it’s really almost a silo — holding biomass after intake. After this unit, it will proceed left to the core hydrolysis technology where proprietary enzymes will separate out the C5 and C6 sugars

Fermentation and hydrolysis units

The units above include the large hydrolysis unit to the rear, and the fermentation units — three of them, in the front. It’s bacterial fermentation, so that’s a change of pace from the more-traditional yeast.

fermentation, hydrolysis, storage

Here, you see most of the same technology — and some storage, from a different angle, but you also note there’s still a lively construction crew on site, pushing the project towards completion. That’s Fagen — so well known during the first-generation of ethanol construction.

Distillation

Distillation comes last, where the ethanol is separated from the “beer”.

Crane

Here. you can see the official bird of cellulosic biofuels — the crane — spotted all over Iowa and spreading into Kansas of late.

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.

April 18, 2014

Cosan: Brazillian Sweetheart

by Debra Fiakas CFA

The first thing we think about Brazil in the context of alternative energy is sugar cane and ethanol.

In the last growing season Brazil producer 596 million tons of sugar cane, a feat that secured Brazil’s position as the largest sugar cane grower in the world.  About 55% of the crop was used to producer ethanol and the balance ended up as sugar.  Brazil’s sugar cane industry association has predicted that despite a severe drought, the 2014-2015 growing season will be even more productive with expected sugar cane production in the range 632 million tons to 636 million tons.  About 40% of Brazil’s sugar cane is produced by a highly populated group of independent farmers. 

Investors are perhaps more interested in the processors.  The three largest processors in Brazil include Cosan Ltd (NYSE:CZZ), Sao Martinho and Acucar Guarani.

Like many of the other sugar cane processors Cosan is integrated backward in to sugar cane growing and as well as forward into ethanol production.  Cosan controls the world’s largest sugar cane processor Raizen, SA in a partnership with Royal Dutch Shell.  Riazen has a capacity to crush as much as 65 tons annually, but only reached 62 million tons in the 2013-2014 growing season.  That represents approximately 10% of Brazil’s sugar cane crushing capacity.  The company earned $4.5 billion in sales in the last twelve months, representing 15.7% growth over the prior year.   Cosan earned a 3.2% net profit during the year.
 
Raizen is expected to benefit from government support for ethanol production.  The Brazilian national development bank recently announced major financing package for the construction of Raizen’s cellulosic ethanol project in Sao Paulo state.  The plant is apparently designed to rely on Iogen’s cellulosic ethanol technology and is estimated to require US$90 million for construction.  Raizen management has bragged that within ten years it will have as many as eight plants producing advanced ethanol.  Already the company has pledged to invests US$7 billion to increasing sugar cane crushing capacity by 50% or 100 billion tons. 

Cosan trades on the NYSE under the symbol CZZ and has been on a long-term downward journey since the beginning of last year.  That has left the stock trading at 11.4 times forward earnings.  Before investors jump to buy these seemingly cheap shares, it is well to look at the long-term and short-term character of the stock’s trading.  The stock has been attempting something of a seasonal recovery over the past month as the company has just released its financial results for the year ending March 2014, which coincides with the last growing season.  The upward trend appears to be proceeding with some strength, but it might be prudent to wait for the stock to take a bit of a breather before loading up for a long position.
 
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.

February 12, 2014

Lessons From Tesla: Building An Ethanol Market

Jim Lane 

E85 ethanol? Been stuck with low sales for years – with producers pointing to “no market access”.  Yet, Tesla was faced with “no market access” — and built its own market. What lessons can be learned?

Last week, Tesla Motors (NASD:TSLA) announced the completion of its transcontinental US Supercharger Corridor, a network of stations that enable Model S owners to (somewhat) rapidly recharge their Teslas on a cross-country drove. And intrepid Tesla blgger Hamish McKenzie relayed the news last week that two Tesla Model S sedans completed a 76-hour coast-to-coast all-electric crossing.

The news follows closely on the announce from last October that Tesla had completed its West Coast Supercharger Corridor, a network of stations between San Diego, California and Vancouver, British Columbia.

Tesla Superchargers are substantially more powerful than any other charging technology — providing half a charge in as little as 20 minutes via Superchargers that are strategically placed along major highways connecting city centers.

How much do you pay for a recharge? A dollar per KW, 20 cents, a dime, a nickel?

Actually, Tesla gives you the power for free.

In terms of alternative fuels technology, you have to salute their achievement. They’ve taken a long-mentioned problem with all-electrics — the absence of rapid recharging stations that shuts down the effective range of the vehicles — and turned it in to a product advantage.

Turning to E85 ethanol’s market access woes

Turning to liquid alternative fuels such as E85 ethanol — it goes without saying that the Renewable Fuel Standard would be intact if the ethanol industry had been so intrepid and built a network of E85 stations that addressed that fuels’ challenges as adroitly as Tesla addressed theirs.

It is a different challenge, of course. It’s not about extending range, since there are already 3,000 stations in place — nor about repaid fill-up, since E85 fills up rapidly. The issue with E85 is cost. 85-cent E85 gets them lining up around the corner. $3.00 E85 is a non-starter that has been failing ever since it was brought to the market.

In the case of Tesla, they correctly concluded that oil companies were not going to build a network for them — thereby handing a new market Government funds are sometimes available, but grants are unreliable in size and scope. Your friend at the state or national capital might just be as likely to build something you don”t really need, at a cost you can’t afford. Consider, for example, the $1 million per outlet that California is spending on building a hydrogen fueling station network.

According to the Digesterati, who provided some figures on the subject this week, there are now more than 15 million flex-fuel cars built in the US, with 5 million new vehicles on the street just last year. Detroit has done a good job.

Now, the world does not need blender pumps, it needs low-cost fuels — low enough to induce people to make a switch. Which is to say, more than a 50-cent discount to conventional fuels. In fact it needs an 85-cent discount – available every day.

Who’s going to provide that? Ethanol producers, via their own network. One corridor of, say, 20 stations coast-to-coast, saving drivers 85 cents per gallon and providing a lesser, but still notable, reduction in cost per mile. Backed by meaningful promotion.

That’s the kind of publicity that drives market awareness, market acceptance. Makes a flex-fuel vehicle something worth having, something worth understanding. Sure, early adopters care about carbon, but the mass market cares about price and performance

Consider the math this way.

If just half of the 15 million drivers with flex fuel cars chose E85 just half the time, that would equate to roughly 2.25 billion gallons of additional demand per year. The Renewable Fuel Standard would not have any problems based on blend wall, today.

Demand begins with acceptance, acceptance begins with experience, experience begins with incentive.

If every ethanol producer contributed one penny per produced gallon at an E85 development fund, that would represent enough cash to outfit 125 stations with a blender pump and 200 gallons per day of discounted fuel, for one year. With plenty left over for promotions like 85-cent per gallon fuel-ups on special days, or at special locations.

That’s would equate to an average range distance of 150 miles between E85 stations, which is to say that you could drive just about anywhere in the US on discounted fuel.

That’s a market solution to the blend wall problem that costs the taxpayer nothing, and does not require a separate mandate, incentive, tariff, subsidy, grant or tax credit.

Here’s the data on those 15 million flex-fuel vehicles.

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.

January 30, 2014

The Proof in Ceres' Pudding

by Debra Fiakas CFA

Cereslgo[1].jpgJudging by stock prices, investors have decided Ceres, Inc. (CERE:  Nasdaq) is the favorite horse in the cellulosic ethanol race  -  at least among those that have publicly traded stocks.  Ceres develops and sells sorghum, switch grass and miscanthus seeds to feedstock growers that supply cellulosic ethanol mills. The stock is selling for a buck and change, which is far more impressive that the stocks of most companies that could be included in the “cellulosic biofuel” sector.

Ceres announced fiscal second quarter 2014 results at the beginning of this month.  The company cited sorghum plantings this season for forty-nine customers in Brazil.  That sounds impressive, but most of the plantings are for sampling and testing so that mills can evaluate potential yield.  It is not like Ceres has not been testing its sorghum.  The company used a grant from the Department of Energy to test various plant traits.  Ceres has done so well with its plant trait development it was able to get a U.S. patent for a sorghum-derived gene promoter.

Ceres reported $4.0 million in total sales over the last twelve months.  Profits are still on management’s wish list.  The company is still using cash to support operations  -  $5.7 million in the November 2013 quarter.  The good news is that the cash burn rate has been brought down to from a run rate near $28 million in fiscal year 2013 to $23 million per year.   Management has undertaken some cost cutting measures that appear to be yielding results.

The proof is always in the pudding.  For Ceres the pudding is in forty-nine sorghum field trials in Brazil.  Orders from any one of those Brazil mills is a solid endorsement for Ceres and provides a compelling support for the value of the company’s new patent.
 
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.

January 02, 2014

Corn Ethanol On The Chopping Block: Can Green Plains Escape?

by Debra Fiakas CFA

Legislation introduced in the U.S. Senate has put corn-based ethanol fuel on the chopping block.  The bill’s title says it all – Corn Ethanol Mandate Elimination Act of 2013.  Put into place in 2005, the Renewable Fuel Standard required refiners and blenders to use 16.6 billion gallons of renewable fuel in 2013, of which approximately 13 billion gallons will be met through ethanol made from corn. 

Support for the legislation is coming from all quarters.  It is not surprising that poultry, dairy and beef people would think this is a good idea, since corn-ethanol producers have driven up the price of corn-based feeds.  Likewise the oil and gas industry is an expected supporter.  It is surprising to find environmental and outdoor recreation groups calling for the demise of corn ethanol.

Widespread support means the legislation is more likely than not to pass, so it seems like a good time to check on the stocks of public corn ethanol producers.  One would expect the stocks to trade down on the news.  The thing is the stocks prices of most of the corn ethanol producers were already deeply depressed even before the current legislation was in the planning stage.  That might have something to do with the fact that conventional as well as cellulosic ethanol producers alike have largely failed to reach profitability.

The exception is Green Plains Renewable Energy, Inc. (GPRE:  Nasdaq) .  During the twelve months ending September 2013, the company reported $3.2 billion in revenue from the sale of ethanol, corn oil, distillers gains and other livestock feed additives.  Green Plains turned those sales into $127.9 million in operating cash flow.  A cash conversation rate of 4% might not seem very high, but in the ethanol industry where most companies are losing money it is impressive.  No other public ethanol producer can boast such success.   What is more Green Plains has a history of profitability and positive cash flow generation.

At the time the mandate elimination bill was introduced GPRE was trading at 11.1 times trailing earnings.  The unfriendly vibe from Washington DC should have driven the stock down.  However, two weeks later it is trading higher at 12.5 times those same earnings.  In the intervening time Standard & Poor announced it was adding GPRE to the S&P Small-cap 600 Index.  Portfolio managers using the S&P 600 Index were required to immediately step into the market and buy shares of GRPE to bring portfolios in-line with the revised index.

The gap higher in trading last week was just a head fake.  GPRE is not a stock that is ultimately headed to new highs.  At least that is my view.   The corn-ethanol mandate is likely to occupy discussion in the press for a number of weeks and possibly months.  The discussion will not bode well for valuation of even a highly successful corn-ethanol producer.

A few facts regarding the ownership of GPRE might help in anticipating how the stock might behave.  First, the majority of GPRE shares are held in managed accounts rather than by individual investors.  Professional managers tend to be a bit less susceptible to unfounded rumor, but once a sell decision is made it can involve sizeable volume. Second, note that 27% of the float in GPRE had already sold short.  The recent gap higher in price might have washed a few out, but short sellers are likely to circle even closer around GPRE in the weeks ahead.

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.

December 23, 2013

The Other Cellulosic Fuel

by Debra Fiakas CFA

In an article posted in November I incorrectly named the product of Kior, Inc. (KIOR:  Nasdaq) as cellulosic ‘ethanol’.  Kior does indeed use cellulosic biomass -  wood chips to be exact  -  but the company’s catalytic pyrolysis technology turns out crude oil that can be further refined into gasoline or diesel.  Ethanol, on the other hand, is the product of a fermentation process. 

There is nothing new about catalytic pyrolysis  -  superheating in a container with no oxygen.  Oil refiners have been fracturing large, complex hydrocarbons using heat and catalysts for a long time.  However, sending biomass through this process is quite different than breaking down crude oil.  Hydrocarbons like crude oil are made up of hydrogen and carbon.  When wood chips, for example, are processed, the end result is pyrolysis oil and a lot of char. 

The pyrolysis oil holds oxygen.  Here is where Kior’s proprietary catalyst comes into play.  By infusing the biomass with a catalyst, the oxygen components of the pyrolysis oil can be upgraded to something closer to a hydrocarbon.

Kior management has been careful to characterize its frequent delays and setbacks as unrelated to its catalyst technology.  However, just the word char should provide investors with a clue as to how there might have been problems in perfecting the process.  Char is messy.  Likely there has been unexpected wear and tear on the equipment and perhaps the catalyst has become unexpectedly contaminated with ash.

Kior is not the only company to pursue this technology.  Ensyn Corporation has been working on its technology to use heat to thermally crack carbon-based feedstock.  Ensyn calls it the Rapid Thermal Process or RTP.  Ensyn makes use of heated sand to trigger the cracking of the feedstock into gases and vapors.  Ensyn has reached commercial production at its Renfrew RTP Facility in Ontario, Canada.  The facility can process up to 150 tons of dry material per day.  The company plans another plant of similar size in cooperation with an Italian partner.  An even larger plant is in the engineering stage in Malaysia.

Ensyn benefits from a partnership with Honeywell’s (HON:  NYSE) UOP Division.  The two have formed a joint venture called Envergent Technologies.  Ensyn has several other partnerships and strategic affiliations aimed at penetrating the market with its renewable fuels.  The company claims over 65 million liters of its RTP renewable fuels have been used as commercial heating fuel by industrial customers.

Unlike Kior, which must report its progress every three months to the public, Ensyn enjoys the cloak of privacy.  Its failures, if it has experienced any, are kept in the family.  Kior has lost more than one-third its value in the six weeks since my article in November.  The company’s chief financial officer resigned unexpectedly in early December, leaving shareholders wondering if some sort financial time bomb is ticking away at Kior.  Its technology may be proven, but its business model has yet to pass muster. 
 
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.

December 20, 2013

Sweetwater and Pacific Ethanol Strike Supply Deal

Jim Lane

In New York, Sweetwater Energy and Pacific Ethanol (PEIX) announced a project to supply customized industrial sugars for the production of cellulosic ethanol. The agreement supports the construction of a cellulosic biorefinery, contingent upon Sweetwater Energy obtaining the necessary financing and permits, at the Pacific Ethanol Stockton facility capable of producing up to 3.6 million gallons of cellulosic ethanol annually.

Pacific Ethanol operates and manages four ethanol production facilities, which have a combined annual production capacity of 200 million gallons in Boardman, Oregon, Burley, Idaho and Stockton, California, and one idled facility is located in Madera, California.

Sweetwater Energy will use its patented, decentralized process to convert locally available cellulosic material, such as crop residues, energy crops, and wood waste into a sugar solution, which Pacific Ethanol will ferment into cellulosic ethanol at its Stockton, CA refinery.

Fifth major deal of 2013 for Sweetwater

The deal is the fifth major deal announce by Sweetwater in 2013. In addition to Pacific Ethanol, the company announced similarly-structured agreements with Colorado-based Front Range Energy and Ace Ethanol, both in January. More about those, here.

In March, the company announced a $250 million, 15-year pact to provide Naturally Scientific with customized industrial sugars, in a transaction valued at $250 million.

In October, Naturally Scientific and Sweetwater announced a project to produce sugar from waste carbon dioxide. The new technology converts carbon dioxide taken directly from the emissions of industries such as ethanol refineries, natural gas power plants and many others, into usable sugars — and expands Sweetwater’s sugar-production reach beyond biomass-based, second-generation feedstocks into third-generation feedstocks.

Adding the ability to create sugar from carbon dioxide means Sweetwater can supply biomass- based sugar to an ethanol refinery, for example, and then also capture the carbon dioxide that’s a byproduct of the ethanol production to create emission-based sugars, which can be turned into oils, biodiesel, or other products.

Reaction from the partnersPacific Ethanol logo

Neil Koehler, CEO of Pacific Ethanol, stated, “An important part of our long-term strategy is to take advantage of the flexibility of our plant infrastructure to process alternate feedstocks such as sugar, corn and other grains, and now sugars produced from cellulosic material. The Sweetwater platform furthers our initiative in producing next-generation fuels such as cellulosic ethanol while providing additional flexibility in sourcing, reducing feedstock costs and enhancing plant operating margins.”

“We are very pleased to work with Pacific Ethanol on this project,” says Arunas Chesonis, Chairman and CEO of Sweetwater Energy. “We are going to start by supplying up to 6 percent of Pacific Ethanol Stockton’s feedstock requirements and, as our partnership grows we will evaluate increasing the amount.”

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.

November 27, 2013

Why Have Ceres' Sorghum Plans Soured?

Jim Lane
360px-Sorghum_bicolor_%286442164465%29[1].jpg
Sorghum Bicolor photo by Matt Lavin

As Ceres points towards minimal plantings of its sweet sorghum hybrids in its key market of Brazil for next year, investors ask two questions.

Will sweet sorghum realize its vast potential, and when?

Just when many observers hoped that Ceres, Inc. (CERE) would dramatically expand hectares planted with its Blade hybrid sweet sorghum, the 2014 planting outlook was released last week and the total hectares crashed from 3000 in 2013 to 1000 in 2014.

It’s a far cry from the 8,000 hectares modeled earlier in the year by energy analyst Pavel Molchanov at Raymond James and back in spring 2012, energy analysts Michael Cox and Mike Ritzenthaler at Piper Jaffray wrote: “We are modeling Ceres sweet sorghum plantings to increase from 3,400 hectares to 25,000 hectares next season.”

And 2013′s result came in at 3,000 hectares.

The result? Ceres’ break-even has been pushed back to at least 2017. The company, which has $30 million on hand and is expected to burn $21 million in 2014 to cover development-stage losses, is going to need to raise capital in the next 12 months.

The opportunity

Now, it’s not a trivial feedstock — in fact, it could well be key to health for the Brazilian ethanol sector. As Molchanov writes, “Ceres’ sweet sorghum provides a solution: it can extend a mill’s operations by ~60 days, yielding an estimated $9 million of EBITDA uplift.”

Why? As Ceres pointed out in its original IPO filing, “Due to the inherent limitations of sugarcane physiology and growth patterns, Brazilian mill operators, which have an estimated 3.4 million metric tons per day of crushing capacity, can only obtain usable sugarcane approximately 200 days per year.”

Accordingly, the company staked its sweet sorghum fortunes on Brazil. As we wrote in 2012: “The company’s IPO leans heavily on its prospects in Brazil, where growers and mills see an opportunity to extend mill operations by up to 60 days via sweet sorghum. Such an extension would add, at full capacity, as much as 10 billion gallons of ethanol production on existing land.” Ceres management added: “Our largest immediate commercial opportunity is the Brazilian ethanol market, which currently uses sugarcane as its predominant feedstock.”

The Risks

At the time of the IPO, Ceres shared many of the risks with prospective investors, mostly relating to scale-up and the time it takes for grower adoption. We translated some of those into English in our 10-Minute Guide to the Ceres IPO:

In IPOspeak: The markets for some of our dedicated energy crops are not well established and may take years to develop or may never develop and our growth depends on customer adoption of our dedicated energy crops.
In English: If biofuels and biopower do not scale globally, we are toast.

In IPOspeak: Our crops are new and most growers will require substantial instruction to successfully establish, grow and harvest crops grown from our seeds. A significant increase in the price of sugar relative to the price of ethanol may reduce demand for our sweet sorghum and may otherwise adversely affect our business.
In English: We hope not to be “Son of D1 Oils”.

In IPOspeak: We are at the beginning stages of developing our Blade brand and we have limited experience in marketing and selling our products. Our principal competitors may include major international agrochemical and agricultural biotechnology corporations, such as Advanta, Dow Chemical, Monsanto, DuPont and Syngenta, all of which have substantially greater resources to dedicate to research and development, production, and marketing than we have.
In English: Big Ag may swoop in and take away all our toys.

Competitive forces: Monsanto, DuPont and Syngenta

Is it low yields? Low levels of attentiveness from hard-presssed Brazilian ethanol producers; or a glut of seed players crowding into a development-stage opportunity?

Turns out, could be a combination of all three.

Among the traditional agriseed companies, Monsanto (MON), DuPont’s (DD) Pioneer unit and Syngenta have been actively taking an interest in bringing sweet sorghum to market. Syngenta paired up with Ceres, DuPont with NexSteep and Monsanto has been going it alone.

Hopes were high at one stage. In particular, Monsanto distributed seed equivalent to 20,000 hectares for the 2012 planting season, with 20 mills as customers — and at the time, Jose Carramate at Monsanto told Bloomberg, “This year will be the magic year. We could see 100,000 hectares planted next year at the very least.”

Accordingly, it was cheery news for Ceres investors at the time of its 2012 IPO that “Management has claimed that early indications point to their hybrids performing better than those of their competitors.” Indeed, in product development trials and at the company’s breeding center (Note: where field evaluation plots are irrigated and managed more closely than commercial fields), Ceres hybrids averaged 80 or more metric tons per hectare. Subsequent field evaluations in the Southeast U.S. last summer confirmed similar results.

And, the company, under a DOE grant and in partnership with Amyris (AMRS), successfully demonstrated processing of their sweet sorghum into renewable diesel.

Ceres and Syngenta

So it, was doubly cheery news, when the company struck a sweet sorghum market development agreement with Syngenta in late 2012 and extended it just two weeks ago. Under the renewed agreement, Syngenta and Ceres will continue to collaborate on field evaluations with mills. Syngenta will evaluate its portfolio of crop protection products alongside Ceres hybrids, while Ceres will provide both seed and research support.

With 400+ ethanol mills in Brazil alone, the Syngenta partnership did much to boost seed marketing expectations for Ceres. But, it is not just a case of fending off Monsanto in a big market. There’s DuPont, as well.

DuPont and NexSteppe

DuPont made an equity investment in NexSteppe, and through its Pioneer Hi-Bred business, is providing knowledge, resources and advanced technologies to help the company accelerate the breeding and commercialization of new hybrids of these crops in the United States and Brazil.

Um, who is NexSteppe?

NexSteppe is developing sweet sorghum, high biomass sorghum and switchgrass to produce feedstocks tailored for these biobased industries. NexSteppe is also refining crop management practices and supply chain operations to provide optimized, fully-integrated feedstock solutions. The company was founded just a couple of years back by CEO Anna Rath, who raised $14M in the company’s Series B investment round and counts Braemar Energy Ventures, DuPont, CYM Ventures and Zygote Ventures among the investor group.

The focal points? As with Ceres, a germplasm collection, breeding team and technology platform. The company also indicates thus: NexSteppe: “We are dedicated to overcoming the difficulties faced by processors of our crops, from process-specific compositional optimization to location-specific crop management practices to project-specific feedstock supply-chain solutions.”

Yields

According to Molchanov, “Ceres stated that greater-than-expected variability in the yield data from this past season would cause FY14 plantings to “grow more modestly than originally anticipated.” That’s couched in pleasant terms, but the reductions caused Molchanov to reduce his share price target from $20.00 to $1.97 in recent months.

Grower adoption rates

Now, the presence of so many seed options, and yield troubles, invariably will press down hard on the acreage available to Ceres. But there’s a ray of hope.

Though hectares have dropped considerably, the number of mills doing trials has jumped from 30 to 50. In fact, one of the ongoing trends has been the sharp reductions in hectares per trial. In the case of Monsanto, the seed volumes covered 1000 hectares per mill. In the 2013 Ceres trial programs, that figure dropped to 100 hectares per mill. For 2014, the trials are down to 20 hectares per mill.

Good, though, to see that the number of trials has jumped to as much as 20% of the total number of mills.

What about the US Market?

Yep, there’s a US market, too, though far more fuzzy in exact potential, and longer-term in nature. Hence the focus of Ceres and NexSteppe on Brazil.

Another player, focused on the US, is Epec, which includes in its management ranks CEO Ron Miller, former Aventine CEO, and Executive Chairman Steve Vanechanos, Sweet Sorghum Ethanol Association Director, technology entrepreneur, and former member of the Board of Governors for the American Stock Exchange.

Last year, Epec hit the headlines when BioDimensions Delta BioRenewables announced a strategic equity investment from Epec. The investment, it said, will allow the company to install a demonstration sweet sorghum semi-works processing facility at Agricenter International in Memphis, as well as resources to accelerate technology and market development for sweet sorghum industrial sugars and co-products.

By last December, that collaboration bore fruit, when Delta BioRenewables delivered its first-ever commercial-sized batch of sweet sorghum juice to the Commonwealth Agri-Energy plant in Kentucky.

Kentucky has set itself as something of a center for sweet sorghum. In the summer of 2012, Southeast Biofuels was spotted promoting sweet sorghum in the Kentucky legislature as the Interim Joint Committee on Agriculture and Small Business meets. The company had at the time just produced over a million gallons of ethanol from sweet sorghum, and was developing a processing unit to fit on a tractor trailer, suitable for a small farm operation.

The bottom line

The real culprit here is fast-falling hectares per trial. Had the industry been recording the kind of averages that Monsanto delivered in 2011, we’d be looking at 50,000-80,000 hectares and investor sentiment would be quite different.

But “greater-than-expected variability” in the yield data is going to create a bottleneck for the sweet sorghum developers — now just a drag on Ceres’ share price, but a drag on the upside in Brazilian ethanol margins if they cannot access the 60-day additional harvest window in the next few seasons.

And, with export opportunities constrained, producers will be watching the margins and yields more closely than in boom times when capacity and production is all that matters.

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.

October 14, 2013

Green Plains, Green Profits

by Debra Fiakas CFA

Green Plains Renewable Energy, Inc. (GPRE:  Nasdaq) is one of the few U.S. ethanol producers to turn a consistent profit.  The company is half way through its fifth consecutive profitable year.  Sales in the most recently reported twelve months totaled $3.4 billion, on which the company earned $40.5 million in net income.  During this period Green Plains generated $100.0 million in operating cash flow.

Tracing Green Plains profits requires a bit of effort by investors.  The company channels its products through a marketing and distribution division.  Thus while, ethanol production represents about one-third of total revenue, it has reported significant operating losses.  Production losses are offset by profits in each of the other segments.  Corn oil production and agribusiness products such as distiller grains provide the majority of profits.

Green Plains operates nine ethanol plants with a total production capacity of 740 million gallons per year.  At a capacity the ethanol process Green Plains uses can generate up to 150 million pounds of corn oil and 2.1 million tons of distillers grains.  The company has built up through a combination of new construction and acquisitions.  We expect more of the same in the coming years. 

Green Plains has plenty of cash in the bank, especially after closing debt offering of $120 million last month.  We estimate Green Plains now has $320 million in cash on its balance sheet.  Some of that cash may be used to pay down higher coupon debt.  The new debt carries an interest burden of 3.12% compared to a coupon of 5.75% on the existing convertible senior notes.  Green Plains has a total of $518 million in debt, representing about 51% of the company’s total capital.

Even if some of the funds are diverted to debt pay-off, we expect management to look more seriously at investments for growth.  One of the company’s more interesting ventures is BioProcess Algae, which is developing technologies for growing and harvesting algal biomass.  Of course, additional ethanol production capacity and grain storage capacity are also on management’s wish list.

At the current price level GPRE is priced at 11.8 times forward earnings  -  no significant bargain compared to the trailing price earnings multiple of 12.5.  However, compared to the broader specialty chemical sector, GPRE is trading well below the average.

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.

October 09, 2013

The Andersons: E14 Ethanol Blend

by Debra Fiakas CFA

The Andersons (ANDE: Nasdaq) is not one of the first companies that comes to mind as an alternative energy company.  However, ANDE has been in the Ethanol Group in our Beach Boys Index for some time.  Ethanol is one of six revenue sources for The Andersons, contributing $743 million to the top line in the year 2012.  That represents about 14% of The Anderson’s total revenue base.  The company produces ethanol in four plants located in the Midwest with a production capacity of 330 million gallons per year.
Andersons Ethanol Plant
The Andersons Clymers Ethanol
Plant, Logansport, Indiana

Unfortunately, the ethanol segment is not consistently profitable.  In 2012, the company disclosed a $3.7 million operating loss on the $743 million in ethanol sales.  This follows a small profit of $23.3 million in 2011.  The ethanol operations were hit by narrowing profit margins, but the real problem in 2012 were substantial losses in unconsolidated operations, in which The Andersons have invested but do not have control.

All of the company’s other five segments are profitable.  Consequently, The Andersons has delivered profits in every one of the last ten years.  In the most recently reported twelve months The Andersons reported a net profit of $73.6 million on $5.7 billion in total sales.  Cash generated by operations totaled $402.9 million, representing a sales-to-cash conversion rate of 7.1%.

Unfortunately, the consistency in earnings and cash flow has not impressed investors.  The stock trades at 17.6 times trailing earnings, while other food commodities companies trade near 22.0 time earnings.  ANDE trades at lower multiples of sales, cash flow and book value as well.

Alternative energy companies have been slow to achieve profitability.  They frequently operate at a loss for so long it is necessary to raise capital, diluting the equity positions of early investors.  It makes sense to take an alternative strategy  -  invest in established companies that have integrated alternative energy projects into conventional operations.

A review of historic trading patterns in ANDE suggests the stock has developed enough momentum to reach a stock price near $86.00.  This target price represents 25% upside from the current price level.  It is also a multiple of 15.7 times the 2014 consensus estimate  -  well below the company’s peer group.  A forward dividend yield of 0.9% is better than a poke in eye with a sharp stick.

Thus a position in ANDE gives investors consistent financial performance at a decent price from a company that has its foot in the door of alternative energy.
 
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.

June 15, 2013

California's Other Ethanol Producers

by Debra Fiakas CFA

California[1].gif
In the last two posts Pacific Ethanol (PEIX:  Nasdaq) and Aemetis, Inc. (AMTX:  OTC/BB) got all the attention.  Both companies have crafted their facilities to accept lower-cost sorghum as an alternative feedstock, opening up the door to lower carbon intensity measures for their ethanol output.  There are other ethanol producers in the state, which we believe are still relying on corn as feedstock.  Which companies will remain in operation in California is not yet clear.  Standards sets by California Air Resources Board (CARB) for the carbon intensity of alternative fuels favors local producers and renewable diesel or biofuel over corn-based ethanol.


Calgren Renewable Fuels has operated a 55 million gallon ethanol plant in Pixley, California.  For feedstock Calgren is bringing in corn from the Midwest by train.  If you have read by two previous posts, the words Midwest and corn should cause some concern for how the company’s product will fair under CARB’s carbon intensity standard.  However, Calgren claims its carbon footprint is small than most and its production of ethanol per bushel of corn is higher than average.  Calgren has been fiddling around with cow manure to make ethanol, receiving a $4.5 million grant from the California Energy Commission to construct a digester to make biomethane.

Coshochten, Californai is home to the ethanol plant of AltraBiofuels.  It has a capacity of 60 million gallons and has been in production since 2008. Like Calgren, AltraBiofuels is sourcing its corn feedstock principally from the Midwest.   

California Ethanol Power stands apart from the rest of the pack.  CE&P plans to source its feed stock from sugar cane produced in the Imperial Valley.  Once its facility is operation in late 2015, CE&P plans send its ethanol by truck to customers in southern California and Arizona.

