The Oilcane Boom

January 21, 2013 |

Though building capacity globally, Solazyme’s operations in Brazil are getting traction fast – and raised $235M last week.

How much oil could be produced in Brazil via sugar-munching microalgae? Today, the Digest looks at Solazyme’s progress and the bigger picture.

In California, two monster announcements came out of Solazyme headquarters last week. One related to project finance and one related to raising cash.

In midweek, Solazyme Bunge Renewable Oils received approval for project financing in the form of a $120M (R$245.6M) loan from the Brazilian Development Bank (BNDES).

moema

Bunge’s Moema, Brazil facility

The BNDES funding will support the joint venture’s first commercial-scale renewable oil production facility in Brazil, which is being constructed adjacent to Bunge’s Moema sugarcane mill in São Paulo state. The 8-year loan will have an average interest rate of approximately 4%.

At week’s end, Solazyme announced the pricing of its offering of $115 million in Convertible Senior Subordinated Notes due 2018. Solazyme also granted the initial purchaser a 30-day option to purchase up to an additional $10 million aggregate principal amount of Convertible Notes solely to cover over-allotments. The Convertible Notes will bear interest at a fixed rate of 6.00% per year. The initial conversion price will be approximately $8.26 per share of common stock and, under certain circumstances, Convertible Note holders will be entitled to additional payments upon conversion.

What’s up? Why raise capital now?

At latest glance, Solazyme had $167M in cash and was burning through roughly $20M per quarter – so why the rush?

Raymond James’ Pavel Molchanov explains: “Bankers the world over tell their clients that “you raise money when you can, not when you must”. At a time when the capital markets “window” is open for clean tech firms – amid a broad-based resurgence of market optimism – we also recognize management’s logic in taking advantage of this in order to bulk up the cash balance.

Interestingly, the stock was down but not crushed. As Molchanov noted, “[Yesterday's] 9% drop was less than the implied dilution of 23% (assuming full conversion), making the market’s response far gentler than that which greeted Gevo’s similarly sized capital raise (equity plus convert) last June.”

Bottom line, the company raised a net of $230 million in debt this week, at a 5 percent interest rate. Any advanced biofuels (or renewable oils) company would, generally, commit mayhem to get those opportunities. Which brings us to the source of investor optimism, which is more related to cane-crush than stock-crush.

The Moema project

Solazyme Bunge Renewable Oils broke ground in June 2012 and is scheduled to be operational in the fourth quarter of 2013. It will service the renewable chemical and fuel industries within the Brazilian marketplace and will initially target 100,000 metric tons per year of renewable oil production.

In November 2012, Solazyme and Bunge announced in a framework agreement that they intend to expand production capacity from 100,000 metric tons to 300,000 metric tons globally by 2016, and that the portfolio of oils will broaden to include a range of healthy and nutritious edible food oils for sale in Brazil.

READ MORE: Solazyme and its hybrid vigor

READ MORE: Solazyme, Bunge break ground

Brazil’s above-ground oil fields

Let’s look at the opportunities — breaking them, as Caesar divided Gaul, into three parts. First, Solazyme’s current opportunity’s based on their cost structure. Third, we’ll look at the comparable value of ethanol vs renewable oil. Second, a look at Brazil’s oil production capacity.

Production cost

What’s Solazyme’s production cost – the last we have on that topic is this, from the company’s 2011 IPO: “our lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that we believe would allow us to manufacture oils today at a cost below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter) if produced in a built-for-purpose commercial plant. This cost includes the cost of anticipated financing and facility depreciation.”

Ethanol vs oil

Latest we have from Solazyme on yield forces us to do some sleuthing. Last we have from them is that their Bunge partnership gives them access to up to 8 million tons of annual crush, and they indicated a maximum production of 400,000 tons of oil per year. They never have put those two figures together in one place, so caveat emptor – but it indicates roughly a rate of 20 pounds of cane required to produce a pound of oil. Now, generally, you get around 2 pounds of sugar from a pound of (good) cane — indicating a potential yield of up to 50 percent.

That compares pretty favorably with ethanol yields — where you get roughly 7.5 pounds of ethanol (1 gallon) from 12 pounds of corn starch.

As we said, caveat emptor – the data stream is pretty thin. For now, consider these reasons to think that the management at Bunge is rightly focused on value-add opportunities in producing oils from sugars — rather than definitive economics.

Brazil’s capacity

Keeping with the same data, and the same warnings on using it, let’s look at Brazil’s oil capacity. In this case, we’ll look well beyond the 8.5 million hectares that is currently in sugarcane production in Brazil – and towards the 63 million hectares of land that has been authorized for production agriculture in Brazil’s long-term plan — converting idle or underused land in the country’s southwest (and farther from the Amazon as Miami is from New York, for those worried about deforestation.)

That. er, is a lot of land — and is expected to support, to a great extent, a large rise in cane cultivation. The opportunities in ethanol and sugar being well understood, the opportunity for renewable oils is novel and worth a look.

How much capacity is that? Well, consider that Brazil raises 660 million tonnes of cane from its current 8.5 million hectares. With comparable yields, there could be 4.9 billion tonnes of cane. That’s enough to produce, in this example, 244 million tonnes of oil. Now, Solazyme believe it can generate premium values (as much as 30 percent above market) for its tailored oils, based on their performance characteristics.

Now, take soybean oil — price is now around $1140 per tonne. Ethanol has been trading in the $700-$800 per tonne range. Suggesting there is a lot of upside in upgrading to oil — or simply, a more balanced “portfolio” approach to matching supply and demand with both oil and ethanol opportunities in hand.

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