Industrial Biotech’s 2013 Santa Claus Rally: What happened?

December 25, 2013 |

santa-2013Santa Claus rallies typically occur between Christmas and New Year’s. But industrial biotech’s rally came early this year.

Who is up, and why? The Digest investigates.

If you’ve been following The Digest’s Equity Index in recent weeks, you’ll note that it has rallied just on 8 percent in the past two weeks, after hitting a 6-month low in the aftermath of the EPA’s proposal of low biofuels targets for the 2014 Renewable Fuel Standard.

Why the rally?

One reason: equities are up. The DJIA closed on December 13th at 15739 and was up to 16357 yesterday, a gain of just shy of 4 percent. But industrial biotech has been accelerating at twice that clip this month.

Here’s the skinny on seven bellwether stocks in the Index: Amyris (AMRS), Gevo (GEVO), Solazyme (SZYM), BioAmber (BIOZ), ADM (ADM), Renewable Energy Group (REGI), and Pacific Ethanol (PEIX).

Amyris (AMRS)

$2.58 on 12/13, closed at $3.91 on 12/24

The biggest news:

After hitting promised production milestones, Amyris announced this week an agreement to sell senior convertible promissory notes in a private placement for $28 million in cash proceeds.
Under the terms of the agreement, one of Amyris’s largest stockholders, Temasek, in conjunction with new investors affiliated with Wolverine Asset Management, agreed to purchase an aggregate $28 million of the notes. Temasek’s participation will complete its commitment to purchase notes under the Company’s previously announced two-stage convertible note placement. In addition, Total, Amyris’s largest stockholder, agreed to cancel approximately an additional $6.1 million of outstanding convertible promissory notes to take its pro rata portion of the financing.

Reaction:

“This financing will provide Amyris with funding to help achieve our business plan for 2014 where, based on achievement of our sales and collaboration revenue targets, we would reach positive cash flow from operations during the year. The funding will also support our plans for a significant increase in renewable product sales and continued delivery of our partner collaboration activities,” said John Melo, Amyris President & CEO.

Gevo (GEVO)

$1.14 on 12/16, $1.30 on 12/24

The biggest news:

Gevo announced that the U.S. Army has successfully flown the Sikorsky UH-60 Black Hawk helicopter on a 50/50 blend of Gevo’s ATJ-8 (Alcohol-to-Jet). ATJ is a renewable, drop in alternative fuel for JP8 that addresses the Army Energy Security Strategy and Plans mandate that the Army certify 100% of its air platforms on alternative/renewable fuels by 2016. This flight marks the first ever Army Aircraft to fly on the isobutanol ATJ blend.

Also, Gevo confirmed that Underwriter Laboratories (UL) has approved the generic use of up to 16% isobutanol in UL 87A pumps by any manufacturer meeting ASTM specifications, providing all of the service stations across the country with the assurance that isobutanol blended gasoline will work in their current gasoline pumps without the need to purchase new equipment.

Reaction:

Mike J. Ritzenthaler, Sr Research Analyst at Piper Jaffray writes:

“We maintain our Overweight rating and $5 price target on shares of GEVO following the positive fuel announcements this morning. The two announcements highlight the value building within the hydrocarbons franchise as well as the ability to swing volumes into gasoline blendstocks as Luverne production ramps. We believe GEVO shares will work as sales ramp into the fuel markets in 4Q, increasing sequential production volumes from Luverne validate process optimization, sales under the Sasol contract happen perhaps in 1Q14, and work on definitive licensing agreements progresses.

“With the key parts of Gevo’s technology all demonstrated at commercial scale and operating in an integrated fashion, we are optimistic that the company will be able to continue executing on the ramp-up of production at Luverne. The execution milestones are mainly focused on optimizing the organism’s performance in the fermentation phase and automating the batch process – all milestones well within the company’s control. In our view, this optimization will enable a couple more batches to be completed per week by 2H14, turning the Luverne assets cash flow positive.

Solazyme (SZYM)

$8.41 on 12/12, $9.93 on 12/24

Pavel Molchanov at Raymond James writes:

* Moema and Clinton both on track for startup within 90 days. Scale-up milestones are what investors own early-stage stocks like SZYM for. The two most impactful scale-up catalysts in Solazyme’s history are on deck. Solazyme is set to reach commercial-scale production in the U.S. and Brazil in 1Q14 – unquestionably the first player in the algae arena to claim such a feat. Recall, management disclosed in November that startup would be a quarter later than the original target of 4Q, and despite recent gains the stock is still 3% lower than it had been prior to that disclosure ($10.35).

* We project a 4x increase in total revenue by year-end 2014. Of course, the ramp-up of utilization will not be linear – industrial biotech never follows a smooth curve. The trajectory of the ramp-up will certainly be back-end-loaded: while this is not much more than a guesstimate on our part at this point, we anticipate utilization of 8% in 1Q14, rising to 50% in 4Q14. This translates into a four-fold increase in total revenue from 3Q13 to 4Q14, with product sales jumping more than seven-fold. As before, our model shows operating cash flow approaching breakeven towards the end of 2014. Consistent with guidance, we anticipate Solazyme to be cash flow positive on a full-year basis in 2015, with both facilities reaching nameplate capacity (120,000 metric tons in total) that year.