Parallel Products offers yet another twist on ethanol production.  Parallel is using waste consumer products to produce ethanol.  Fermentation of sugar laden liquids and the distillation of alcohol-based wastes yield 5 million gallons of ethanol per year.  Headquartered in Kentucky, the company operates five facilities around the country, including one in Ontario, California.  Parallel says this facility receives over 3.5 million cases of dated or damaged beverage products annually. The carbon intensity of Parallel’s products is not clear.  Its business model is highly unique.

There is no immediate investment opportunity in any of these companies.  AltraBiofuels  showcases its venture capital and private equity investors, but the rest are a bit circumspect on where the got start-up capital.  What might be more important for investors to watch in this group is potential merger and acquisition activity.  With the exception of Calgren, which seems to be using conventional fermentation and distillation processes, each appears to have developed unique technologies and processes.  What is more these processes seem to have been proven economically viable as well as scientifically sound.  In my view, that makes each of these Golden State operators a plum target for others who need to improve competitive position with lower-carbon content alternative fuel production.

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. 

June 14, 2013

The Battle for California’s Ethanol Market

by Debra Fiakas CFA

California[1].gif
For all the fuss, investors might think California’s ethanol market is another Gold Rush.  The Midwest-based ethanol producers are up in arms over California’s attempt to set standards for renewable fuels sold in the state.  My recent post, describes legal maneuverings by South Dakota-based ethanol producer Poet, LLC and others to block a ‘carbon intensity’ standard imposed by the California Air Resources Board (CARB).
  
Under the CARB standard the carbon intensity of alternative fuels includes elements for power and other inputs as well as transportation and distribution.  The formula CARB is using give Midwest suppliers of ethanol a significantly higher carbon content rating than just about every other alternative fuel category.  

In 2012, the U.S. produced approximately 13.8 billion gallons of ethanol.  About 85% of that production originated in the Midwestern States.  California’ ethanol market is the largest in the U.S. and represents the majority of sales by Midwest-based ethanol producers.  Poet and its peers in corn country cannot afford to let its market share in the Golden State.

If Midwest ethanol producers believe they are disadvantaged by the California low carbon standard, it stands to reason there must be others that will benefit.  The renewable diesel and biofuel producers are noticeably absent from the legal fray.  Nor have any of the California-based ethanol producers had anything to say.

Winners and Losers...

 We identified algal-based renewable diesel developer Sapphire Energy and Neste Oil (NEF: MU) as two parties which have already made some moves toward the California market.  Neste Oil claims it is the largest producer of renewable diesel in the world, with operations in the U.S. and Europe.  Neste just signed an off-take agreement with Cellana, Inc., a cultivator of algal oils with operations in Hawaii and California.  In March 2013 Sapphire landed an off-take agreement with oil refiner Tesoro Corp. (TSO:  NYSE).  Tesoro is buying an undisclosed amount of algal-based oil produced at Sapphire’s New Mexico plant.  Tesoro has two refineries in California at Martinez and Los Angeles and just recently bought another refinery from BP (BP:  NYSE) located in Carson.  Do not expect Tesoro or Neste to begin blending algal-based renewable diesel until 2014 at the earliest.

Even if these algae cultivator partners were already producing at scale, the situation does not present an accessible investment opportunity for minority investors like you and me.  Sapphire Energy is a private company that appears to have all the financial support it needs from venture and other institutional investors.

Cellana, which used to be known as HR BioPetroleum, is currently working on a Series A financing that could be open to qualified investors.  Royal Dutch Shell had been a joint venture partner until HR BioPetroleum bought out its stake in 2011. Cellana has made disclosures of government funding sources, but has kept mum on investors.   The company was founded by two University of Hawaii scientists, Dr. Mark Huntley and Dr. Barry Raleigh who are also members of the board of directors.  An offering circular will no doubt provide details on financing requirements and the magnitude of any revenue sources, if there are any at this point in Cellana’s development.

More Winners...

Algae is not the only potential beneficiary of California’s attempt to strain out the carbon content of transportation fuels used in the state.  The post “Sorghum Power Ball” on December 4, 2012 followed sorghum’s designation by the U.S. Environmental Protection Agency as an advanced fuel.  Pacific Ethanol (PEIX: OTC/BB) had recently announced that California-grown sorghum provided 30% of the feedstock used in its ethanol production in third quarter 2012.

At the end of 2012 California-based Aemetis, Inc. (AMTX:  OTC/BB) announced its intentions to transition from corn feedstock to sorghum at its Keyes, California ethanol plant.  Integrating a combined heat and power system into its process creates enough efficiency to qualify Aemetis’ sorghum-based ethanol as a renewable fuel with a lower carbon rating.  The plant has a 60 million gallon production capacity.

Both companies could benefit if CARB prevails in legal battle over its low carbon fuel standard.  What is more both are accessible to investors in the public secondary market.  Now that we have established there is wind at the backs of these companies that could drive revenue and profits, let see how much it will cost.

Pacific Ethanol shares have a beta measure near 3.90, indicated a long position in PEIX would be a cheap, but exciting roller coaster ride.  This puts a bit of pressure on an investor to pinpoint enterprise value.  In 2012, the company lost $20.8 million on $848.8 million in total sales.  Indeed, Pacific Ethanol only produced an operating profit in the year 2011 when sales topped $900 million.  Sales in the first quarter 2013 recovered and if that pace is maintained the company could deliver another $900 million in total sales for the year 2013.  Unfortunately, it looks like management has become a big spender as operating expenses were significantly higher in the quarter, putting into doubt a profit even on $900 million in sales.   PEIX shares are trading at 0.20 times assets, most of which are tied up in the ethanol-making plant and equipment.  These plants have been proven to have value even in bankruptcy and we think this stock might be undervalued in terms of asset value.

With such a short history, valuing Aemetis is even more challenging.  However, AMTS is priced more like an option on the company’s business strategy and management’s ability to execute on the growth plan.  Thus a long position in Aemetis is contingent on an investor’s confidence that competitive conditions in California will continue to favor local producers  -  at least in part.  The other part of the bull-case is the qualification of management.  Aemetis is still run by its founder Eric McAfee, a farmer-venture capitalist.  He is also co-founder of Pacific Ethanol and left when the company went public in 2005.  McAfee has a string of solar power and alternative fuel investments.  

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. 

June 03, 2013

Ethanol Producers Vs. California Air Resources Board

by Debra Fiakas CFA

Sometime back Poet, LLC, the private producer of ethanol based in Sioux Falls, SD (my home state), filed a lawsuit against the State of California, strenuously objecting to rules related to ‘carbon intensity’ adopted by the California Air Resources Board (CARB) When the dust settled, the California rules were still standing and Poet skulked off to the appeals court.  The appeal was filed this week in the California’s Fifth Appellate District in Fresno.

Originally approved in 2009, California’s ‘low carbon fuel standard’ (LCFS) is aimed at sorting apples and oranges in the renewable transportation fuels market by requiring that producers meet an average declining standard of carbon intensity.   Now they must reduce total carbon measure by 10% over the next seven years.  Carbon intensity is measured as the sum of all greenhouse gas emissions associated with the production, transportation, processing and consumption of a fuel.   CARB calls this a ‘pathway’.  More about pathways later.

Ethanol is at a disadvantage all around because it cannot be distributed through existing fuel pipelines.  It must be sent by rail or truck tanker to end-markets, adding to the carbon intensity.  What is more, ethanol fuels produced out-of-state end up classified lower than in-state product because the added transport element contributes even more to carbon intensity 

It is understandable why Poet has its corporate hackles up over the California rules. California is the largest ethanol market in the U.S.  The largest ethanol producers need to command a share.  Only Archer Daniels Midland (ADM:  NYSE) producers more ethanol than Poet.  Poet is not alone in its efforts to fight state bureaucrats.  The Renewable Fuels Association and Growth Energy also filed suit against California over the low carbon fuels standard.

Investors should also note that Poet is not arguing against the underlying principal of CARB’s LCSF.  Poet has told court that CARB failed to adequately assess the environmental impact of the standard before it was adopted.

The California Air Resources Board (CARB) is a group to watch in the renewable fuel industry.  They like it that way.  CARB was set up in 1967 by then Governor Ronald Regan.  It is a one-of-a-kind group, established before the federal government took over air quality standard setting for the country through a 1970 amendment to Clean Air Act.  Now the other forty-nine states are stuck with using CARB rules or federal rules.

CARB is not in the least intimidated by Poet’s arguments against the standard.  Earlier this year several parties with interests in the renewable fuel market weighed in to support CARB and its LCSF.  Natural gas supplier Clean Energy Fuels Corp. (CLNE:  Nasdaq) and California’s leading electric utility Pacific Gas & Electric (PCG:  NYSE) as well as the California Biodiesel Alliance and the National Biodiesel Board all filed briefs with the court extolling the virtues of CARB and its LCSF.  The briefs made note of California’s nascent cap-and-trade program, which sets California out ahead of the rest of the country.

Of course, these folks have a different view on California’s carbon intensity standard because it shifts the competitive balance in their favor.  Renewable diesel and algal-based fuels, for example, are so-called ‘drop-in’ fuels that can be distributed using the existing pipeline infrastructure.  These fuels come out looking good in the carbon intensity competition, even the producers from outside California.

So it is the ethanol industry against the renewable fuel industry.  What appears to be a blow to ADM and Poet may end up being a boon to others.

Companies that might benefit include Sapphire Energy, which produces an algal-based renewable diesel.  In March 2013 Sapphire landed an off-take agreement with oil refiner Tesoro Corp. (TSO:  NYSE).  Tesoro is buying an undisclosed amount of algal-based oil produced at Sapphire’s New Mexico plant.  Sapphire claims its plant has been producing two barrels of oil per day, but could ramp to 100 barrels per day.  Tesoro has reportedly agreed to take all production as the facility ramps to capacity.  The EPA still has not approved Sapphire’s fuel for on-road use.

Algal-based biofuel releases the same amount of carbon dioxide that was used to grow it.  This is about half the carbon dioxide released by burning gasoline.  However, when the carbon dioxide used to grow algae comes from power plant or other emissions, the carbon intensity is lowered.  Investors should note that there are a number of algal-based fuel producers in California.  The Algae Biomass Organization recently updated a U.S. map showing locations across the country

CARB has a table of carbon intensity ‘pathways’ for various fuels.  The table is to be used as guidance for all parties targeting the renewable fuel market in California.  CARB has invited renewable fuel producers to apply for new pathways.  With the competitive field tilted toward renewable diesel, it is not surprising that the market is attracting the interest of some big players. Indeed, oil refining giant Neste Oil (NEF: F)  has applied for a ‘pathway’ or carbon intensity measure for its non-ester renewable diesel product it calls NExBTL.  Neste’s Singapore plant produces about 250 million gallons of it per year from Australian tallow.

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. 

February 04, 2013

Biobased and Biofuel Investments: A System

Jim Lane

A Biofuels and Biobased investment primer: An 18-combination, 8-character system for classifying bio investments
Here’s our investment primer on how to size up the risks and the rewards and tune them to meet your goals.
And, a system for organizing opportunities.

So, you’re thinking about investing in bio? Here’s the good news – you’re not alone. Here’s the bad news – you’re not alone.

There are retail, private equity, hedge fund, sovereign wealth, strategic, grower, VC and institutional investors snooping around too, and making active investments.

For one thing, carbon’s making a comeback as the economy recovers and the weather continues to get wilder, whackier and scarier. As DOE Deputy Chief of Staff Jeff Navin observed, “Just because the appetite to tackle it went away, didn’t mean the [climate change] problem went away”.

As investors are discovering, the whole world changes when the rain doesn’t fall where it used to fall.

Though there are hundreds of companies, you can parse it all down into some pretty simple categories – in order to measure the rewards (which, generally speaking, you’ll hear a lot about from the promoters) against the risks (er, less chatted up).

That’s what we’re going to cover today — with three broad strokes: stage, stream and degree of novelty. There are only 18 combinations. They are the first keys to unlocking opportunities.

3 Streams

There are lots of ways to sector out the biobased space. The most useful way is to divide it, like oil &gas, into upstream, midstream and downstream. The way these work are a little different, and here’s how.

Upstream. In a word, feedstocks – typically crops or residues. Could be anything as mainstream as year’s corn crop, to something as exotic as carbon monoxide and water or municipal solid waste and sludge. A seed company or a grower fits into this category. More exotically, an algae grower does too. Sometimes, a polluter does, if there’s a residue in the mix. If you’re invested in Syngenta, Monsanto or Ceres, you are right here.

Midstream. These are the processing technologies. Could be standard fermentation that has been used for centuries to make alcohols from grain – could be exotic technologies that make bio-oils and char. They could be owner-operators of projects, or technology licensors. If you are invested in Solazyme, Gevo, Renewable Energy Group or Amyris, you fit right here.

Downstream. These are the molecules themselves – their distribution into the marketplace.

2 degrees of novelty

There’s known, and there’s novel. For example, gasoline is known, ethanol is novel (though less so).

Known molecules cause no infrastructure change or change in other processes. Making renewable diesel or jet fuel is an example.

Novel molecules can be substitutes with new uses, such as using biofene as a lubricant— or known molecules that have never been feasible before (e.g. using adipic acid as an intermediate pre-cursor for nylon 6,6 – which wasn’t economically feasible before).

Known molecules have equivalent performance. Novel molecules can be varied – they can perform better, or worse.

3 investment stages

There’s early stage, mid-stage and late-stage. Now, everyone has a different definition – for instance, late-stage can mean “pre-IPO” for VC investors. SO, here’s how we look at it.

Early stage. The proof of concept phase. Not just proving that, for example, you can train an given organism to secrete a hydrocarbon. It means — from the first moment of the idea until the point where, at any scale, the process is shown to work and is feasible.

This assumes that results hold up during scale-up, the molecule performs as expected in an engine or in green chemistry, input and product prices hold, and that the process bolts into the rest of the field-to-wheels supply chain as expected).

Proof-stage. The point from proof of concept to proof of process.

Late-stage. Process is proven, economics are known. From here, it is a a matter of lining up location, customers and capital in an optimal way. For example, Shell’s Gas-to-Liquids project in Doha, Qatar.

OK, so you’re done. There are 18 different combinations – ranging from “Early-stage, novel, upstream” (e.g. a jatropha seed developer) to a “late-stage, known, downstream” (e.g. investing in a fuel marketer that is distributing, as an offtaker, renewable diesel from a producer’s sixth commercial plant).

You can use acronyms if you like. You use U, M or D for stream, E, P or L for stage, and K or N for novelty. In the examples cited above, you have ENU, and LND. There are just 18 combinations.

Assessing risk and opportunity

From that point, you can start to make some rational investment risk assessments. It’s helpful to line up opportunities within categories (like for like), and compare.

For example, early-stage investments tend to be smaller, and riskier – than later-stage. The “will it work?” factor looms large, early-on. Later, you have more certainty — and, as a result, less upside. The more you understand technology and market forces, the more you will like the early-stage.

Upstream technologies are more fully exposed to the biobased sector, than midstream and downstream, while the farther you move down the stream the more you are exposed to a market in a given molecule (downstream), or the arbitrage between the molecule price and feedstock price (midstream).

In terms of novelty — for sure, novel technologies have transformative economics on price as well as cost – known molecules tend to offer opportunities in terms of cost savings (cheaper production) or market share shifts (as customers adopt, for example, equally-priced molecules with attractive carbon attributes).

By contrast, novel technologies can have superior performance, or can eliminate a step in a chemistry – even if they cost more, they can offer customers amazing opportunities. But the more novel the molecule, feedstock or technology, the more important the IP protection is, and potentially devastating the loss of patent protection is — speed to market will matter in terms of producing ROI.

A real-world example

Let’s take a popular area for investment these days — adding technology to enable an existing ethanol plant to make biobutanol.

They are currently in proof-stage, making known molecules, and midstream. Call it a MPK.

So, there you have it. The biobased world of thousands of molecules, a hundred feedstocks and several dozen technologies, parsed down into 8 simple letters, and 18 combinations, that you can use to rate opportunities for risk and reward.

In the retail investing world, in debt-side investing, or in pre-IPO equity investing — there are companies of all combinations available. Parse away.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 31, 2013

The API Bushwhacks Ethanol

Jim Lane
320px-1967-1969_Looney_Tunes_Opening_Title_Card[1].png

Who’s right, in the fight of their lives over E15 ethanol blending?

Whose data’s a Looney Tune, whose is from the real-world?

Yesterday the American Petroleum Institute, in an apparent impression of Yosemite Sam, held a press conference in DC to highlight a new report from the Coordinating Research Council on E15 ethanol blends.

The report is here.

The API: Blast your scuppers, now I gotcha, ya’ flea-ridden riff-raff!

Use of the ethanol gasoline blend E15 may endanger fuel systems in millions of 2001 and newer vehicles, says API. The Institute’s Group Director of Downstream and Industry Operations Bob Greco said the fuel system failures could lead to vehicle breakdowns, also cited CRC research completed last year that found E15 could damage valve and valve seat engine parts in vehicles.

“The additional E15 testing, completed this month, has identified an elevated incidence of fuel pump failures, fuel system component swelling, and impairment of fuel measurement systems in some of the vehicles tested. E15 could cause erratic and misleading fuel gauge readings or cause faulty check engine light illuminations.

“It also could cause critical components to break and stop fuel flow to the engine. Failure of these components could result in breakdowns that leave consumers stranded on busy roads and highways. Fuel system component problems did not develop in the CRC tests when either E10 or E0 was used. It is difficult to precisely calculate how many vehicles E15 could harm. That depends on how widely it is used and other factors. But, given the kinds of vehicles tested, it is safe to say that millions could be impacted.”

The Industry: Eh, what’s up Doc?

The reaction from ethanol trade groups was, as expected, apoplectic — and we’ll get to that in a minute.

EPA and the Department of Energy have not responded to the study, yet — but the DOE did respond to the May 2012 CRC study, and described it as “deeply flawed”.

The issue

Ford and GM say that E15 is safe for all of their 2013 model year cars – and are cautionary about earlier models. The auto industry, taken as a whole, would prefer to see higher blends of ethanol in flex-fuel cars, not the entire fleet – for now.

By contrast, the EPA, based on a review of DOE test results, has declared E15 safe for 2001 model year cars, and later. So what we have is a dispute over E15, vs E10, in non flex-fuel cars for model years 2001-2012. Sounds pretty narrow, doesn’t it?

What’s at stake

Absent the arrival of drop-in fuels in large quantities — or an (unexpected) surge in the near-term availability and popularity of higher blends of ethanol for flex fuel cars — there isn’t going to be any way to meet the Renewable Fuel Standard targets without higher blends of ethanol put into the standard fuel distribution.

The testing and the dispute

The results are the results, and no one is saying that CRC faked the data. The cat fight between ethanol groups and anti-ethanol forces centers on whether the CRC designed a real-world test — that is, would any of these problems really be seen in actual autos on actual roads, and if they are seen, would they really be due to E15 ethanol, as opposed to something else.

The most recent tests focused on the fuel pumps and sensor systems on a series of cars – one set were left to “soak” for 12 weeks, with eight brief starts to measure performance. In the second, pumps were operated continuously for 3,000 hours to “age” them to the equivalent of 90,000 miles. In general, they were a follow-up to earlier work CRC did on E20 — which was understandably rendered less useful when EPA approved E15 use.

The RFA has prepped a response, here.

Meanwhile, we’ll point out three problems that ought to be troubling to thoughtful people.

1. The “Measure Twice, Cut Once” problem. RFA tells us: “The AVFL-15 project was duplicated by Minnesota State University back in 2008 also using an aggressive E20 test fuel on fuel system components.  Conclusions of the report stated “E20 was found to have a similar effect as E10 and gasoline on fuel pumps and sending units.”

2. The sulfur problem. Excessive sulfur can cause fuel sensors to fail – ask CRC, they wrote the book on the topic back in 2009, here.  For that and for emissions reasons, it is limited to 30 parts per million in (corporate averaged) gasoline, and 10 PPM in California. We noted that the CRC soak test pitted 10.4 PPM gasoline against 14.4 PPM E15 ethanol. That’s a 40% “juicing” of the sulfur content — and you would need to blend 37 PPM ethanol with 10.4 PPM gasoline to get that sulfur level.

3. The aging problem. Fuel pumps fail, and they are known to do so, starting at 60,000 miles or so in the real world  — for a host of reasons. Particularly if, as in this case, you run for 90,000 miles without mentioning a change of fuel filter. Ask Ford – they tell you to change the filter every 15,000 miles in the real world, here.

Industry responds.

OK, now over to industry response.

Bob Dinneen, President and CEO of the Renewable Fuels Association

“API has absolutely no credibility when it comes to talking about E15.  That point has never been more clear than in this new study in which they ‘cooked the books’ by using an aggressive fuel mix to try and force engine damage.  This isn’t real testing and this certainly isn’t real life.  Enough already with the scare tactics.  E15 is rolling forward and API needs to get out the way of progress that will result in a stronger country, a stronger economy, and stronger, cleaner environment.  E15 will not be stopped by feet dragging and forecasts of fictional faults.”

Ron Lamberty, Senior Vice President for the American Coalition for Ethanol

“This is just another ghost story, told by people who stand to lose market share when consumers finally have access to E15. We shouldn’t be surprised at Big Oil’s latest attempt to scare consumers – they’ve shown no shame in twisting test results to protect their market share. There is a reason that the oil companies don’t want E15 and it has everything to do with protecting the bottom line and nothing to do with protecting consumers.”

Tom Buis, CEO, Growth Energy

“Today’s study is no surprise. This is a classic example of ‘he, who pays the piper, calls the tune.’ Oil companies are desperate to prevent the use of higher blends of renewable fuels. They have erected every regulatory and legal roadblock imaginable to prevent our nation from reducing our dependence on oil. For Big Oil, this is about market share. To see what’s driving them, ‘follow the money,’ as every gallon of renewable fuel that enters the market reduces Big Oil’s market share. Obviously they have deep pockets in which to fund studies that can at best be described as incomplete and cherry picking.

More data for thought

The CRC maintains an extensive library of its ethanol test program, here.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 16, 2013

Eight Upsides of the New Ethanol

Jim Lane

Eight technologies, seven public stocks – who’s adopting what, who’s in the lead?

Perhaps you have written off ethanol as a bum investment.

That’s understandable. Though, as a general rule, all acts of mind-closing should be made while chanting Michael Dell’s mantra from 1997, writing off Apple as a bum investment.

It’s a good chant, you could try it. Here’s how it goes.

“What would I do?” Hari Rama.
“I’d shut it down.” Rama Krishna.
“And give the money back”. Krishna Rama.
“To the shareholders.” Rama Rama.
Missing the biggest gold rush. Krishna Hari.
In market history. Hari Krishna.”

If chanting is not your thing, perhaps you and I can visit a while on the 8 Upsides of the New Ethanol.

The technologies out there are five in number. They are all in commercial deployment now, though some are at the capacity-construction stage. Some of them vary the feedstock, some vary the products produced. What they share is an ability to be co-located, bolted-on, or retrofitted into existing ethanol plants.

The upside varies in character. In some cases, there are cost reductions. In others, higher volumes. Some offer higher-priced product opportunities. Some allow access to higher-value renewable fuel credits (called RINs) that are used under the Renewable Fuel Standard to encourage the development of advanced, non-food biofuels.

We’ve looked at them as technologies, here in “7 Bleeding Edge Technologies unlocking Mighty Value in the First-gen Ethanol fleet“, and here in “The (Next) Next-Gen Cellulosic Biofuels“, and here in “7 Paths of the New Agriculture“.

Here, in BioInvest Digest, we look strictly at the investment aspect – what does it mean, when, for whom, and always, always how much.

Here’s the investment set – Aventine Renewables (AVRW), Pacific Ethanol (PEIX), Green Plains Renewable Energy (GPRE), Gevo (GEVO), Biofuel Energy (BIOF), BlueFire Renewables (BFRE), and Aemetis (AMTX).

Now, the technologies.

1. Feedstock switching. Sorghum as the new corn?

What it is: Switching from corn and natural gas to grain sorghum and biogas.

As we saw in “The New Milo-naires: Corn, Milo and the Biofuels Market’s Invisible Hand”. Aemetis (AMTX:OTC) operates a 60 mgy corn ethanol plant which imported milo from Argentina in Q4 2012 at a cost savings of about $0.90 per bushel under corn. They require approximately 22 million bushels per year at capacity, so the milo savings are more than $18 million per year. Add $18 million to the $24 million per year AB RIN’s, subtract about $8 million for the increased cost of biogas, and the net increase in cash flow is about $34 million per year for the 60 mgy (former) corn ethanol plant operated by Aemetis.

Who makes it: The milo is being imported from Argentina.
The upside: $0.56 per gallon, according to Aemetis.
Who’s using: Aemetis (AMTX).

2. Advanced extraction and yield technologies.

What it is: Pacific Ethanol is installing Edeniq technology at Pacific Ethanol’s Stockton, California ethanol plant. Pacific Ethanol will install Edeniq’s proprietary Cellunators™ to boost ethanol yields, and will also deploy Edeniq’s patented OilPlus™ corn oil extraction process to increase corn oil recovery.

Who makes it: EdeniQ
The upside: Not yet made public.
Who’s using: Pacific Ethanol (PEIX).

3. Advanced enzymes.

What it is: Our 2012 Biofuels Digest Yield Improvement Award went to Mascoma and Lallemand’s TransFerm enzymes. It’s a bioengineered drop-in substitute for conventional fermenting yeast that lowers costs for corn ethanol producers by alleviating the need to purchase a significant amount of the expensive enzymes currently used in corn ethanol production.

Who makes it: Mascoma and Lallemand.
The upside: 3.4% increase in ethanol yield, or 7.6 cents per gallon.

4. Enzymes in corn.

What it is: In October, we reported that Syngenta and Plymouth Energy signed an agreement to use Enogen trait technology starting in fall 2013. Syngenta states that when using Enogen trait technology there is no need to use liquid alpha amylase enzyme for dry grind ethanol production.

Over in Massachusetts, Agrivida has been working hard too. “Agrivida has created a proprietary INzyme molecular engineering technology that allows the renewable chemicals, fuels and other industries to grow a substrate of non-food energy crops that contain dormant enzymes.

Who makes it: Syngenta, Agrivida
The upside: $70 cents per gallon, according to Agrivida, on cellulosic ethanol production cost.
Who’s using: Plymouth Energy among others have adopted Enogen.

5. Algae co-location and production.

What it is: Our 2012 Industrial Symbiosis Award went to Green Plains Renewable Energy and BioProcess Algae — for the BioProcess Algae project as it advances from a small pilot system to a 5-acre demonstration including all components systems that lead from CO2 capture through algae growth, harvest, and extraction.

Who makes it: BioProcess Algae.
The upside: Could be more than $2.60 per gallon in revenue- early days on the cost to get there. That’s the upside with high-value algae made from waste CO2.
Who’s using: Green Plains Renewable Energy (GPRE).

6. Switchover to biobutanol.

What it is: Take the same corn ethanol feedstock stream, add a relatively low-impact unit for biobutanol production, and produce a $4 molecule instead of a $2 molecule.

Who makes it: Gevo (GEVO), Butamax
The upside: Could be $1.60 per gallon of revenue upside, long term, based on $2 more per gallon for the molecule and 20% drop in production yield.
Who’s using: 10+ plants in early adopter programs. Gevo’s plant in Luverne, MN has the technology installed but is awaiting an upgrade.

7. Cellulosic Ethanol add-on

What it is: Take a 100 million gallon traditional ethanol plant in Emmetsburg. Start bringing in the corn stover as well as the corn kernels – add-on some highly cool enzymatic hydrolysis technologies and – voila – you have 25 million gallons of bolt-on production, same grower base, same location.

Who makes it: POET-DSM
The upside: $0.56 per installed gallon of capacity, based on boosting capacity by 25 percent. Costs to get there – that’s not yet stablized.
Who’s using: POET-DSM

8. Cut-over to cellulosic sugars.

What it is: A hub-and-spoke process to convert locally available cellulosic, non-food biomass, such as crop residues, energy crops, and woody biomass into highly fermentable sugar, which an ethanol producer will ferment into ethanol.

Who makes it: Sweetwater (in this model), but also Renmatix, BlueFire (BFRE), Comet, and Proterro among others,
The upside: In the Sweetwater model, as much as $0.55 per gallon in upside based on reducing feedstocks costs by as much as 15% over last-bushel of corn and a $0.40 gain in RIN value.
Who’s using: Front Range Energy, Ace Ethanol.

Disclosure: None.

Jim Lane is editor and publisher  of Biofuels Digest and BioInvest Digest where this article was originally published. Biofuels Digest is the most widely read Biofuels daily read by 14,000+ organizations. Subscribe here.

January 14, 2013

7 Bleeding-Edge Technologies Reinventing First-gen Ethanol Plants

Jim Lane

The US Ethanol Fleet reinvents as super-advanced technologies target the old fleet for new purposes.

bigstock-night-shot-of-plant-producing--18525755.jpg
Ethanol Plant Photo via BigStock

For some time, perhaps one of the toughest assets to manage in the Western World — possibly the Milky Way Galaxy or even the local galaxy group — has been a starch ethanol plant. They’ve been through it all, just about.

Food vs fuel, indirect land-use change, the ethanol blend wall, attacks on the RFS from cattle and dairy interests, attacked on ethanol tax credits, a turbulent relationship with the oil refining industry — not to mention, occasionally upside-down economics, rising input costs, and tough times ahead for E15, E30 blender pumps and E85 as a platform.

But they are here — and increasingly, the advanced biofuels industry is seeing them as a diamond-like deployment asset. We looked at that phenomenon, in prospect, some time ago in the Bioenergy Project of the Future Series — in which we outlined that step one in creating a Project of the Future was “buy or partner with a corn ethanol plant.” But it’s no longer theory, it’s becoming solid reality.

The most popular technologies that are targeting the corn ethanol fleet?

1. Feedstock switching. Sorghum as the new corn?

As we saw in “The New Milo-naires: Corn, Milo and the Biofuels Market’s Invisible Hand”.

Aemetis (OTC:AMTX) operates a 60 mgy corn ethanol plant which imported milo from Argentina in Q4 2012 at a cost savings of about $0.90 per bushel under corn. They require approximately 22 million bushels per year at capacity, so the milo savings are more than $18 million per year.
Add $18 million to the $24 million per year AB RIN’s, subtract about $8 million for the increased cost of biogas, and the net increase in cash flow is about $34 million per year for the 60 mgy (former) corn ethanol plant operated by Aemetis.

As Aemetis CEO Eric McAfee outlined for shareholders in a conference call just before Christmas: ”[The] market disadvantage for corn ethanol facilities allowed Aemetis to acquire the 60 million gallon per year Keyes ethanol plant near Modesto, California. The plant originally cost $132 million to construct, and was acquired in July 2012 by Aemetis for only about $15 million in cash and approximately 11% of Aemetis fully diluted shares. On an actual cash cost basis for the investors in the Keyes plant, this transaction values Aemetis common stock at about $6 per share.

“Aemetis originally leased the Keyes plant in late 2009, and then retrofitted the plant to implement Aemetis design upgrades at a total cost of about $8 million. The plant was restarted in April 2011.”

2. Advanced extraction and yield technologies.

Just this morning, we heard that Edeniq and Pacific Ethanol (PEIX) entered into an agreement to install Edeniq technology at Pacific Ethanol’s Stockton, California ethanol plant. Pacific Ethanol will install Edeniq’s proprietary Cellunators™ to boost ethanol yields, and will also deploy Edeniq’s patented OilPlus™ corn oil extraction process to increase corn oil recovery.

