KiOR: Biofuels Digest’s 2014 5-Minute Guide

February 20, 2014 |

Company description:

KiOR is a next-generation renewable fuels company that has developed a proprietary technology platform to convert sustainable non-food biomass into cellulosic gasoline, diesel and fuel oil. Using standard refinery equipment, KiOR’s products are compatible with the existing fuel infrastructure. KiOR strives to ease dependence on foreign oil, reduce lifecycle greenhouse gas emissions and create high-quality jobs and economic benefit across rural communities.

Rankings

50 Hottest Companies in Bioenergy: #3, 2013-14

30 Hottest Companies in Biobased Chemicals and Materials: #20, 2013-14

Biofuels Digest Awards

2012: Best Project (Thermochemical) Award — Columbus, Mississippi

The Situation

In December 2013, KiOR released the following operational update.

KiOR expects that, given current and anticipated operations through the remainder of the year, the Columbus facility will produce approximately 410,000 gallons of fuel during the fourth quarter of 2013, bringing full year production total from the facility to approximately 920,000 gallons. The ratio between gasoline, diesel and fuel oil expected to be produced during the year is approximately 35% gasoline, 40% diesel, and 25% fuel oil.

“We are pleased that we expect to reach our best quarter in terms of production volumes from the Columbus facility,” said Fred Cannon, President and CEO. “It continues to demonstrate the progress that we have made in bringing the world’s first cellulosic gasoline and diesel commercial facility to steady-state operations.”

“Despite our accomplishments to date, we still have a lot of work to do to bring the Columbus facility towards target throughput, yield and financial performance levels. The financial performance of the facility was also negatively impacted by the temporarily depressed pricing for RINs caused by proposed 2014 renewable volume obligation rulemaking by the USEPA.”

“Given these factors,” Mr. Cannon continued, “we believe that, from both an operational and financial perspective, we need to focus our execution on three simple goals: first, bringing the Columbus facility to the levels of operational and financial performance that we expected when we designed that facility over three years ago; second, continuing to develop our technology so that we can improve our yields and process improvements both at Columbus and at future facilities; and third, aggressively managing our cost without sacrificing our long term goals.

To that end, from now through the end of the first quarter of 2014, we expect that our efforts at Columbus will be focused on implementing a series of mechanical improvements to the facility rather than production volumes. We plan to operate the facility on a limited campaign basis only to verify the expected impact of improvements we intend to implement. In addition, we continue to see encouraging developments in our catalyst and process development efforts that we believe will continue to drive improvement in yields and overall plant economics.

“With these short-term steps, we are staying true to the KiOR business strategy that we outlined at the time of the initial public offering: bring the operations at the Columbus facility to expected production and economic performance, and allow that performance to serve as the foundation for the development of future KiOR facilities that produce real hydrocarbon fuels competitive with traditional fuels without subsidy — whether through a second Columbus facility or larger, standard scale commercial production facilities,” Mr. Cannon concluded.

“The uncertainty caused by USEPA’s proposed 2014 RVO rulemaking has already made and will continue to make our expansion financing efforts more challenging, but we believe that once USEPA adjusts the 2014 RVOs in a manner consistent with the policy goals of the Renewable Fuel Standard, some of these short term challenges will lessen. While our strategy is taking longer to execute than we anticipated two years ago, we believe that successful execution of our strategy will build a sustainable business that will deliver long-term value to our shareholders.”

 

In January 2014 Raymond James energy analyst Pavel Molchanov  issued a “tactical downgrade” for KiOR after slashing the share’s value to $2.68 per share from a prior estimate of $5.73. “KiOR’s first production in 2013 marked an important milestone for the company and the cellulosic biofuels industry as a whole. However, inconsistent execution and lack of operational visibility have become a major source of frustration for investors. After disclosing 4Q production in late December, KiOR hosted an update call yesterday to detail goals for 2014. Recall, 4Q production (~400,000 gallons) arrived slightly below target, though it was the highest quarterly figure to date. Sadly, visibility remains lacking. Having already stated that the plant will be offline all 1Q for operational improvements, management provided slim detail for the rest of the year: no production guidance of any kind, even in general terms. Once optimization is complete, Columbus is expected to generate improved yields and be able to run at higher throughput and reliability rates. We understand management’s reluctance to avoid a repeat of 2013′s “overpromise and underdeliver” scenario, but we don’t have much confidence in meaningful ramp-up progress in the near future.

