Come On Seven: Investors weigh options, as 7 companies near key biofuels milestones

April 7, 2011 |

As seven projects aim for important milestones, investors face big decisions on whether advanced biofuels companies, even after the run-up in share prices, are still undervalued.

Yesterday on the NASDAQ, Gevo hit another all-time high,  jumping 7.36 percent to an all-time high of $24.65, and the stock is now 64 percent above its $15 debut just two months ago this week, when the company raised $123 million in its over-subscribed IPO.

A question circulating among investors, both those holding large blocks of Gevo stock and those who sat on the sidelines during the run-up – is it time to get in, hold, or lock in profits and get out.

2012: Make or Break

The answer is, in all likelihood, we’re going to know by the end of Q1 2012 where Gevo is, when it switches off ethanol at its new commercial-scale facility in Luverne, Minnesota, and begins producing isobutanol at scale for the first time. If results on the economics and yield are in line with the company’s expectations, then the investors are likely to agree with Gevo CFO Mark Smith, who said yesterday in a meeting with investors that”we still think the company is undervalued”.

Conversely, should the economics of its feedstocks, the rates, concentrations and yields in production, or the downstream pricing of isobutanol, cause serious disruptions to its expansion plans, then Gevo is an ethanol producer with 21 million gallons in capacity and is overvalued.

The latest production numbers on rate, yield, and concentration are unlikely to make an appearance in the company’s 10-Qs any time soon, and the forward price of corn is really anyone’s guess at this stage, linked as it is to the mysterious price of oil. Consequently, there’s an element of “come on, seven!” and finger-crossing when it comes to investing in early-stage advanced biofuels companies.

The good news for prospective investors, and that which makes it so difficult a calculus for current shareholders, sitting on large unrealized gains, is that the value of the upside far outweighs the the loss of value on the downside. Amyris, with its $1.3B market cap, and Gevo at $630M won’t have valuations based on revenue and earnings any time soon, but on the disruptive potential of their business models.

Sell, hold, buy?

Depends on your appetite for risk. For sure, in the long term, there will not be any companies making renewable fuels at parity pricing with petroleum, that have billion-dollar market caps. Companies will either become niche suppliers of pricey farnesene and isobutanol to niche markets, and have far less exotic valuations – or they will become fuel-supply monsters with .

That’s the ‘Come on, Seven’ aspect of renewable fuels development and deployment, for investors. For supporters of renewable fuels, 2012 will bring its own flavor of Come on, Seven. There are seven companies that have gigantic milestones in their paths from R&D to commercialization coming up in 2012. If all seven hit their marks, that a hugely bullish sign for the industry. If all seven fall short, that’s a big black eye, isn’t it?

So, who are the “Come on, Seven” of renewable fuels in 2012, and what are their key milestones?

Amyris

2012 Make or Break: Start-up of the company’s first commercial-scale facility, in Brazil, by Q2.

The latest: Raymond James analyst Pavel Molchanov upgraded Amyris’ stock from Market Perform to Outperform with a share price target of $31, commenting that “With shares down 13% since March 24, erasing virtually all of the year-to-date gains, we believe the risk/reward profile has become more attractive.”

Molchanov wrote that “this won’t be an earnings story until the second half of 2012 or even 2013…here are the catalysts we would expect this year. First, 2Q11 should be the first full quarter of commercial farnesene production…Second, as has been continually visible over the past six months, Amyris continues to add offtake partners in both fuel and chemical end markets…third, we expect to hear project status updates on the company’s first large-scale production plant in Brazil – the joint venture with Grupo São Martinho – which should drive positive companywide EBITDA upon start-up in 2Q12.”

Butamax

2012 Make or Break: Announce a deal to commercialize its biobutanol technology, based on a corn ethanol plant conversion.