3. Advanced enzymes.

Our 2012 Biofuels Digest Yield Improvement Award went to Mascoma and Lallemand’s TransFerm enzymes. It’s a bioengineered drop-in substitute for conventional fermenting yeast that lowers costs for corn ethanol producers by alleviating the need to purchase a significant amount of the expensive enzymes currently used in corn ethanol production.

4. Enzymes in corn.

In October, we reported that Syngenta and Plymouth Energy signed an agreement to use Enogen trait technology starting in fall 2013. Syngenta states that when using Enogen trait technology there is no need to use liquid alpha amylase enzyme for dry grind ethanol production.
The technology improves ethanol production while reducing energy, gas and water usage. Syngenta is currently contracting corn growers to grow Enogen corn. Under the agreement, growers will receive a premium price for each bushel of Enogen grain delivered to the ethanol plant.

Another win? Last month, Syngenta signed Bonanza BioEnergy of Garden City will use the revolutionary technology that allows corn to express a robust form of alpha amylase enzyme, the primary enzyme used in dry grind ethanol production to convert starch to sugars. For those reasons, we awarded Enogen corn the Biofuels Digest 2012 New Trait Deployment Award.

Over in Massachusetts, Agrivida has been working hard too. “Agrivida has created a proprietary INzyme molecular engineering technology that allows the renewable chemicals, fuels and other industries to grow a substrate of non-food energy crops that contain dormant enzymes, “said Agrivida’s Dr. Michael Lanahan.  “These enzymes accumulate in the energy crop—which can be corn stover or other grains or plants—and are then activated during processing. This approach adds significant value by greatly reducing pretreatment energy and chemical costs normally associated with glucose conversion.”  Agrivida’s engineered energy crops and proprietary low temperature, low cost processes release over 80 percent theoretical glucose yield from cellulosic biomass.

5. Algae co-location and production.

Our 2012 Industrial Symbiosis Award went to Green Plains Renewable Energy (GPRE) and BioProcess Algae — as the as the BioProcess Algae project advances from a small pilot system to a 5-acre demonstration including all components systems that lead from CO2 capture through algae growth, harvest, and extraction – it aims at transforming not only the opportunities for algae production, but the potential to transform GPRE’s operating income stream.

6. Switchover to biobutanol.

Gevo (GEVO), Butamax, and Green Biologics are working on these opportunities – though Butamax and Gevo have been more active to date with the US corn ethanol fleet. The opportunity? Take the same corn ethanol feedstock stream, add a relatively low-impact unit for biobutanol production, and produce a $4 molecule instead of a $2 molecule. Payback, say the technology developers, can come within three years.

We looked at the Gevo-Butamax competition in “Gevo vs Butamax: Biofuels’ Montagues and Capulets race for scale with new agreements.”

7. Cellulosic Ethanol add-on

This is the POET-DSM route. Take a 100 million gallon traditinoal ethanol plant in Emmetsburg. Start bringing in the corn stover as well as the corn kernels – add-on some highly cool enzymatic hydrolysis technologies and – voila – you have 25 million gallons of bolt-on production, same grower base, same location. More on the latest with POET-DSM, here.

Disclosure: None.
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.

December 12, 2012

Dyadic: a 5-Minute Guide

Jim Lane

Dyadic LogoDyadic International, Inc. is a global biotechnology company that uses its patented and proprietary technologies to conduct research, development and commercial activities for the discovery, development, manufacture and sale of products and solutions for the bioenergy, industrial enzyme and biopharmaceutical industries.

Address:

140 Intracoastal Pointe Drive
Suite 404
Jupiter, Florida 33477

Year founded:

1979

Stock Ticker:

Pink Sheets: DYAI

Type of Technology(ies)

Patented and proprietary C1 platform technology based on a unique fungal microorganism which is programmable and scalable in producing enzymes and proteins in large quantities

Feedstocks:

Dyadic’s C1 platform technology is effective in producing enzymes from a broad variety of feedstocks

Fuel Type

Dyadic’s C1 platform technology can be used to produce many types of biofuels including, but not limited to, cellulosic ethanol, biobutanol and biodiesel.

Offtake partners

    Abengoa Bioenergy (ABGOY)
    Codexis Inc. (CDXS)

Co-products (if applicable)

Industrial Enzymes

3 Top Milestones for 2010-12
  •     Entered into non-exclusive license agreement with Abengoa Bioenergy
  •     Reported record revenues and profits for fiscal year 2009
  •     Signed term sheet for potential exclusive outlicense of C1 technology for biopharmaceutical applications to EnGen Bio, Inc.
3 Major Milestone Goals for 2013-15
  •     Consummate additional licensing and other strategic collaborations to monetize Dyadic’s technologies
  •     Increase sales of industrial enzymes
  •     Consummate additional research and development collaborations
Business Model: (e.g. owner-operator, technology licensor, fee-based industry supplier, investor)
  •     Technology licensor
  •     Industrial enzyme sales
Competitive Edge(s):
  •     Patented and proprietary C1 technology
  •     C1 platform technology is programmable (genome has been sequenced and annotated)
  •     C1 technology can produce enzymes and proteins on commercial scale (up to 150,000 liter fermentors)
  •     Dyadic provides partners with ability to license the C1 platform technology for in-house/on-site manufacturing of customized enzymes and proteins
Distribution, Research, Marketing or Production Partnerships or Alliances.
  •     Non-Exclusive License Agreement with Codexis Inc.for use of C1 technology for biofuels, chemicals and pharmaceutical intermediate production
  •     Non-Exclusive License Agreement with Abengoa Bioenergy New Technologies, Inc.for use of C1 technology for biofuels, chemicals and/or power production
  •     Non-binding term sheet with EnGen Bio, Inc. for potential outlicense of C1 technology for biopharmaceutical applications
  •     Multiple research partnerships
Stage:

Dyadic has been producing enzymes in up to 150,000 liter fermentors for over a decade

Demonstration and soon-to-be commercial stage through Dyadic’s licensees and partners

Website

www.dyadic.com

Disclosure: None.

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.

December 10, 2012

EPA Makes Sorghum an Advanced Biofuel Feedstock

by Debra Fiakas CFA
360px-Sorghum_bicolor_%286442164465%29[1].jpg
Sorghum Bicolor photo by Matt Lavin
 
 Like the Fairy Godmother in Cinderella, the Environmental Protection Agency has waved a wand and given sorghum a new dress and slippers.  Sorghum has been designated as an eligible feedstock under the Renewable Fuels Standards for production of advanced biofuel.  Only biofuels produced from non-corn starch, sugar, or lingo-cellulosic biomass, which reduces carbon intensity by 50% or more from a gasoline baseline, qualify as ‘advanced.’

Sorghum qualifies for advanced fuel status as the result of a 53% reduction in greenhouse gas emissions.  The plant is hardy and requires grows with modest moisture conditions and requires little fertilizer.  Indeed, in comparison to corn, sorghum requires one-third less water but produces an equal amount of ethanol.

As an advanced fuel, sorghum-based ethanol with benefit from higher prices.  The prospect has ethanol producers salivating.  Western Plains Energy in Kansas has indicated interest in as much as 17 million bushels of grain sorghum from farmers in the area and its facilities are being converting to methanol from natural gas as a production fuel source.  The company is targeting 50 million gallons of ethanol that will qualify as ‘advanced.’  Pacific Ethanol (PEIX:  OTC/BB) announced that sorghum provided 30% of the feedstock used in third quarter 2012.  The sorghum was sourced from farms in California.

Do not expect a sweeping conversion of ethanol plants from corn to sorghum.  The preponderance of ethanol plants is located in the Corn Belt precisely because the corn is there.  While there are a few sorghum fields in Iowa and Illinois, most of red grain is raised in the central and southern plains  -  Texas, Oklahoma, Kansas, Colorado, Nebraska and South Dakota.  This means that for the time being the ethanol facilities in these states will likely be the sorghum lottery winners.

If I am right in this view, then there are likely a string of ethanol stocks that could get a boost for the development.  Abengoa’s (ABGOY:  OTC/PK) Bioenergy has plants in Kansas and Nebraska.  In Nebraska is home to plants operated by Aventine Renewable Energy (AVRW:  OTC/BB) and Green Plains Renewable Energy (GPRE:   Nasdaq).  In South Dakota Valero’s (VLO:  NYSE) Renewable Fuel produces as much as 12% of the one billion gallons of ethanol that is presently originated in the state.  Two private producers, POET Biorefining and Glacial Lakes Energy, account for over half the state’s output.  The added value from the switch to sorghum could be the catalyst that enables POET's long-awaited public offering.
 
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. 

October 24, 2012

Codexis: a 5-Minute Guide

Jim Lane

Address:

200 Penobscot Drive
Redwood City, CA 94063

Year founded 2002

Annual Revenues: $107 million (2010)

Company description: Codexis serves major worldwide markets where clean technology can make a positive economic and environmental impact. Codexis CodeEvolver ™ directed evolution technology accelerates development of high value sustainable products. Our focus is on the cost-effective conversion of renewable resources into transportation fuels, pharmaceuticals and biobased chemicals, and on the development of new technologies for effective air and water treatment.

Stock: CDXS; NasdaqGS

Type of Technology(ies):

Directed evolution – CodeEvolver™ directed evolution technology
DNA shuffling
Synthetic biology/Systems biology
Multiplexed gene SOEing
Bioinformatics
Green chemistry

Feedstocks:

All – Codexis’ technology is feedstock agnostic.

Products

Ethanol and Cellulosic ethanol

Past Milestones

Completed IPO April 2010
Received EPA Presidential Green Chemistry Award with Merck
Initiated detergent alcohol product line and completed cellulose enzyme scaleup 2011
Negotiated worldwide (ex. Brazil) rights and Shell royalty agreement to commercialize cellulase enzymes

Future Milestones

Commercialize detergent alcohol product line
Establish significant commercial presence in Brazilian fuels and chemicals markets

Competitive Edge(s):

There are a few things that make Codexis a formidable competitor in the biofuels industry:

- Codexis’ CodeEvolver™ directed evolution technology platform which combines sophisticated DNA shuffling and proprietary bioinformatics with advanced systems biology and nearly a decade of research experience to create “super” biocatalysts that are “custom fit” to solve complex bioindustrial problems. The Codexis CodeEvolver™ technology has been shown to reduce manufacturing costs, improve yield and reduce environmental waste in multiple applications in the pharmaceutical industry and is now under development for us in the advanced biofuels, biobased chemicals and carbon capture markets. Future applications include new methods of cost-effective wastewater treatment.

- Codexis’ role in Raizen, Shell’s $12 billion joint venture with Cosan – Shell has contributed its 16% ownership stake in Codexis to the joint venture company, Raizen, with the goal of developing and commercializing next-generation biofuels.

Stage (Bench, pilot, demonstration, commercial) Development

Website: www.codexis.com

Disclosure: None.

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.

September 01, 2012

Ag Goddess Smiles Favorably on Ceres, Investors Frown

by Debra Fiakas CFA

Recently, in compiling our lists of remarkable small-cap stock trades, I was surprised to find the shares of Ceres, Inc. (CERE:  Nasdaq) among stocks setting new 52-week lows.  Ceres has only been trading since its initial public offering in February 2012, when the company sold 5.0 million shares at $13.00 per share.  After a brief trade higher in the early spring, Ceres shares have been steadily losing ground, finally setting an all-time low of $6.02 last week.

Named after the Greek Goddess of Agriculture, Ceres is a self-styled energy crop producer.  Ceres has developed proprietary seeds for sweet sorghum and switchgrass to be used as feedstock for ethanol production.  Ceres seeds are genetically modified to produce crops that require less water and fertilizer and are tolerant of higher salt levels in soil.  Higher yields and consistent availability lead to improved economics for large-scale ethanol production.

A big part of Cere’s IPO pitch was the market opportunity in Brazil where ethanol production is highly dependent upon seasonal production of sugarcane.  Sweet sorghum is compatible with existing equipment and helps fill in the gap between sugarcane crops.  Ceres worked with a joint venture led by Petrobras in a commercial planting of sorghum that for all practical purposes was successful. 

The Greek Goddess has other reasons to smile on Ceres.  Amyris (AMRS:  Nasdaq) used Cere’s sorghum syrup in its proprietary yeast fermentation system to produce Amyris’ farnesene, an oil used in producing diesel.  Amyris had been widely reported as exiting biofuels to concentrate chemical know-how in the cosmetics sector.  However, in July 2012, Amyris announced a revision of its collaboration with Total, Gas and Power, SA (TOT:  NYSE) to carry the renewable farnesene torch forward.  Total agreed to give Amyris $30 million this year to continue a research and development program.  The verdict is still out on whether the developments at Amyris will make a difference for Ceres.

 With the U.S. corn crop severely reduced by drought this year, ethanol producers may look at sorghum with greater interest.  Sorghum fields are still in relatively good condition this year, demonstrating the plant’s hardiness.  The problem is that farmers do not find sorghum an attractive crop.  Unlike corn, which has many uses, there are few buyers for sorghum.  Thus promoting sorghum in the U.S. probably means a collaboration like that in Brazil with a crop sponsored by an ethanol producer.

  Even if investors have lost confidence in Ceres to make sorghum a favored ethanol feedstock, the Company has plenty of capital to keep trying.  At the end of May 2012, Ceres had $67.7 million in cash on its balance sheet, just a bit more than the $65.2 million it raised in its 2012 IPO.  In the last twelve months Ceres used $25 million of its cash to support operations and continued development work on new seeds.  Even if the company makes no attempt to curtail spending, I estimate Ceres has a big enough nest egg to keep trying to another two years.

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.  CERE is included in the Cellulosic Ethanol group of Crystal Equity Research’s Beach Boys Index.

August 04, 2012

Cosan: No Haven for Ethanol Investors

by Debra Fiakas CFA

cosan logoThe stark reality of basing their business model on a food commodity has been brought into sharp focus for ethanol producers.  The drought settling across the U.S. corn crop is helping drive up corn prices for hog producers, chicken farms and ethanol plants alike.  Investors who simply must have a position in ethanol might think the sugarcane-based ethanol producers could offer a safe haven against the supply and margin squeeze that is certain to hobble GreenPlains Renewable Energy (GPRE:  Nasdaq), Pacific Ethanol (PEIX:  Nasdaq) and Poet (private), among others relying on corn feedstock.

Think again!  Cosan Ltd. (CZZ:  NYSE) is one of Brazil’s leading ethanol producers and sources sugarcane from other farmers as well as its own farms.  After strong growth at the beginning of calendar year 2011, adverse weather conditions got the best of Cosan as well.  Crushed sugar cane volumes declined year-over-year as did ethanol and sugar volumes.  In the fiscal year ending March 2012, Cosan reported a 10.9% gross margin, well below the prior fiscal year profit of 16.1%.

Cosan is not a unique case in Brazil.  In calendar year 2011, Brazil produced 5.6 billion gallons, representing 25% of the world's total ethanol used as fuel.  This compares to 7.5 billion gallons in 2010.  As the year unfolded politicians began getting nervous.  In August 2011, in anticipation of further ethanol production declines, the Brazilian government took measures to prevent shortages by lowering Brazil’s gasoline blend requirement from 25% to 20%.  Nonetheless, in the dramatic volume decline, Brazil is struggling to meet domestic demand for ethanol.

Thus it is not just the use of food commodities for ethanol feedstock, it is the use of crops that are particularly susceptible to weather extremes.  It is clear the renewable energy sector has a long way to go to perfect technologies and business models.  Unfortunately, cellulosic ethanol technologies remain illusive and drought resistant crops require years to perfect.  In the meantime, investors could simply accept what has not been fixed.   Use seasonal and cyclical influences to establish long positions in corn and ethanol at value prices….or take profits in short-positions previously established at cycle peaks.

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.

April 17, 2012

Butamax and Gevo: Bio’s Montagues and Capulets get it on, and on, and on


Jim Lane

gevo logoIsobutanol – a gateway to bioprocessing fortunes? Well, the lawyers are doing just fine too.

Here’s a 2-Minute Guide to all the Gevo (GEVO) and Butamax hollerin’, and how to separate the alcohol from the folderol.

In case it has escaped your attention, Butamax is suing Gevo (GEVO) and Gevo is suing Butamax. Enough paper has been issued by the parties, in court submissions and press releases, that INEOS New Planet  might eventually consider this dispute a low-cost waste stream feedstock for their new biorefinery, if somebody can get it all hauled down to Florida.

Gasify the paper to make it go away? Possible. Gasify the issue? Not happening. Prompting Domestic Fuel’s Cindy Zimmerman to issue an appeal last week for an end to all the tit-for-tat releases.

Butamax logoOverall, in the stream of claims and counterclaims, we’ve seen most of the drama that people usually seek in wrestling matches between exotic dancers, excepting the hair pulling and the mud.

Here in Digestville, we doubt the issue will melt away soon, and with Gevo’s stock price in the toilet, we doubt there is going to be much dampening of the signal and the noise on this one any time soon. For the two companies, it’s big, it’s that big.

In today’s Digest, we are publishing a Two-Minute Guide to the controversy, and we would also like to make three points, for consideration by the broader industry.

The broader issues

1. There’s gold in them thar ‘cules. No one is suing anyone over, say, Cello’s technology, or to gain control of the Range Fuels process. At least not a positive suit aimed at gaining freedom to operate.

For the same reason, you never see a Western where two old prospectors duel it out over a worthless piece of land. In films like Treasure of the Sierra Madre, the fight is invariably over the gold, the map that marks the gold, or the entrance to the mine that guards the gold.

The mounting mountains of paper should be properly seen as a leading indicator of just how valuable a bio-based process to generate low-cost isobutanol from biomass can be, especially if you have figured out the engineering of  separating the alcohol from the broth before it kills the microorganism.

(Note to readers: micro-organisms, it turns out, are just like humans in one respect, you wouldn’t last long, in a closed fermenter, in a swill of your own food and waste by-products either).

Let’s think of it this way. Think of the spread between carbohydrate and oil prices. At $6.50 per bushel of corn and $100 per barrel of oil, carbs are pricing at $305 per metric ton, while oil is pricing at $742 per metric ton. That $437 per ton spread is the foundational market opportunity.

2. The “Sue, Baby” gene that never stops expressing. In the bio-based space, if pharmatech and the Novozymes (NVZMY.PK)-Genencor wars offer any guide, one important byproduct of a successful fermentation process is a whole bunch of lawyering.

The titer of alcohols in a given beaker, from a given process, is sometimes not where we would like it to be.  But yeast appears to robustly and effortlessly ferment claims, letters, and lawsuits from biomass. The titer and yield are never in question, and the “sue, baby, sue” gene never seems to stop expressing.

Nevertheless, lots of pesky legal activity does not generally correlate to long-term loss in company value, for robust management teams that have built companies instead of science projects disguised as companies. Novozymes has, for example, more than 6000 pending and granted patents and a $7.6 billion market cap, and Danisco and its Genencor subsidiary recently sold to Dupont for $6 billion.

3. Big Buckaroos at stake. Just in specialty chemicals, isobutanol is a $7B industry. On the speculative assumption that a bio-based prices could deliver into that market with a 20 percent margin, and that NASDAQ companies will continue to trade at around 20 times earnings, there’s roughly $28B in market value up for grabs in the isobutanol wars.

Throw in the addressable potential for $44 billion in specialty gasoline blendstock, globally, there’s another $176 billion there. Forget Gevo’s market cap of $236 million – DuPont’s market cap is $49 billion. Therein lies the potential for gateway molecules. And make no mistake, really foundational C4 molecules – those have gateway characteristics.

So, the lawsuits? Here’s what you need to know.

The 2-Minute Guide to Butamax vs Gevo, and vice-versa

1. The idea. To make isobutanol, you need a microorganism that makes isobutanol from biomass, and a separation technology. The first gives you isobutanol in a broth, the second gives you isobutanol as a recoverable product. The faster you can pull off the isobutanol, the faster you can make it without killing the little micro critter (keep in mind, when you want to sterilize a wound, you pour alcohol on it – its a real killer of microvarmints).

2. The system. Butamax has a system, Gevo has a system. Both can be bolted onto existing corn ethanol plants.

3. Butamax lands a foundational patent. Amidst a whole lot of patents and patent apps for both companies, Butamax was granted two patents, known colloquially as the ’188 and the ’889 (sigh, only lawyers could love nicknames expressed in three-digit codes).

4. Butamax vs Gevo. Also, last year – and, well you be the judge on the merits of the timing, right in the middle of Gevo’s IPO road show, Butamax sued Gevo over infringement of the patents. That’s Butamax vs. Gevo, and it is set for trial in April 2013.

5. The Gevo response.  Gevo’s defense is two-pronged. One, they don’t infringe on the patent in their process. Two, the USPTO should never have granted ’188 or ’189 in the first place. So, Gevo has petitioned for re-examination of both, and the USPTO is in the process of doing so. Stand by, and we’ll advise further when there’s further to know – you can let the press releases sail on by.

6. Gevo vs Butamax. Gevo has, in turn, sued Butamax over infringement of its ’375, ’376, ’715 and ’808 patents. Butamax has denied the claims,  and is seeking dismissal of the suits.  There’s no trial date set yet that we are aware of.

A Primer

Here’s a timeline of the dispute, as written up by Gevo, for scorekeepers.

Outcomes and dates

1. Gevo and Butamax have participated in court-ordered mediation, in March. Bet that was a barrel of monkeys. Might have been easier to mediate Alec Baldwin and Kim Basinger. Outcome not yet certain.

2. Butamax has filed for a preliminary injunction against Gevo. A hearing was held in March, and a ruling is pending.

3. Trial date for Butamax vs. Gevo is April 2013.

4. First switch-over of a corn ethanol plant to isobutanol in scheduled for the Gevo plant in Luverne, Minnesota, before the end of June. Expect that it will take some period of weeks or months to ramp up to full production – if sooner, great, but don’t expect miracles before the 4th quarter. That’s the magic hour.

The Bottom Line

It’s a serious dispute, for the companys involved. For bio-based pathways to isobutanol as a class, there doesn’t appear to be a losing side, except to the extent that lawsuits slow companies down, and depress stock prices and thereby chill the financing of expansion at commercial-scale.

The scramble over the patents could drag on for years. The loser in the Butamax vs Gevo suit should be expected to appeal almost instantaneously; same with the losing side in Gevo vs Butamax, whenever that comes to trial.

So, eyes might generally turn more towards the commercial-scale activities at Luverne. Because that is the proof of the value of a bio-based process – whomsoever it is determined actually owns it. Something worth fighting to the death over, now that’s music to the industry’s ears.

Disclosure: None.

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.

February 06, 2012

Enerkem’s $125M IPO: The 10-Minute Version

Jim Lane

The second technology focused on unlocking value in municipal solid waste comes to the public markets.

Here’s our 10-minute version of the filing, with a translation of the risks into English.

In Canada, Enerkem has filed an F-1 registration statement for a proposed $125 million initial public offering. The number of shares to be offered in the proposed offering and the price range for the offering have not yet been determined. The lead book-running managers for the offering are Goldman Sachs, Credit Suisse and BMO Capital Markets.

The company is currently ranked #7 in the world in the 50 Hottest Companies in Bioenergy. The rankings recognize innovation and achievement in fuels and are based on votes from a panel of invited international selectors, and votes from Digest subscribers.

Enerkem, which in the first three quarters of 2011 lost $19.1 million while recording $887K in revenues (primarily government grants) becomes the 15th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis (CDXS) in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, Coskata, PetroAlgae (PALG.PK), Bioamber, Myriant, Ceres, Genomatica, Mascoma and Elevance Renewable Sciences and Fulcrum Bioenergy have also filed S-1 registrations for proposed IPOs.

Here’s the F-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Enerkem model, opportunities for the intrepid investor, and some risks which we have translated from the ancient and original SEC into modern English.

Company Overview

From the F-1:  “We develop renewable biofuels and chemicals from waste using our proprietary thermochemical technology platform.

We intend to take advantage of the abundant supply of municipal solid waste, or MSW, which we expect to be paid to use as feedstock, to profitably produce cellulosic ethanol, a second-generation biofuel. We believe that our waste-based biofuels provide one of the most advanced solutions to the growing world demand for renewable sources of energy, while also addressing the challenges associated with waste disposal and greenhouse gas, or GHG, emissions.

Our pilot facility in Sherbrooke, Canada has been in operation since 2003 and has a throughput capacity of 4.8 metric tons per day. We have successfully increased, or scaled-up, our throughput capacity tenfold, or 10x, to 48 metric tons per day in our commercial demonstration facility in Westbury, Canada. The Westbury facility has a production capacity of 1.3 million gallons per year, or MMGPY.

Our first standard 10MMGPY commercial facility is currently under construction in Edmonton, Canada. We have developed a modular, copy-exact and scalable approach for equipment production and installation that we anticipate will allow us to have our systems manufactured by third parties as pre-fabricated, replicable modules under fixed-price contracts.

The Technology

From the F-1: “Our proprietary technology platform converts MSW and other heterogeneous waste feedstocks, consisting of mixed textiles, plastics, fibers, wood and various other forms of waste, into a pure, chemical-grade synthesis gas, or syngas. This syngas is then converted into biofuels and chemicals through well-established catalytic reactions.

Feedstock preparation. The MSW we plan to use as feedstock is first sorted, using equipment and processes used in existing sorting and recycling facilities in order to remove unusable materials. During this process, typically approximately 40% of the MSW is removed from the waste stream and approximately 60% of the MSW is shredded to be used as feedstock.

Gasification through a bubbling fluidized bed. Our proprietary bubbling fluidized bed gasification reactor breaks down the feedstock into its constituent parts or molecules, a process that is called thermal cracking. In the same reactor, these broken-down molecules are then blended with steam to produce syngas.

Syngas cleaning and conditioning. Our bubbling fluidized bed gasification process yields a crude syngas that is fed into our proprietary syngas cleaning and conditioning process. This process upgrades the crude syngas to a chemical-grade syngas that can be refined into liquid fuels and chemicals.

Catalytic conversion into final products. We typically start by reacting a portion of our syngas with a commercially available catalyst to produce methanol, which we can either sell as an end-product or use as an intermediate to make other products. To produce ethanol, we react methanol with carbon monoxide from our syngas with a commercially available catalyst to produce methyl acetate. The final conversion step in our ethanol production process entails splitting the methyl acetate by inserting a hydrogen molecule that is extracted from the produced syngas.”

The Market

MSW Market. The United States generated 435 million metric tons of MSW in 2009, of which approximately 289 million metric tons, or 66% was landfilled. The company projects that approximately 140 million metric tons is suitable for ethanol production through gasification, yielding up to 14 billion gallons of ethanol annually.

The remaining landfill capacity for MSW in the United States as of 2009 equates to approximately 19 years of remaining life at 2009 MSW disposal rates, down from 26 years in 1995. 30% of Canadian landfills reported having an expected remaining life of fewer than ten years.

Tipping fees. According to the Waste Business Journal, an industry publication, average tipping fees for landfills in the United States were $47 per metric ton in 2009. The company projects that every $10.00 dollars per metric ton of tipping fees that they receive will generate revenue of approximately $0.12 per gallon.

Global fuels market. According to the Energy Information Administration, or EIA, global crude oil and liquid fuel consumption of approximately 87 million barrels per day, or bbl/day, equates to approximately a $2.5 trillion market in 2010, at an average price of approximately $79 per barrel.

US Renewable Fuels Market. The U.S. Renewable Fuel Standard mandates 16 billion gallons per year of cellulosic biofuels, which include cellulosic ethanol, be blended by 2022. The company projects cellulosic ethanol in the United States at operating costs, before depreciation and amortization, of $1.50 to $1.70 per gallon in a 10MMGPY facility.  They estimate that they can reduce costs to approximately $1.05 to $1.25 per gallon by building 40MMGPY facilities (four of our 10Mgy units).

Price floor. In the US, the EPA creates cellulosic biofuel waiver credits, or CWCs, for purchase for that year. The CWCs to be made available for sale to obligated parties in 2012 for the higher of (1) the amount by which $3.22 per gallon (in 2011 prices) exceeds the average wholesale price of a gallon of gasoline in the United States or (2) $0.27 per gallon (in 2011 prices).

Chemicals. Methanol can act as a building block for acrylic acid, with a market size of $3.1 billion in North America and $10.9 billion globally; n-Propanol, with  a market size of approximately $1.5 billion in North America and $3.0 billion globally; and n-Butanol, with a market size of approximately $2.4 billion in North America and $7.5 billion globally.

The Risks, Translated from SEC-speak

Among the lowlights of reading S-1 registrations are the endless pages of risk disclosures couched in an alloy of SECspeak and legalese.

We offer these excerpts from the original S-1, and a translation into English, prepared by our Digest lexicologists.

In SECSpeak: We have not yet completed the manufacturing of our first standard 10MMGPY prefabricated module and design defects may occur in our equipment and/or modules, which may adversely affect our business and financial results.

In English: Oy vey, build-out, schmild-out, vat could be de problem?

In SECSpeak: Our, or any of our partners’, inability to obtain an adequate supply of MSW may adversely affect our business and financial results.

In English: “Waste is a Terrible Thing to Mind.”

In SECSpeak: Changes in government regulations, including mandates, tax credits, subsidies and other incentives, could have a material adverse effect on our business and results of operations.

In English: G-Man, give me some lovin’.

In SECSpeak: Infrastructure constraints pose uncertain market barriers for ethanol.

In English: “Alex, I’ll take ‘Blend Wall’ for five hundred, please.”

In SECSpeak: We may need substantial additional capital in the future in order to expand our business.

In English: That giant sucking sound you hear: that’s our CAPEX fund.

In SECSpeak: We have not produced ethanol at a scale needed for the development of our business or built the facilities needed for such production. Furthermore, the conversion of methanol into ethanol in large commercial volumes may prove to be more challenging than we anticipate and may not initially be possible in a cost-effective manner.

In English: Psst! The secret phrase is “Range Fuels.”

In SECSpeak: Our partners may not adequately operate the systems utilizing our proprietary technology platform or safeguard our intellectual property and confidential information, which may adversely affect our business.

In English: Dang it Zeke, how do you work this darn thing anyway? Is this right? Oops. Eew, that’s not right.

In SECSpeak: Our ability to compete may decline if we are required to enforce or defend our intellectual property rights through costly litigation or administrative proceedings.

In English: Psst! The secret phrase is “Butamax and Gevo.”

In SECSpeak: We rely in part on trade secrets to protect our technology, and our failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

In English: Psst! The secret phrase is “INEOS Bio and Coskata.”

The Strategy

From the F-1: “1. Build, own and operate new facilities.
2. Pursue development opportunities with select industry-leading companies.
3. Focus on reducing our costs.
4. Expand internationally.
5. Innovate and develop new products.”

The Commercialization Plan

From the F-1: 1. Westbury, Canada demonstration, 2009-2011.
We completed the installation of methanol production equipment in Westbury in 2011, and the facility commenced production of methanol in June 2011. We intend to add ethanol production equipment to the Westbury facility in 2012 to enable a production capacity of 1.3MMGPY.

2. Edmonton, Canada first commercial plant.
In 2010, we commenced construction of our first standard 10MMGPY commercial facility in Edmonton. We intend to build, own and operate this facility, which is located on a municipal landfill to provide us proximity to feedstock. We have secured a 25 year MSW feedstock supply agreement with the City of Edmonton. We expect to ready our Edmonton facility for methanol production in the first quarter of 2013.

3. Pontotoc, Mississippi second commercial plant.
We plan to commence construction of an additional 10MMGPY commercial facility in Pontotoc in the fourth quarter of 2012. The Pontotoc facility will be located on a landfill site and will be constructed by our wholly-owned subsidiary Enerkem Mississippi Biofuels LLC. We estimate that it will take approximately 18 months to build the facility.