“The other reason poor visibility is disconcerting is that steady-state operational data is needed to secure debt financing for Columbus II, the expansion project that is necessary for KiOR to reach cash flow breakeven at the corporate level. We previously hoped that the debt could be raised in 1Q14. That is no longer feasible: 3Q is the best-case scenario, 4Q more likely. With $25 million of cash at year-end, KiOR needs more capital this quarter, even though corporate cost cuts are reducing cash burn. In the absence of project debt, it will have to be either straight equity or a convert. We don’t doubt the company’s ability to raise the funds, but there is no escaping further near-term dilution – which is painful given the current market cap.”

Major Investors

Nasdaq: KiOR.

As of 8/31/12 Khosla Ventures, Artis Capital, Alberta Investment Management Corporation and other major direct and institutional holders were major investors in KiOR.

Top Milestones for 2009 – 2013:

1.       Development and commercialization of the Company’s proprietary biomass-to-cellulosic fuels technology.

2.        Acquire funding for the Company’s capital and operating requirements through the public and private capital markets.

3.        Development, construction, commissioning and operation of the Columbus, Mississippi facility, KiOR’s first commercial scale cellulosic fuel production facility.

In September 2013,  KiOR announced that it is pursuing plans to double production capacity at its Columbus, Mississippi, cellulosic fuels facility through construction of a second facility incorporating KiOR’s commercially proven technology. KiOR estimates that the project – Columbus II – will cost approximately $225 million, will break ground within 90 days of the Company raising sufficient equity and debt capital to commence the project, and will take approximately 18 months to construct and start up.

Once completed with its latest technology improvements, KiOR expects that the Columbus II project will allow each Columbus facility to achieve greater yields, production capacity and feedstock flexibility than the original design basis for the existing Columbus facility, enabling KiOR to more quickly make progress towards its long-term goal of 92 gallons per bone dry ton of biomass.

KiOR also announced that it has received commitments, subject only to negotiation and execution of final documentation, from Khosla Ventures and Vinod Khosla for an aggregate commitment of up to $50 million as the cornerstone investor for the Columbus II project and to meet the Company’s ongoing liquidity needs. Khosla Ventures and Mr. Khosla have advised that they are prepared to fund these commitments either as part of a broader debt and/or equity financing structure, in connection with a note that would convert at a premium to the current price of the Company’s Common Stock or on alternative terms if requested by the Company, and mutually agreed by the parties, as in the best interest of the Company and its stockholders.

Also in September 2013, KiOR said that the Columbus facility produced 172,398 gallons of fuel, bringing the 2013 production total from the facility to 357,532 gallons through August 31, 2013. Approximately 83% of production was in the form of gasoline and diesel, with the remaining production as fuel oil. Production from Columbus during July and August exceeded total second quarter production by nearly 40,000 gallons.

As of August 31, 2013, Columbus has shipped 199,071 gallons of fuel since the beginning of 2013, about half of which (99,175 gallons) were shipped in July and August. The Company expects to continue shipping fuel produced in July and August during the month of September.

Major Milestone Goals for 2014 – 2015

1.        Full ramp up of Columbus facility

2.       Development and construction of KiOR’s first commercial cluster of production facilities, consisting of four standard conversion facilities (three times larger than the Columbus facilities) and two upgrading facilities for production of cellulosic gasoline and diesel

3.        Continued research and development on KiOR’s proprietary biomass-to-cellulosic fuels technology platform to reach targeted yield and throughput goals

Business Model:

Owner-operator and “value share” joint venture participant

Competitive Edge(s): 

1. Breakthrough technology based on well-established refining processes.

2. World’s first “drop in” cellulosic hydrocarbon gasoline and diesel (as opposed to ethanol or biodiesel) producible at commercial scale.

3. Cellulosic fuel that can be cost-competitive with traditional fossil fuels but with 80% reduction in lifecycle greenhouse gas emissions than fossil fuels.

4. Feedstock flexibility on all types of sustainable, non-food biomass.

5. Enhances energy independence and increases energy security.

6. Significant economic benefits for rural communities.

Research, or Manufacturing Partnerships or Alliances.  

None

Stage

Commercial

Company website.

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