Is Gevo still Gevolicious?

| November 2, 2012

Though a panic-inducing analyst report circulates on the internet, the consensus among analysts continues to be bullish on the biobased isobutanol pioneer.

With Gevo’s stock in the toilet — as of now, trading at $2.01 — the company has a market cap of $79 million and $92 million in the bank. When any company — much less one with a hot technology — is trading at less than its cash-on-hand value, it’s both rare and a reason to reflect on the financial state of affairs.

Especially since alarming reports such as David Sterman’s “Bankruptcy Watch: Sell Gevo Now” appeared at StreetAuthority.com, suggesting that “A technical glitch could be a death blow for this biofuels firm.”

Regarding Gevo’s third quarter results, energy analyst Pavel Molchanov writes.

“The reported net loss per share of $(0.31) included a $15 million non-cash gain from a change in the convert-related derivative. Adjusting for this gain, the loss per share of $(0.70) was below our estimate of $(0.46) and consensus of $(0.43). In the absence of commercial isobutanol (or ethanol) production during 3Q, revenue was de minimis and consisted of funding from R&D agreements with Coca-Cola and others. The miss was mainly driven by higher SG&A (including Butamax-related legal costs) and interest expense. Adjusting our interest expense assumptions results in slightly wider future losses, though we continue to project operating cash flow turning positive in 2H14.”

Looking at the quarterly result, Sterman wrote:

“Can Gevo work out the bugs? Well, it’s not a hopeful sign that the company’s chief technology officer, David Glassner, decided to resign on Oct. 1. This may have been a sign that a technology fix is neither imminent nor feasible…For now, I give this stock “4″ bankruptcy rating, which means that bankruptcy concerns aren’t imminent, but the company may need to sell stock in the next 12 months. However, if the technology update on Oct.30 proves disappointing, then I may be inclined to move the rating up to “6,” which implies that bankruptcy is possible within the next 12 months.”

The change in technology management – true?

True. Gevo reports that Chris Ryan, Gevo’s President and Chief Operating Officer, assumed the additional role of Chief Technology Officer. Dr. Ryan is no stanger to the role. Prior to joining Gevo in 2009, Dr. Ryan co-founded NatureWorks LLC in 1997 and served as its Chief Technology Officer from 2005 to 2008, where he led the development and commercialization of that company’s proprietary yeast biocatalyst and new biobased polymer from laboratory scale production through completion of a commercial-scale production facility.

How was the technology update?

Molchanov writes: “While the yield optimization program is underway, the target for resuming isobutanol production remains no more specific than 2013, though management has indicated that a more precise timeline should be available by the time of the 4Q12 results next February. Our restart assumption remains April.

At Piper Jaffray, analyst Mike Ritzenthaler penned this to shareholders: “We believe that the new organism will be ready for startup in the commercial plant in 1Q13, and have modeled a production ramp starting in 2Q13 through the end of the year…We are cognizant that Gevo’s current state of development and stage of commercialization can be confusing, especially given the woeful under-delivery at some of Gevo’s peers. Having commercialized similar technologies in the past, we are supremely confident that there is no such confusion at the company.”

The cash burn’s impact

At Cowen & Company, Rob Stone and James Medvedeff write: “Negative EBITDA could consume remaining cash, leaving challenging funding necessities. Management estimates $60-63MM of 2012 EBITDA burn and has $92MM of cash on hand. Unless isobutanol is brought back on line, successfully, in volume, this burn rate would leave less than the $45-55MM needed to build out Redfield. Additional financing may be needed, which could be expensive (if debt) or dilutive (if equity).”

Gevo CEO Pat Gruber’s outlook

“Our goal now is to resume isobutanol production in 2013. While isobutanol production at the Luverne facility is temporarily paused, we plan to take advantage of our flexible technology and temporarily revert the Luverne facility to ethanol production with two goals in mind: a) demonstrate to our partners that our plants can switch between isobutanol and ethanol production, which is important to them and differentiates our technology from others; and b) generate incremental cash flow. Prior to that, if we need to produce more isobutanol for market development reasons and it makes good business sense we can always bring the plant back up to produce isobutanol.”

When will we know on a return to isobutanol at Luverne

Molchanov writes: “Clarity on Luverne likely by February. Gevo has produced over 150,000 gallons of isobutanol and currently has ~100,000 gallons in inventory. The plant is being readied for the (temporary) transition to ethanol. While the yield optimization program is underway, the target for resuming isobutanol production remains no more specific than 2013, though management has indicated that a more precise timeline should be available by the time of the 4Q12 results next February. Our restart assumption remains April.

The bottom line: analysts

Molchanov writes: “GEVO shares have fallen more than 30% since the September 24 news of scale-up delays at the Luverne plant – a “sell first, ask questions later” reaction that needs to be seen in the context of a hyper risk-averse, short-term fixated market. Quite simply, most investors appear to have given up on Gevo. Our view, by contrast, is that the market experienced a textbook overreaction to a delay that is frustrating but in no way unprecedented or shocking. The slower than expected scale-up is entirely normal for industrial biotech. We think the market egregiously overreacted, and we strongly encourage investors with a 12+ month time horizon to view this as a buying opportunity. We reiterate our Outperform rating.”

Ritzenthaler agrees. “We maintain our Overweight rating. Among the positives in the quarter is an additional supply agreement with the Air Force, and following a discussion of energy goals we had with DOD officials last week, the new contract is certainly an encouraging development. Additionally, a new LOI was signed with an affiliate of Great River Energy with access to 130 million gallons of ethanol capacity. This agreement, along with the LOI with BFE announced last quarter, could take the form of technology licenses, as opposed to Gevo putting its own capital to work. We are lowering our price target to $9 (from $15) on sector compression.”

The Digest’s Take – Butamax’s outlook may be highly gevolicious

It’s a lonely view that Gevo won’t have the liquidity or cash-raising power to address its needs. It’s more popular among analysts to suggest that delaying the return to isobutanol production at Luverne into Q3 or later will start to put pressure on Gevo’s ability to finance both Redfield and its litigation with Butamax. Accordingly, Gevo is facing the squeeze on its litigation – and it is not out of the question that the company may have to accept an unfavorable settlement in the suit, simply to boost investor confidence and clear its financial path at Redfield and beyond.

The analysts all agree on this: the February update on Luverne is critical. An early return to isobutanol production will preserve cash, and make the path to financing the conversion at Redfield much more clear. With the stock trading at just 1.5 times the cash required to retrofit Redfield, an equity raise would be painful if needed.



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