In December 2009, we were awarded U.S. Department of Energy, or DOE, conditional financial assistance of $50.0 million under the American Recovery and Reinvestment Act of 2009 — Demonstration of Integrated Biorefinery Operations Program, for the development of the Pontotoc facility.

4. Varennes, Canada third commercial plant.
We also plan to commence construction of a 10MMGPY commercial facility in Varennes as early as the first quarter of 2013. We estimate that it will take approximately 18 months after commencement of construction to build the facility. This facility will be constructed by Varennes Cellulosic Ethanol L.P., a 50/50 joint venture with GreenField Ethanol Inc., one of the largest ethanol producers in Canada. The Varennes facility will be located on the site of GreenField’s grain ethanol facility in Varennes.

5. Waste Management and Valero
Our term sheet with an affiliate of Waste Management (WM) contemplates the sale of systems utilizing our proprietary technology platform for the potential development of up to six sites with a combined ethanol production capacity of 100-120MMGPY. With Valero, we have entered into a non-binding term sheet to sell our systems for the development of up to six stand-alone facilities with a combined ethanol production capacity of 80-250MMGPY and additional facilities to be co-located with existing Valero facilities. We expect that our arrangements with Waste Management and Valero would also provide us with an option to own up to 49.5% or 50.0% of these facilities, respectively.

6. Other Projects and Considerations
We have prioritized, based on specific selection criteria, 68 landfills in the United States as potential sites for development by us or our strategic partners. These locations represent a combined waste inflow of 40 million metric tons of unsorted MSW, which represents a potential production of 2 billion gallons of ethanol per year using approximately 200 of our standard 10MMGPY modules.

Enerkem as it sees itself:  6 Competitive Strengths

From the F-1: “Converting heterogeneous waste to biofuels and chemicals. We believe that we are the first company to produce a pure, chemical-grade syngas using heterogeneous waste in a commercial demonstration facility. Since 2003, we have tested and validated our technology with MSW from numerous municipalities, as well as a broad variety of other feedstock, at both our pilot and demonstration facilities.

Lowest scale-up among cellulosic ethanol producers. The scale-up from our commercial demonstration facility in Westbury to our planned standard 10MMGPY commercial facilities represents approximately a 2x scale-up in gasification and gas conditioning equipment size and approximately a 7x scale-up in throughput capacity.

Large market opportunities and an attractive cost structure. Our primary product focus is cellulosic ethanol, a significant market opportunity that is driven by a rapidly growing market demand for renewable biofuels, and is further bolstered by government mandates and incentives. In addition, we believe our cost structure benefits from the ability to locate our compact facilities on or near landfill sites, the abundant supply of negative cost MSW feedstock and our competitive production costs.

Tangible commercial pipeline. In addition to our first standard 10MMGPY commercial facility under construction in Edmonton, we have two 10MMGPY commercial facilities under development in Pontotoc and Varennes. Beyond these projects, we have prioritized 68 landfills in the United States as additional potential sites for development by us or our strategic partners, representing a potential production of 2 billion gallons of ethanol per year using 200 of our standard 10MMGPY modules.

Key strategic relationships with industry-leading partners. We have entered into a non-binding arrangement with an affiliate of Waste Management (WM) to sell systems using our proprietary technology platform for the potential development of up to six sites with a combined ethanol production capacity of 100-120MMGPY.

With Valero, we have entered into a non-binding term sheet to sell systems using our proprietary technology platform for the development of up to six stand-alone sites with a combined ethanol production capacity of 80-250MMGPY and additional facilities to be co-located with existing Valero facilities.

Experienced management team. Our executives and senior managers have built our business from the ground up and have extensive experience in research and development, business development, project financing, procurement and plant operations.”

Financing to date

Enerkem has incurred substantial net losses to date, losing $C5.9 million in 2008, $C3.7M in 2009, $11.8M in 2010 and 19.1M for the first nine months of 2011.

From the F-1: “On March 13, 2009, in connection with a $4,000,000 loan from Atel Ventures, Inc., we issued a warrant to Atel Ventures, Inc. pursuant to which it is entitled to purchase 9,682 Series 3 Class A preferred shares at an exercise price of C$46.00 per share.

“On January 27, 2010, we issued 828,667 Series 4 Class A preferred shares at C$46.00 per share, for an aggregate purchase price of C$38,118,896.

“On April 25, 2011, we issued 475,559 Series 1 Class B preferred shares at C$124.17 per share for an aggregate purchase price of C$59,050,161.

The bottom line

As essentially pre-revenue companies go, here’s a gem. The right partners, a low-cost, locked-in, always available, non-commodity feedstock. The upstream is gold. Downstream? Who better than Valero, which has been turning its own ethane production and distribution arm into a corporate shining star.

All of which brings us to the midstream. There are three and only two concerns, but they are, how do we put it, items to watch and note.

First, like so many others who have come to market in this IPO wave, Enerkem has not completed a commercial scale facility – so there is what is becoming “the usual” scale-up risk. In Enerkem’s case, it’s a 7X scale-up, far less than many others who have made it across the IPO chasm.

Second, bringing down the costs. Enerkem emphasizes its ability to manage down the operating costs – , absent an execution at scale, that will have to be taken on faith. Again, a common feature of the IPOs in this sector.

The third? Yikes, Enerkem hasn’t made ethanol yet at its demonstration plant. Now, methanol to ethanol is not exactly rocket science – the catalysts and technology have been around for some time. But, there it is – they haven’t made a drop of the intended product at the Westbury plant.

Ethanol is selling in the 2013 futures market for $2.11 per gallon, and there’s about $0.27 per gallon in cellulosic waiver credits available – that gives the company a target, today, of around $2.38 for its operating costs, capex and margin. Right now, it’s a light margin – but with some work down on cost through scale, the margins look sweet.

The complete S-1 registration statement.

All 250-or-so pages in all their glory. The complete F-1 registration statement is here.


Disclosure: None.


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.

December 26, 2011

Coskata’s $100 million IPO: The 10-Minute Version

Jim Lane
coskata_small_logo[1].jpg

The first gas fermentation technology to come to the public markets: Coskata files its $100 million IPO.

Here’s our 10-minute version of the filing, with a translation of the risks into English.


In Illinois, Coskata has filed an S-1 registration statement for a proposed $100 million initial public offering. The number of shares to be offered in the proposed offering and the price range for the offering have not yet been determined. The lead book-running managers for the offering are Citigroup, Barclays and Piper Jaffray.

The company is currently ranked #17 in the world in the 50 Hottest Companies in Bioenergy. The rankings recognize innovation and achievement in fuels and are based on votes from a panel of invited international selectors, and votes from Digest subscribers.

Coskata, which in the past year lost $28.7 million while recording $250K in revenues becomes the 14th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis (CDXS) in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, PetroAlgae (PALG.PK), Bioamber, Myriant, Ceres, Genomatica, Mascoma and Elevance Renewable Sciences and Fulcrum Bioenergy have also filed S-1 registrations for proposed IPOs.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Coskata model, opportunities for the intrepid investor, and some risks which we have translated from the ancient and original SEC into modern English.

Company Overview

From the S-1: “We are a technology leader in renewable fuels and bio-based chemicals. Our low-cost, proprietary process converts a wide variety of abundant feedstocks, such as woody biomass, agricultural residues, municipal wastes, natural gas and other carbon-containing materials, into fuels and chemicals. We have combined…synthesis gas production and cleaning…with our molecular biology and process engineering capabilities to create a synthesis gas fermentation platform.

“We operated a production facility at demonstration-scale for more than two years where we achieved what we believe to be the highest yield of cellulosic ethanol per bone dry ton of feedstock demonstrated at this scale. In 2012 we expect to begin constructing our first commercial-scale cellulosic ethanol production facility.

“At our demonstration-scale facility in Madison, Pennsylvania, which we refer to as Lighthouse, we operated our technology platform to produce ethanol for over 15,000 hours. At this facility we converted a wide variety of feedstocks, including wood chips, wood waste, sorted municipal solid waste, and natural gas, into ethanol.”

The Technology

Historically, there were two widely-recognized conversion methods for the production of cellulosic ethanol: biochemical and thermochemical. The platform utilizes a hybrid process which combines key elements of the biochemical and thermochemical methods.

The process is not dependent on sugar-based feedstocks or the use of enzymes and catalysts. Our integrated platform encompasses all aspects of the production process, from feedstock handling to product separation.
The high yields and low cost are driven primarily by four factors in our production process:

• the conversion of feedstock into synthesis gas, or syngas, which makes more of the carbon in the feedstocks available for conversion;

• the use of proprietary micro-organisms that ferment syngas with a high degree of target end-product selectivity, minimizing production of less-valuable by-products;

• the elimination of chemical catalysts and enzymes; and

• the use of an integrated platform design that allows for a continuous production process.

CoskataProcessDiagram[1].jpg

The Market

Fuel-grade ethanol is an established fuel blendstock, representing a 23 billion gallon global market in 2010, and has drop-in compatibility with existing infrastructure. Ethanol is the most common biofuel, with the United States consuming 13 billion gallons in 2010. At a December 9, 2011 market price of $2.71 per gallon, this represents a $35 billion market.

RFS2, a U.S. government incentive program, currently mandates that 21 billion gallons of advanced biofuels be produced by 2022, with at least 16 billion gallons derived from cellulosic biofuels.

Our technology platform can also produce cost competitive chemical intermediates that can be converted into propylene and ethylene, which represented $100 billion and $140 billion global markets.

The Risks, Translated from SEC-speak

Among the lowlights of reading S-1 registrations are the endless pages of risk disclosures couched in an alloy of SECspeak and legalese.

We offer these excerpts from the original S-1, and a translation into English, prepared by our Digest lexicologists.

In SECSpeak: “In place of the plasma gasifier that we used at our Lighthouse facility, we expect to integrate an indirect biomass gasifier with our syngas cleaning technology, which have never been tested together for fuels production. While biomass gasifiers are a proven technology, they have only been used commercially on a limited basis and have experienced operational reliability issues.”

In English: Uh, we didn’t actually use our proposed gasification machine, a/k/a/ Old Unreliable, because in the demonstration that we did, we decided to demonstrate something else.

In SECSpeak: “We have entered into an MOU with a lender for $87.9 million of debt financing to fund a portion of the cost of constructing Phase I of our planned Flagship facility. We have also received a conditional commitment from the USDA relating to a 90% guarantee of such debt financing…The process for finalizing the definitive documentation with the lender and the USDA may take longer than expected or may not happen at all.”

In English: Your investment dollars may become, er, marooned (i.e “into the Valley of Death rode the six hundred”), if we don’t close this loan.

In SECSpeak: “There has been a substantial increase in ethanol production in recent years, but increases in the demand for ethanol may be limited because of market resistance to ethanol. At current consumption levels, the industry is approaching saturation of the 10% blend level market.”

In English: And now, the Talking Heads with their classic hit, “Road to Nowhere.”

In SECSpeak: “A disruption in our supply chain for components of our proprietary nutrient package could materially disrupt or impair our ability to produce renewable fuels and chemicals.”

In English: If Rumplestilskin the Magic Coskata Microorganism doesn’t get his vitamins, he won’t spin our straw into gold.

In SECSpeak: “Our planned Flagship facility will be located in Boligee, Alabama, which is an area exposed to and affected by hurricanes. Our other future commercial production facilities may also be located in areas susceptible to natural disasters, such as hurricanes, wildfires, earthquakes and floods.”

In English: “Brownie, you are doing a heck of a job down there with Hurricane Katrina.”

In SECSpeak: “Our management team has worked together for only a limited period of time and has a limited track record of executing our business plan as a team. We have recently filled a number of positions in our senior management and finance and accounting staff. Additionally, certain key personnel have only recently assumed the duties and responsibilities they are now performing.

In English: “Brownie, if that’s your name, you are doing a heck of a job, whatever it is that you do, down there with that, what do you call it, that Flaghouse project in Alaskabama. I think. (Pause) Oh, shoot, I dialed the wrong number. How do you get an outside line here?”

In SECSpeak: “Our commercial success depends on our ability to operate without infringing the patents and proprietary rights of other parties and without breaching any agreements to which we become a party. We are aware of other parties applying various technologies, including Ineos Bio and LanzaTech NZ Ltd.”

In English: Yep, we’re aware of INEOS Bio. They are, like, suing the heck out of us.

In SECSpeak: “Although we currently intend to use the net proceeds from this offering in the manner described in “Use of Proceeds,” we will have broad discretion in the application of the net proceeds.”

In English: If we spend all this money on, say, golf memberships, the only ethanol we’ll see will be at the 19th Hole.

The Strategy

From the S-1:

“Build our first commercial-scale facility.

Expand through a flexible, capital-efficient business model.

Be a full service solution provider.

Commercialize production of bio-based chemicals.

Identify attractive global market opportunities.

Maintain technology leadership through ongoing investment in R&D.”

The Commercialization Plan

From the S-1: “Our first commercial facility will be built in Boligee, Alabama. The initial production capacity of this facility, which we refer to as Flagship, will be [Phase I] 16 million gallons of ethanol per year, and [Phase II] to achieve total production capacity of 78 million gallons of ethanol per year…at an unsubsidized cash operating cost of less than $1.50 per gallon, net of co-product sales, assuming a feedstock cost of $64 per bone dry ton of softwood.

“Phase I of Flagship will be financed by a portion of the proceeds of this offering, cash on hand and $87.9 million of debt financing supported by a 90% loan guarantee through the USDA’s 9003 Biorefinery Assistance Program.

“We expect Phase I and Phase II to be completed in 2013 and 2015, respectively.

“We expect to use a wide variety of other feedstocks, in addition to woody biomass, for subsequent facilities, including municipal solid waste, agricultural residues, energy crops and fossil fuel sources…We also believe that corn ethanol producers can expand their capacity by co-locating our technology at their existing ethanol production facilities, since it would allow them to convert agricultural residue into cellulosic ethanol.

“Our proprietary technology platform can produce valuable bio-based chemicals in addition to renewable fuels like cellulosic ethanol. We are currently collaborating with Total Petrochemicals to develop a unique micro-organism-based technology that produces propanol…coupling our propanol technology with proprietary technology to dehydrate alcohol into alkenes, including propanol into propylene.

“In addition to building and operating facilities, we plan to enter into joint ventures for the co-ownership of facilities and to license our technology platform to third parties.”

Coskata as it sees itself:  6 Competitive Strengths

Proprietary technology platform. As of November 30, 2011, we had six patents issued and 28 patent applications pending on key elements of our technology platform, including syngas cleanup, micro-organisms and continuous anaerobic fermentation. At Lighthouse, our demonstration-scale facility, [we have] over 15,000 hours of run time

Low cost production with high yields. Based on demonstration runs at Lighthouse, we expect to achieve yields of 100 gallons of ethanol per bone dry ton of softwood at Flagship, with unsubsidized cash operating costs of less than $1.50 per gallon.

Significant feedstock flexibility. Our process can utilize a wide variety of carbon-containing feedstocks, including wood chips, wood waste, municipal solid waste, agricultural residue such as corn stover and bagasse, energy crops and fossil fuel sources such as natural gas, coal and petroleum coke.

Multiple end products targeting large existing markets. Our first commercial product will be fuel-grade cellulosic ethanol. Our technology platform can also produce cost competitive chemical intermediates that can be converted into propylene and ethylene. In addition, we have demonstrated in a laboratory setting the production of butanol, butanediol, hexanol, organic acids and certain fatty acids.

Fully-integrated process solution that enables rapid commercialization. Our technology platform is a complete, fully-integrated process solution that can be delivered to our future wholly-owned facilities, as well as to our joint venture projects and licensees.

Experienced management team. We have assembled strong management, scientific and engineering teams with deep knowledge in research and development, new product development, capital project execution, feedstock procurement, plant operations and business plan execution.

Financing to date

Coskata has incurred substantial net losses since its inception, including net losses of $28.7 million for the year ended December 31, 2010 and $23.3 million for the nine months ended September 30, 2011. They expect these losses to continue for the foreseeable future. As of September 30, 2011, they had an accumulated deficit of $88.2 million.

The bottom line

The really good news here is that a sygas-to-biofuels technology is now available to investors. Of all the processing technologies, it’s been among the most promising for quite some time, but all the companies have been privately held. With syngas, you get more carbon to work with, and you can work more easily with ultra-low cost feedstocks like MSW.

Even better, in maintaining their $1.50 per gallon or better projection on operating costs, Coskata is signaling that it has cracked the technology problem, from a process point of view. That’s huge.

Now, for the tough love, in five parts:

1. The USDA loan has not closed.
2. There’s no really, really significant strategic partner with skin in the game, here, whose presence says “our engineers have looked at the technology, and we believe” to the investor.
3. There’s a potentially damaging, unresolved lawsuit with INEOS Bio, how damaging, we don’t know.
4. Who knows exactly what will happen when the project switches from plasma gasification to a biomass gasifier.
5. The CAPEX looks like around $12 per gallon for the Phase I, and we’re not sure how fast that will come down in Phase II, as down it must come.

So, there are reasons why, to the retail investor, confidence may be low. If #1 and #3 are resolved and #4 and #5 are explained between the time of the filing and the road show, that will make for an easier time for CEO Bill Roe and team. As with Mascoma’s IPO, it would definitely strengthen the offering and confidence, if a major strategic came on board in a stunningly material way, as Total did with Amyris. It happened with Valero and Mascoma, and that added zing and magic to a good package.

It’s a good package that could well be a great package by the time the offer prices. Stay closely tuned to Coskata’s news stream.

The complete S-1 registration statement.

All 180-or-so pages in all their glory. The complete S-1 registration statement is here.

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.

September 29, 2011

Fulcrum Bioenergy’s $115M IPO: The 10-Minute Version

Jim Lane

The first zero-cost feedstock biofuels company comes to the public markets with its IPO.

Like to see how this “Back the the Futuresque” technology unlocks value by converting household garbage into transportation fuel?

Here’s our 10-minute version of the IPO from Fulcrum Bioenergy.

In California, Fulcrum Bioenergy has filed an S-1 registration statement for a proposed $115 million initial public offering. The number of shares to be offered and the price range for the offering have not yet been determined. The company proposes to list under the symbol FLCM. UBS Investment Bank is the underwriter for the offering.

The company is currently ranked #45 in the world in the 50 Hottest Companies in Bioenergy. The rankings recognize innovation and achievement in fuels and are based on votes from a panel of invited international selectors, and votes from Digest subscribers.

Fulcrum becomes the 12th company to file for an IPO in the industrial biotech boom, which began with a successful listing on the NASDAQ by Codexis (CDXS) in 2010. IPOs by Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), and KiOR (KIOR) have followed. In recent months, PetroAlgae (PALG.OB), Myriant, Ceres, Genomatica, Mascoma and Elevance have also filed S-1 registrations for proposed IPOs.. Three in the past week, in fact.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Fulcrum model, opportunities for the intrepid investor, and some risks which we have translated from the ancient and original SEC into modern English.

Company Overview

Fulcrum produces advanced biofuel from garbage. Its business model combines a proprietary process and zero-cost municipal solid waste, or MSW, feedstock to provide them with what they term “a significant competitive advantage over companies using alternative feedstocks such as corn, sugarcane and other sources of biomass in the production of renewable fuel”. According to the filing, they have entered into long-term, zero-cost contracts for enough MSW located throughout the United States to produce more than 700 million gallons of ethanol per year; the core element of their technology, they confirm, has been demonstrated at full scale.

They intend to use a substantial portion of the IPO proceeds of this offering to fund the construction of its first commercial-scale ethanol production facility, the Sierra BioFuels Plant. At this facility, they expect to produce approximately 10 million gallons of ethanol per year at an unsubsidized cash operating cost of less than $1.30 per gallon, net of the sale of co-products such as renewable energy credits.

For a company that believes in waste, they sure don’t believe in large overhead. It’s a poster child for lean management in the development of advanced bioenergy. Employee headcount is just 17, at IPO time, with just 2 in research and development.

Development costs to date: net losses of $12.4 million, $16.5 million, and $18.0 million for 2008, 2009 and 2010, respectively and $13.8 million for the six months ended June 30, 2011. Total: $63.8 million.

The Technology

From the S-1: “In collaboration with a leading global engineering, consulting and construction company, we conducted an extensive review of more than 100 technologies and processes for producing large volumes of advanced biofuel and concluded that thermochemical technologies offered the most commercially viable solution. Based on this review, we developed a two-step process that consists of gasification followed by alcohol synthesis to produce ethanol from MSW. For the gasification step, we worked with InEnTec LLC, or InEnTec, to combine two gasification technologies into a single energy-efficient process to produce syngas from MSW. For the second step, we worked with Saskatchewan Research Council, or SRC, and Nipawin Biomass Ethanol New Generation Co-operative Ltd., or Nipawin, to integrate their thermochemical catalyst into our proprietary alcohol synthesis process to convert syngas to ethanol.”

The Market

The market-limiting factor for this biofuels process is not the overall demand for transport fuel, or ethanol, but the availability of MSW as a feedstock and the availability of sufficient tipping fees to ensure that arrival of zero-cost or negative-cost feedstock at the manufacturing facility gate.

From the S-1: “According to the EPA, annual MSW generation in the United States has trended upwards over the past several decades, increasing from 88 million tons in 1960 to 243 million tons in 2009. On average, each person in the United States generates approximately one ton of MSW per year. More than 85% of the MSW generated in 2009 was comprised of carbon- and hydrogen-based organic materials with latent energy content.

Waste collectors are charged fees for landfill waste disposal, which are referred to as tipping fees. According to the Waste Business Journal, the national average for tipping fees increased from $28.52 per ton in 1991 to $45.62 per ton in 2011, with considerably higher tipping fees in more densely populated regions.”

Based on the Fulcrum yields of 50 gallons per ton of MSW, the addressable US market is 12.15 billion gallons of ethanol.

The Strategy

Commence production at Sierra. They plan to commence construction of the first commercial-scale ethanol production facility by the end of 2011, with ethanol production expected to begin in the second half of 2013, at a total capacity of 10 million gallons per year.

Expand production capacity. They will use the the modular design of the technology to construct new, larger facilities quickly and efficiently, with future production capacity at 30- and 60-million gallons per year at future facilities. Such larger facilities would also lower both the capital cost per gallon and the fixed cost component of per gallon production costs (to as low as $0.90 per gallon), enhancing the economics.

Execute fixed-price offtake and hedging contracts. For each facility, we intend to enter into physical and/or financial fixed-price arrangements to lock in sufficient economics to cover a substantial portion of our fixed costs, including debt service.

Secure additional MSW contracts. Longer term, they intend to expand our business by entering into additional MSW feedstock agreements to increase the amount of resources we have available to supply our commercial facilities.

Explore new market opportunities. They may license the technology to third parties and/or partner with large strategic players, such as major oil and chemical companies, outside of the base model to build, own, and operate facilities within the United States.

The Commercialization Plan

Coming online in 2013 and located in the Tahoe-Reno Industrial Center approximately 20 miles east of Reno, Nevada, the cost of constructing the 10 million gallon Sierra project is estimated at $180 million, which will be financed through existing equity capital and proceeds from this IPO.

The State of Nevada currently has a demand for ethanol of more than 50 million gallons per year. Today, there are no ethanol producers in the state of Nevada, nor to our knowledge are there any slated for development other than Sierra.  The State of California currently has a demand for more than 950 million gallons of ethanol per year and imports 80% of its total ethanol supply .

Future locations will have capacities of 30 or 60 million gallons, and unsubsidized cash operating costs of less than $0.90 per gallon.

They have identified more than 20 potential site locations across the United States for future development, located in the 19 states in which they have contractually secured zero-cost MSW. They believe opportunities may exist to co-locate our facilities at sites with significant infrastructure in place, such as refineries, which could lower our per-gallon capital costs.

Fulcrum as it sees itself:  11 Competitive Strengths

Zero cost feedstock. We have executed feedstock contracts with some of the largest waste service companies in the United States that will supply us with sufficient feedstock, at zero cost, to produce more than 700 million gallons of advanced biofuel annually for up to 20 years. Our use of MSW at zero cost removes the largest, and most volatile, component of traditional renewable fuels production cost from our cost structure. We believe this provides us with a significant cost advantage over competitors paying for feedstock or utilizing purpose-grown feedstocks.

Transportation advantage. Significant volumes of MSW are generated near metropolitan areas, providing us with a transportation advantage compared to feedstocks harvested or grown in rural areas that must ultimately transport either the feedstock or the fuel to metropolitan areas.

Reliable supply. The United States generates more than 243 million tons of MSW annually, the majority of which is rich in organic carbon, providing sufficient feedstock for our process to produce approximately 12 billion gallons of biofuel annually.

Established infrastructure. By using MSW, we benefit from existing infrastructure for collection, hauling and handling. No new logistical networks would be required to transport the feedstock to our facilities.

No competing use. We produce advanced biofuel from a true waste product that has no competing use, is not sought after by food producers and has no impact on food prices.

Clear path to commercialization. Our first commercial-scale ethanol production facility is expected to begin production in the second half of 2013. We expect to construct additional commercial-scale production facilities across the United States that will be supplied with MSW under our existing contractual arrangements with Waste Connections, Inc. Our modular plant design not only significantly reduces scale-up risk, but will also allow us to construct new facilities and deploy our capital efficiently to capture a meaningful share of the ethanol market in the United States.

Proprietary process not dependent on yield improvement. Our process integrates a catalyst that converts syngas into ethanol, and we have demonstrated the success of this process at full scale at our demonstration facility. We believe our process will produce ethanol at net yields of approximately 70 gallons per ton of MSW, which we believe is sufficient for us to operate profitably in the absence of economic subsidies.

Business model built for long-term and sustainable profitability. We do not rely on government subsidies to make our product commercially viable. While we benefit from policies such as RFS2 and the LCFS, and will access incentives available for the production of our advanced biofuel, we expect our product to be sold on a cost-competitive basis with existing transportation fuels without any reliance on subsidies.

Flexible production process. We have designed our proprietary alcohol synthesis process to give us the flexibility to produce alcohols other than ethanol and take advantage of opportunities in other renewable fuels and chemical markets.

Benefits for our customers. Zero-cost feedstock; stable cost structure.   Access to domestically-produced advanced biofuel.  Large-scale development program.

Benefits for our MSW suppliers. A cheaper source of waste diversion than traditional landfill disposal. Extend landfill life at existing capacity levels.  Avoidance of methane gas emissions.

The Risks, Translated from SEC-speak

In SEC speak: We are a development stage company with a limited operating history, and we have not yet generated any revenue. We currently expect to begin constructing our first commercial ethanol production facility, the Sierra BioFuels Plant, or Sierra, by the end of 2011, and to begin production in the second half of 2013.

In English: We ain’t sold nuttin’, honey. Cause we ain’t built it yet.

In SEC speak: To date, the components of our process have been demonstrated or used separately, but we have not previously demonstrated the processes on a fully-integrated basis at a single location or on a commercial scale.

In English: “Salagadoola mechicka boola bibbidi-bobbidi-boo. Put ‘em together and what have you got? Bibbidi-bobbidi-boo.”

In SEC speak: We are currently in the process of negotiating a term sheet with the U.S. Department of Energy, or DOE, for a loan guarantee to fund a portion of the construction costs associated with Sierra. As a part of the loan guarantee process, the DOE and its independent consultants conduct due diligence on projects which includes a rigorous investigation and analysis of the technical, financial, contractual, market and legal strengths and weaknesses of each project.

In English: S-O-L-Y-N-D-R-A.

In SEC speak: In order to produce sufficient yields of ethanol to make our facilities economically viable, we will require large volumes of MSW feedstock. Though we have entered into long-term MSW feedstock supply agreements with waste companies to provide enough feedstock to produce more than 700 million gallons of ethanol annually at zero cost, deliveries by such companies may be disrupted due to weather, transportation or labor issues or other reasons outside of our control.

In English: “Keep America Beautiful” – throw lots and lots of litter in the general direction of Lake Tahoe, please.

In SEC speak: We will also apply to the State of California to have our ethanol certified under California’s Low Carbon Fuel Standard, or LCFS, which would make our ethanol eligible for the carbon intensity reduction credits that will be available under this program for reducing the carbon intensity of California’s transportation fuels.

In English: Not that California might actually pull the rug out from underneath any biofuels venture. Nah, never happen.

In SEC speak: As of June 30, 2011, our executive officers, directors and beneficial holders of 5% or more of our outstanding stock owned almost all of our outstanding voting stock. As a result, these stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.

In English: Ah, Skywalker, you will not be a full member of the Jedi Council at this time.

Financing to date

In 2007, James A. C. McDermott, the Managing Partner of USRG Management Company had contributed or made commitments to contribute $1.0 million to the LLC, for  6,741,573 shares of Series A convertible preferred stock.

In August 2007 and February 2008, they sold an aggregate of 14,000,000 shares of our Series B convertible preferred stock at $1.00 per share for an aggregate purchase price of $14.0 million.

In October 2008, they issued two Senior Secured Convertible Notes,  to USRG Holdco III and  Rustic Canyon Ventures III, with an initial maximum principal amount of $5.0 million for a maximum aggregate principal amount of $10.0 million, which accrued interest at the rate of 8% per year

In March 2010, they issued two new Senior Secured Convertible Notes to the same parties – the 2010 USRG Note and the 2010 Rustic Canyon Note, with an initial aggregate principal amount of $4.0 million.

In June 2010, the 2008 USRG Note and the 2008 Rustic Canyon Note were converted into 13,450,762 shares of Series B-2 preferred stock, in exchange for the conversion of $26.9 million in principal amounts and accrued interest owed on the notes.

In September 2011, the 2010 USRG Note and the 2010 Rustic Canyon Note were converted into 12,924,605 shares of Series C-1 preferred stock at $2.67 per share,  in exchange for the conversion of $32.5 million aggregate principal amount of our senior secured convertible notes and $2.0 million of accrued interest.

Also in September 2011, they sold, or expect to sell prior to completion of this offering, an aggregate of 29,216,738 shares of our Series C-1 convertible preferred stock at $2.67 per share for an aggregate purchase price of $78.0 million, including the conversion of the 2010 USRG Note and the 2010 Rustic Canyon Note.

Fair Valuation by the board of directors

November 1, 2007: $0.24

April 19, 2010: $0.41

June 27, 2011: $1.53

The bottom line

This is the first of the waste-to-biofuels companies to come to the public markets, which elevates the opportunity and risk for the investor in the absence of a benchmark IPO offering.

The company has spent $63.8M to date bringing itself to the cusp of commercialization, which is relatively cheap as advanced biofuels goes. Several companies have filed IPOs after racking up more than $100M in development costs to the point of constructing their first commercial facility.

Like most others (but not all) in this IPO wave, Fulcrum comes to the market with no revenues, and as a financing event rather than a liquidity event for existing shareholders. Having had most of 2011to raise capital, they have (after completing their 2011 pre-IPO financing) $49M in the bank as of June 30th.

Attractive aspects of this filing: zero-cost, locked in feedstock. Assuming we believe the cost estimates from the demonstration-level work that has proceeded to date, there’s not much that can go materially wrong in terms of the proposed production cost of $1.30 per gallon for ethanol.

Unattractive aspects: aside from the absence of a full-scale demonstration, there’s a high capital cost for this process (at the Sierra facility) of $18 per gallon of capacity – that’s more than nine times the cost of building out corn ethanol at scale – though corn ethanol producers (buying on the spot market) are looking at feds rock costs in the $2.50 per gallon range. Even assuming zero-debt and a 20-year life for the facility, the amortized capital cost of this facility will raise the overall fixed production cost to $2.20 per gallon on an unsubsidized basis, which leaves little room for profit at current spot ethanol prices of $2.50 per gallon and exposed at the CBOT current October 2012 ethanol futures price of $2.12 per gallon.