The latest: Tim Potter, CEO of Butamax told the Digest in November, “We are looking at a 3 year payback, and 30 percent increase in income [for licencees of our biobutanol technology]. We are still on target for 2012 corn to butanol, and sugarcane in the 2013-14 period.”

Previewing the bolt-on biobutanol technology that Butamax is expecting to commercialize with corn as a feedstock by 2012, and sugarcane by 2013-14, Potter confirmed that the company is in discussions for “conversions…that’s with an s” in the United States, and is expecting to focus on Brazilian sugarcane for export.  Potter said that the company is proceeding with engine testing and fleet trials, which will take two years, and said that he expects the fuel to enter the market with a blend rate of up to Bu16, under a biobutanol waiver that was granted to Dupont, which has partnered with BP to form Butamax.

Fulcrum Bioenergy

2012 Make or Break: Completion of construction on the company’s first commecial-scale facility, the $120M Sierra BioFuels Plant in Nevada.

The latest: Fulcrum Bioenergy announced in February that it closed a $75 million Series C financing. A portion of the financing will be used to fund the equity capital for the company’s Sierra BioFuels Plant, a commercial-scale production facility designed to convert household garbage to  ethanol, renewable electricity and other high value chemical products. Fulcrum reports they have  been working with Fluor on the engineering services for the project and expects to begin construction this summer.  Fulcrum expects construction to be completed in late 2012.  The  $120 million Sierra BioFuels Plant will reportedly convert  post-sorted MSW into ethanol, renewable electricity and propanol.

Gevo

2012 Make or Break: Meet expectations on rate, concentration and yield, when it switches from ethanol production to isobutanol at its first commercial facility in Luverne.

The latest: Back in August, Gevo agreed to acquire the 21 Mgy Agri-Energy ethanol plant in Luverne, and will commence mechanical retrofitting of the plant   to produce isobutanol. The company said that during most of the retrofit process, the facility will continue to produce ethanol, and that the conversion will be complete by Q1 2012.

Gevo’s integrated fermentation technology platform consists of two components: a yeast biocatalyst and a separations technology unit that bolts into existing ethanol plants. Isobutanol can be used directly as a solvent and converted to isobutylene, the raw material for plastics and fibers. Gevo believes its isobutanol will provide a route to the renewable production of rubber, polypropylene, polystyrene, and PET. Isobutanol can also be used directly as a gasoline blendstock.

INEOS Bio

2012 Make or Break: Commence operations at the company’s 8 million commercial demonstration in Vero Beach, FL, for which it recently secured a USDA loan guarantee.

The Latest: INEOS recently broke ground on the Vero Beach facility, which it is constricting in partnership with New Planet Energy. Located at a former citrus processing plant site in Vero Beach, Florida, the BioEnergy Center will provide 380 direct and indirect jobs (including 175 construction jobs) over the next two years and 50 full-time jobs in Indian River County.

Joule Unlimited

2012 Make or Break: Demonstrate that its technology package is producing at-scale yields and costs anywhere near its hoped-for metric of $58 per barrel- of-oil-equivalent, for ethanol.

The latest: Bill Sims, CEO, Joule Unlimited told the Digest back in November,  “We are already at 10,000 gallons per acre for ethanol, and we expect to reach a cost of $30 per barrel of oil equivalent for diesel, and $58 for barrel of oil equivalent of ethanol. Next fall we expect to start the commercialization scale effort, and we have a pretty good chance if succeeding.”

Neste Oil

2012 Make or break: Open the 240 Mgy Rotterdam renewable diesel facility, confirming that the company is finding customers for its palm based drop-in fuels.

The latest: Neste Oil and Stora Enso are seeking sites for a facility that would produce 200,000 metric tons per year of renewable diesel from wood waste using Neste’s NExBTL technology. The plan will develop its environmental impact assessment beginning in November with the plant built possibly as early as 2012. Neste plans to open its 800,000 ton NExBTL plant in Singapore before the end of the year and another one of the same size in Rotterdam next year.

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