Algae – Will Bulls or Bears rule?

With the launch of PetroAlgae’s $200 million IPO last week, and news that Solazyme has raised an additional $52 million from its investor group towards its commercialization efforts, questions among investors invariably turn to: algae, how soon as a commercial platform for fuels, chemicals or other bio-based products.

Bulls say: Solazyme IPO

Interest must invariably increase because of a $1 million investment in Solazyme’s preferred stock by Keating Capital, a Colorado-based firm that specializes in pre-IPO financing. Keating’s investment criteria are: aiming for IPO in the next 18 months, “at or near EBITDA profitability,” and “Producing an innovative product or service, with market potential that will support earnings growth of 25%+ for a minimum of 3 years.”

The Digest’s take: We can infer from the investment that Solazyme expects an IPO event by no later than spring 2012, and is “nearing” EBITDA profitability as it attracts what appears to be its late-stage, pre-IPO financing. Exact timing? A major order for Solazyme product – presumably long-term in nature – such as an expanded US Navy order, would be a good sign that the company has assembled the necessary elements to move successfully onto NASDAQ.

More market moo-vement

Meanwhile, Global Information has released a new market research report, Algae Biofuels Production Technologies Worldwide, in which they project that the total algae biofuels production technologies market (including cultivation technology sales, harvesting, extraction and fuels production facilities) will reach $1.6 billion in 2015. According to the study, “Starting at an estimated $271 million market size for 2010, this increase is significant and underscores that this is a quickly changing and evolving industry, expected to show and annual growth rate of nearly 43 percent.”

More bulls, or just bull?

In California, BioCentric Energy Holdings announced a $600,000 licensing and royalty agreement with Biocen Natural Products Development for a $600,000, in which BNPD will purchase from BioCentric Energy and its clients 3 specific algae strains to be used in BNPD’s health and nutraceutical products: Haemaotoccocus, spirulina and chlorella. According to BioCentric, Haemaotoccocus has a current market value of $341 per kilogram, while Chlorella clocks in at $44 per kilo and spirulina sells for $20 per kilo. BioCentric projects that it can produce between 6 and 10 tons per year of each strain.

The Digest’s take: It’s an encouraging sign for an algae-based development company that has taken the tough road of developing as a publicly-traded company. However, we note that Biocen is also a micro-cap, pink-sheet traded early stage company, so investors apply the usual cautions, please.

In Utah, Compact Contractors for America (CCA), announced an initial sale of powdered algae fuel to the United States Air Force Research Laboratory, to be evaluated as a solid fuel propellant for aviation use. According to CCA, “dry process biofuels are essentially powders that can be fluidized and combusted in jet turbine engines. Dry process fuels have been around for a long time, at least since the first pulverized coal power plants…what CCA has done is identify the most effective feedstock’s, process methodology and fuel delivery processes to make dry process biofuels scalable to military operations.”

The Digest’s take: That’s an interesting turn: dry fuels. Clearly this is an initial sale for test purposes, but one worth tracking.

Bears in the woods?

A group of researchers from Wageningen University & Research Centre indicate that it will be 10-15 years before algae-based biodiesel is available at affordable prices and commercial scale – though the group does confirm that they see a technical path towards price parity with fossil fuels, and scale, and generally is focused on the prospects for algal-based fuels in Europe, rather than on the broader global front.

From the report: “The 5000 tonnes of algae (dry matter) now produced annually in the whole world has a value of €250/kg. The price is so high because algae can make rare (and therefore expensive) substances like carotenoids and omega 3 fatty acids that are converted into high-quality products such as food supplements…To investigate whether the use of algae as biofuels is feasible, a feasibility study was carried out on scale enhancement in algal cultivation. This showed that presently the cost price could be reduced to €4/kg. By making use of residues such as wastewater and CO2 from exhaust gases, by improving the technology and by shifting production to sunnier countries, it would even be possible to reduce the price to one-tenth of that level, namely, €0.40 /kg. Even then, however, the production of bioenergy from algae would not be financially viable. To achieve that goal, the whole algal biomass would have to be utilised. This consists of roughly 50% oil (40 cents/kg, thus), 40% proteins (yielding 120 cents/kg) and 10% sugars (100 cents/kg). This causes the value to rise to €1.65/kg which is enough to run production on a large scale.”

The Digest’s take: The Wageningen group does not detail in its high-level summary exactly why it will take 10 years to reach both the cost targets it indicates. But it continues a trend out of the academic community of suggesting that algal fuels are 10 years away. We heard similar time frames out of the European Biodiesel Board’s algae summit.

Bears at the door?

Cyanotech, one of the handful of companies in commercial-scale algae nutraceutical production (among the others, Earthrise and Martek), reported Q2 net income of $399,000, on sales of $3.9 million, compared to income of $413,000 on sales of $4 million for this period in 2009.

The Digest’s take: “Where is the growth in the algae nutraceutical market?”

The Bottom line

A significant number of voices in the community continue to caution that algal biofuels are 10 years away, or likely to arrive at commercial scale only in the waning years of the existing Renewable Fuel Standard. However, we see increasing numbers of signs of commercial traction in the higher priced co-products area, such as nutraceuticals.

With the global market for algae nutraceuticals at 5000 tonnes per year and not showing immense growth signs, algal producers will need to establish new markets rather than simply aim to use technology to flood existing markets with low-cost product. The nature of that transitional set of end products?

Food-grade oil may be one path.

The other: well, let’s spell it out in three words. United States military.

The US military: a bear repellent

If the Navy or Air Force see a path for algal fuels, based on their actual fuel delivery costs for their markets – and their unlimited balanced sheet and aggressive green energy targets – then it could well be “game on” for algal fuels. With the Navy aiming for 50 percent conversion to renewable energy by 2016 and fuel options by 2012 for its “Green Strike Force,” they will have to declare very soon whether this is another end-user saying “if you build it, we will come,” or whether they expect to have to take a stronger structural role in the development of its fuel supply in order to assure itself of the fuel streams it needs for the fleet it envisions.

There is such a precedent in history. When the British Navy was converting from coal-fired ships to oil power, it needed to look beyond its own shores, for the first time, for the energy needed to power its fleet. It saw the strategic opportunity: oil-powered ships, given the fuel density of oil compared to coal, had longer ranges and were more compact, and faster. To secure what became a vital oil supply, they capitalized a new oil exploration, refining and distribution company in the Middle East. It’s name: the Anglo-Persian Oil Company. You know it today as BP.