On the other hand, with its 75 percent GHG reduction, Fulcrum will not be competing head-to-head against, say, corn ethanol, but rather be competing within the cellulosic biofuels pool, which in the RFS is restricted to technologies that produce a 60 percent or higher GHG savings. There, the prices (given tight supply for some time to come) are expected to be higher.

Pools of risk: Aside from the aforementioned risks associated with the Sierra project, we have a sketchy, but not contracted out, pathway to future facilities.

The complete S-1 registration statement is here.

Jim Lane is the Editor and Publisher of Biofuels Digest.

September 24, 2011

Mascoma’s IPO: The 10-Minute version

Jim Lane

No appetite for 200 pages of IPO-speak in Mascoma’s S-1 registration statement? Here’s our 10-minute version.

In Massachusetts, Mascoma Corporation announced that it has filed an S-1 registration statement relating to a proposed $100 million initial public offering. The number of shares to be offered and the price range for the offering have not yet been determined, and the company has not indicated yet which exchange it will apply to for a listing of its shares.

Here’s the S-1 registration, in a conveniently downsized 10-minute Digest version – with some commentary along the way as to what is driving value in the Mascoma model, what might be tempting to potential investors, and the risks and pitfalls along the road to cellulosic ethanol riches. Yes, we’ve marched through the hours of brain-numbing legalese and disclaimers, so you won’t have to. Here’s the news you can use.

Mascoma’s IPO: The 10-minute version

It’s been a long journey for Mascoma to develop its technology, in the glare of attention from an adoring (and heavily invested) public, entranced by its revolutionary consolidated bioprocessing “magic bug”, which eliminates the need for costly enzymes in processing advanced cellulosic feedstocks into ethanol.

What is consolidated bioprocessing? A magic bug that simultaneously extracts simple sugars from cellulose and then ferments them into ethanol. As the company observed in it’s S-1: “In a 2006 report on biomass conversion to biofuels, the DOE endorsed the view that CBP technology is widely considered the ultimate low-cost configuration for cellulose hydrolysis and fermentation…Typically, biomass conversion processes require a collection of saccharolytic enzymes (cellulases and hemicellulases), which hydrolyze the carbohydrates present in pretreated biomass to sugars, and microorganisms capable of fermenting the liberated sugars into ethanol or other end-products. When the microorganisms both produce the necessary saccharolytic enzymes and ferment the liberated sugars to end-products, the biomass conversion process is called consolidated bioprocessing, or CBP.”

It needs a good pre-treatment for its feedstocks, which is partly why Mascoma acquired SunOpta’s cellulosic ethanol business and its pre-treatment technology last year. The CBP approach bypasses the need for costly enzymes, which currently are in the $0.50 (per gallon of ethanol) range and have been a key stumbling block in the race to make cellulosic biofuels.

The company signed its landmark commercialization deal with JM Longyear in 2008 with a goal of developing a 20 million gallon commercial-scale facility in Michigan, but has not yet commercialized – and the valuations on Mascoma’s stock have been on a downtrend in the past year, hovering at $3.75 in private capital raises, after reaching a high of $6.40 in 2009.

Under new CEO Bill Brady, the company has continued to improve its results, and has its operating costs down to a projected $1.77 per gallon, and has developed what it calls a “capital light” strategy for getting its CBP magic bug into business. According to its S-1 registration statement, it expects to commence construction in Michigan in the next 3-6 months.

But a new, nearer-term, even more capital light product has emerged – Mascoma Grain Technology, an enzyme-replacement product for conventional corn ethanol that Mascoma says can reduce costs by $0.01 to $0.02 per gallon for ethanol producers today, and could rise to 4% reductions in enzyme costs in the future. Given a 13 billion gallon market, that’s as much as $260 million in savings for the US corn ethanol industry – but the margins are razor-thin, and assume that Mascoma can stay ahead of companies like Genencor and Nozozymes on enzyme cost.

The Commercialization Plan

Phase 1: Mascoma Grain Technology.

From the S-1: “We plan to initially target the large and established first generation corn ethanol industry with our proprietary Mascoma Grain Technology, or MGT, yeast product, that can be used by corn ethanol producers as a drop-in substitute for existing yeasts. We expect to begin selling this product in 2012.

“Our initial MGT product adds value by alleviating the need to purchase most of the expensive enzymes currently used in corn ethanol production, lowering production costs. Based on laboratory test runs and management estimates of ethanol production costs, we believe that our initial MGT product will reduce the cost of producing corn ethanol by approximately $0.01 to $0.02 per gallon.

“Based on laboratory test runs, we believe future generations of our MGT product will be capable of ethanol yield improvements of up to 4%.

Phase 2: Hardwood consolidated bioprocessing for fuels

From the S-1: “We expect that our first two hardwood CBP facilities will be built in Kinross, Michigan and Drayton Valley, Alberta. We anticipate construction of our hardwood CBP facility in Kinross, Michigan to start in the next 3 to 6 months and construction of our hardwood CBP facility in Drayton Valley, Alberta to start within 12 to 24 months.

Phase 3: Consolidated bioprocessing of multiple fuel and chemical products from multiple feedstocks

From the S-1: “Beyond corn and hardwood, we have already shown the flexibility of our CBP technology platform through the conversion into ethanol of a number of additional feedstocks in a laboratory setting, including corn stover, sugarcane bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum…we have demonstrated in a laboratory setting the production of propanol and fatty acids. These chemicals can in turn be used to create propylene and alkanes, which are the building blocks of many petrochemical replacements.”

The Yields and Cost Improvements

From the S-1:
“The operating cost of $3.00 for 2009 is based on a hardwood to ethanol conversion yield of 52 gallons per bone dry short ton.

“The operating cost of $2.13 for 2010 is based on a hardwood to ethanol conversion yield of 67 gallons per bone dry short ton.

“The current operating cost of $2.00 is based on a hardwood to ethanol conversion yields of 71 gallons per bone dry short ton.

“The estimated operating cost of $1.77 [per gallon] for our planned hardwood CBP facility in Kinross, Michigan assumes that the facility is built to our specifications with a hardwood to ethanol conversion yield of 83 gallons per bone dry short ton, which is what we expect when the facility is fully operational.

“All of the operating cost estimates set forth in the table above assume a hardwood feedstock cost of $66 per bone dry short ton of hardwood.”

The Mascoma Markets: First generation ethanol

From the S-1: “According to the Renewable Fuels Association, or RFA, U.S. corn ethanol production increased from 3.6 billion gallons in 2005 to over 13 billion gallons in 2010, which represented a compound annual growth rate of over 30% for that period, and ethanol exports in 2010 hit a record high of 350 million gallons. As of 2010, over 200 ethanol plants existed in the United States. We believe this large and established industry presents a compelling market for our drop-in MGT yeast product.”

Second generation ethanol

From the S-1: “Of the 36 billion gallons of renewable fuels mandated by 2022, 20 billion gallons are mandated to be advanced biofuels (excluding 1 billion gallons of biomass-based diesel), with at least 16 billion gallons required to be cellulosic biofuels. The vast majority of ethanol consumed in the United States today is produced from corn and does not satisfy RFS2 advanced biofuels requirements. We expect the ethanol produced at our hardwood CBP facilities will be a cellulosic biofuel and we intend to capitalize on this mandated market.”

Challenges

From the S-1: “The market for renewable fuels and chemicals has evolved significantly over the past several years, with many companies seeking to capitalize on the growing market potential and the environmental benefits offered by these products. However, many challenges exist and we believe that companies will need to satisfy the following criteria to succeed in this market:

• Demonstrated and Validated Technology.
• Comprehensive, Integrated Process.
• Low Cost.
• Flexibility.”

Mascoma as it sees itself: 10 Competitive Strengths

The company cites 10 factors in its filing.

1. Proven CBP Technology. It has demonstrated the performance of our MGT yeast product and hardwood CBP technology as follows:

2. Validation of the performance of its initial MGT yeast product by ICM, Inc., the leading provider of engineering services to the ethanol industry.

3. Successful production runs using its hardwood CBP microorganisms, including more than 1,000 continuous hours of operating data on a fully-integrated basis at our demonstration facility in Rome, New York;

4. Validation of its hardwood CBP technology by independent engineers at the U.S. Department of Energy and by independent third parties; and

5. Proven commercial use of the core equipment used in its biomass conversion process, with the front-end pretreatment equipment traditionally used in the pulp and paper industries, and the back-end distillation equipment used in the fuels and petrochemical industries.

6. Comprehensive and Efficient Biochemical Solution for Biomass Conversion. Mascoma contends that no other solution for biofuels and chemicals from multiple feedstocks that covers the full spectrum of the biomass conversion process, including pretreatment, hydrolysis and fermentation.

7. Low All-in Cost Solution. CBP is distinct from other, less integrated configurations, in that it alleviates the need to purchase most of the expensive enzymes associated with most other ethanol production methods while also improving yields.

8. Capital-Light Path to Revenue Generation. The commercialization of its initial MGT yeast product is not dependent on any meaningful capital expenditures. The hardwood CBP commercialization strategy is based on collaboration with third parties to fund, build, develop and operate the facilities.

9. Feedstock Flexible and Adaptable Technology. Beyond corn and hardwood, Mascoma has demonstrated in a laboratory setting the ability to convert corn stover, bagasse, palm residue, softwood, miscanthus, switchgrass, paper sludge and sorghum.

10. Deep Domain Expertise. Mascoma believes believe that its business is differentiated by our ability to leverage the deep domain expertise of an exceptional and distinguished group of executives, scientists and partners.

Commercialization and Grant Partners

JM Longyear. In December 2008, Mascoma and Longyear formed Frontier to develop and operate an integrated commercial-scale cellulosic fuel production facility in the state of Michigan. As of June 30, 2011, we had a 75% ownership interest in Frontier and Longyear owned the remaining 25%.  The operating agreement was amended in June 2010 to provide that Longyear will contribute the land at a date to be determined by the board of Frontier on or after January 1, 2012, upon commencement of development at the site.

The U.S. Department of Energy. In October 2007, Mascoma entered into a $4.3 million DOE grant agreement for the development of an organism for the conversion of lignocellulose to ethanol. As of June 30, 2011, Mascoma has received $4.1 million in proceeds from the DOE under this grant. In September 2008, the company entered into a $20 million grant agreement for the construction of an industrial scale fermenter system and the design, construction and operation of an integrated cellulosic ethanol plant for transforming locally grown mixed hardwoods or switchgrass into ethanol. As of June 30, 2011, Mascoma has received approximately $16.5 million.

The BioEnergy Science Center. In June 2008, Mascoma entered into a subcontract with UT-Battelle as one of more than a dozen participants in the BioEnergy Science Center, or BESC, supporting the multi-year effort to overcome recalcitrance of cellulosic biomass to conversion. BESC will provide up to approximately $6.3 million to fund our portion of the project. As of June 30, 2011, we have received $5.1 million from BESC. The contract lasts through 2012.

The Michigan Strategic Fund. In December 2008, Mascoma entered into a grant agreement with the Michigan Strategic Fund for the planned hardwood CBP facility in Kinross, Michigan, for up to $20 million. As of June 30, 2011, Mascoma has received $12.1 million from MSF.

The New York State Energy Research and Development Authority. In October 2007, Mascoma entered into a grant agreement NYSERDA, to build and operate a biomass-to-ethanol demonstration plant in Rome, New York. In connection with this grant agreement, we were awarded a grant of up to $14.8 million, to be paid in installments upon certain milestones. As of June 30, 2011, we have received $13.8 million.

The Province of Alberta, Canada. In March 2010, Mascoma entered into an Agreement with the Province of Alberta, Canada for the development of a planned commercial cellulosic ethanol facility in Alberta, Canada. Under this arrangement, Alberta will provide up to $0.8 million in funding to be used exclusively for this project.

Proposed Projects

• Kinross, Michigan: The hardwood CBP facility in Kinross, Michigan is expected to be a 20 million gallon per year facility.

• Drayton Valley, Alberta: The hardwood CBP facility in Drayton Valley, Alberta is expected to be a 20 million gallon per year facility that will produce ethanol, as well as coproducts such as renewable electricity and purified xylose.

In addition to Kinross and Drayton Valley Mascoma has identified additional potential development sites in the Great Lakes region and Alberta.

Financing along the way

From inception in 2005 through June 30, 2011, Mascoma funded operations primarily through $105.3 million in proceeds from the sale of preferred equity securities, $10.0 million in proceeds from the sale of convertible notes, $20.0 million in borrowings under secured debt financing arrangements, and $34.5 million in revenue.

As of June 30, 2011, cash, cash equivalents and short-term investments totaled $12.1 million.

Series A. In March 2006, Mascoma sold an aggregate of 5,000,000 shares of Series A preferred stock at a price of $0.80 per share for gross proceeds of approximately $4.0 million.

Series A-1. In September 2006, Mascoma sold an aggregate of 5,000,000 shares of Series A-1 preferred stock at a price of $1.00 per share for gross proceeds of approximately $5.0 million.

Series B. In November 2006, Mascoma sold an aggregate of 11,241,573 shares of Series B preferred stock at a price of $2.67 per share for gross proceeds of approximately $30.0 million.

Series B-1. In October 2007, former shareholders of Celsys Biofuels, Inc., or Celsys, received shares of Mascoma Series B-1 preferred stock, with an aggregate fair value of the shares of $5,250,000 at the time of issue.

Series C. Between February and April 2008, Mascoma sold an aggregate of 9,531,250 shares of Series C preferred stock at a price of $6.40 per share for gross proceeds of $61.0 million.

Series D. In August 2010, Mascoma issued 2,702,883 shares of Series D preferred stock at a price of $3.75 per share in connection with the conversion of 2010 Notes.  In August 2010, Mascoma also issued 11,268,868 shares of Series D preferred stock at a price of $3.75 per share to SunOpta in connection with the SunOpta acquisition.

In January 2011, Mascoma sold 1,333,333 shares of our Series D preferred stock at a price of $3.75 per share for gross proceeds of approximately $5.0 million.

In August 2011, Diamond Alternative Energy, LLC, or Valero, exercised a warrant for 1,333,333 shares of Series D preferred stock at an exercise price of $3.75 per share for gross proceeds of approximately $5.0 million.

Financial results along the way

Mascoma has generated $34.5 million in revenue along the way, primarily government funding for R&D. They have not yet commercialized their MGT corn ethanol technology or the hardwood CBP process.

The accumulated deficit as of June 30, 2011 was $118.722 million.

The net loss was $30.4 million, $38.3 million and $25.7 million for the years ended December 31, 2008, 2009 and 2010, respectively, and $14.8 million for the six months ended June 30, 2011.

Valuations along the way

Fair Value Per Share, from the S-1:

February 29, 2008 $2.94
October 31, 2008 $2.86
October 31, 2009 $2.95
August 31, 2010 $1.97
June 30, 2011 $2.93

The Risks, translated from SEC-speak

In S-1 speak: We have a limited operating history, a history of losses and the expectation of continuing losses.
In English: “We have spent all of Vinod Khosla’s investment, and would like to spend your investment too.”

In S-1 speak: In order to sell any of our MGT yeast products to corn ethanol producers we must obtain regulatory approval, and any delays in receiving approval could have a material adverse effect on our business, financial condition and results of operations.
In English: “Dad, can I borrow the car? I’ll be getting my license soon, I hope.”

In S-1 speak: “We have no experience applying our CBP technology to the production of renewable fuels or chemicals at commercial scale and our management has limited experience in the renewable fuels and chemicals business, and as a result, we may not be successful in commercializing our hardwood CBP technology.”
In English: “We could be a blockbuster. On the other hand, we could be Blockbuster.”

In S-1 speak: “The market for renewable fuels and chemicals may not develop as anticipated.”
In English: “If they mess with the RFS, we own a pub with no beer.”

In S-1 speak: Our stockholders’ deficit, recurring net losses and history of negative cash flows from operations raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm included an explanatory paragraph in its report on our financial statements as of and for the year ended December 31, 2010 with respect to this uncertainty.
In English: “We’re down to $12 million in the bank and, er, we lost $14 million in the first half.”

In S-1 speak: We have a history of material weaknesses in our internal control over financial reporting, including a material weakness that remains unremediated at December 31, 2010. Failure to achieve and maintain effective internal control over financial reporting could result in our failure to accurately report our financial results.
In English: “Oops, we hired Goofy as our bookkeeper a while back. But we fixed it, sort of.”

In S-1 speak: We may not be able to enforce our intellectual property rights throughout the world.
In English: “Technology piracy? Never heard of it.”

The bottom line

Mascoma is the first company primarily chasing cellulosic ethanol and consolidated bioprocessing, to file for an IPO in quite some time, so this is an important one in every way. There are two aspects to this filing. The near-term commercialization, and the long term in hardwood consolidated bioprocessing.

Near-term. Mascoma Grain Technology – hmmm, those are thin margins and no announced customers. That’s a toughie. The Valero investment in January may well signal that a customer may emerge there.

Long-term. $1.77 per gallon on an operating basis – well, we are not sure we are seeing a completely capitalized cost here – in industry terms, operating cost generally does not include the capital expenditure. But if we added 50 cents a gallon, or even $1.00 per gallon for the capex (assume $7.50 or $15 per gallon in construction, spread over 15 years), the numbers aren’t half bad at all. If the cellulosic biofuels credit survives a while at anywhere near the lofty $1.01 it is at today, that’s purty darn good. But we’re guessing on the capex. It would be nice to have that spelled out.

Upside opportunity. There’s room for improvement in that cost of $66 per dry ton for hardwood.

In the absence of announced customers or partnerships for MGT, or a strong pre-treatment revenue stream, investors may be tempted to continue to focus solely on the cellulosic biofuels business.

In that realm, Digest readers have been hugely strong fans of consolidated bioprocessing for a long, long time, and the numbers continue to look strong, and the timelines continue to point toward commercial volumes of cellulosic ethanol in the 2013-14 time frame, at affordable prices.

The complete S-1 registration statement is here.

Jim Lane is the Editor and Publisher of Biofuels Digest.

April 18, 2011

Kaydon: Profits Behind the Scenes

Debra Fiakas

Most investors when they consider the alternative energy sector think about the big solar photovoltaic manufacturers or the ethanol producers.  Engineering firms like Kaydon Corporation (KDN:  NYSE) rarely come to mind.  With special expertise in fluid processes, Kaydon is an indispensable partner in a variety of alternative energy projects such as wind, renewable diesel and ethanol plants.

The company earned a 12% net profit margin on $4645 million in total sales in the year 2010.  As impressive as that might be the really bright spot in Kaydon’s financial picture is its ability to generate cash  -  $93.9 million in 2010.  This implies a cash conversion rate of 20.2%.

Kaydon is not a high profile company with flashy investor relations outreach.  Its corporate web site is static and is directed primarily toward customers who might happen by looking for custom bearings or rings and seals.  Perhaps this customer-centric orientation is why Kaydon is growing in a field that is challenging for others.

The company just announced a key acquisition in German adding springs and dampers to the product line.  Kaydon is buying HAHN-Gasfedern GmbH for an undisclosed sum.  HAHN-Gasfedern is doing approximately $20 million in annual sales and is reportedly profitable.  The new product line should be interesting to customers all across Kaydon’s base in the energy, renewable energy, pharmaceutical and other process manufacturing industries.

The stock is selling at 23.5 times trailing earnings and 20.8 times forward earnings, suggesting analysts following the company see earnings growth ahead.  The consensus rating at this time is hold.  However, we believe investors should consider company’s like Kaydon that have been consistently delivering profits for a play on the alternative energy industry.  KDN also offers a 2.0% dividend yield at the current price level, suggesting that even at even with a forward earnings multiple near its growth rate, the stock offers value.


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.  KDN is included in Crystal Equity Research’s Earth, Wind and Fire Index in the Wind Group.

March 23, 2011

Greenshift Corp: Putting the Squeeze on Corn

Debra Fiakas

After a series of bankruptcies laid the U.S. ethanol industry on its back a few years ago, the survivors got the message  -  become economically viable or go out of business.  The industry has been scrambling to adopt new processes that utilize other non-food materials or at least get more out of the corn that has been the mainstay feedstock for the U.S. ethanol industry.  

Enter Greenshift Corporation (GERS:  OTC/BB) with its corn oil extraction process and a new step in the corn-ethanol production process.  Greenshift may change the economics of corn-ethanol production by giving producers new revenue streams.  

In the U.S. corn-ethanol industry the dry mill process is most typical with the whole corn kernel going into the fermentation stage.  After the fermentation process that turns the sugars in the corn kernel to ethanol, the leftovers or “corn stillage” are usually put through water extraction and drying stages.  The dried by-product called distillers grain is sold as animal feed.  Cattle or hog finishers are only to happy to get distillers grains since the protein content is near 30%.

However, distillers grains also has a high fat content  -  12% to 15%.  Greenshift’s corn oil extraction process removes corn oil from the corn stillage, providing ethanol producers another revenue producing by-product.  The corn oil can then be sold as biofuel feedstock or as an alternative animal feed ingredient.  What is left in the stillage goes on through the usual water extraction and drying process.  Greenshift claims its process removes as much as 80% of the oil from the corn stillage.

Greenshift has managed to license its process to a half dozen or so ethanol and corn handling concerns, including most recently Marquis Energy for its Wisconsin ethanol plant.  Marquis previously licensed the Greenshift technology for its plant in Illinois.  Green Plains Renewable Energy, Inc. (GPRE:  Nasdaq) is also a licensee.  In a recent letter to shareholders, Greenshift CEO Kevin Kreisler predicted that current license agreements would be sufficient to bring the company to break-even at the operating level.  

As rosy as the story might sound, GERS is only for the most risk tolerant investor.  The stock is trades more than 70 million shares per day at a price that is well under a half penny.  Those of us who need to sleep at night might wait until Green Plains has implemented the Greenshift technology.  Green Plains expects to complete deployment by the end of March 2011 and claims the change could enhance operating income by $15 million to $19 million per year.  If Green Plains is able to make good on its claims, it could be a good reason to look more carefully at GERS.

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.  GERS and GPRE are included in Crystal Equity Research’s Beach Boys Index in the Ethanol Group.  

$GPRE, $GERS

February 05, 2011

Throwing Corn off the Green Bus

Dana Blankenhorn

I am a big booster of alternative energy. Harvesting the wind, the Sun, the heat of the Earth, the tides – I'm there and NIMBYs be damned.

But I am increasingly having second thoughts about one type of green energy. Corn-based ethanol. (I would toss in sugar cane, too, but America doesn't grow enough to matter here.)

Corn ethanol was one of the first biofuels to find a market. Pushed by companies like Archer Daniels Midland (ADM) and Cargill, corn ethanol is now an integral ingredient in many blends of gasoline. It is compatible with gasoline and, its advocates say, it burns cleaner.

But corn is a row crop. That means it's planted in long rows. It's dependent on man for its survival. (If we didn't open the husks and spread the seed it would not exist.) Corn also takes nitrogen from the soil. It depletes the land. The way you sustain land for corn is by either spreading fertilizer every year or letting the land “rest” every so often, rotating it with soybeans or (better yet) some non-food crop such as a perennial grass.

Corn is also a food crop. The same process which leads to ethanol leads to corn syrup. Corn is an essential feed for livestock of all kinds. Corn ethanol competes with people and animals for corn.

All this makes corn an easy whipping boy for those who actually oppose renewable energy, like oil industry analyst Bob van der Walk.

“Using food for bio-fuels – especially in Western countries – is counter productive to keeping the price for those staples affordable, but that is exactly what is being encouraged by the proposed federal subsidies,” he writes.

He's right. Support for corn is the Achilles Heel of the alternative fuels industry. And it doesn't have to be that way.

As venture capitalist Vinod Khosla notes, concentrated hydrocholoric acid can break any plant material into its constituent parts, leaving it all available for use. Forest waste can be used to produce ethanol. So can switchgrass. Polyculture, growing several different kinds of plants in the same place, can become an economic source of cellulosic alcohol while reclaiming land row crops are making unusable.

The problem here is that cellulosic alcohol is not yet a proven technology. But that's a technical problem. It should not be a political one.

The political problem here is not with the farmer – not if he has economic alternatives to corn that can supply energy. The political problem here is with the processors, with firms like ADM that have married corn to green politics and don't want to change either business or political strategy. The processors are the financial support for politicians across the farm belt who are willing to stick their neck out for renewable energy. Remove that support and, it seems, their replacements would vote against us. Or they would.

It reminds me of the old “National Lampoon” cover from the 1970s – if you don't buy this magazine we'll kill this dog. The dog in this case is environmental politics, and ADM holds the gun.

It's time for that company to disarm.

Under CEO Patricia Woertz, there have been some indications the company wants to do just that. A former Chevron executive, Woertz talks a good game, but the company's stock has gone nowhere under her leadership and its prospects remain tied to the price of corn.

ADM has used government money for a demonstration cellulosic plant near its headquarters, and has worked with Purdue on research that would use all of a corn plant for energy production. But in this new game it's only one of many contenders. In corn it's king.

Is the best way to accelerate the move to truly renewable ethanol, to cellulosic alcohol, for the rest of the renewables industry to let ADM go?

Dana Blankenhorn first covered the energy industries in 1978 with the Houston Business Journal. He returned last month after a short 29 year hiatus because it's the best business story of our time. In between he covered PCs, the Internet, e-commerce, open source, the Internet of Things and Moore's Law. It's the application of the last to harvesting the energy all around us he's most excited about. He lives in Atlanta.

June 16, 2010

Should Ethanol Subsidies be Renewed?

Jeff Coombe

The Ethanol industry has only responded tepidly to the Volumetric Ethanol Excise Tax Credit in the past, so why should it be renewed?


The U.S. ethanol industry is nearing a major deadline. The industry's primary subsidy mechanism, the Volumetric Ethanol Excise Tax Credit (VEETC), is set to expire on December 31, 2010. Federal ethanol subsidies were worth roughly $5 billion in 2009, a figure large enough to create vigorous debate over their renewal. Some call the credits a boondoggle, others a vitally important lifeline for an industry still in its formative years.

Whichever it is, one has to wonder whether we as a country and as taxpayers are getting our money's worth for it. All subsidies are intrinsically positive for the industries they support, of course. But how much of an impact is really felt by the industry, especially as compared to the cost to the taxpayer, is much harder to quantify.

This article will look at the history of subsidies and other government support mechanisms for the ethanol industry, and how they result in increased production, plant construction, and stock pricing. By lining up the dates of landmark legislation with several industry performance metrics, we are able to view the industry response in terms of production and growth, rather than rhetoric. Only pure-play ethanol company stocks are reviewed, represented here by Andersons, Inc. (ANDE), Pacific Ethanol (PEIX), BioFuel Energy Corp. (BIOF), and the now-defunct VeraSun Energy (VSE).

The data below is a limited snapshot, and cannot account for the myriad of variables that affect the ethanol industry. Supply-and-demand market conditions, economic climate, and even public perception impact businesses and investment decisions. While keeping this in mind, it is still striking how little of an effect the VEETC, by far the largest biofuel subsidy, has on the industry as a whole. Almost no metrics responded positively to key dates in the VEETC history, instead seeming to respond much more to direct producer incentives and production / use mandates.

History of Ethanol Incentives

The VEETC was enacted on October 22, 2004 with the American Jobs Creation Act, and set a $0.51/gallon credit for any blender of ethanol into the petroleum gasoline stream. It replaced a convoluted set of subsidies begun in 1979, with a partial federal tax exemption of  gasoline blended with at least 10% ethanol (gasohol) by the Energy Tax Act. Fuel blender's tax credits and a pure alcohol tax credit were subsequently added, achieving roughly the same goals, but available to smaller fuel blenders that were unable to receive the excise tax exemption. The VEETC streamlined this system and provided a single mechanism for subsidizing ethanol use. The 2008 Farm Bill reduced the VEETC credit to $0.45/gallon.

One other federal tax credit applied to ethanol, the Small Ethanol Producer Tax Credit.  Enacted in 1990, this credit allowed plants producing less than 30 million gallon per year to receive a $0.10/gallon credit for the first 15 million gallons of fuel produced annually. The size of plants that can receive the tax credit was subsequently raised to 60 million gallons per year, though it still only applied to the first 15 million gallons of annual production. The Small Ethanol Producer Tax Credit also expires at the end of 2010. In addition, some 30 states have enacted their own biofuel incentive measures.

The federal government also uses non-monetary support mechanisms to assist the ethanol industry. Foremost amongst those is the Renewable Fuel Standard (RFS), enacted with the August 8, 2005 Energy Policy Act, and amended with the Energy Independence and Security Act, signed into law on December 19, 2007. RFS1 was the 2005 version, and mandated that specific minimum volumes of ethanol be blended with gasoline in the national fuel pool. Starting at 4 billion gallons in 2006, the RFS ramped up the minimum volume of ethanol that had to be blended with gasoline to 7.5 billion gallons by 2012. The industry grew much faster than expected, though, and in 2007 the RFS was amended (RFS2). This raised the minimum volume of corn ethanol blending to 15 billion gallons per year, and adds another 20 billion gallons of cellulosic ethanol, biodiesel, and other advanced renewable fuels by 2022.

Early Years of the Ethanol Industry

Ethanol production as a large-scale industry began in the 1970's. Over 150 ethanol plants, mostly small on-farm distilleries, were built in response to the OPEC oil crisis and fuel prices spikes. However, many plants were going out of business by the end of the decade, and the first ethanol subsidy was installed in 1979 to support the flagging industry. While the volume of production steadily rose in the 1980's and 1990's, the excise taxes failed to stem the drop in plant numbers. By the mid-1980's, there were less than 40 ethanol plants in the U.S. Figure 1 shows numbers of U.S. ethanol plants and production numbers from 1960-2000. Reliable ethanol production volumes were not tracked until 1980.

Ethanol Plants and Volume
*Source: RFA 2010 Ethanol Industry Outlook
**Source: BBI International


While the total number of plants barely changed in the 1980's and early 1990's, larger scale plants were being constructed and the ethanol production volume increased steadily over that time period. The Small Ethanol Producer Tax Credit was installed in 1990, and likely contributed to an increase in total production from 900 million gallons in 1990 to 1.4 billion gallons in 1995. How this credit was set up is in itself an indicator of its impact on the ethanol industry. The Small Ethanol Producer Tax Credit is the only credit that is paid directly to the companies that make ethanol. The VEETC and its predecessor excise credits are paid to fuel blenders, which are often petroleum refineries or bulk distributors, and not the ethanol producers themselves. While the majority of the excise credit finds its way back to producers in the form of better prices for their product, the subsidy effectively incentivizes oil companies to use ethanol.

Boom Times

Everyone knows the ethanol industry experienced a boom cycle in the mid-2000's. What is less agreed upon is what set of market forces really caused this boom. Contrary to popular belief, the data shows that the VEETC, enacted in 2004, did not immediately result in a change of ethanol plant construction. Between 2002 and 2005, the number of new plants or plant expansions announced held relatively static in the neighborhood of 15 plants per year. Total production capacity of plants grew slightly during that time. The real growth in the ethanol industry came in 2006 and 2007, which more closely corresponds to the RFS implementation. Figure 2 shows the relative inactivity between 2004 and 2005, and the large increase in construction projects from 2006-2008.

It is important to take into account the lag time between when a project is conceived and construction begins. This lag allows for the requisite capital to be raised, construction firms contracted, and other aspects of the project to be developed to the point that construction can be announced. In the ethanol industry, and especially in the boom years, the project development period is usually on the order of 12-18 months. If the VEETC was a major difference maker in the decision to build an ethanol plant, at least some early adopters would have been able to capitalize in 2005, and would have registered an uptick in construction. As it worked out, though, the bulk of industry growth came 2-3 years later.