At Seeking Alpha, Kevin Quon writes:

“On November 5, renewable oil producer Solazyme (SZYM) announced its ongoing development of a C8-C10 rich oil. Briefly summarized in a single presentation slide, a novel oil profile capable of significantly increasing the efficiency of existing supply lines was introduced to the world. Yet the news was quickly overshadowed by the disappointment of a facility construction delay, which temporarily pushed back the commercial timeline for the late-stage development company. Following these announcements during the latest quarterly results, Solazyme’s stock proceeded to fall over 20% in the days to follow.

Pacific Ethanol (PEIX)

$3.77 on 12/9, 12/24 close at $4.67

The biggest news:

Pacific Ethanol announced it has entered into agreements to reduce the principal amount of its senior notes by $2.0 million by issuing 500,000 shares of common stock. The company’s common stock is valued in the transaction at $4.00 per share, the closing price on December 13, 2013. Reducing the principal on the senior notes by $2.0 million ensures that the company will avoid scheduled interest rate increases, locking in an annual rate of five percent for the remaining term of the senior notes.

The company also entered into agreements to purchase an aggregate of 6% of additional ownership interests in New PE Holdco LLC, the owner of the Pacific Ethanol plants, for a total cash purchase price of $500,000. The acquisition will increase the company’s ownership interest in the Pacific Ethanol plants to 91%.

In addition, Sweetwater Energy and PEIX announced an agreement to supply customized industrial sugars for the production of cellulosic ethanol. The agreement supports the construction of a cellulosic biorefinery at the Pacific Ethanol Stockton facility capable of producing up to 3.6 million gallons of cellulosic ethanol annually, contingent upon Sweetwater Energy obtaining the necessary financing and permits.

Archer Daniels Midland (ADM)

$40.34 on 12/13, $43.27 on 12/24

The biggest news:

Last week, Archer Daniels Midland Company announced that, as a result of strong operating cash flows and expected improvements in its earnings for 2014, its Board of Directors has voted to raise the company’s regular quarterly cash dividend from 19.0 cents per share to 24.0 cents per share.

The company also announced that it intends to buy back from its shareholders 18 million shares of its stock by the end of 2014 to fully mitigate the dilutive impact of equity units converted in 2011 and compensation and benefit plan issuances in 2013 and 2014.

Reaction:

“Our continued strong cash flow generation and our confidence in the future earnings power of our company allow us to significantly increase our quarterly dividend,” said Patricia Woertz, ADM’s chairman and CEO. “Historically, we have paid out approximately 20 to 25 percent of earnings; going forward we will aim for a range of 25 to 30 percent, thereby allowing shareholders to participate more directly in the earnings stream of the company.”

BioAmber (BIOA)

$6.21 on 12/2, $7.16 as of 12/24

The Biggest News:

In its Q3 results, BioAmber reported progress on its planned 30,000 MT bio-succinic acid plant in Sarnia, Ontario, which remains on track for mechanical completion in the fourth quarter of 2014; achievement the final development milestone for the yeast licensed exclusively from Cargill; sales of $866,000 of bio-succinic acid in Q3 2013, a 83% increase over Q3 2012; a gross margin of 24% on bio-succinic acid product sales in Q3 2013; reduced monthly operating cash burn to $1.68M in Q3 2013, 17% lower than Q2 2013.

Tech Guru writes:

BioAmber is a solid operator whose differentiation within the green chemical space is its low cost and disruptive technology platform. With strong industry partnerships already in place and the ability to scale in an industry that is eager to adopt usage of renewable feedstocks, the company is potentially poised to accelerate operating growth in the next years as it ramps up capacity.

“The company has a reduced commercial scale up risk (owing to commercial scale operations already in France) and is at a major cost advantage vs. other succinic acid companies such as Gevo INC (GEVO). As the Sarnia plant is expected to be completed by the end of 2014, production yields should strengthen and with it, revenues and EBITDA.”

Renewable Energy Group (REGI)

$10.26 on 12/13, $11.80 on 12/24

The Biggest News:

Earlier this month. Renewable Energy Group and Syntroleum announced that they have entered into an asset purchase agreement pursuant to which REG would acquire substantially all of the assets of Syntroleum Corporation, and assume substantially all of the material liabilities of Syntroleum. The terms of the transaction call for Syntroleum to receive 3,796,000 shares of REG common stock (subject to reduction in the event that the aggregate market value of the REG common stock to be issued would exceed $49 million or if the cash transferred to REG is less than $3.2 million).

At The Motley Fool, Maxx Chatsko writes:When life gives you lemons, make lemonade. When the Environmental Protection Agency stunts the growth of renewable fuels and forces you to keep halted construction projects in limbo, make an acquisition. That’s exactly what Renewable Energy Group did by agreeing to purchase the assets of Fischer-Tropsch gas-to-liquids, or FT GTL, company Syntroleum.

“There are some assets that will make a nearly immediate impact, such as a 50% interest in a Dynamic Fuels joint-venture with Tyson Foods , which also allow REG to directly compete with Darling International and Valero in renewable diesel.

The Bottom Line

For industrial biotech investors, it was a welcome rally and Christmas come early. But the gains are too tied to overall equities improvements and specific company milestones to call “trend!” just yet.

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