Solazyme and its hybrid vigor

November 15, 2012 |

Solazyme lands monster capacity expansion agreements with ADM and Bunge – what’s the sector’s hottest company up to now?

Yesterday, Solazyme announced two landmark capacity expansion agreements with Bunge and ADM, respectively.

The Bunge agreement will expand joint venture-owned oil production capacity at Solazyme Bunge Renewable Oils from the current 100,000 metric tons under construction in Brazil to 300,000 metric tons by 2016 at select Bunge owned and operated processing facilities worldwide.

Under the terms of the ADM agreement, Solazyme will initially target the production of 20,000 metric tons of oil in 2014, with an aim to increase production to 100,000 metric tons in subsequent years.

“After building a strong commercial relationship together, we believe there is a broader scope of opportunities ahead of us,” said Ben Pearcy, Managing Director, Sugar & Bioenergy, and Chief Development Officer, Bunge Limited. Specifically, in this round of announcements, in edible food oils.

Let’s look at the scope of Bunge’s operations and current customer base, in this regard.

In their latest quarterly report, Bunge posted $2.395 billion in edible oils sales, representing 1.692 million tons of product sold at $1,415 per metric ton.

In that context, this deal represents $424 million in potential revenues at current prices, using the average edible oils prices that Bunge is currently generating.

Over at ADM

The ADM deal is much smaller, initially, but consistent with Solazyme’s approach to incremental scale-up. It’s capital-light, using the plant that ADM built in order to produce Mirel (PHA) bioplastics in its Telles joint venture with Metabolix, which was recently unwound.

But what is the fundamental nature of both deals?

Fundamentally, the market of customers is beginning to see Solazyme as a particularly efficient hybrid of agroscience company and grower. In the old model, companies like Bunge and ADM depended on companies like Monsanto, Dow AgroSciences, and DuPont’s Pioneer HiBred to come up with seed technologies that optimized oil characteristics, and farmers to grow the oilseeds via their “programmable” farmland.

The old model was slow-moving in product development, slow-moving in adoption, complex in its organization, and subject to risk-building pressures ranging from diesel prices to weather.

For some time, Solazyme has been talking up a comparison to Monsanto, Dow and DuPont – but this week’s deal-making brings the other aspect of the company into a clearer light. That is the ability of the company to replace, via an industrial process, the grower in the field – through large-scale capacity deals that bring tailored renewable oils to market. The company – well, it’s a hybrid, and comes with its own flavor of doublecross hybrid vigor.

Solazyme's platform, compared to traditional agroscience companies

Offtake for growers, vs processors

There has been some bemoaning in the investor and analyst community about of the lack of customer offtake deals within the Solazyme universe. And it’s true – they have a number of contracts, but nothing that would, today, provide complete offtake for the kind of capacity that the company has now set out to build.

But, is that really the right question? After all, Warren Buffett doesn’t have offtake agreements for shares in Berkshire Hathaway, either. It is not offtake, but demand that is the question – especially for growers.

After all, growers don’t generally lock in 100% of their output in offtake deals with end-use customers they might find, one supposes, at weekend Farmer’s Markets. They form relationships with the next set of companies in the supply chain — the processors, with whom they form complex partnerships and trades.

Solazyme's complex universe of molecules and applications, seen against the backdrop of everyday life

The major traders and processors — the famed ABCDs — ADM, Bunge, Cargill and Dreyfus, they are likely to form a key route to market, for hybrids like Solazyme, just as they do for growers and the seed companies who serve them.

And it’s not hard to see why there’s interest in the new model, from the processor side. It’s the opportunity to access a more tailored product, faster, and eliminate the crushing and extraction steps.

At bunge.com, they make the case: “Bunge knows that today’s consumer have a higher level of health concerns than ever before. Even when it comes to indulging, customers continue to look for ways to feel better about the foods they eat. These reasons, combined with the ban on trans fat in several areas, are why we offer multiple oil and shortening solutions.”

What do they see?  In companies like Solazyme, better solutions for their customers through a microbial platform that grows oil in one step – versus the old route of grow, crush, extract. They see the hybrid vigor.

Solazyme vs Metabolix

The Metabolix problem is part of what is spooking investors, when they consider Solazyme.

Both companies had a promising biotechnology that attracted name-brand partners to establish sizzling joint ventures. In the case of Metabolix, it has never been made entirely clear why the order volumes for Mirel bioplastics never reached very attractive levels in the partnership with ADM. Ultimately, what started as a landmark collaboration eventually unwound.

But let’s make the difference clear. Mirel was a single molecule, and a novel one. Solazyme has a platform technology in triglycerides, not a single waffle iron that runs into problems finding markets for all the waffles when they produce them at industrial scale.

Triglycerides are the dominant form of edible oil, here on Planet Earth – demand is abundant, global and obvious. The only questions are price and performance.

The best judge of those? The companies that see all the prices both upstream from growers and downstream with customers, and measure customer demand. In this sector, that’s the ABCDs.

Bunge and ADM: so whadda they know?

In this case, the majors are betting with dollars and with their existing capacity. Should you bet along with them? Well, you know your portfolio investment goals better than we.

Bet against Solazyme’s understanding of the market? A young, small company just getting on its feet as an industrial-scale concern. Sure, that would be reasonable.

Bet against Bunge’s understanding of the edible oils market? Bet against their understanding of what customers need and what production processes will be the winners in the long-term?

Hmmm, you are betting against a market-maker. One whose information is bound to be more complex, critical data-based, and more richly studied and understood than your own. Bet at your peril.

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