Ethanol Plant Construction and Capacity
Source: Renewable Fuels Association

A measure of a company's health, and the most immediate indicator of positive and negative changes affecting a company, are shown in its stock price. In today's investing world, stock prices respond instantly to the slightest news, and it is here that the indifference towards the VEETC is most apparent.

If financial experts had agreed it was vital for the industry, stock prices should have jumped after signing of the VEETC. On the contrary, Figure 3 shows that there was almost no change in ethanol company stock pricing in 2004 and most of 2005. It was late-2005 and 2006 before the pure-play ethanol company stocks began their meteoric rise, immediately after signing of RFS1. Later, the increase in mandated volumes of ethanol production, through RFS2 in 2007, lines up with minor spikes in all four stock prices. This data indicates that investors were more responsive to RFS legislation than the VEETC. (Stocks are shown as a percentage of their highest point within the time period, in order to show the wide range of share values on one graph.)

Ethanol Pure Play Stocks

The other end of the boom (late 2008 and 2009) saw the bankruptcy of VeraSun, sharp drops in ethanol stocks and almost instant halting of all ethanol plant building, including some projects in mid-construction. All of this occurred while the VEETC was in the middle of its 6-year effective term, and the RFS was being increased to its 36 billion gallon goal.

The reduction of the VEETC in 2008 does correspond with reductions in the numbers of plants constructed and stock values. A change of $0.06/gallon in the credit reduces profit to a 100 million gallon plant by $6 million annually, so this change was definitely felt by producers. By that time, however, corn feedstock prices had hit an all-time high, oil prices had crashed, and a recession was hitting the U.S. economy. These forces impacted the industry much more than changes to the federal incentives packages could help. On the other hand, the fact that the industry is still alive today is probably due in part to those support mechanisms.

Going Forward

Does this show that ethanol companies and the investors who fund plant construction were more interested in the guaranteed market for their product resulting from the RFS, rather than increases in profit from the tax credit? Or are subsidies, while easy to point to, insignificant in the face of the much larger economic forces that really determine the health of the industry (general economic and investment climate, crush spread, etc)?

It is impossible to argue that the VEETC did not help spur investment into the ethanol area, and equally as difficult to argue that it isn't helping the industry through the bad times. It is not a perfect incentive, however. The purpose of the VEETC was to equalize the cost of ethanol with gasoline, but at times it has not been enough to help the producers, and at other times bonus profit on top of an already profitable product. Creating a guaranteed market for ethanol through mandated volumes of use, via RFS1 and RFS2, seems have a much greater effect on the industry at a much lower cost. Mandated use stabilizes the market, and still allows for the most efficient, low-cost producers to rise to the top.

A bill for renewing the VEETC and Small Ethanol Producer Tax Credit has been proposed in the House and Senate. Cattle and dairy groups have raised opposition to the measure, not interested in supporting their competition for corn any longer. Many groups feel the ethanol industry, at least the  corn-based subset of the industry, has matured and should  not need further subsidization in the form of tax credits. 

With the biofuels industry mired in a worse rut than the overall U.S. economy, government efforts to help the industry should not be cut. However, alternative incentive schemes need to be devised that provide more bang for the taxpayer buck. Systems including grants and loan guarantees for the construction of plants using second-generation feedstocks, a blending equalization scheme recently proposed in Biofuels Digest, and a new tax-and-tariff system proposed by researchers at Iowa State University and the USDA are all being discussed. With the current subsidy set to expire, now is the best time to explore better and more effective support schemes for the U.S. biofuels industry.

Jeff Coombe has been in the renewable energy and environmental science field for 7 years, including experience developing ethanol and biodiesel production facilities, project management for end use vehicle fleet conversions to alternative fuels, and environmental protection management. He is an active member of the Colorado Governor’s Biofuels Coalition steering committee, and has presented research findings at conferences including the International Algae Congress (Amsterdam, Netherlands), the Advanced Biofuels Workshop (Portland, Oregon), and the Colorado Renewable Energy Conference (Pueblo, Colorado). Strengths include data acquisition and analysis, emerging  feedstock and production technologies, and inter-industry relations. Mr. Coombe is currently seeking a project development position with a company local to the Denver, CO area. Click here to view his resume and biography.

March 11, 2010

Solar Headwinds, Part I

How Solar PV is like Ethanol

Tom Konrad, CFA

High levels of competition in the the solar photovoltaic (PV) industry mean that buy-and-hold investors should look elsewhere.

In May 2007, I published a competitive analysis of the corn Ethanol industry based on Michael Porter's classic Five Competitive Forces model.  At the time, Ethanol stocks were flying high, but my conclusion was that "the prospective ethanol investor should be very careful about investing in corn ethanol producers at random."  If anything, I understated the case.Ethanol Stocks

This chart shows three ethanol stocks that have survived since 2007.  As survivors, they are among the best performers in the industry; several others declared bankruptcy.

Corn ethanol is not a great business to be in; it's too competitive.  If you buy assets at the right price, you can do well, but it's all about timing.  A passive buy-and-hold strategy will  under-perform the same type of strategy in a less competitive industry.  Companies in less competitive industries can maintain higher returns on capital for longer periods.

Solar Manufacturers

It's not a secret that I'm no fan of investing in solar stocks, although I understand why enthusiasts are seduced by the sector.  Unlike corn ethanol, solar PV will likely be a significant part of any future sustainable energy mix, but that is not the same thing as saying that today's solar stocks will be good long-term investments.  Americans watch more television today than ever before, but were network television stations a good investment over the last 20 years?  No, because new entrants came in and stole their audience: the industry has become much more competitive than it was 20 years ago.

Thinking that todays solar stocks will do poorly over the long term is not the same as thinking that the solar industry will flop.  Rather, it is the belief that increased competition will drive down returns at existing companies.  This will be great for buyers of PV panels, but not so great for owners of PV stocks.

Porter's five competitive forces model of competion bears this out, just as it did when I analyzed the corn Ethaonol Industry in 2007.  The next article in this series will take a look at the five forces, and how they apply to solar PV manufacturers.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

October 27, 2009

Dyadic International (DYAI.PK): Update

Representatives of Dyadic International (DYAI.OB) were quite upset when I called the company "A Stock to Avoid."  The company has now released audited financial statements for 2007 and 2008.  The lack of such statements was one of the several reasons I said to avoid the company.  Should I retract my article?

Mark Emalfarb, Dyadic International's CEO sent me an email this morning with attached audited financial statements for 2007 and 2008, saying,

I hope that you will act responsibly as journalists and publish a retraction to your article "A Stock To Avoid" which Tom Konrad admits below that he "did not do any in-depth research" before publishing his article.

May I suggest that you have the courtesy of speaking with someone in the know and get the facts next time!

I have no intention of retracting the article, because the company has not been able to find any factual errors, which I would be happy to correct if there were any.  

In that article, I looked into the company, and found just enough information to know that I was not interested in investing.  To Mr. Emalfarb, I respond that he got what he (or his representative) asked for.  The only reason I looked into the company in the first place was because someone at the company had, unasked, added me to the company's email list for press releases.  I presume they hoped for free publicity.  Perhaps they should have checked that I actually liked their business before adding me to their list.  I have written numerous articles which are skeptical about cellulosic ethanol over the years.  A little research of their own (typing "cellulosic ethanol" into AltEnergyStocks.com's search engine, for instance) would have saved them the embarrassment.  For Mr. Emalfarb and curious readers here is a sampling of what they would have found:

The company proudly links to an interview with Renewable Energy Magazine, on their website.  I can only conclude that they object not to my lack of in-depth research (since the interviewer did less) but that I did not do any in-depth research and did not have anything nice to say.  Unlike John Petersen, I was not very well brought up: When I can't say something nice, I sometimes shoot my mouth off anyway.  

Because I'm skeptical of the whole cellulosic ethanol industry, I have no intention of doing the in-depth research Mr. Emalfarb claims to want.  No one is paying for the time that I could otherwise spend researching better investment prospects.  For readers willing to devote their own time, I suggest that they first read my previous short article and acquaint themselves with my other reasons for avoiding the company, and then read the recently released audited annual reports, which are available here [pdf.]

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

October 05, 2009

Dyadic International (DYAI.PK), A Stock To Avoid

Dyadic International hopes to use proprietary gene discovery to revolutionize cellulosic biofuel and pharmaceuticals.  Investors should stay away.

DyadicDyadic International (DYAI.PK) says they are applying their "proprietary enabling biotechnologies for multi-billion dollar markets in industrial enzymes, biofuels and biotherapeutics."  A very exciting prospect, and just the sort of thing I've long warned investors to avoid.  In short, they are a company with gigantic claims and not a lot of track record to back them up.

Why I Care (I don't, really)

In our survey of readers, one respondent asked that I write more about stocks to avoid.  Dyadic added me to their press list a couple months ago, probably in response to my popular article on investing in advanced and cellulosic biofuels.  If so, it's ironic. If anyone at Dyadic had read the article and thought about it a little, they would have known that I would not recommend anyone buy the stock, just based on their business plan, let alone the disturbing information I found in their press releases (see below.)

Recently, Dyadic sent me an email starting with the line "As you have shown a prior interest in Dyadic International..." (I didn't.) I decided to take a look at the company.  Here is what I found:

Out of Date Filings, Possible Previous Securities Laws Violations

Conclusion

At this point, I stopped looking.  Why would anyone buy stock in a company that is not providing current information, and whose promises sound too good to be true?  Given limited cash, why not invest it in a company that provides current information and promises to do something useful but believable?  Here are 39 green companies which do just that.

UPDATE: Dyadic has now published audited financial statements for 2007 and 2008.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

June 22, 2009

Cellulosic Ethanol and Advanced Biofuels Investments

There's much excitement about second generation biofuels made from cellulosic feedstocks and algae, be they cellulosic ethanol, biodiesel, biocrude, or electricity from biomass.  There will be winners, but they may not be the technology companies.

Tom Konrad, Ph.D., CFA

At the 2009 Advanced Biofuels Workshop, there were two major themes: developing new feedstocks, especially algae, and the development of new pathways to take biomass into products such as biocrude, which can be used in exiting oil refineries.  

Big Market, Many Competitors

The current federal Renewable Fuel Standard requires the use of 36 million gallons of biofuels, including at least 21 billion gallons of advanced biofuels by 2022.  Advanced biofuels are defined as fuels other than corn-based ethanol and with greenhouse gas (GHG) emissions half that of the fuel they replace.  This creates a gigantic market, so large that some industry observers doubt if it can be met.

Many of these fuels will not be ethanol, a fuel which poses problems with the current fuel transport and distribution infrastructure.  Even for cellulosic ethanol, there are several different processes that different companies are pursuing: Acid hydrolysis, Thermochemical conversion, Biochemical conversion, and Consolidated Bioprocessing, and combinations of these three used in various combinations by various companies.  

Potential products not only include fuels such as ethanol, butanol and higher-carbon alcohols, but biocrude which can be fed into existing refineries.  Other potential products include plastics, and many other products currently produced by the petroleum based energy industry.  

The bewildering array of potential pathways and products make for a very challenging investment landscape.  An investor in any company would need a lot of confidence that the company they are investing in will be able to take their chosen feedstocks to a potential salable product at lower cost than all the competitors out there.  Unsurprisingly, nearly every company feels it has the best process.

Lessons From the First Generation

With so many variables, I find it's often better to take a step back to see what impact the development of the advanced biofuels market will have on the larger economy.  Will there be impacts on the broader economy which will be independent of the eventual mix of products and processes in the advanced biofuels market?

We can learn from the experience of first generation biofuels.  

Below is a chart from William Thurmond, President of Emerging Markets Online and author of Algae 2020: Biofuels Commercialization Outlook, and Biodiesel 2020: A Global Market Survey:

Click to Enlarge

It shows how biodiesel feedstocks (Palm oil, rapeseed oil, and soybean oil) are increasingly following diesel prices.  There is a massive overcapacity for biodiesel production in the EU, as shown in the shown in the following graph, also from Thurmond:

Click to Enlarge

With this excess capacity, if biodiesel feedstock prices were to fall relative to diesel prices, biodiesel producers would purchase feedstock either until they fill their excess capacity, or until feedstock prices rise again to a point where it is no longer profitable to run additional biodiesel capacity.  Put another way, biodiesel producers cannot be more than marginally profitable (and may be unprofitable) so long as there is significant excess capacity.  Excess capacity can only be filled if additional feedstock can be found, or plants permanently shut down.

What does this mean for advanced biofuels?  As advanced biofuel technologies advance, feedstocks prices are likely to rise.

Why Advanced Biofuels are Different

Unlike with biodiesel and starch based ethanol, many second generation feedstocks are not generally internationally traded; many are actually waste streams from other processes, such as yellow and brown grease (the restaurant industry), corn stover, forest trimmings (the lumber industry,) and even municipal waste.  The more that these feedstocks are internationally traded and easy to transport (such as yellow and brown grease), the more likely they are to follow the patterns seen in the feedstocks for first generation biofuels.  According to Thurmond, this has already happened with yellow grease, and the rise in price was a surprise to most biodiesel industry participants.

Many emerging biofuels companies have learned this lesson.  ZeaChem's strategy specifically includes setting up a long term contract to purchase feedstock from dedicated energy plantations because "the availability of sustainable, cost effective raw materials is essential for an economically viable cellulosic biofuel facility," according to Andy Vietor, ZeaChem's CFO, who spoke at the workshop.  BioFuelBox Corporation is tackling the same problem from a different direction: by developing a biorefinery that they expect can produce biodiesel from a zero-cost waste stream (trap grease), but I'm not sure that they have completely absorbed the lesson.  Even trap grease will acquire some value if they can consistently make fuel from it.  I think they could improve their business model by selling their technology as a turnkey solution to the waste stream owner.

Investments and the "Everything vs. Fuel" debate

Investors who expect advanced biofuels to be successful should pay close attention to feedstocks.  Just as supply constraints for batteries will shape the electric and hybrid electric auto market, limited supplies of biomass will shape the advance biofuels industry.  

If an advanced biofuel company expects to make biofuel from an easily shippable commodity, such as wood chips, they'd be advised to stay away, unless that company also plans to contract for their supply of feedstock well ahead of time, and such agreements will probably constrain a company's ability to react to changing conditions.  Lack of flexibility can be fatal to start-up companies.

Companies which produce easily transportable feedstocks being considered by advanced biofuel companies stand to benefit from new markets for their products.  These include forestry companies (wood chips), waste management companies, and most owners of arable or marginal land.  Wood chips are likely to see price escalation even without the advent of advanced biofuels based on them.  Wood chips and pellets can be cofired in many existing coal power plants with only relatively inexpensive modifications, a process which offsets large amounts of carbon emissions at very low cost.  Biomass cofiring was the cheapest renewable energy opportunity identified in California's RETI study last year.  For an apples-to-apples comparison, the greater efficiency of electric motors means that electricity produced from biomass can propel an electric vehicle 81% farther than an otherwise comparable ethanol-fueled vehicle running on cellulosic ethanol produced from the same amount of biomass.

Furthermore, the existing biofuel industry may also find better uses for cellulosic feedstocks than turning them into biofuels.  I attended a session at the 2009 Fuel Ethanol Workshop the following day where gasification of cellulosic waste streams such as corn cobs or stover was presented as an economical way to reduce the carbon footprint of corn ethanol by displacing natural gas used in the production process.

The flip side of the feedstock equation is that industries which compete for feedstock with the biofuels industry are likely to be hurt by rising prices.  Advanced Biofuels may resolve the "Food vs. Fuel" debate, but they will be doing so by, at least in part, replacing it with a new "Everything vs. Fuel" debate.  For instance, the paper industry (especially those companies which do not own forestry assets) will likely be hurt by rising pulp prices, like Mexicans who found they could not buy tortillas.  Recycled paper pulp is an excellent cellulosic feedstock as well.  On the other hand, businesses which produce or collect paper waste may find more robust markets for their products.

This line of reasoning might also give you pause if you're considering warming your home with a wood pellet stove.  The advent of biofuels from wood chips will mean that the price of your wood pellets will start to track the price of petroleum, just like the price of vegetable oils are already doing.   From an economic perspective, heating with wood pellets may become not much different than using heating oil.  We saw the start of this trend last year with wood pellet factories starting to price dairy farmers out of the market for sawdust in the Pacific Northwest.

Algae to the Rescue?

Algae is the only feedstock that has the potential to be productive enough to supply most of our current liquid fuel demand, but it is still unproven.  Most current algae to biofuel production methods cost an order of magnitude more than the fossil fuels they hope to displace.  This is why most algae biofuel companies are currently targeting higher-value synthetic bioproducts, such as animal feed additives.  But Will Thurmond believes that some algae companies may be cost competitive with fossil fuels as early as 2012, but only in his most optimistic scenario; the process of bringing down costs could take much longer.

There are now three publicly traded Algae companies.  I've previously written skeptically about PetroSun (PSUD.PK,) and Thurmond told me, "Petrosun appears to doing well in the news, but if you examine their financial statements, it's a different story."   More recently OriginOil (OOIL.OB) and PetroAlgae, (PALG.OB) have also gone public.  PetroAlgae is the industry high flyer, and is doing some interesting work growing duckweed, at least according to a hallway conversation.  Unfortunately, the stock is so thinly traded that it would be difficult for even a small investor to get in without significant price impact.  OriginOil shows better volumes, but they, too, are early in their technological development.

Algae has great promise, but the only investments currently available to the retail investor are very early stage.  Even if we were to assume that the algae industry will quickly meet its potential, these three companies only amount to a tenth of the current players, and the rigors of being a public company are not the best environment in which to develop an emerging technology.  Algae could well be a monumental success story, but that does not mean that any of these three companies will participate in that success.

DISCLOSURE: None.

DISCLAIMER: The information and trades provided here and in the comments are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

June 18, 2009

The Ethanol Industry's Persecution Complex

If the Ethanol industry is going to rehabilitate its image, it needs to understand the issues.

Tom Konrad, Ph.D., CFA

In his opening remarks at the 25th annual, 2009 Fuel Ethanol Workshop, Mike Bryan, the CEO of BBI International called on the attendees to "Take back control of the [fuel ethanol] industry's image."  

It's no secret that the ethanol industry is having problems, mostly, in my mind, due to a classic commodity squeeze: the industry has no pricing power either for its inputs (corn and natural gas,) or its products (ethanol, with a price which closely tracks gasoline.)  This is why, and Mr. Bryan said, the industry could not get plants financed a year before the financial crisis.

Conspiracy or Reality?

For Mr. Bryan, this is about jobs.   He went on to say that he is "not a conspiracy theorist, but a realist,"  but undermined his claim to realism by going on to say, "Tell [the people who say we were building too fast,] "about the people who need those plants for jobs.  Tell that to the community that wants to build an ethanol plant in their community."  Profitable businesses create secure jobs; unprofitable businesses create insecure jobs.  Just as I recently pointed out that investors should not be buying stocks because they need them to go up, the ethanol industry should not be building ethanol plants because they need the jobs.  

Ethanol plants have been a great boon to rural economic development.  As a local value added product to low value commodity corn, they keep more jobs in the community, which in turn create more jobs through economic multiplier effects... but only if the ethanol plants are profitable.  If farmers invest in a local ethanol plant (50% of ethanol plants are locally owned), but that plant cannot be run because they cannot sell the ethanol for the price of the corn, there will be no jobs from the plant, and the investors will lose their investment as well.  Perhaps they should have considered investments in a locally owned wind farm, or making their farming operations more energy efficient.

In short, jobs are not created by, and do not justify unprofitable investments.  There are simply better uses for the money, both in terms of jobs and economic returns.

Is there a conspiracy?  Oil companies don't want to change the way they do business, and be forced to blend in ethanol, nor do they like the competition, even if it is only 7% of their business.  That's real money on the margin, even if land use constraints will not allow ethanol to entirely displace oil.  The food processing industry has even more reason to dislike fuel ethanol.  Although only about 10-15% of price rises in food are due to ethanol-induced corn price rises, ethanol makes a convenient whipping boy for price rises which arise from many factors, most importantly the rising price of energy.  But having people who don't like you does not make for a conspiracy.

Peak Oil

General Wesley Clark, Co-Chairman of Growth Energy, is not a conspiracy theorist.  He, too, is passionate about  the need to take back the industry's image in his keynote address.  For General Clark, ethanol is a national security issue, and I completely agree.   Peak oil means that oil will increasingly be sold at a premium, and as scarcity increases, producing countries will have increasing incentives for producers to keep this high quality liquid fuel for themselves.  

Although the most energy efficient way to power a vehicle is with electric power, batteries are too expensive and have too low an energy density to be practical for long trips.  We will continue to need liquid fuels to power longer trips.  As General Clark said, "Is there any doubt that that the costs of Iraq are related to?  This is about America’s need for imported oil.  It distorts our policy.  It creates friend about people who aren’t our friends; it makes enemies out of people who aren’t our enemies."

Carbon

Compared to the value of ethanol as a liquid fuel, arguments about carbon impact are de minimis.  Bob Dinnen, President of the Renewable Fuels Association an industry lobby group, was the most moderated of the general speakers.  Unlike the other speakers, I'm confident that his assertions can be backed up with studies.  He claims a 61% reduction in greenhouse gas emissions for corn ethanol compared to gasoline.  This is almost certainly the result of a best case analysis, but the worst case analysis are no more than a 30% increase in emissions, and with current technology, there is almost certainly some greenhouse gas savings.  Even if there is a slight increase in carbon emissions from corn ethanol, these extra emissions are likely to be minimal, and less than tar sands..  When it comes to greenhouse gas reduction, ethanol, even corn ethanol, is not the enemy.  The enemy of the human race, as Jim Hansen says, is coal, and while we environmentalists should be concerned about any lack of decrease in greenhouse emissions, we should not lose sight of the true enemy.  The ethanol industry as a whole agrees that they need to increase their efficiency and reduce their carbon emissions.  These should be measured as accurately as possible, but any green washing we see in the ethanol industry pales against that coming out of the coal industry.  Given limited political capital, this is where environmentalists should be focusing our efforts.

Food and Fuel

Ethanol is a domestic fuel, that puts corn to a much better use than high fructose corn syrup that contributes to growing epidemics of obesity and diabetes.  From a historical perspective, we pay hardly any part of our income for food.  Ethanol does reduce the price of gas, and the money we pay for that gas stays closer to home.  Given that, an increase in food prices from corn ethanol may still lead to a net gain for the average consumer, and the economic benefits of a domestic fuel should make us willing to pay for a small net increase in our overall food and fuel budget.  

If we're concerned about Ethanol's carbon footprint, we might pause to consider the carbon impact of our food.  If a rise in food prices results from corn ethanol, the decrease in our collective carbon footprint from what we eat.  Whatever indirect land use impact we attribute to ethanol, we should be attributing a similar indirect land-use impact to the soda we drink that's so full of high fructose corn syrup.

Stop Exaggerating

While environmentalists should not be joining oil companies and food processors by piling on the ethanol industry over its imperfect environmental record, the Ethanol industry could do itself a lot of good by avoiding the exaggerated claims they are prone to.

General Clark said, "There’s plenty of all we need to have all the fuel we want and all the food we want," and Mr. Bryan said something similar.  This is simply false.  The US currently has about 200 million acres devoted to corn and soy.   Corn Ethanol can produce about 200 gallons per acre, while soy biodiesel can produce about 50 gallons per acre of biodiesel.  If all this land were converted to fuel production with corn ethanol (incidentally degrading the land and increasing fertilizer usage), that means we could produce 10 billion gallons of ethanol, the equivalent of about 8 billion gallons of gasoline per year, or about half a million barrels per day.  The US consumed about 20 million barrels of crude per day in 2007, and had to import about 10.5 million barrels of that.  Not all of our imported oil was used for gasoline, but not all of our corn and soy can go to displace oil, either.

The numbers don't add up.  The Ethanol industry undermines its own credibility with these exaggerated claims.

The industry also uses deceptive statistics regarding indirect land use impacts.  Bob Dinnen said that deforestation has to do with grazing and logging, not Ethanol.  They made much of the fact that deforestation has decreased as ethanol production has increased.  Correlation is not causation, nor is anti-correlation lack of causation.  According to a recent article in The Economist, "rate of deforestation tends to move with prices for beef and soya, with a lag of about a year."  This is because the land is cleared for grazing, and then sold on to soy farmers..  As Biodiesel producers discovered to their dismay, rising corn prices leads farmers to shift land from soy to corn, which in turn leads to rising soy prices, and hence to rising deforestation a year later.

As I left the conference on the first day, I walked by Robert Zurbin, author of Energy Victory: Winning the War on Terror by Breaking Free of Oil.  He was sitting in the main lobby with a stack of books to sign.  I had caught the end of his talk an hour before, in which he spun a captivating and convincing yarn about how oil had been key to allied victory in World War II.  I walked up and told him how I only caught part of his talk, but liked what I had heard, and he encouraged me to buy the book.  I was tempted, but then he lost the sale: he told me that, if only 50% of cars were mandated to be Flex-Fuel, it would put a "cap on the price of oil."  While I agree with him that the increased choice would be good for consumers, and even moderate the oil price, there is simply note enough feedstock, either domestically or globally, and too many other valuable uses for that feedstock to cap the price of oil in the face of expanding demand (which is only likely to be restrained by price or economic downturn) and declining oil output. 

There are many good reasons to like Ethanol, even Ethanol from corn.  But it's only part of the solution: Ethanol is not the panacea, and it's not without adverse impacts.  It's also not always good business.  By acknowledging these weaknesses, ethanol advocates would do a lot to raise their credibility with many environmentalists who are natural allies with an industry taking real steps to reduce its environmental impact and enhance our energy security in the face of the much larger challenges of Peak Oil and Global Warming.

My impression is that the major agenda item on the industry's agenda is legislation requiting 50% of vehicles to be flex-fueled.  This would probably be a change for the better, definitely from an economic perspective (the added cost to the vehicle is fairly minimal.  Unfortunately, the use by carmakers of flex fueled vehicles as a loophole in CAFE standards serves to undermine environmental goals.  If the industry wants more environmental allies today, it will need to be clear than environmental goals will not again come second. I think most environmentalists would get behind a 50% or higher requirement for flex fuels vehicles if it were in conjunction with the closure of the flex fuel loophole in CAFE standards.

September 27, 2008

What I Sold: Pacific Ethanol (NASD:PEIX)

This entry continues a series on companies I sold as part of a portfolio cleanup prompted by the mess on Wall Street.  In the first entry I describe what I plan to do with the cash, and the second was about Carmanah Technologies.   UQM Technologies was one I didn't sell.

In May of last year, I took a look at competitive forces in the corn ethanol industry.  While I was rather negative on the industry at the time, when ethanol stocks fell in the summer and fall of 2007, I called the bottom much too soon, and decided to dabble in the industry.  I thought that Pacific Ethanol's (PEIX) strategy of arbitraging the costs of transporting corn vs. the costs of transporting ethanol and distillers dried grains would lend them some protection from industry overcapacity.  Whatever protection they might have had was not enough.  With current liabilities exceeding current assets, and operating cash flow from the last 6 months exceeding cash on hand, PEIX will probably need to raise new capital to stay afloat, something I doubt they can do on favorable terms in today's climate.

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

February 10, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #7 Deere & Co. (DE)

The first and last word in any discussion of biofuels should always be "Feedstock."  Feedstock is the "Bio" out of which biofuels will eventually be made, whether it be corn, sugar, jatropha, algae, palm oil, switchgrass, forestry waste, or municipal solid waste.  

Before the era of peak oil, we lived in a world of plenty, which meant that we could squander energy, not only by driving Hummers, but by feeding energy intensive products such as corn crops to livestock, and by dumping "free" sources of energy such as garden waste and used cooking oil into landfills.

The era of cheap energy is over.  The signs are all around, and even peak oil deniers point to expensive-to-extract reserves such as deep water drilling, Canadian tar sands, and even Colorado's Oil Shale.   These sources of oil are not only more expensive to extract, they are are also more carbon-intensive, meaning that regulation of greenhouse gas emissions will raise their price further.

Commodity Squeezes

In terms of biofuels, I've long argued that there is simply not enough feedstock available, and that even if there were enough feedstock to replace all the oil products we use today, there are many other potential uses which will compete for the output of scarce land and water, such as a replacement for coal in electrical generation, and fodder for livestock.  Biodiesel producers may find that the best quality oil is bought up by refineries to make green diesel instead.  In fact, it seems that almost any form of biomass can be converted to Bio-crude and processed in a conventional refinery.  We'll even have to decide if municipal waste should be recycled, burned for electricity, or turned into cellulosic ethanol.

I'm unconvinced that anyone knows exactly how the limited feedstocks we have available will be used, or what process will be most efficient in converting them into their final form.  This makes it difficult to find a biofuel investment that I can be confident will succeed.  One biofuel technology after another has been caught by a commodity squeeze, first corn ethanol and now biodiesel makersPolyannaish investors expecting limitless supplies of feedstock for cellulosic ethanol should take note.  Higher commodity prices do not always lead to more supply.  Sometimes higher prices lead to lower demand, and the next boom could easily become the next bust.

The Sure Winner

John DeereThe only sure winners from limited and increasingly valuable biomass will be the people who produce it: farmers, foresters, and (perhaps) trash haulers and recyclers.  What do farmers do when they have spare cash?  They buy farm equipment, quite often from Deere & Co. (NYSE:DE)  Few stock have ridden the biofuel boom as well as Deere, with the stock rising 400% in the last four years in a nearly uninterrupted uptrend, without the thrills and spills that have turned so many investors off of corn ethanol.  

The beauty of Deere as a biofuel investment is that there is no need to know what the biomass will be used for, or what form it will come in.  In nearly every scenario I can envision, Deere is likely to be a major supplier to the industry which grows it.  From algae to Jatropha, if Deere does not yet sell equipment to plant, tend, and harvest it, it seems a good bet that they will design one.  This technology agnosticism, combined with their wide dealer network in agricultural areas, makes the company seem to me the safest way to bet on biofuels as a trend.

Deere's close relationship with farmers also gives them an opportunity to profit from another up-and-coming crop: Wind.

Even with a 9-year run up, the stock currently trades at a trailing P/E of 22, and despite its construction arm, has not yet been hit hard by the turbulence in the housing market.  Since I expect the housing situation to only get worse over the coming months, a sharp decline in construction income or a continued broad market decline may be just what prospective investors need to pick up this solid biofuel play on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in DE.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

January 23, 2008

Cellulosic Electricity: Stock Analysts v. Venture Capitalists

Romm v. Kholsa

In a persuasive series of articles, entitled "Pragmatists vs. Environmentalists" (Parts I, II, and III) on Gristmill, Vinod Khosla provides the reasoning behind his "dissing" of plug-in hybrids, which drew the ire of Joeseph Romm.  Neither seems to think the argument is settled, and Joeseph Romm returns fire here.

As someone who knows as much about investing as Joe Romm and has written as much about Climate Change and Energy Policy as Vinod Khosla, I feel the need to jump into the debate and settle the matter.  (Will either of them will notice?)

To summarize, Khosla argues that cellulosic ethanol shows more promise for reducing carbon emissions than plug-in hybrids because he sees the barriers to plug-ins (the need to improve batteries and clean up the grid) as harder to surmount than the barriers to cellulosic ethanol (the improvement of conversion technology.)  In his words, 

I consider replacing coal-based electricity plants (50-year typical life) a much longer, tougher slog than replacing oil with biofuels (15-year car life).

Romm blasts back reiterating the multiple problems of corn ethanol in response to the first of Khosla's series, but has not yet responded to his point about cellulosic.  I thought I'd tackle the point about cellulosic myself.

There Isn't Enough Biomass

According to the National Renewable Energy Laboratory's From Biomass to Biofuels [.pdf] study, given all the available biomass in the United States, we will only be able to displace a little less than 2 billion barrels of oil equivalent a year.  But we currently use about 7 billion barrels of oil a year, so to displace all our oil usage, we would need nearly a 4x increase in fuel efficiency (not the 1.5x increase in internal combustion engines Khosla talks about.) 

 1.3 billion ton.bmp
Image source: NREL (From Biomass to Biofuels)

If the problem we're trying to solve is the need to displace petroleum as the transport fuel of choice (because of both climate change and peak oil), Khosla's "solution" can at best only tackle about 40% of the problem.

A Third Way: Cellulosic Electricity

Now let's return to Khosla's belief that it is simpler to replace the fuel (petroleum) in vehicles than the fuel (coal) in the grid, because of the longer lifetimes of coal plants than cars.  If you take a moment to review my article Ten Insights into Carbon Policy, you will note (insight #2), co-firing biomass in existing coal plants is more effective for reducing carbon emissions than turning it into liquid fuels.  You will also note (insight #9) that electric drivetrains are inherently more (5x) efficient than gasoline drivetrains.Image Source: European Biomass Industry Association

Khosla may be right that we are not going to shut down old coal plants quickly (although my own utility, Xcel Energy, is planning to do just that.)  But even given an existing fleet of coal plant some biomass can be cofired with coal in existing plants with relatively easy retrofits.  Cofiring biomass is part of the Arizona Renewable Energy Assessment, which Black and Veatch predict would cost about 6-7 cents per kWh, and the limited amount included in the assessment is mostly due to Arizona's limited biomass resource.

According to the NREL report referenced above, converting biomass into cellulosic ethanol can be done at about a 45% efficiency (i.e. 45% of the energy of the biomass makes it into the fuel.)  In contrast, biomass can be converted at 33-37% efficiency [pdf] when cofired.  Combining this with the 5x improvement of drivetrain efficiency that comes with electric propulsion, and the same amount of biomass converted to what I'll call "cellulosic electricity" will take a vehicle 3.8x as far as it would in the form of cellulosic ethanol.  In a more recent article on Biomass, Vinod Khosla states "we consider [Energy Return on Investment] a less important variable than carbon emissions per mile driven."  If carbon emissions per mile driven are the most important variable, a 3.8x increase in miles driven on the same energy source will lead to a less than 27% of the carbon emissions per mile driven.

While cellulosic electricity is still not sufficient to displace all of our current petroleum use, it comes much closer than cellulosic ethanol.   Biomass cofiring with coal also tends to reduce SOx and NOx emissions.

Direct Combustion of Biomass

Biomass is a distributed resource, seldom available in large quantities in any one place.  This will be a problem for the cellulosic ethanol and cellulosic electricity industries.  Only a fraction of the available biomass will be close enough to existing coal plants that it will be practical to transport for cofiring.  Cellulosic visionaries see a system of distributed ethanol plants, yet that still leaves the problem of getting the fuel to market, since the current pipeline system for petroleum products has difficulty accommodating ethanol.  

On the other hand, while distributed direct- fired biomass generation of electricity is probably twice as expensive as cofiring with coal, distributed generation leads to opportunities for Combined Heat and Power (CHP), or cogeneration.   CHP can displace heating fuels such as natural gas, propane, or electricity, and often have combined efficiency from 50% to 80%.  In addition to the potential of displacing additional fossil heating fuel, cellulosic electricity is identical to the fossil fuel derived kind.  Therefore, unlike cellulosic ethanol, cellulosic electricity is completely compatible with the existing electric grid, leading to far fewer difficulties in transport.

A Cellulosic Sideshow

While I'm sure that economic techniques to convert various forms of biomass into ethanol and other liquid fuels will be developed, including by some of the companies in Khosla's portfolio, I think it is unlikely that a large fraction of what is likely to become an increasingly valuable and scarce resource, biomass, will be used for ethanol.  As a scarce resource with relatively inelastic supply, the price will rise to the point where only the most efficient uses will be profitable.  In most cases, cellulosic ethanol is unlikely to be one of the most efficient uses of biomass.

Khosla's dichotomy of replacing cars versus replacing coal plants is a false dichotomy.  While it is easy to retrofit gas cars to burn ethanol, it is also easy to retrofit coal plants to burn some biomass.  Given the dispersed and varied nature of the feedstock, both solutions are likely to coexist for a long time, but biomass cofiring has a little-heralded head start (unlike cellulosic ethanol, it is already progressing beyond the experimental stage), and cofiring's superior efficiency should allow it to keep, and widen its lead.

But Vinod Khosla will have little reason to weep.  His Concentrating Solar Power investments will also be fueling our cars, and his "clean coal" technology has the potential to produce carbon-negative cellulosic electricity.

November 04, 2007

Another Sign of Ethanol Oversupply in the Midwest

Priming the E85 Pump

This Sunday, I had dinner with my aunt, who lives in Chicago.  She recently bought an Impala LT (she's a loyal GM customer), and was surprised when she received a $1000 debit card with which to buy E-85, the 85% Ethanol, 15% gasoline blend used in flex-fuel vehicles.  

DSCF0041.JPG

I was not able to find any web reference to this offer (including on the GM website), but Google still had a cached article from HowStuffWorks.com which explained: To help defray fuel costs, GM, as part of its "Live Green, Go Yellow" E85 ethanol campaign, gives buyers of its flex-fuel vehicles a $1000 debit card toward the purchase of E85 ethanol fuel. (As of November 2006, the offer was good only to buyers in the Chicago and Minneapolis areas.)

To me, this is a sign of desperation, both on the part of GM to sell a car rated 16 MPG city / 24 MPG highway as "green." If GM really wants to help defray fuel costs, might I suggest not fighting increased CAFE standards?

It's also quite possibly a sign of desperation on the part of Midwest ethanol producers, who are producing ethanol at a record pace despite rising corn prices, but have difficulty transporting it out of the region because the corrosive and water-absorbing nature of ethanol means that it must be transported by truck or rail rather than pipelines.  I speculate that Ethanol producers and distributors contributed to these debit cards as a way to make new Flex-Fuel vehicle owners aware that they could use E-85 and to give them the incentive to seek out and become familiar with the stations where E-85 is available.

For Investors

Is this good news for Ethanol investors?  Possibly.  It's a clever way to overcome some of the biggest barriers to E-85 use: lack of familiarity with the fuel, and lack of awareness among flex fuel vehicle owners.  Ethanol producers have taken a beating in the stock market, but if this campaign and others like it are successful, they may spur demand for ethanol in precisely the region where we have over-capacity.

Investors should not consider ethanol stocks to be particularly green, but ethanol does begin (in a small way) to address the problem posed by peak oil: how do we get liquid fuel from other sources which we can use in our current car fleet?  So an investor more concerned about peak oil than global warming might consider taking another look at ethanol stocks now that they're selling at much better prices than they were just a few months ago. However, I still prefer producers based outside the Midwest or ones that also own the corn they use.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

August 28, 2007

They'll Put the Cellulose in Cellulosic Ethanol

One of the keys to staying ahead of the game in money management is lateral thinking.  I start with the trend, and then try to think of industries or companies that might benefit, but are not on everyone else's radar.  With Peak Oil-driven demand for biofuels, regular readers know that I consider the people who produce the feedstock (farmers, and industries whose waste can fairly easily be converted into biofuel) to be the most certain winners. 

One direction this chain of logic has taken me is to forestry companies.  I'm far from a forestry analyst, so I decided to take small stakes in a few of the more sustainable forestry companies.  When it comes to wood products, the gold (or is it green?) standard for sustainable certification is the Forest Stewardship Council's.  Do not be fooled by watered down industry sponsored pretenders like the Sustainable Forestry Initiative.  Last year, to find sustainable companies, I went to the FSC's list of certified forests, and looked for large numbers that were owned by public companies.

The companies I came up with: Domtar (NYSE:UFS), Tembec (TMBAF.PK), Cascades, Inc. (CADNF.PK), and Potlach (NYSE: PCH).  I later added Catalyst Paper (CTLUF.PK) to my list when reading a news story that, as an aside, mentioned them as a sustainable leader in the Canadian wood and paper industry.  

Scientific?   Not at all.  I consider my investments in sustainable forestry as a diversification with an interesting alternative energy long term upside.  Needless to say, my investments in each company are small.  The ones that didn't make it into the Energy Tech Stocks Interview were ones that had slipped my mind.  I did not end up purchasing them due to the price movements at the time (i.e. my other limit orders executed first.)

I'd love to see comments from readers who know more about sustainable forestry than I do... I'm sure that there are some stand-out forest stewards that I missed when I put together this little diversification.  I personally expect the subprime mess to lead to a prolonged housing slump, at which time even further depressed forestry companies may be excellent bargains... if they are not bankrupt.

DISCLOSURE: Tom Konrad  and/or his clients have positions in the following companies mentioned here: UFS, PCH, CTLUF.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

 

August 23, 2007

Hither and Yon: Transmission and Biofuels

In the most recent two installments of Energy Tech Stocks' interview with me cover my views on transmission stocks, and biofuel stocks.  Readers of AltEnergyStocks know that I am a big fan of electricity transmission, a theme I keep coming back to.  You also know that I have a very ambivalent relationship with both ethanol and biodiesel.  So I liked Bill's transmission article, but I just wasn't able to convey to him the subtleties of how I feel about biofuels.  But he got one thing right: the owners of biofuel feedstock are likely going to be the biggest winners.

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

While you're on the Energy Tech Stocks site, read a little about trading of wind power futures (here and here.nbsp; While I personally have no interest in speculating in wind futures, I predict this will be a great boon to wind farm owners and climate scientists everywhere.  I also predict hedge funds which will use strategies based on emerging inverse correlations between wind power futures and natural gas futures, probably sooner than anyone might guess. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

July 30, 2007

A Modest Proposal: Cellulosic Beef

The Future is Cellulosic

It is now widely accepted that the future of ethanol is cellulosic: Rather than distilling corn for ethanol to fuel our cars, accepted wisdom is now that we will be able to replace a large fraction of our current fuel consumption with ethanol distilled from agricultural and forestry waste, as well as dedicated energy crops, such as switchgrass and hybrid poplar.  Cellulosic ethanol also has the potential to alleviate the greatest stumbling block of corn ethanol as a potential replacement of gasoline: that there is simply not enough of it.  Corn ethanol will only be able to displace a small percentage of total US gas consumption.  If the entire current US corn crop were converted into ethanol, it could replace less than 20% of current gasoline consumption.  More realistically, the National Renewable Energy Laboratory (NREL) projects that 4% of gasoline could be replaced without overly affecting corn prices. 

Recently, cellulosic ethanol has been much in the news.  POET recently announced that they were producing cellulosic ethanol from corn cobs and the fiber in corn kernels, while FPL Energy LLC signed a deal with Citrus Energy to develop a biorefinery to make ethanol from citrus waste.  Both of these plants avoid one of the biggest hurdles that cellulosic ethanol still has to overcome: the distributed and varied nature of potential cellulosic feedstocks.   POET will be working with waste that would otherwise have to be disposed of, while the FPL/Citrus Energy plant uses a citrus processing waste which "is available at the plant at no cost [and] with no transportation costs."  

In addition to cellulosic's transportation Achilles Heel, these two projects also show how far we are from tackling the true scale of the problem: POET's plant will deliver 27% more ethanol from an acre of corn, while the "ethanol from citrus peel could... replace about 1% of Florida's gasoline production."  So if these two technologies were to be scaled up to use the entire US corn crop and all available citrus processing waste, we still could replace less than 6% of US gasoline usage with ethanol from these sources.

barrels.PNG

The Size of the Problem. Source: National Renewable Energy Laboratory

The limited supply of agricultural and forestry waste is why cellulosic visionaries often look farther a field, to other sources of agricultural waste in addition to corn cobs and citrus, as well as to dedicated energy crops.  NREL estimates that while we can produce about 0.3 billion barrels (oil equivalent) of ethanol from corn, the biochemical conversion of inedible carbohydrate would be able to supply 1.1 billion barrels of oil equivalent, or about 17% of current oil consumption.

Using Non-food crops 

This leads inevitably to talk of switchgrass, and other "energy crops."  If land which is not currently considered suitable for conventional agriculture can be used to produce high-energy content feedstock for our ethanol plants, we will have a source of supply of fuel for our vehicles that does not impinge on our food supply.  One much discussed option is using Conservation Reserve Parcel (CRP) land to grow highly productive perennial  grasses such as switchgrass and miscanthus.   While miscanthus seems to be more productive than switchgrass, switchgrass has the benefit of incumbency: many of the existing CRP parcels are already planted with swithgrass, a North American native.  Another contender is a diverse mix of native prairie plants, which has more than twice the energy yield of any native monoculture.   

Before we can move to a system of growing energy crops, and transporting those crops to cellulosic ethanol plants, we first have to find a process of breaking down cellulose into something that can be easily fermented into fuel.  We can already accomplish this, but the sticking point remains cost.

 cellulosic cost.PNG

DOE Cellulosic cost goals.  When I first saw this slide, I asked an NREL spokesman why they assume that the price of feed will drop to $34 per ton.  He replied that they had to in order to achieve DOE's cost targets.

There has been considerable progress in reducing the cost of conversion and enzymes.  One interesting pathway being explored is to adapt natural systems, such as enzymes from the guts of termites, or to use fungi to help break down resistant cellulosic material.   

Let Cows Eat Grass

Cows evolved to eat grass, including proposed energy crops such as switchgrass, which is already used as forage for livestock, and the more productive mixed prairie plants (including grasses.)   We don't have to wait until the technology for converting grass into ethanol becomes economic to use grass to increase ethanol production: Instead, all we need to do is to supply the grass to the cattle, and use the corn that they would have eaten instead to produce ethanol.

Feedlot operators will doubtless protest at the massive logistical problems of bringing hay, rather than corn, to feedlots where cattle are fattened. However, these logistical problems seem to me to be on the same order of magnitude as supplying that same grass to cellulosic ethanol plants, if it is too much to ask of the cattle industry to let the cattle "harvest" the grass themselves by grazing.

How much ethanol could we gain by shifting cattle feed to ethanol production?  In the 2005/6 season, 6.1 billion bushels of corn was used for animal feed, about 1.8 billion bushels of which went to feed cattle, compared to 1.6 billion bushels used to make ethanol.  Hence, we could double ethanol production by using corn currently fed to cattle.  And, since distiller's grains, a byproduct of ethanol production is usually fed to cattle, not all of the current feed corn would have to be replaced with hay to do so.

In addition to the logistical problems of getting hay to feedlots, beef producers have other objections to "finishing" cattle on grass.  First, corn-fed cattle can be fattened much more quickly than grass fed cattle (by as much as a year.)  In addition, corn feeding produces a juicer steak with more marbling than grass feeding.  Offsetting these advantages of grain fed cattle are the health advantages of grass fed cattle.  Grass fed cattle have much higher concentrations of CLA and Omega-3 fatty acids.   While the health benefits of CLA have only been demonstrated in animals to date, the American Heart Association says Omega-3 fatty acids benefit the heart of healthy people, and those at high risk of — or who have — cardiovascular disease.  These are the fatty acids for which wild fish are prized, and which some believe may be able to cure a wide variety of ills.

Finally, the same arguments that are made against corn based ethanol apply equally well to corn-fed beef, because they are essentially arguments against using corn, rather than against making ethanol.  For instance, the fossil energy used to grow corn is the same, regardless of use, and so this fossil energy is consumed equally if it goes into our cars or into our cows.  I have not done the calculations, but I expect that much of the benefit in terms of our personal carbon footprint which might be gained by giving up beef altogether might also be gained by eating grass-fed beef.  According to a recent Japanese study, over two-thirds of the energy in beef production goes towards producing and transporting the animals' feed.   Just as the feedstock for ethanol has a large effect on its energy balance, so does the feed of the cattle we eat.  

There may be other benefits as well, such as fewer dangerous E-Coli outbreaks.  The strain of E-Coli which put most of us off spinach last year only grows in the guts of grain-fed cattle, not grass fed ones.  

How it Might Happen

Rising corn prices are already making it less economical to feed corn to cattle.  Clearly, we are not going to see 1.8 billion bushels of corn a year diverted from cattle feed to ethanol overnight, but the changing economics are likely already having an effect.  As it becomes more expensive to feed cattle, a rational owner will look for alternatives, and grass will surely be one of these alternatives.  Over time, I expect to see cattle spending more of their lives grazing, and less at the feedlot.  I would not be surprised if this trend has already begun, and recent statistics show that new cattle placed in feedlots are down 15% from 2006 and 6% from 2005 for the month of June.  

Over the longer term, some feedlots and dairies will close as they are used less intensively, while others will shift to feeds which contain more distiller's grains and, eventually, hay.   Other potential substitutes for corn in feed include some of the other options which are being considered for cellulosic ethanol, such as corn cobs (which have long been fed to cattle) and stover.  All this will come at the price of more expensive beef and milk, but it will be less expensive than it would have been if methods remained unchanged, as well as healthier to eat.  We will probably eat less beef overall, and be healthier for it.

Investments

Companies hoping to use grasses as a feedstock for cellulosic ethanol plants may find themselves in unexpected competition with cattle, and so excitement around companies such as BlueFire Ethanol Inc. (OTCPK: BFRE) may be overblown.  However, to the extent that they plan to use feedstock which cannot be fed to cattle, a shift in cattle feeding should not effect them much.  BlueFire is currently focusing on urban landfill waste, something I hope no one is contemplating feeding to cows.  I do not know of any public companies that are currently focusing on grasses as a feedstock.

Conversely, the opportunity to double the amount of corn available to ethanol production may confound analysts who expect the ethanol boom to end due to rising corn prices.  I admit that I have also worried publicly about a commodity squeeze in corn (here and here).  Considering the recent gloom about ethanol producers due to rising corn prices, now may be a good time to make a contrarian bet on conventional ethanol producers such as Archers Daniels Midland (ADM), Green Plains Renewable Energy, Inc. (Nasdaq: GPRE), US BioEnergy Corporation (NASDAQ:USBE), VeraSun Energy Corp (NYSE: VSE), and Pacific Ethanol (PEIX).   

Corn ethanol is certainly not going to bring the United States anywhere near energy independence, and it does little or nothing for the fight against global warming.  It has, however, provided a relatively harmless use for the massive glut of corn created by US agricultural policy, at least in comparison to feeding ever greater amounts of corn to cattle and high-fructose corn syrup to humans.

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: ADM.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

June 21, 2007

An Insider's Take on the Ethanol Industry

Biofuels: Panacea or Pandora's Box?

Last night, I attended a talk in the Rocky Mountain Institute's "Quest for Solutions" lecture series titled "Biofuels: Panacea or Pandora's Box?"  We were told that a video of the event will soon be up on RMI's website.  Most of us were probably there to hear Amory Lovins speak, and no doubt most of the news coverage of the event will focus on him.  Amory is a visionary as well as an engaging speaker, and Tom Foust of the National Renewable Energy Lab helped shed light on the science of biofuels, but for stock market investors, the speaker with the most useful insights was without a doubt Mark Wong, CEO of the private corn based ethanol company, Renewable Agricultural Energy (RAE). 

Here are some of his insights helped refine my perspective on the ethanol industry:

Ethanol Supply:

    There is currently an oversupply of ethanol on the market.  As evidence, Mr. Wong cited the fact that in recent months, ethanol blenders have been able to capture most of the federal government's tax credit, while in the past, most of this subsidy has gone to ethanol producers, a situation which attests to the increased bargaining power of blenders over producers which stems from the current overproduction.  He expects the current oversupply to worsen over the next couple years.   After the talk I asked him if he felt that his company could make a profit, given the oversupply he cites, and he felt it would be possible if oil says above $70 a barrel.  I told him that I wouldn't be surprised to see $90 oil before the end of the year and he agreed.

    If we can extrapolate RAE's economics to public ethanol companies, traders should think of ethanol stocks as leveraged bets on the oil price, similar to long term oil futures.  They are likely to swing between profit and loss mostly due to oil price movements, but the percentage change in profit or loss will be large compared to the percentage change in the price of oil.  Given that I think it is likely the price of oil will rise further (and possibly dramatically) this year, that would certainly be a reason for speculators to buy ethanol stocks, now that they have retreated from the massively inflated levels of 1-2 years ago.

Competitive Strategies:

    RAE is currently still in the process of adding ethanol plants.  Mr. Wong detailed several factors the company considers when choosing plant locations.  He mentioned the local supply of corn, access to rail transport, other uses of corn in the area, access to water, and local demand for distiller's grains, all unsurprising considerations.  Interestingly, RAE has chosen to reduce the ethanol yield they get from a bushel of corn in order to provide a better feed (in the form of distiller's grains with a higher percentage of carbohydrate) for livestock.  He didn't say it, but I infer that one factor in this decision is the current low profitability of ethanol.

    More surprising to me was his emphasis on the yield variability of nearby corn crops.  I would not have thought of this, and as such, I believe that it may be a useful too for gaining insight into the riskiness of public ethanol producers.  A producer working with a highly variable supply of corn feedstock would be considerably riskier than a producer with an assured supply.

The Future

    In the future, RAE plans to use anaerobic digestion on their lower value output streams to produce gas which can be used in the distillation process, which should increase the net energy benefits of their process.  Mr. Wong also brought up the idea of using fractination to separate the corn into various components before they process it, which he expects will allow them to improve process efficiency.  Prior to this, I had only considered fractination as an early step in the process of making cellulosic ethanol.  This interested me, because one of the pioneers in biomass fractination technology is PureVision, a private, Fort Lupton based company where I know the management, and this is an existing (as opposed to the nascent cellulosic ethanol market) where they can apply their technology.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

May 20, 2007

Ethanol Stocks: Risks, Challenges, & Opportunities

The Great Ethanol Debate: Shoddy Economics all 'Round.

Like many environmentalists, I'm not a big fan of the ethanol industry, especially corn ethanol.  From a net energy standpoint, even advocates agree that you only get a little more energy out than the energy you put in (Energy Return on Energy Invested or EROEI of 0.9 to 1.5, depending on whom you ask... some say it's much lower.)  At this point, most environmentalists simply decide that ethanol isn't sustainable enough for them, and go back to talking about photovoltaics (EROEI around 8, PDF) and wind (EREOI 30-70, PDF).  The last two are from my calculations from numbers given as energy payback  (As an aside, I think most of these measures of energy economics are crude and only give a partial picture.  We should really be looking at energy net present value (NPV) or internal rate of return (IRR), analogous to economics NPV or IRR which would apply a discount rate to future energy flows, for all the same reasons we don't look at payback or similar measures in economics.)

If we did take a net present value approach to energy return on investment, we'd find that ethanol started looking a lot better, because we can use the ethanol as soon as it is made, a process which could happen within a year of the first seed of corn being planted, in comparison to solar photovoltaics, which, if they have an energy payback of around 4 years and last 30 years, will end up having and "Energy IRR" of around 12% (this number is for conventional crystalline silicon: Thin film and concentrating PV have potential to be a lot better because of lower energy use in manufacture), compared to an "Energy IRR" for corn ethanol (using a median 1.2 EROEI figure and a one year lifecycle) of 20% (although the uncertainty in this number is much larger than the uncertainty in the number for PV.) 

So the bigger problem for me is not Energy Payback, but the environmental damage associated with the way we raise corn.  Energy isn't everything.  I feel that the "low energy return" argument does not hold a lot of water.  My main problem with corn ethanol lies in the negative externalities of corn production, such as high water use, fertilizer runoff, and soil mineral depletion.  And then there's always the food vs. fuel debate, where even the IMF is weighing in.  

Is the ethanol industry a good long term investment?

Clearly, the debate on the possible benefits of corn ethanol is far from settled.  Regardless, ethanol has strong political support, and we can expect continued rapid increase in US ethanol production.  Does it follow that the industry will produce good returns for investors?  Will increases in production be accompanied by increases in profit, or will ethanol producers find they cannot sell their product at a price high enough to cover their full costs?  To answer that, we have to understand the competitive forces in play in the industry, which I will look at from Michael Porter's Five Competitive Forces Model.  The more and stronger competitive forces are at play, the less attractive the industry will be in terms of producing attractive returns on investment.  These forces are the threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, internal competition, and the availability of substitutes.

Threat of New Entrants

Corn ethanol production is easy to establish.  Distilling grain into alcohol has been around for all of human history, and while the techniques have been refined, the basic production process is well known.  The remarkable number of new plants being built testifies to this. This is a big strike against the long term profitability of the industry.  

Bargaining Power of Suppliers

The major suppliers to the ethanol industry are corn growers and the suppliers of process heat (often produced by natural gas, but more innovative firms are using gas from anaerobic digestion of manure from cows which also eat some of the distillers grain byproduct.)  In most cases, these are commodities, meaning that neither the suppliers nor the ethanol industry has any real bargaining power.  I consider this a modest negative for the industry, but may give competitive advantage to firms such as Archers Daniels Midland (ADM) and the Andersons (ANDE) who have vertically integrated supply chains, as well as firms who can use renewable sources of process heat to lock in energy prices.

Bargaining Power of Buyers

Ethanol is also a commodity, but it has the interesting property that it can't be shipped through the same pipelines as other liquid fuels because it's water soluble.  Hence, ethanol must be transported by truck, rail, and ship to markets that do not currently.  To me, this means that ethanol producers in the Midwest are likely to have a much harder time than ones in California, such as Pacific Ethanol (PEIX), and Hawaii, where they now have a 10% ethanol mandate, but little or no local production, despite their large sugar industry. 

Internal Competition

See my comments above about internal competition in the US industry, but the 800 pound gorilla here (especially for states on the East of Gulf Coast) is imported ethanol from Brazil.  For the moment, that internal competition is contained somewhat by the United States' punitive tariff, but if the political will to maintain that fails, Brazilian ethanol's better price structure (and better energy returns, since it's made from sugarcane) would be traumatic for the industry.  In my mind, the internal competitive outlook is not very good.

Availability of Substitutes

Ethanol is a substitute for both gasoline and MTBE.  At the moment, much of ethanol's momentum is due to the ban on MTBE.  However, many consider ethanol to be a poor substitute for MTBE because of it can increase smog formation in some circumstances.  If a better oxygenator were found for gasoline, the prospects for corn ethanol on the coasts would likely be bleak.  In its E85 formulation, ethanol is touted as a gasoline substitute, and until cellulosic ethanol becomes economic (which would lead to a new set of problems for corn ethanol, and might happen much sooner than  expected), we can reasonably expect that gasoline will generally be more prevalent than E85.  So the economics of ethanol hinge on the lack of another substitute for MTBE, which currently puts ethanol in a good position on the coasts, where MTBE was formerly used, be puts the industry at the mercy of gasoline price swings in the Midwest.

Conclusion

Regardless of how you feel about ethanol from an environmental or net energy perspective, the prospective ethanol investor should be very careful about investing in corn ethanol producers at random.  As I have argued here, vertically integrated producers, Californian producers, and producers who use renewable energy based processed heat may have a competitive advantage over a generic Midwest ethanol plant, but such competitive advantages seem slim and could rapidly vanish due to outside events. 

DISCLOSURE: Tom Konrad and/or his clients have positions in the following stocks mentioned here: ADM.
DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

May 14, 2007

3 Alternative Energy Stocks You Need to Know

In the face of a declining overall energy market today, three of our favorite alternative energy stocks posted strong gains on high volume.

The Oil Services HOLDRs ETF (OIH) was down 2% and the PowerShares WilderHill Clean Energy ETF (PBW) was down 1.7%. Indeed, the vast majority of the energy stocks that we track were in the red. But bucking the trend were two energy stocks that we have profiled in the recent past and a third company that we will begin covering today.

First on the list is our favorite wind energy play, Welwind Energy International (WWEI). We recommended Welwind during October of 2006, when it was trading around $0.07. It closed today at $0.18, up 26% on 4X average trading volume. That is more than a 900% gain in the six months since we first initiated coverage on Welwind.

Next on the list of breakout stocks today is Nova Biosource Fuels (NVBF). Nova just announced a move from over-the counter to the AMEX, which will be effective on Monday, May 14. Nova recently held its official groundbreaking ceremony at the site of its planned biodiesel refinery in Seneca, Illinois. The plant is expected to have a 60-million-gallon per year biodiesel production capacity from locally generated, low-cost feedstocks, including rendered animal fats and oils and recycled vegetable and animal- based greases. Nova’s stock price increased by 4.5% today on 12X normal trading volume.

Our final stock is getting its first mention on Gold Stock Bull today. Despite being the darling of the ethanol investment community and attracting funding from none other than Bill Gates, we have been hesitant to recommend Pacific Ethanol (PEIX). We watched the stock quadruple during 2006 from $10 to nearly $45, but couldn’t see any fundamental justification for the rise and held off. PEIX has since retreated to around $15 in an overall downturn amongst ethanol producers.

So what is driving our optimism with Pacific Ethanol? A shift from hype to substance. The Sacramento, Calif.-based company swung to a first-quarter profit, earning $1.9 million, or 5 cents per share. During the same quarter last year, Pacific Ethanol lost $612,000, or 2 cents per share. This first-quarter profit was generated from revenue that more than doubled to $99.2 million from $38.2 million. Pacific Ethanol sold 37.5 million gallons of ethanol, almost twice as many as it did a year ago, and ethanol prices were up more than 20 percent.

Pacific Ethanol’s share price responded by climbing 9.1% on 6X normal trading volume. Despite fears by some investors of an oversupply in ethanol during the back half of 2007, we believe PEIX will continue pushing higher. We have a price target of $22 for 2007, which is a 47% increase from the current price. The chart below shows clear support at $15 and we believe a bounce off this price floor is imminent.

Pacific Ethanol currently has one plant operational, one plant about to open and three other plants under construction. The operational plant is located in Madera, California and has a capacity of 35 million gallons per year. It is the largest ethanol plant on the west coast.

Their second plant is being constructed in Boardman, Oregon and will also have a capacity of 35 million gallons per day. Construction is scheduled to be completed in the next few months.

Pacific Ethanol also has begun construction on three 50 MGY name plate capacity production plants that will open mid 2008. Magic Valley, Idaho will serve growing markets in the Intermountain West, while Pacific Ethanol’s Stockton, California and Imperial Valley, California plants will help meet the growing demand for ethanol in California.

The energy bill passed by Congress in 2005 requires an increase in ethanol use by refiners to 7.5 billion gallons by the year 2012. With Democrats now controlling both houses and looking likely to take over the presidency, we can only expect additional government incentive for alternative energies such as ethanol.

A significant portion of Ethanol demand is coming from the fact that states across the country have banned MTBE (Methyl Tertiary Butyl Ether), a fuel additive formerly required to increase octane levels of gasoline. MTBE has found its way into drinking water and many believe is cancer-causing. Ethanol is the only other commercially viable additive that will bring gasoline into compliance with state and federal clean air regulations. Consumption and production of ethanol has continued rising at a record pace and should be considered as part of any investment portfolio.

Good luck and happy investing!


Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.

April 24, 2007

New York, New York!

While New York's Mayor Michael Bloomberg was busy unveiling a package of measures aimed at making NYC green (including reducing CO2 emissions by 30% by 2030), the state's Governor, Eliot Spitzer, was making his reservations about corn ethanol known, as reported in the Globe & Mail.

This adds yet one more (powerful) voice to the chorus of those skeptical about the viability of the corn ethanol industry.

The article also notes that Dr. Dan Kammen, an influential Berkeley academic and advisor on climate change to California Governor Arnold Schwarzenegger, is also among those who doubt that corn ethanol is the best route to follow to deal with climate change. This likely means that at least one of Arnie's advisors on the politically-sensitive issue of climate change is advising caution on corn ethanol.

Finally, the article recognizes that even powerful foes in high places might not be able to curtail the progression of the "ethanol juggernaut".

Corn ethanol is a classic case of an investment story where one could be labeled as preferring "to be right rather than rich". As far as I go, I see enough red flags to convince me that there is something fundamentally flawed here. But I would definitely be interested to hear more from the "other side". In the meanwhile, I prefer to put my limited supply of money behind things that look fundamentally stronger.


April 11, 2007

Current Structure of the US Ethanol Industry "Problematic", Says the IMF

The International Monetary Fund released its Spring 2007 World Economic Forecast today.

Fuel Vs. Food

There is a short sub-section in Appendix 1.1 ("Recent Developments in Commodity Markets") that I thought might be worth sharing with you. If you download the PDF version of the report and scroll down to page 44, you will find the said sub-section under the heading "Food and Biofuels".

In it, the IMF notes that food prices (as measured by its own food price index) rose by 10% in 2006, driven partly by a poor wheat crop in certain countries but also by (mandated) demand for biofuels in the US and Europe (see graph below).


The report notes that, looking ahead, the prices of crops like corn and soybeans, which are the main feedstocks for ethanol (US) and biodiesel (Europe), respectively, should: (a) continue to rise and (b) begin moving in line with the price of crude oil, which is currently the case with sugar because of its role in the Brazilian ethanol industry.

About the recent news that US farmers are planning to plant more corn acreage next year, the IMF has this to say:

"For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise."

IMF economists also point out that the price of "partial substitutes" such as wheat and rice, as well as the price of meat and poultry, should trend upwards as a result of higher corn and soybean prices. Finally, high crude prices could place further upwards pressure on the price of corn because corn farming in the US is highly energy intensive.

The IMF - Not Especially Bullish on Corn Ethanol

It is the sub-section's final paragraph, in my view, that best captures IMF's view of current US and European biofuels policy. It reads as follows:

"While on a small scale biofuels may be beneficial by supplementing fuel supply, promoting their use to unsustainable levels under current technology is problematic, and long-term prospects for biofuels depend heavily on how quickly and efficiently second-generation substitutes (such as plant waste) can be adopted. Many energy market analysts also question the rationality of large subsidies that benefit farmers more than the environment.

While new technology is being developed, a more efficient solution from a global perspective would be to reduce tariffs on imports from developing countries (for example, Brazil) where biofuels production is cheaper and more energy efficient."

This reaffirms some of the contentions that were made on this site in the past:

(a) The way the US is proceeding with its approach to ethanol will inevitably place inflationary pressures on domestic and global food prices, which will result in tensions at home and abroad.

(b) The main reasons for pursuing ethanol in the manner in which it is being pursued in the US right now are, in order: (a) placate the farming lobby and earn valuable political support in America's hinterland; (b) placate the wean-America-off-foreign-oil lobby; (c) placate the soft environmentalist lobby; (d) combat climate change...oh, wait a minute...I guess no one's settled that thorny energy balance question yet, have they?

(c) Not letting emerging markets export ethanol tariff-free to the US is bad economically for a lot of people, from poor Brazilians to middle-class Americans

(d) Cellulosic ethanol is the only way forward if biofuels are ever to displace oil in a sustainable manner

To Conclude...

"Old news!", you might say...well you're right, except for this: it's one thing when I or some other insignificant blogger bashes (or celebrates) corn ethanol; it's quite another when the top economic think-tank in the world tells you that it sees real long-term viability problems with the way that this industry is currently structured.

To be sure, it's not like the IMF dedicated a large amount of space to this issue, and I'm quite certain that most of the economists who participated in producing this report don't loose sleep over it at night. But the strong terms used in that little sub-section further reinforce what the corn ethanol bears have been saying: enjoy it while it last, because it's not structured to be sustainable in its current form for much longer...and I'm not talking about environmental sustainability here.

DISCLOSURE: The author does not hold a position in any company involved in biofuels

February 06, 2007

An Interesting Way To Play Cellulosic Ethanol

Last Friday (Feb. 2), the Globe & Mail's business section (the G&M is Canada's top national newspaper) ran an interesting piece by a senior business writer on cellulosic ethanol. I wish there was a way to view this article for free, but, unfortunately, the G&M charges for access to certain of its articles, and this is one of them.

The gist of the argument is as follows: (a) forget corn-based ethanol, the future lies with cellulosic (yyaawwnn...); (b) deep down inside, Bush knows this; (c) to make cellulosic ethanol competitive, you need super-enzymes that speed up the process of breaking down the cellulose and transforming the biomass into a liquid fuel; (d) because of 2 companies' super-enzymes, the cost of producing cellulosic ethanol will go from about $2.25 a gallon today to $1.07 by 2011; (e) it will be possible, then, to convert about 1 billion tons of biomass into liquid fuel annually, which will equate, in energy terms, to about 3.5 billion barrels of oil, and this without any adverse impact on the food supply.

Sounds interesting? It's because it is. Those of you who visit this blog often know that I belong to the camp of those who maintain that corn-based ethanol is nothing but a distraction.

The 2 companies identified in the article as holding the enzymatic key to unlocking the potential of cellulosic ethanol are: Novozymes, a subsidiary of Novozymes AS [OTC:NVZMF.PK]; and Genencor, a subsidiary of Danisco AS [OTC:DNSOF.PK].

Although both subsidiaries are based in California, both parent companies are Danish and their primary listings are on the Copenhagen exchange (Danisco AS [Copenhagen:DCO.CO] and Novozymes AS [Copenhagen:NZYM.CO]). The Pink Sheets listings are less than ideal...




Novozymes and Genencor have, respectively, a 40% and a 20% share of the global market for enzymes used in ethanol production.

The article concludes with this prediction by Michael Pacheco, director of the National Bioenergy Center in Golden, Colorado: production of cellulosic ethanol could reach 60 billion gallons by 2030, or 30% of total US gasoline consumption.

Besides the US, cellulosic ethanol will undoubtedly, once it can be produced on a cost-competitive basis, spread to other ethanol majors, most notably Brazil.

January 18, 2007

Ethanol, NAFTA, Tortillas and Walmart?

Author Neal Dikeman is a founding partner at Jane Capital Partners LLC, a boutique merchant bank advising strategic investors and startups in cleantech. He is the founding contributor of Cleantech Blog, and a Contributing Editor to AltEnergyStocks.com.

Quick, what do Ethanol, NAFTA, Mexican Tortillas and Walmart have in common? Don't know? Well here's the story.

I am fascinated by the discussion about ethanol feedstocks issues. There has been a lot of talk about corn production for ethanol either crowding out beef or food production, or driving up the price of food, or failing to supply the demand for ethanol.

I have stated before on Cleantech Blog and other sites that I believe corn is a lot more substitutable than the anti-ethanol and cellulosic ethanol advocates give it credit for. Our take: that the corn price rise from ethanol demand will not be as steep as the worst case, that the industry will find more acreage than expected for corn, and that costs will fall, in part because corn producers (and beef producers) are highly flexible and relatively global. Also that cellulosic processes are a lot harder and will take a lot longer to make economic than expected, and that the end result will be corn ethanol for a long time.

But the subject just keeps rolling - quoting an Inside Greentech interview with David Aslin of 3i:

"Leaving the issue of food substitution out for a moment, as your article pointed out, the sheer acreages that are going to be required are daunting.

There was a dramatic increase in 2006 in corn plantings over the prior year, and the industry forecasts an additional 10 million acres in 2007 in response to the need for fuel. How much of that is going to be available for food if all these ethanol plants being constructed actually come online, and at what price? (Heck, there's way too much corn syrup in U.S. food industry products anyway, so if we take a bit of the excess sugar out of people's food, that won't be a bad thing for the nation's health!)"

At the same time, we have also been saying that corn ethanol is inherently a high cost fuel ($1.50-$2.50/gallon direct cost on a btu basis compared to $0.50-0.60/gallon for gasoline on a direct cost basis - read our blog, and please don't email me arguing the price of crude is over a $1/gallon, it's the COST of finding and producing that crude, not the price the oil companies can sell it at, that matters), with lots of new supply coming on that is going to hurt the economics of US ethanol producers like VeraSun, Aventine, etc.

But this is a whole new angle - the political ramifications of our ethanol industry driving up prices for our neighbors food supply.

One of my friends, the CEO of a fuel cell startup who happens to read Cleantech Blog, emailed me an article today. Basic gist - the Mexican government is concerned that ethanol demand is driving up the price of tortillas! And is trying to decide what to do about it. As they describe the impact:

"Prices for white corn used to make tortillas have been hit the hardest. Although local corn prices are typically volatile around harvest time, which mostly falls in the second half of the year, traders say the farm gate price for white corn saw an unprecedented rise of up to 45 percent in 2006 compared with the year-ago levels in the Mexican market.

Grains traders have forecast tortilla prices to rise between 20 percent and 25 percent during the last quarter of 2006 and the first quarter of 2007. "

My friend's commentary on the subject:

"Even more funny, in the story I heard on NPR, Wal-Mart Mexico is taking advantage of the tortilla price run up to undercut independent tortilla shops. But besides the humor, there may be something here. I think the Mexican government is just out in the lead. I’ve seen at least one piece predicting that additions to ethanol production have been under estimated and that significant corn feedstock shortages will occur in 2008."

Now, nobody's talking NAFTA yet, but one of the things free trade does is globalize commodities. I'm just waiting for the next reverse "giant sucking sound" attack on NAFTA to follow this corn price rise. Or worse, some blogs are bound to start complaining that corn ethanol is racist, and anti-Mexican. To an economist like me, this price rise is just a perfect example of how globalization can even out the impact of something like ethanol demand on corn prices by spreading the effect across multiple markets and multiple commodities (and drive a new energy commodity export business - see our recent blog) - an example of my point that corn ethanol has longer legs than the cellulosic guys would like. But I'm sure that's not how it'll get reported.

Though you do have to admit - our ethanol craze could make Mexican tortillas too expensive to eat? That's kind of funny.

January 09, 2007

The Future of Alternative Fuels: Ethanol

Besides a slew of clean car announcements connected to the North American International Auto Show, the alt energy topic that has made media and blog headlines most often over the past week has been alternative fuels. We are thus going to run a 2-part series on alternative fuels this week as follows: ethanol today and coal-to-liquids tomorrow.

ETHANOL: INVESTOR FRIEND OR FOE?

I’m going to start this post with a statement of opinion: I don’t really like corn-based ethanol (as an investment), I never have, and, as a result, I haven’t followed this space as closely as I probably should have. AltEnergyStocks.com Contributing Editor Neil Dikeman, in a November post, did a great job of outlining key concerns investors should have with ethanol as an asset class. However, whether one likes ethanol or not, it was without a doubt one of the top alt energy stories of 2006, and will remain a biggie in the years ahead.

Industry Growth: Some Numbers

Ethanol is an interesting beast because, from one point-of-view, it’s merely the new-kid-on-the-block of a decades-long US agricultural policy. Let’s face the facts: US farmers are not, without massive subsidies and trade protection, competitive on a global basis. In a free global market, nobody would want US crops because they’re plain too expensive. Luckily, with the help of US tax-payers, the US farm industry has been able to survive, and, in many cases, thrive. But the US agricultural complex has, in the past few years, come under increasingly intense pressure from America’s trading partners, and cracks in the system are unavoidably beginning to show. Ethanol provides a partial route out of these troubles; redirect the expensive corn away from international markets to US-based ethanol processing facilities, put in place the right regulatory framework to boost ethanol demand, and keep the low-cost ethanol producers like Brazil at bay with tariffs. The result? A booming ethanol industry that is fundamentally transforming the economics of corn farming in the US.

Consider this quote from a recent Bloomberg article on biofuel demand and feedstock prices:

“The 110 factories now producing ethanol in the U.S. have boosted their annual capacity by 12 percent in the past six months, to 5.3 billion gallons, according to the Renewable Fuels Association in Washington. An additional 6 billion gallons of capacity will be added in the next two years as 79 new plants or expansions of factories are completed, the association said.?

The industry’s capacity will thus grow by 113% by the end of 2008, a significant number.

And then there are those who are disputing these growth forecasts, saying they are gross underestimates. Lester Brown, a known environmental commentator, argues that the Department of Agriculture’s projections that ethanol producers will, as a result of industry growth, consume 60 million tons of corn by 2008 are wrong, and says he instead expects ethanol manufacturers to consume 139 million tons of corn by then, more than double (by the way, the Earth Policy Institute, Lester Brown’s outfit, produced this very cool table of ethanol distilleries in the US by aggregating data from multiple industry sources. I don’t know of any other such resource).

However way you look at it, if the ethanol industry is truly responsible for the current rise in corn demand and associated run in corn prices, it is doubtful US farmers will be able to scale up production enough to keep pace with the kind of refining capacity growth discussed above, and prices should thus spike. The result of this will be that the food-Vs-fuel debate, which was mostly academic only 18 months ago, will intensify, pitting farmers and the ethanol industry against environmentalists and other concerned citizens. Another impact of this will be that high feedstock costs will eat away at producers’ margins, as there will be limits to what the market will tolerate in terms of price increases, especially if oil gets cheaper.

Ethanol: The Politicians’ Favorite Kid

There are early signs that the new Democratic Congress wants to forge ahead with the budding ethanol economy. This article from the Green Car Congress provides details on a proposed piece of legislation that, if adopted, would grant significantly more regulatory certainty to the ethanol industry than to just about any other alternative energy industry in America. A nation-wide renewable fuel standard with a 2030 timeframe is something the wind and solar industries could only ever dream of, and this despite the growing controversy surrounding corn-based ethanol. Besides the concerns outlined above, there also remains the fundamental question of whether or not, on balance, more energy is required to bring a unit of ethanol to market than that unit yields once consumed. A recent MIT study does not provide a conclusive answer to that question.

It has become clear that, among alternative energy sources, ethanol is the political favorite. Like the parent who, for one reason or another, loves a kid more than its siblings, Federal legislators have embraced ethanol, and are giving it visibly more motherly love than its available sister solutions, namely tougher fuel efficiency standards and plug-in hybrid technology. But politicians shouldn’t kid themselves; ethanol, it seems, is not the win-win solution to air pollution, climate change, foreign oil dependence and a dying farming sector that some had hoped. Something tells me that a battle is now brewing, and an anti-ethanol lobby, or at least a put-a-moratorium-on-further-ethanol-growth lobby, could emerge sooner rather than later.

Investing in Ethanol: All is not Lost

I’m not suggesting investors steer clear of ethanol altogether here; I’m merely pointing out that, while some people are hailing the growth in the ethanol industry as the next Klondike, there are some very significant and immediate concerns with corn-based ethanol that will have to be addressed. These concerns could, under a bearish scenario, stunt growth in the sector, or at least threaten the profitability of more vulnerable players.

But all is not lost. In my view, corn-based ethanol is one of those transition technologies that will play a key part in America's energy mix for some time, but that will slowly dwindle into irrelevance as better solutions come on-stream. The best plays on ethanol should therefore do well, for a time. While I’m not familiar enough with any of the top ethanol pure-plays to make an authoritative call, certain larger companies have certainly benefited from the ethanol boon so far. ADM [NYSE:ADM], Monsanto [NYSE:MON], and Syngenta [NYSE:SYT] are all names that come to mind. Seeking Alpha’s Ethanol section is a good resource for the would-be ethanol investor.

You should also keep an eye on firms that are working on cellulosic ethanol. Cellulosic ethanol holds great promises, as evidenced by the fact that Goldman Sachs took, in May 2006, a $30 million position in cellulosic ethanol firm Iogen of Canada. But cellulosic ethanol is at least 5 years away.

In short, I’m sure ethanol, as an asset class, can and will make you money. The ethanol investor will, however, have to be cautious, as the waters ahead are not free of trouble.

(DISCLOSURE: I do not have positions in any of the stocks discussed in this article)

November 12, 2006

Are Ethanol Companies Risky Investments?

By Neal Dikeman, Partner, Jane Capital Partners LLC, and Founding Contributor, Cleantechblog.com. He has no investments in or financial incentive related to ethanol or ethanol stocks.

Are ethanol stocks risky long-term investments? We think they are. Don’t get me wrong, I’m a big fan of ethanol blended fuels for a whole host of reasons, I just don’t like ethanol as an investment. Here are six solid reasons to be very, very cautious.

1. Demand vs. supply – As with most regulatory driven markets, the demand has come on very fast behind the advent of renewable fuel standards, fuel subsidies, and the phasing out of MTBE resulting in ethanol’s rise as an oxygenate of choice. As a result the demand has far outstripped the historically available supply, and while supply plays catch up the industry has done well. However, as any student of refinery cycles knows, the moment supply catches up with demand at point “n? (and it will), the “n+1? ethanol production will put tremendous price pressure on the market and drive the industry into its first down cycle. (Keep in mind, all those announcements about new ethanol plants are driving growth – but at the same time driving the industry straight for its own readymade cliff).

2. Massive commodity price risk – Ethanol companies, like refineries, typically find themselves at the mercy of massive commodity price cycles. Unfortunately for ethanol producers, they stand at the mercy of several price cycles – corn (which ethanol producers are driving up the cost of), natural gas (the primary fuel), gasoline and crude. When the confluence of cycles is in their favor - life is very good, but when it is bad, it will be very, very bad. Now, for grins, just imagine a bad cycle confluence at the same time supply outstrips demand.

3. Market size pressure – Also, the current volumes of ethanol are a few percentage points of total refining volumes, barely worth fighting over if you are an oil company (a typical ethanol plant is about 5% of the size of a typical refinery) – but if ethanol ever comes near the DOE’s 30% by 2030 goals, do you really expect the oil companies to give up market share easily – especially when they already own most of the blending and distribution? Trust me, it’s not going to be Exxon, BP, Shell, and ChevronTexaco that get crushed in the stampede (and probably not Ag giants like ADM). Just because ethanol succeeds does NOT mean ethanol companies will.

4. Technology change – As the industry matures, and each of these cycles and concerns comes into play, the emphasis on survival will move more and more to low cost and high efficiency – early players with older less efficient (and often smaller) plants may actually be at a disadvantage. On the technology side, I have recently seen technology programs working in everything from more efficient distillation columns to less energy intensive better water removal, to advanced catalysts. And as mature players take notice (oil giant BP is establishing a $500 million Environmental Bioscience Institute for R&D in part in this area), even the winners of the current land grab phase may not actually make money long-term.

5. Ethanol is fundamentally a high cost fuel – As a fuel, ethanol is a fundamentally higher cost feedstock and processing cost than gasoline – just because the oil industry sells gasoline for higher than the ethanol industry can produce it, does NOT mean ethanol is cheaper (an analysis which is so apples to oranges as to be difficult even to begin to dissect)!. I know a number of well known analysts and investors have come out stating the opposite, but the numbers don’t lie. From Is Ethanol Controversial? Should it Be?, by Vinod Khosla - “Ethanol production costs in the US today are about $1.00 per gallon before any subsidies or taxes, substantially cheaper than the production cost of gasoline, even if oil was to decline to the mid-40’s.? They of course are forgetting that when looked at on a comparable cost basis – the full cycle actual cost to make gasoline from crude is on average up to half the comparable cost of ethanol from corn. Just because oil prices are high does NOT mean gasoline is expensive to produce, in large part it means oil companies that own reserves are making lots of profits. It is correct to say that when crude is at $60/barrel, it is economic to produce ethanol (and along with subsidies sell it for a tidy profit), but ethanol will be for now, our highest cost fuel. [Note: Look for our upcoming article on Cleantech Blog detailing the cost comparison]

6. Valuations – Bottom line, these are cyclical refineries producing a commodity product, not technology companies, and refineries typically trade at a TEV/EBITDA of the mid single digits, and a PE in the high single digits to low teens. Currently the ethanol market trades at hefty premiums to the pureplay oil refiners – a recent check had the average of VeraSun (VSE) & Aventine (AVR) trading at 80% higher PE and 110% higher Enterprise Value/EBITDA than the average of Sunoco (SUN), Tesoro (TSO) , and Valero (VLO) .

Are these all possibly reasons pure plays like VeraSun and Aventine are trading at one-third and one-half off their 52 week highs respectively (See our earlier Cleantech Blog article on VeraSun’s IPO)?

Conclusion – In the short run ethanol stocks are in a land grab phase ramping to meet demand, and some of these stocks may do well while demand still outstrips supply and the industry is still small, but when this dynamic changes – watch out as the margin pressure will be brutal, and could turn already aggressively valued stocks into a dot bomb style free fall as per gallon profits get crushed. So, make your profits while you can!

May 26, 2006

Xethanol to Acquire Plant in Georgia

Xethanol Corporation (XTHN.OB) announced that its CoastalXethanol subsidiary has signed a letter of intent with Pfizer, Inc. to purchase Pfizer's pharmaceutical manufacturing complex located in Augusta, Georgia. While details are yet to be finalized, CoastalXethanol and Pfizer are working together to complete the transaction.

The state of the art, 40 acre site includes: an 89,100 square foot manufacturing facility, a 25,000 square foot warehouse facility, 7,300 square feet of laboratory space, and 16,000 square feet of offices and conference rooms. CoastalXethanol intends to retrofit the site to produce 35 million gallons per year of ethanol. The facility will produce ethanol from cellulosic and other biomass waste streams generated by industrial producers in the surrounding areas. [ more ]

May 16, 2006

Green Star Products to Construct Total Bio-Refineries

Green Star Products Inc (GSPI) announced its plans to construct total Bio-Refinery Complexes for production of both biodiesel and biomass ethanol at each facility.

The first Bio-Refinery is planned to be in North Carolina (see GSPI press release dated April 20, 2006) and the location of the second facility is to be announced soon in the northwestern sector of the United States.

Each GSPI-designed Bio-Refinery will have a start-up production of between 10 or 20 million gallons per year with quick expansion capabilities. The facility infrastructure will be capable of expanding to 60 million gallons per year (and further expansion capabilities could reach 100-million gallons per year), ranking them among the largest fuel production facilities in the world. [ more ]

May 11, 2006

ADM to build 275-million gallon ethanol facility

Archer-Daniels-Midland Co. (ADM) said it will build an ethanol plant with 275-million gallon annual capacity in Cedar Rapids, Iowa as it looks to expand production of the alternative fuel.

The expansion comes on top of ADM's plans to build a 275-million ethanol plant in Columbus, Nebraska. [ more ]

Pacific Ethanol Completes Permitting for Planned Ethanol Plant in Boardman, Oregon

peix_logo.gifPacific Ethanol, Inc. (PEIX) announced that it has received all necessary permits to begin construction on a 35 million gallon per year ethanol facility at the Port of Morrow, located on the Columbia River near Boardman, Oregon. The Company further stated that it expects to begin construction, which should take approximately 12 months, within the next thirty days.

The Oregon ethanol facility will provide ethanol for the Pacific Northwest gasoline markets, helping to increase supply in that area and provide a CO2-reducing fuel for the transportation sector. It is expected that the plant's distillers grains will be sold to the local Oregon and Washington dairy and feed markets. [ more ]

April 27, 2006

ADM raises capacity of N. Dakota biodiesel plant

Archer-Daniels-Midland Co. (ADM) s increasing the capacity of a biodiesel plant under construction in North Dakota to 85 million gallons a year, a company spokesman said on Wednesday.

ADM originally announced the plant in Velva would produce 50 million gallons of biodiesel a year using canola oil. ADM decided to increase capacity to take advantage of economies of scale, said Greg Webb, vice president of public affairs. [ more ]

Green Plains Renewable Energy, Inc. Announces Commencement of Construction of Its 50 Million Gallon Ethanol Plant

gpre_logo.gifGreen Plains Renewable Energy Inc. (GPRE) announced that its project in Shenandoah, Iowa is progressing as planned. The Company received its air permit from the Iowa Department of Natural Resources late last week. Fagen Inc. has set up their on-site construction offices and anticipates construction of the plant to begin early next week. The Company anticipates that the Shenandoah plant will begin producing ethanol in the Spring of 2007. [ more ]

Groundbreaking Set for Clymers Ethanol Plant

Andersons Inc. (ANDE) will conduct a groundbreaking ceremony April 27, 2006, at 11:30 a.m. for its 110 million gallon ethanol plant in Clymers, Indiana.

When completed by the first quarter of 2007, the Clymers plant will be the largest of its kind east of the Mississippi River. Along with the 110 million gallons of ethanol, the plant will produce 350,000 tons of distillers dried grains, an animal feed ingredient. [ more ]

April 25, 2006

Ethanol Stocks Reviewed On Seeking Alpha

With oil and gasoline prices rising ever higher, investors are shifting attention to alternative energy stocks as a promising high-growth sector. A particular area of interest is ethanol stocks and forthcoming ethanol IPOs. Here are companies recently reviewed on Seeking Alpha [ more ]

Archers Daniels Midland Company (NYSE: ADM)
Pacific Ethanol (PEIX)
Xethanol (XTHN)
VeraSun (VSE)
MGP Ingredients (MGPI)
Aventine Renewable Energy (AVR)
Green Plains Renewable Energy (GPRE)
Andersons Inc. (Nasdaq: ANDE)
Veridium Corporation (VRDM)

April 24, 2006

Veridium Receives Order from South African Ethanol Producer for Corn Oil Extraction Technology

Veridium Corp. (VRDM.OB) announced its receipt of an order from Ethanol Africa for the use of Veridium's patent-pending Corn Oil Extraction System(TM) at Ethanol Africa's new Bothaville, South Africa ethanol production facility.

Veridium's proprietary new Corn Oil Extraction Systems(TM) extract high grade corn oil from an ethanol by-product called distillers dried grain ("DDG"). Veridium's technology has the capability of removing up to 75% of the corn oil from within the DDG in two stages. [ more ]

I have been finding more signs that this looks like its a real company and not just a shell to take advantage of the recent surge and popularity in Alternative Energy and Ethanol. I'm still not completely convinced, but the stock has been performing very well with over 200% gains this month.

April 19, 2006

Veridium Updates License for Exclusive Rights to CO2 Bioreactor

Veridium Corp. (VRDM.OB) announced its execution of an amended license agreement with Ohio University ("Ohio") for its patented bioreactor process for reducing greenhouse gas emissions from fossil-fuelled combustion processes.

Veridium's original license with Ohio provided for non-exclusive rights to the technology for the purpose of processing exhaust gas streams from electrical utility power generation facilities, and exclusive rights to the technology for applications involving all other sources. The amended license agreement increases the scope of Veridium's license to provide for exclusivity in all applications, including electrical utility power generation facilities. [ more ]

April 12, 2006

ADM and Siouxland Ethanol Announce Marketing Agreement

Archer-Daniels-Midland Co. (ADM) and Siouxland Ethanol LLC are pleased to announce the formation of an ethanol marketing agreement. As part of this marketing agreement, ADM will market all ethanol produced by Siouxland Ethanol at its forthcoming 50 million gallon Jackson, Nebraska facility. Construction has begun and the plant is expected to be operational in early 2007. In addition to producing ethanol, the plant will produce an estimated 165,000 tons of distiller grains on an annual basis. [ more ]

Clearfish Research Profiles Pacific Ethanol (PEIX)

Pacific Ethanol (PEIX) is building a refinery in California for corn based ethanol production in the heart of the California agricultural and dairy land (the biggest agricultural and dairy producer in the country). The refinery is supposed to come on line in Q4 2006, and there are plans for 4 more subsequent refineries. As there is unlikely to be any increased ethanol demand in California (see background above), the supply capacity they are bringing online must be able to disrupt the current out-of-state supply and/or undercut the current prices. They are one of the biggest distributors of that alternate supply in the state, and that is their main business right now. [ more ]

April 11, 2006

Ethanol Producers Climb to New Highs

Shares of ethanol producers extended their recent rally Monday, as oil refiners continued their rush to substitute ethanol for a toxic gasoline additive before the summer driving season shifts into gear.

The enthusiasm for ethanol is tied to the fate of methyl tertiary butyl ether (MTBE), an additive mixed into gasoline to reduce pollution. However, studies have found that MTBE to be carcinogenic if it seeps into a water source.

States are increasingly banning MBTE due to contamination concerns. Companies wishing to comply with new laws -- and worried about the potential for legal liability -- are turning to ethanol as a replacement for the additive. [ more ]

April 03, 2006

Baron's Thinks Archer Daniels Stock to Rise on Ethanol Harvest

Barons profiles Archer-Daniels-Midland Co. (ADM) in the April 3rd edition. They feel that ADM shares are poised to climb further, literally fueled by its dominance of the ethanol market as investors seek alternative energy investments.

Archer Daniels was believed to have secured a 50-cent per gallon increase in ethanol contract pricing to $1.85 per gallon in recent negotiations. Given ethanol price rises seen in the commodities market, Archer Daniels could reap significant further increases in its next round of talks for October contracts. [ more ]

March 31, 2006

Ethanol shortage could up gas prices

USA Today Money comments about a potential for future increases in gas prices and also shortages in Ethanol.

"Gasoline prices will be unusually high and shortages might occur this summer, because the U.S. ethanol industry can't keep up with the demand for fuel-grade alcohol to mix with gasoline, the head of the U.S. Energy Information Administration told a Senate committee Wednesday." [ more ]

On Wednesday of this week the Senate Environment and Public Works Committee met to discuss ethanol as a substitute for MTBE, a clean-air additive in gasoline. This potential change will increase the cost of refining and also greatly increase the usage ethanol. Refiners currently use MTBE and are now are discontinuing it because MTBE can taint water supplies and Congress has refused to protect them from MTBE lawsuits. Ethanol is the only readily available substitute.

Veridium Receives Order to Increase Ethanol Production Efficiencies

Veridium Corp. (VRDM.OB) announced its receipt of an order from a Wisconsin based ethanol producer for the second stage of Veridium's patent-pending Corn Oil Extraction Systems(TM).

Veridium's proprietary new Corn Oil Extraction Systems(TM) extract high grade corn oil from an ethanol by-product called distillers dried grain ("DDG"). Currently, the majority of ethanol production is based on a dry milling technique that utilizes more than 1 billion bushels of corn to produce 3 billion gallons per year of ethanol. The dry mill process converts the starch from the kernel of corn into sugar and then the sugar into ethanol. The balance of the corn (non-starch components) then goes through a dewatering and dehydration process where the byproduct is sold as a commercial feed ingredient called DDG. DDG contains the majority of the corn oil that was present in the kernel. Today, the 1 billion bushels of corn currently used in the dry mill ethanol process contain roughly 300 million gallons of corn oil that is currently sold for about $0.03 per pound as commercial feed. The new Veridium technology presents another option - cost effective conversion of the oil in the ethanol by-product into biodiesel. [ more ]

February 16, 2006

ADM Selects Columbus, Nebraska as First Location for Ethanol Expansion

Archer-Daniels-Midland Co. (ADM) announced that it has selected Columbus, Nebraska as the first location for its ethanol capacity expansion. The Company will build a dry corn milling plant with an initial annual capacity of 275 million gallons adjacent to the existing ethanol plant in Columbus.

In September, ADM previously announced that it planned to expand ethanol capacity by 500 million gallons through the addition of two dry milling plants at existing ADM ethanol facilities. Construction, expected to be complete in early 2008, is subject to applicable governmental approvals. [ more ]


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